================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES ACT OF 1934
For the Quarter Ended December 31, 2001
Commission File Number 000-26299
-----------------
ARIBA, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0439730
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
807 11th Avenue
Sunnyvale, California 94089
(Address of principal executive offices)
(650) 390-1000
(Registrant's telephone number, including area code)
-----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
On January 31, 2002, 263,712,587 shares of the registrant's common stock
were issued and outstanding.
================================================================================
ARIBA, INC.
INDEX
Page
No.
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at December 31, 2001 and
September 30, 2001.............................................. 3
Condensed Consolidated Statements of Operations for the three
month periods endedDecember 31, 2001 and 2000................... 4
Condensed Consolidated Statements of Cash Flows for the three
month periods endedDecember 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........................................... 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 42
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................... 45
Item 2. Changes in Securities and Use of Proceeds....................... 45
Item 3. Defaults Upon Senior Securities................................. 45
Item 4. Submission of Matters to a Vote of Securities Holders........... 45
Item 5. Other Information............................................... 45
Item 6. Exhibits and Reports on Form 8-K................................ 46
SIGNATURES...................................................... 47
2
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
ARIBA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
December 31, September 30,
2001 2001
------------ -------------
ASSETS
------
Current assets:
Cash and cash equivalents.......................... $ 68,964 $ 71,971
Short-term investments............................. 109,292 145,931
Restricted cash.................................... 3,300 2,800
Accounts receivable, net........................... 15,541 27,336
Prepaid expenses and other current assets.......... 35,156 35,963
----------- -----------
Total current assets........................... 232,253 284,001
Property and equipment, net........................... 44,151 50,353
Long-term investments................................. 60,288 43,109
Restricted cash....................................... 29,781 29,771
Other assets.......................................... 2,843 3,007
Goodwill and other intangible assets, net............. 732,381 877,806
----------- -----------
Total assets................................... $ 1,101,697 $ 1,288,047
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable................................... $ 24,086 $ 28,395
Accrued compensation and related liabilities....... 44,438 53,285
Accrued liabilities................................ 53,203 56,072
Restructuring costs................................ 21,190 18,339
Deferred revenue................................... 79,471 70,006
Current portion of other long-term liabilities..... 292 296
----------- -----------
Total current liabilities...................... 222,680 226,393
Restructuring costs, net of current portion........... 4,217 12,855
Deferred revenue, net of current portion.............. 89,723 107,055
Other long-term liabilities, net of current portion... 38 106
----------- -----------
Total liabilities.............................. 316,658 346,409
----------- -----------
Minority interests.................................... 13,499 15,720
----------- -----------
Commitments and contingencies (Note 3)
Stockholders' equity:
Common stock....................................... 526 520
Additional paid-in capital......................... 4,461,623 4,477,971
Deferred stock-based compensation.................. (5,754) (33,023)
Accumulated other comprehensive loss............... (5,198) (1,172)
Accumulated deficit................................ (3,679,657) (3,518,378)
----------- -----------
Total stockholders' equity..................... 771,540 925,918
----------- -----------
Total liabilities and stockholders' equity..... $ 1,101,697 $ 1,288,047
=========== ===========
See accompanying notes to condensed consolidated financial statements.
3
ARIBA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Months Ended
December 31,
--------------------
2001 2000
--------- ---------
Revenues:
License................................................ $ 23,660 $ 128,911
Maintenance and service................................ 31,590 41,322
--------- ---------
Total revenues..................................... 55,250 170,233
--------- ---------
Cost of revenues:
License................................................ 378 8,686
Maintenance and service (exclusive of stock-based
compensation expense of $671 and $1,494 for the
three months ended December 31, 2001 and 2000,
respectively)........................................ 9,709 22,645
--------- ---------
Total cost of revenues............................. 10,087 31,331
--------- ---------
Gross profit........................................... 45,163 138,902
--------- ---------
Operating expenses:
Sales and marketing (exclusive of stock-based
compensation expense of $(1,003) and $7,723 for the
three months ended December 31, 2001 and 2000,
respectively, and exclusive of $0 and $12,783 of
business partner warrant expense for the three
months ended December 31, 2001 and 2000,
respectively)........................................ 28,134 83,688
Research and development (exclusive of stock-based
compensation expense of $35 and $2,927 for the three
months ended December 31, 2001 and 2000,
respectively)........................................ 15,608 20,789
General and administrative (exclusive of stock-based
compensation expense of $3,665 and $8,187 for the
three months ended December 31, 2001 and 2000,
respectively)........................................ 10,481 16,395
Amortization of goodwill and other intangible assets... 145,414 328,528
Business partner warrants.............................. -- 12,783
Stock-based compensation............................... 3,368 20,331
Restructuring and lease abandonment costs.............. 5,642 --
--------- ---------
Total operating expenses........................... 208,647 482,514
--------- ---------
Loss from operations...................................... (163,484) (343,612)
Interest income........................................... 2,531 5,867
Interest expense.......................................... (15) (51)
Other income (expense).................................... 780 (1,236)
--------- ---------
Net loss before income taxes.............................. (160,188) (339,032)
Provision for income taxes................................ 1,091 8,592
--------- ---------
Net loss.................................................. $(161,279) $(347,624)
========= =========
Basic and diluted net loss per share...................... $ (0.63) $ (1.48)
========= =========
Weighted-average shares used in computing basic and
diluted net loss per share.............................. 255,625 235,285
========= =========
See accompanying notes to condensed consolidated financial statements.
4
ARIBA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended
December 31,
--------------------
2001 2000
--------- ---------
Operating activities:
Net loss......................................................... $(161,279) $(347,624)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Provision for doubtful accounts............................... -- 12,965
Depreciation and amortization................................. 155,529 332,893
Stock-based compensation...................................... 3,368 20,331
Impairment of leasehold improvements.......................... (2,182) --
Non-cash warrant expense...................................... -- 12,783
Tax provision related to benefit from employee stock option
plans....................................................... -- 6,848
Minority interests in net income (loss) of consolidated
subsidiaries................................................ (867) 153
Changes in operating assets and liabilities:
Accounts receivable........................................... 11,795 (71,002)
Prepaid expenses and other assets............................. 971 (12,844)
Accounts payable.............................................. (4,309) (36,573)
Accrued compensation and related liabilities.................. (8,847) 10,348
Accrued liabilities........................................... 1,131 58,300
Restructuring costs........................................... (5,787) --
Deferred revenue.............................................. (7,867) 35,306
--------- ---------
Net cash provided by (used in) operating activities.............. (18,344) 21,884
--------- ---------
Investing activities:
Purchases of property and equipment, net...................... (1,730) (21,225)
Proceeds from (purchases of) investments, net................. 18,659 (83,662)
Allocation to restricted cash................................. (510) (11,963)
--------- ---------
Net cash provided by (used in) investing activities.............. 16,419 (116,850)
--------- ---------
Financing activities:
Repayments of long-term obligations........................... (72) (135)
Proceeds from issuance of common stock........................ 2,578 15,108
Proceeds from subsidiary stock offering....................... -- 40,000
Repurchase of common stock.................................... (363) (5)
--------- ---------
Net cash provided by financing activities........................ 2,143 54,968
--------- ---------
Net increase (decrease) in cash and cash equivalents............. 218 (39,998)
Effect of foreign exchange rate changes.......................... (3,225) (913)
Cash and cash equivalents at beginning of period................. 71,971 195,241
--------- ---------
Cash and cash equivalents at end of period....................... $ 68,964 $ 154,330
========= =========
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, services and network access to enable
corporations to evaluate and manage the cash costs associated with running
their business. The Company's products are designed to integrate with its
customers' existing applications and infrastructure to enable them to more
quickly realize savings. 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 the Company and reflect all adjustments
(all of which are normal and recurring in nature) that, in the opinion of
management, are necessary for a fair presentation of the interim periods
presented. Certain amounts in the prior year financial statements have been
reclassified to conform to the current year presentation. The results of
operations for the interim periods presented are not necessarily indicative of
the results to be expected for any subsequent quarter or for the entire year
ending September 30, 2002. 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, 2001, filed on December
31, 2001 with the Securities and Exchange Commission.
Acquisitions
To date, the Company's 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
6
ARIBA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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
The Company's revenue consists of fees for licenses 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 Ariba Enterprise Spend Management solution consists of three
component solutions: Ariba Analysis, Ariba Enterprise Sourcing and Ariba
Procurement. Ariba Buyer, Ariba Sourcing, Ariba Dynamic Trade and Ariba
Marketplace were the Company's primary software products in the quarter ended
December 31, 2001 and in fiscal 2001. Ariba Enterprise Sourcing, which was
introduced in late fiscal 2001, is derived from Ariba Dynamic Trade and Ariba
Sourcing, which are still available as separate products. Ariba Sourcing and
Ariba Marketplace are also available as hosted applications. The Company's
primary products in fiscal 2000 were Ariba Buyer and, to a lesser extent, Ariba
Marketplace.
The Company licenses its products through its direct sales force and
indirectly through resellers. The license agreements for the Company's products
do not provide for a right of return, and historically product returns have not
been significant. The Company does not recognize revenue for refundable fees or
agreements with cancellation rights until such rights to refund or cancellation
have expired. The products are either purchased under a perpetual license model
or under a time-based license model. Access to the Ariba Supplier Network,
formerly known as the Ariba Commerce Services Network, is available to all
Ariba customers as part of their maintenance agreements.
The Company recognizes revenue in accordance with Statement of Position
(SOP) 97-2, Software Revenue Recognition, as amended by SOP 98-4 and SOP 98-9,
and Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB)
101, Revenue Recognition in Financial Statements. 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.
7
ARIBA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 hosting services is 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 VSOE of fair value for undelivered
elements.
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. Revenue from those contracts with extended payment terms is
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 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. These
arrangements occur infrequently as implementation services are generally not
considered essential to the functionality of the Company's products and are
typically managed by third party consultants.
The Company's customers include certain suppliers from whom, on occasion,
the Company has purchased goods or services for the Company's operations at or
about the same time the Company has licensed its software to these
organizations. These transactions are separately negotiated and recorded at
terms the Company considers to be arm's-length. The Company did not have any of
these transactions for the quarters ended December 31, 2001 and 2000.
Deferred revenue includes amounts received from customers for which revenue
has not been recognized that generally results from deferred maintenance and
support, consulting or training services not yet rendered and license revenue
deferred until all requirements under SOP 97-2 are met. Deferred revenue is
recognized as revenue upon delivery of our product, as services are rendered,
or as other requirements requiring deferral under SOP 97-2 are satisfied.
Accounts receivable include amounts due from customers for which revenue has
been recognized.
Fair value of financial instruments and concentration of credit risk
The carrying value of the Company's financial instruments, including cash
and cash equivalents, investments, accounts receivable and long-term debt,
approximates fair value. Financial instruments that subject the Company to
concentrations of credit risk consist primarily of cash and cash equivalents,
investments and trade accounts receivable. The Company maintains its cash and
cash equivalents and investments with high quality financial institutions. The
Company's customer base consists of businesses in North America, Europe, Middle
East, Asia, and Latin America. The Company performs ongoing credit evaluations
of its customers and generally does not require collateral on accounts
receivable. The Company maintains allowances for potential credit losses.
Historically, such losses have been within management's expectations.
8
ARIBA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue and accounts receivable comprising of more than 10% of total amounts
by customers is as follows:
% of
Total Revenues
--------------
% of Accounts
Three months Receivable as of
ended -------------------------
December 31,
-------------- December 31, September 30,
2001 2000 2001 2001
---- ---- ------------ -------------
Customer A............................. -- -- 12% --
Customer B............................. -- -- 10% --
Customer C............................. -- -- -- 11%
Recent accounting pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 requires that the purchase method of accounting be used
for all business combinations initiated after June 30, 2001. SFAS No. 141 also
specifies criteria for determining intangible assets acquired in a purchase
method business combination that must be recognized and reported apart from
goodwill, noting that any purchase price allocable to an assembled workforce
may not be accounted for separately. SFAS No. 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead be tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets
with definite useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of. The Company has adopted the
provisions of SFAS No. 141 and is required to adopt SFAS No. 142 effective
October 1, 2002. Goodwill and intangible assets acquired in business
combinations completed before July 1, 2001 will continue to be amortized prior
to the adoption of SFAS No. 142. The adoption of SFAS No. 141 did not have a
significant impact on the Company's consolidated financial statements. Because
of the extensive effort needed to comply with adopting SFAS No. 142, which the
Company will adopt on October 1, 2002, it is not practicable to reasonably
estimate the impact of adopting this statement on the Company's consolidated
financial statements at the date of this report, including whether any
transitional impairment losses will be required to be recognized as the
cumulative effect of a change in accounting principle.
In June 2001, the FASB issued Statement No. 143, Accounting for Asset
Retirement Obligations, which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. The standard applies to legal
obligations associated with the retirement of long-lived assets that result
from the acquisition, construction, development and/or normal use of the asset.
SFAS No. 143 requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The fair value of the liability
is added to the carrying amount of the associated asset and this additional
carrying amount is depreciated over the life of the asset. The liability is
accreted at the end of each period through charges to operating expense. If the
obligation is settled for other than the carrying amount of the liability, the
Company will recognize a gain or loss on settlement. The Company is required
and plans to adopt the provisions of SFAS No. 143 for the quarter ending
December 31, 2002. To accomplish this, the Company must identify all legal
obligations for asset retirement obligations, if any, and determine the fair
value of these obligations on the date of adoption. The determination of fair
value is complex and will require the Company to gather market information and
develop cash flow models. Additionally, the Company will be required to develop
processes to track and monitor these obligations. Because of the effort
necessary to comply with the adoption of SFAS No. 143, it is not practicable
for management to estimate the impact of adopting this Statement at the date of
this report.
9
ARIBA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, which supersedes both SFAS Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of and the accounting and reporting provisions of APB Opinion
No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions, for the disposal of a segment of a business
(as previously defined in that Opinion). SFAS No. 144 retains the fundamental
provisions in SFAS No. 121 for recognizing and measuring impairment losses on
long-lived assets held for use and long-lived assets to be disposed of by sale,
while also resolving significant implementation issues associated with SFAS No.
121. For example, SFAS No. 144 provides guidance on how a long-lived asset that
is used as part of a group should be evaluated for impairment, establishes
criteria for when a long-lived asset is held for sale, and prescribes the
accounting for a long-lived asset that will be disposed of other than by sale.
SFAS No. 144 retains the basic provisions of APB No. 30 on how to present
discontinued operations in the statement of operations but broadens that
presentation to include a component of an entity (rather than a segment of a
business). Unlike SFAS No. 121, an impairment assessment under SFAS No. 144
will never result in a write-down of goodwill. Rather, goodwill is evaluated
for impairment under SFAS No. 142, Goodwill and Other Intangible Assets. The
Company is required to adopt SFAS No. 144 no later than the fiscal year
beginning after December 15, 2001, and plans to adopt its provisions for the
quarter ending December 31, 2002. Management does not expect the adoption of
SFAS No. 144 to have a material impact on the Company's financial statements.
In November 2001, the Emerging Issues Task Force (EITF) reached consensus on
EITF No. 01-9, Accounting for Consideration Given by a Vendor to a Customer or
a Reseller of the Vendor's Products. EITF No. 01-9 addresses the accounting for
consideration given by a vendor to a customer and is a codification of EITF No.
00-14, Accounting for Certain Sales Incentives, EITF No. 00-22, Accounting for
'Points' and Certain Other Time-Based or Volume-Based Sales Incentives Offers
and Offers for Free Products or Services to be Delivered in the Future, and
EITF No. 00-25, Vendor Income Statement Characterization of Consideration Paid
to a Reseller of the Vendor's Products. The Company is required to adopt EITF
No. 01-9 no later than in the financial statements for annual or interim
periods beginning after December 15, 2001, and plans to adopt its provisions
for the quarter ending March 31, 2002. The Company is evaluating the impact of
EITF No. 01-9 and does not believe that upon adoption it will have a material
impact on the Company's financial statements.
Note 2--Goodwill and Other Intangible Assets
Goodwill and other intangible assets consisted of the following (in
thousands):
December 31, September 30,
2001 2001
------------ -------------
Goodwill......................................... $ 907,100 $ 907,103
Assembled workforce.............................. 11,127 11,127
Covenants not-to-compete......................... 1,300 1,300
Core technology.................................. 17,392 17,392
Intellectual property agreement.................. 786,929 786,929
Business partner warrants........................ -- 11
---------- ----------
1,723,848 1,723,862
Less: accumulated amortization................... (991,467) (846,056)
---------- ----------
Goodwill and other intangible assets, net........ $ 732,381 $ 877,806
========== ==========
The Company 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. In the quarter ended March 31,
2001, the
10
ARIBA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Company recorded a $1.4 billion impairment charge relating to goodwill and
other intangible assets acquired in the Tradex acquisition.
During the third quarter of fiscal 2001, the Company determined that an
intangible asset recorded in connection with the prior issuance of a business
partner warrant was impaired. As a result, the Company recorded a $17.7 million
impairment charge to business partner warrant expense to write off the
remaining net book value of this intangible asset.
As of December 31, 2001, the Company had $732.4 million of goodwill and
other intangible assets relating to the acquisition of TradingDynamics, Tradex
and SupplierMarket and an intellectual property purchase agreement after giving
effect to previous amortization and impairment charges. Amortization of
goodwill and other intangible assets was $145.4 million and $328.5 million for
the quarters ended December 31, 2001 and 2000, respectively.
Note 3 --Commitments and Contingencies
Leases
In March 2000, the Company entered into a facility lease agreement for
approximately 716,000 square feet in four office buildings and an amenities
building in Sunnyvale, California as the Company's headquarters. The operating
lease term commenced in phases from January through April 2001 and ends on
January 24, 2013. Minimum monthly lease payments are $2.1 million and will
escalate annually with the total future minimum lease payments amounting to
$362.2 million over the lease term. The Company also contributed $79.9 million
towards leasehold improvement costs of the facility and for the purchase of
equipment and furniture, which was paid in full as of December 31, 2001, and of
which approximately $49.2 million was written down in connection with the
abandonment of excess facilities. As part of this agreement, the Company is
required to hold two certificates of deposit, $25.7 million as a form of
security through fiscal 2013 and $2.5 million as security until construction is
complete which is expected to occur in the quarter ending March 31, 2002. These
two certificates of deposit are classified as restricted cash on the condensed
consolidated balance sheets.
Restructuring and lease abandonment costs
In fiscal 2001, the Company initiated a restructuring program to conform its
expense and revenue levels and to better position the Company for growth and
profitability. As part of this program, the Company restructured its worldwide
operations including a worldwide reduction in workforce and the consolidation
of excess facilities. During the quarter ended December 31, 2001, the
restructuring resulted in a total charge of $5.6 million which is classified
within operating expenses. The following paragraphs provide detailed
information relating to the restructuring and lease abandonment costs which
were recorded in the quarter ended December 31, 2001.
The following table details restructuring activity through December 31, 2001
(in thousands):
Severance Lease
And abandonment
benefits costs Total
--------- ----------- --------
Balance at September 30, 2001............... $ 851 $30,343 $ 31,194
Total charge to operating expense........... 4,946 696 5,642
Cash paid................................... (4,681) (6,748) (11,429)
------- ------- --------
Balance at December 31, 2001................ $ 1,116 $24,291 25,407
======= =======
Less: current portion....................... 21,190
--------
Accrued restructuring and lease abandonment
costs, less current portion............... $ 4,217
========
11
ARIBA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Worldwide workforce reduction
Severance and benefits primarily include involuntary termination and COBRA
benefits, outplacement costs, and payroll taxes. A majority of the
terminations, which included sales and marketing, engineering and general
administration support personnel, were completed during the third and fourth
quarters of fiscal 2001 and in the quarter ended December 31, 2001. For the
quarter ended December 31, 2001, total accrued charges for severance and
benefits amounted to $4.9 million, of which $4.7 million had been paid or used
by the quarter end. As of December 31, 2001, the remaining accrued balance of
approximately $1.1 million in severance and benefits charges consists primarily
of COBRA benefits and outplacement costs and involuntary termination costs
related to the Company's international workforce, which the Company expects
will result in all remaining cash expenditures being completed by the quarter
ending June 30, 2002.
Consolidation of excess facilities
For the quarter ended December 31, 2001, the Company recorded restructuring
expense of $696,000 related to the abandonment of its facility in Hong Kong.
Lease abandonment costs incurred to date relate to the abandonment of excess
leased facilities in Mountain View and Sunnyvale, California, Tampa, Florida,
Alpharetta, Georgia, Lisle, Illinois, Burlington, Massachusetts, Florham Park,
New Jersey, Dallas, Texas, Hong Kong and Singapore for the remaining lease
terms. Total lease abandonment costs include the impairment of leasehold
improvements, remaining lease liabilities and brokerage fees offset by
estimated sublease income. The estimated net costs of abandoning these leased
facilities, including estimated sublease costs and income, were based on market
information trend analyses provided by a commercial real estate brokerage firm
retained by the Company.
Net cash payments made in the quarter ended December 31, 2001 related to
abandoned facilities amounted to $6.7 million. As of December 31, 2001, $24.3
million of lease abandonment costs, net of anticipated sublease income of
$303.3 million, remains accrued and is expected to be utilized by fiscal 2013.
Actual future cash requirements and lease abandonment costs may differ
materially from the accrual at December 31, 2001, particularly if actual
sublease income is significantly different from current estimates.
Litigation
Between March 20, 2001 and June 5, 2001, several purported shareholder class
action complaints were filed in the United States District Court for the
Southern District of New York against the Company, certain of its officers or
former officers and directors and three of the underwriters of its initial
public offering. These actions purport to be brought on behalf of purchasers of
the Company's common stock in the period from June 23, 1999, the date of the
Company's initial public offering, to December 23, 1999 (in some cases, to
December 5 or 6, 2000), and make certain claims under the federal securities
laws, including Sections 11 and 15 of the Securities Act of 1933 and Sections
10(b) and 20(a) of the Securities Exchange Act of 1934, relating to the
Company's initial public offering. Specifically, among other things, these
actions allege the prospectus pursuant to which shares of common stock were
sold in the Company's initial public offering, which was incorporated in a
registration statement filed with the SEC, contained certain false and
misleading statements or omissions regarding the practices of the Company's
underwriters with respect to their allocation of shares of common stock in the
Company's initial public offering to their customers and their receipt of
commissions from those customers related to such allocations, and that such
statements and omissions caused the Company's post-initial public offering
stock price to be artificially inflated. The actions seek compensatory damages
in unspecified amounts as well as other relief.
On June 26, 2001, these actions were consolidated into a single action
bearing the title In re Ariba, Inc. Securities Litigation, 01 CIV 2359. On
August 9, 2001, that consolidated action was further consolidated before a
single judge with cases brought against over a hundred additional issuers and
their underwriters that make similar allegations regarding the initial public
offerings of those issuers. The latter consolidation was for purposes of
pretrial motions and discovery only. The Company intends to defend against the
complaints vigorously.
12
ARIBA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company is also subject to various 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 the Company's business, financial
condition or results of operations. The Company has accrued for estimated
losses in the accompanying condensed consolidated financial statements for
those matters where it believes that the likelihood that a loss has occurred is
probable and the amount of loss is reasonably estimable. Although management
currently believes that the outcome of other outstanding legal proceedings,
claims and litigation involving the Company will not have a material adverse
effect on its business, results of operations or financial condition,
litigation is inherently uncertain, and there can be no assurance that existing
or future litigation will not have a material adverse effect on the Company's
business, results of operations or financial condition.
Note 4--Minority Interests in Subsidiaries
As of December 31, 2001, minority interest of approximately $13.5 million is
recorded on the condensed consolidated balance sheets in order to reflect the
share of the net assets of Nihon Ariba K.K. and Ariba Korea, Ltd. held by
minority investors. In addition, the Company recognized approximately $867,000
and $153,000 as an increase to other income and as an increase to other loss
for the minority interests' share in operating results of these majority owned
subsidiaries' for the quarters ended December 31, 2001 and 2000, respectively.
Note 5--Segment Information
The Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, in fiscal 1999. SFAS No. 131 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 has only one segment, software solutions. The Company markets
its products in the United States and in foreign countries through its direct
sales force and indirect distribution channels. The Company's chief operating
decision maker evaluates resource allocation decisions and the performance of
the Company based upon revenue recorded in geographic regions and does not
receive financial information about expense allocations on a disaggregated
basis.
Information regarding revenue for the three months ended December 31, 2001
and 2000, and information regarding long-lived assets in geographic areas as of
December 31, 2001 and 2000, are as follows (in thousands):
Three months ended
December 31,
--------------------------
2001 2000
------------ -------------
Revenues:
United States................................. $ 31,692 $127,240
International................................. 23,558 42,993
-------- --------
Total..................................... $ 55,250 $170,233
======== ========
December 31, September 30,
2001 2001
------------ -------------
Long-Lived Assets:
United States................................. $772,727 $923,351
International................................. 5,310 6,477
-------- --------
Total..................................... $778,037 $929,828
======== ========
13
ARIBA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenues are attributed to countries based on the location of the Company's
customers. The Company's international revenues were derived from sales in
Europe, Asia, Asia Pacific and Latin America. The Company had net liabilities
of $57.2 million in its international locations as of December 31, 2001.
Note 6--Stockholders' Equity
Stock option exchange program
On February 8, 2001, the Company announced a voluntary stock option exchange
program for its employees. Under the program, Ariba employees were given the
opportunity, if they chose, to cancel outstanding stock options previously
granted to them in exchange for an equal number of replacement options to be
granted at a future date, at least six months and a day from the cancellation
date, which was May 14, 2001. Under the exchange program, options for 12.7
million shares of the Company's common stock were tendered and cancelled. On
December 3, 2001, the grant of replacement options to participating employees
was approved resulting in the issuance of options for approximately 7.8 million
shares of common stock. Each participant employee received, for each option
included in the exchange, a one-for-one replacement option. The exercise price
of each replacement option is $4.02 per share, which was the fair market value
of the Company's common stock on December 3, 2001. The replacement options have
terms and conditions that are substantially the same as those of the canceled
options. The exchange program did not result in any additional compensation
charges or variable plan accounting. Members of the Company's Board of
Directors and its officers and senior executives did not participate in this
program.
Warrants
In the past, the Company has issued warrants for the purchase of its common
stock to certain business partners which vest either immediately or vest
contingently upon the achievement of certain milestones related to targeted
revenue. The Company has accounted for these warrants in accordance with the
provisions of EITF No. 96-18. Each reporting period, the Company determines
which warrants have vested or are deemed probable of vesting. Business partner
warrant cost is measured based on the total fair value of such warrants using
the Black-Scholes option pricing model. The fair value of contingent warrants
deemed probable of vesting is remeasured at the end of each subsequent quarter
until the warrant vests, at which time the fair value attributable to that
warrant 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 warrant, a cumulative adjustment of warrant expense is
made in the current quarter.
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. In December 2001, all of these warrants were cancelled in
connection with an amendment of the related sales and marketing agreement.
Business partner warrant expense related to these warrants was insignificant
for all periods.
In March 2000, in connection with a sales and marketing alliance agreement
with a third party, the Company issued an unvested warrant to purchase up to
3,428,572 shares of the Company's common stock at an exercise price of $87.50
per share. 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 products. The business partner can
partially vest in this warrant each quarter 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 resale to
third parties by the business partner. The warrant generally expires as to any
earned or earnable portion when the milestone period expires or eighteen months
after the specific milestone is met. The warrant can be earned over
approximately a five-year period. From March 2000 through December 2001, the
business partner vested in 982,326 shares of this warrant. During the quarter
ended December 31, 2001, the business partner did not vest in any shares of
this warrant. Accordingly, $0 and $9.3 million of business
14
ARIBA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
partner warrant expense was recorded for this warrant for the quarters ended
December 31, 2001 and 2000, respectively. No amounts related to the unvested
warrants are reflected in the accompanying condensed consolidated financial
statements.
In April 2000, the Company entered into an agreement with a third party 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. In the quarter ended June 30,
2000, 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. The agreement provided that the Company will receive $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
accordingly, the net amount of $31.2 million was recorded as an intangible
asset. The guaranteed gainshare of $25.0 million was recorded as a receivable
in "Other Current Assets" and as of December 31, 2001, $20.0 million remains
outstanding to be collected. The intangible asset was being amortized over the
expected term of the arrangement of three years. For the quarter ended December
31, 2000, approximately $2.8 million of the intangible asset was amortized to
business partner warrant expense. During fiscal 2001, the Company determined
that the carrying value of the intangible asset was impaired due to
communications from the partner that the establishment of vertical marketplaces
would significantly underperform original plans and as a result, recorded a
$17.7 million impairment charge to business partner warrant expense to write
off the remaining net book value. The remaining 4,840,000 shares of the
Company's common stock underlying the warrants vest upon attainment of certain
milestones related to contingent revenues (gainshare) to be received by the
Company under the terms of a related arrangement. The warrants generally expire
when the milestone period expires or one year after the specific milestone is
met. As of December 31, 2001, no portion of the remaining warrants had vested
or were deemed probable of vesting or are reflected in the accompanying
condensed consolidated financial statements.
Deferred stock-based compensation
The Company accounts for its employee stock-based compensation plans in
accordance with APB Opinion No. 25, and Financial Accounting Standards Board
issued Interpretation No. 44 (FIN 44), Accounting for Certain Transactions
Involving Stock Compensation--an Interpretation of APB No. 25. Accordingly, no
compensation cost is recognized for any of the Company's fixed stock options
granted to employees when the exercise price of each option equals or exceeds
the fair value of the underlying common stock as of the grant date.
During the quarter ended December 31, 2001, 3.3 million restricted shares of
common stock at prices below current fair market value were issued to certain
officers and employees of the Company. Restrictions on restricted shares lapse
ratably over a two to four year period or have up to five year vesting periods
that are subject to acceleration if individual performance goals are achieved
except for 2.0 million fully vested shares issued in connection with the
severance of a former executive. Based on the intrinsic value at the date of
grant, the Company recorded approximately $11.2 million of deferred stock-based
compensation related to the issuance of the restricted common stock which will
be charged to operating expenses as the shares vest.
The Company has recorded deferred stock-based compensation totaling
approximately $191.7 million from inception through December 31, 2001. Of this
amount, $38.4 million related to the issuance of stock options prior to the
Company's initial public offering in June 1999 and $124.6 million related to
the acquisition of SupplierMarket, consummated in August 2000. These amounts
are amortized in accordance with FASB
15
ARIBA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Interpretation No. 28 over the vesting period of the individual options and
restricted common stock, generally between two to four years. During the
quarter ended December 31, 2001, deferred stock-based compensation was reduced
by approximately $32.0 million due to the cancellation of unvested stock
options. Stock-based compensation expense totaled $3.4 million and $20.3
million for the quarters ended December 31, 2001 and 2000, respectively.
Comprehensive income
SFAS No. 130, Reporting Comprehensive Income, establishes standards of
reporting and display of comprehensive income and its components of net income
and other comprehensive income. Other comprehensive income refers to revenues,
expenses, gains and losses that are not included in net income but rather are
recorded directly in stockholders' equity. The components of comprehensive loss
for the quarters ended December 31, 2001 and 2000 are as follows (in thousands):
Three months ended
December 31,
--------------------
2001 2000
--------- ---------
Net loss.............................................. $(161,279) $(347,624)
Unrealized gain (loss) on securities.................. (801) 542
Foreign currency translation adjustments.............. (3,225) (913)
--------- ---------
Comprehensive loss.................................... $(165,305) $(347,995)
========= =========
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 as of December 31,
2001 and September 30, 2001 are as follows (in thousands):
December 31, September 30,
2001 2001
------------ -------------
Unrealized loss on securities......................... $ 638 $ 1,439
Foreign currency translation adjustments.............. (5,836) (2,611)
------- -------
Accumulated other comprehensive loss.................. $(5,198) $(1,172)
======= =======
16
ARIBA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 7--Net Loss Per Share
The following table presents the calculation of basic and diluted net loss
per common share (in thousands, except per share data):
Three months ended
December 31,
--------------------
2001 2000
--------- ---------
Net loss.............................................. $(161,279) $(347,624)
========= =========
Weighted-average common shares outstanding............ 261,702 249,587
Less: Weighted-average common shares subject to
repurchase....................................... (6,077) (9,652)
Less: Weighted-average shares held in escrow related
to acquisitions.................................. -- (4,650)
--------- ---------
Weighted-average common shares used in computing basic
and diluted net loss per common share............... 255,625 235,285
========= =========
Basic and diluted net loss per common share........... $ (0.63) $ (1.48)
========= =========
At December 31, 2001 and 2000, 46,757,597 and 62,038,000 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 quarters ended December 31, 2001 and 2000
exclude 7,286,246 shares and 10,943,389 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 $4.22
and $33.34 as of December 31, 2001 and 2000, respectively. The weighted average
repurchase price of unvested stock was $0.21 and $0.45 as of December 31, 2001
and 2000, respectively. The weighted average exercise price of warrants
outstanding was $107.39 and $85.12 as of December 31, 2001 and 2000,
respectively.
Note 8--Income Taxes
The Company incurred operating losses for the quarters ended December 31,
2001 and 2000. Management has recorded a valuation allowance for the full
amount of the net deferred tax assets, as sufficient uncertainty exists that it
is more likely than not that the deferred tax assets would not be realized.
During the quarter ended December 31, 2001, the Company incurred income tax
expense of $1.1 million primarily attributable to its international
subsidiaries. For the quarter ended December 31, 2000, the Company recorded
income tax expense of $8.6 million which was reversed in subsequent quarters
due to projected taxable income that did not materialize.
Note 9--Related Party Transactions
In the first and third quarters of fiscal 2001, the Company sold
approximately 41% of its consolidated subsidiary, Nihon Ariba K.K. and
approximately 42% of its consolidated subsidiary, Ariba Korea, Ltd.,
respectively, to Softbank, a Japanese corporation and its subsidiaries
(collectively, "Softbank"). An affiliate of Softbank also received the right to
distribute Ariba products from these subsidiaries in their respective
jurisdictions.
From April through December 2001, the Chief Executive Officer of Softbank
was a member of the Company's Board of Directors. For the quarters ended
December 31, 2001 and 2000, the Company has recorded revenue of approximately
$2.2 million and $6.4 million, respectively, related to transactions with
Softbank.
17
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 31, 2001 with the SEC.
Overview
Ariba (referred to herein as "we") provides software, services and network
access to enable corporations to evaluate and manage the cash costs associated
with running their business (their "spend"). Our Ariba Enterprise Spend
Management solution is an integrated suite of applications and services which
provides customers with a single solution to analyze and manage their spend on
items such as commodities, raw materials, operating resources, services,
temporary labor, travel, and maintenance, repair and operations equipment. Our
solution is designed to allow companies to streamline their existing
procurement processes and expand control over their spend by better leveraging
their existing in-house domain expertise while retaining their existing
supplier relationships. We also offer access to our Ariba Supplier Network,
which allows customers to contact suppliers via the Internet and offers
electronic payment, access to catalog information and the ability to route
orders.
We were incorporated in Delaware 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 and Asia Pacific primarily through our direct
sales force and to a lesser extent through indirect sales channels.
Our Ariba Enterprise Spend Management solution consists of three component
solutions: Ariba Analysis, Ariba Enterprise Sourcing and Ariba Procurement.
Ariba Buyer, Ariba Sourcing, Ariba Dynamic Trade and Ariba Marketplace were our
primary software products in the quarter ended December 31, 2001 and in fiscal
2001. Ariba Enterprise Sourcing, which was introduced in late fiscal 2001, is
derived from Ariba Dynamic Trade and Ariba Sourcing, which are still available
as separate products. Ariba Sourcing and Ariba Marketplace are also available
as hosted applications. Our primary products in fiscal 2000 were Ariba Buyer
and, to a lesser extent, Ariba Marketplace.
We have incurred significant losses since inception. As of December 31,
2001, we had an accumulated deficit of $3.7 billion, including cumulative
charges for the amortization of goodwill and other intangible assets totaling
$1.8 billion, impairment of goodwill and other intangible assets totaling $1.4
billion, amortization of stock-based compensation totaling $73.6 million and
business partner warrant expense totaling $63.3 million.
We believe our current stability is contingent on increasing our customer
base and developing our products and services. We intend to continue to invest
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, subject to
certain effects of the new accounting pronouncements as described in note 1 of
notes to condensed consolidated financial statements.We therefore expect to
continue to incur substantial operating losses for the foreseeable future.
18
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 given that we
operate in new and rapidly evolving markets, have recently completed several
acquisitions and face an uncertain economic environment. We may not be
successful in addressing such risks and difficulties. Please refer to the "Risk
Factors" section for additional information.
Critical Accounting Policies/Estimates
Accounting policies, methods and estimates are an integral part of the
consolidated financial statements prepared by management and are based upon
management's current judgments. Those judgments are normally based on knowledge
and experience with regard to past and current events and assumptions about
future events. Certain accounting policies, methods and estimates are
particularly sensitive because of their significance to the financial
statements and because of the possibility that future events affecting them may
differ markedly from management's current judgments. While there are a number
of accounting policies, methods and estimates affecting our financial
statements, areas that are particularly significant include revenue recognition
policies, the assessment of recoverability of goodwill and other intangible
assets, and restructuring reserves for abandoned operating leases.
Through December 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 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 rely primarily on third-party
consulting organizations to deliver these services directly to our customers.
We also offer fee-based training services to our customers.
We license our products through our direct sales force and indirectly
through resellers. The license agreements for our products do not provide for a
right of return, and historically product returns have not been significant. We
do not recognize revenue for refundable fees or agreements with cancellation
rights until such rights to refund or cancellation have expired. Our products
are either purchased under a perpetual license model or under a time-based
license model. Access to the Ariba Supplier Network, formerly known as the
Ariba Commerce Services Network, is available to all Ariba customers as part of
their maintenance agreements.
We recognize revenue in accordance with Statement of Position (SOP) 97-2,
Software Revenue Recognition, as amended by SOP 98-4 and SOP 98-9, and SEC
Staff Accounting Bulletin (SAB) 101, Revenue Recognition in Financial
Statements. 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 us 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 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.
19
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 hosting services is 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 VSOE 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 is
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 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. These arrangements
occur infrequently as implementation services are generally not considered
essential to the functionality of our products and are typically managed by
third party consultants.
Our customers include certain suppliers from whom, on occasion, we have
purchased goods or services for our operations at or about the same time we
have licensed our software to these organizations. These transactions are
separately negotiated and recorded at terms we consider to be arm's-length. We
did not have any of these transactions for the quarters ended December 31, 2001
and 2000.
Deferred revenue includes amounts received from customers for which revenue
has not been recognized that generally results from deferred maintenance and
support, consulting or training services not yet rendered and license revenue
deferred until all requirements under SOP 97-2 are met. Deferred revenue is
recognized upon delivery of our product, as services are rendered, or as other
requirements requiring deferral under SOP 97-2 are satisfied. Accounts
receivable include amounts due from customers for which revenue has been
recognized.
As discussed in note 1 of notes to condensed consolidated financial
statements, management is required to regularly review all of its long-lived
assets, including goodwill and other intangible assets, for impairment whenever
events or changes in circumstances indicate that the carrying value may not be
recoverable. Factors we consider 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 our overall business,
significant negative industry or economic trends, a significant decline in our
stock price for a sustained period, and our market capitalization relative to
net book value. When management determines that an impairment review is
necessary based upon the existence of one or more of the above indicators of
impairment, we measure any impairment based on a projected discounted cash flow
method using a discount rate commensurate with the risk inherent in its current
business model. Significant judgment is required in the development of
projected cash flows for these purposes including assumptions regarding the
appropriate level of aggregation of cash flows, their term and discount rate as
well as the underlying forecasts of expected future revenue and expense. We
have recorded significant impairment charges for goodwill and intangible assets
in the past and to the extent that events or circumstances cause our
assumptions to change, additional charges may be required which could be
material.
As discussed in note 3 of notes to condensed consolidated financial
statements, we have recorded significant restructuring charges in connection
with our abandonment of certain operating leases as part of our program to
20
restructure our operations and related facilities initiated in the third
quarter of fiscal 2001. Lease abandonment costs for the abandoned facilities
were estimated to include the impairment of leasehold improvements, remaining
lease liabilities and brokerage fees offset by estimated sublease income.
Estimates related to sublease costs and income are based on assumptions
regarding the period required to locate and contract with suitable sub-lessees
and sublease rates which can be achieved using market trend information
analyses provided by a commercial real estate brokerage retained by us. Each
reporting period we review these estimates and to the extent that these
assumptions change due to changes in the market, the ultimate restructuring
expenses for these abandoned facilities could vary by material amounts.
Stock Option Exchange Program
On February 8, 2001, we announced a voluntary stock option exchange program
for our employees. Under the program, Ariba employees were given the
opportunity, if they chose, to cancel outstanding stock options previously
granted to them in exchange for an equal number of replacement options to be
granted at a future date, at least six months and a day from the cancellation
date, which was May 14, 2001. Under the exchange program, options for 12.7
million shares of our common stock were tendered and cancelled. On December 3,
2001, the grant of replacement options to participating employees was approved
resulting in the issuance of options for approximately 7.8 million shares of
common stock . Each participating employee received, for each option included
in the exchange, a one-for-one replacement option. The exercise price of each
replacement option is $4.02 per share, which was the fair market value of our
common stock on December 3, 2001. The replacement options have terms and
conditions that are substantially the same as those of the canceled options.
The exchange program did not result in any additional compensation charges or
variable plan accounting. Members of our Board of Directors and our officers
and senior executives did not participate in this program.
Pro Forma Financial Results
We prepare and release quarterly unaudited financial statements prepared in
accordance with generally accepted accounting principles ("GAAP"). We also
disclose and discuss certain pro forma financial information in the related
earnings release and investor conference call. This pro forma financial
information excludes certain non-cash and special charges, consisting primarily
of the amortization of goodwill and other intangible assets, impairment of
goodwill, other intangible assets and equity investments, business partner
warrants expense, stock-based compensation and restructuring and lease
abandonment costs. We believe the disclosure of the pro forma financial
information helps investors more meaningfully evaluate the results of our
ongoing operations. However, we urge investors to carefully review the GAAP
financial information included as part of our Quarterly Reports on Form 10-Q,
our Annual Reports on Form 10-K, and our quarterly earnings releases, compare
GAAP financial information with the pro forma financial results disclosed in
our quarterly earnings releases and investor calls, and read the associated
reconciliation.
21
Results of Operations
The following table sets forth statements of operations data 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 our Form 10-K for the fiscal year ended September 30,
2001 filed December 31, 2001 (in thousands, except per share data).
Three Months Ended
December 31,
--------------------
2001 2000
--------- ---------
Revenues:
License................................................ $ 23,660 $ 128,911
Maintenance and service................................ 31,590 41,322
--------- ---------
Total revenues..................................... 55,250 170,233
--------- ---------
Cost of revenues:
License................................................ 378 8,686
Maintenance and service (exclusive of stock-based
compensation expense of $671 and $1,494 for the
three months ended December 31, 2001 and 2000,
respectively)........................................ 9,709 22,645
--------- ---------
Total cost of revenues............................. 10,087 31,331
--------- ---------
Gross profit........................................... 45,163 138,902
--------- ---------
Operating expenses:
Sales and marketing (exclusive of stock-based
compensation expense of $(1,003) and $7,723 for the
three months ended December 31, 2001 and 2000,
respectively, and exclusive of $0 and $12,783 of
business partner warrant expense for the three
months ended December 31, 2001 and
2000, respectively).................................. 28,134 83,688
Research and development (exclusive of stock-based
compensation expense of $35 and $2,927 for the three
months ended December 31, 2001 and 2000,
respectively)........................................ 15,608 20,789
General and administrative (exclusive of stock-based
compensation expense of $3,665 and $8,187 for the
three months ended December 31, 2001 and 2000,
respectively)........................................ 10,481 16,395
Amortization of goodwill and other intangible assets... 145,414 328,528
Business partner warrants.............................. -- 12,783
Stock-based compensation............................... 3,368 20,331
Restructuring and lease abandonment costs.............. 5,642 --
--------- ---------
Total operating expenses........................... 208,647 482,514
--------- ---------
Loss from operations...................................... (163,484) (343,612)
Interest income........................................... 2,531 5,867
Interest expense.......................................... (15) (51)
Other income (expense).................................... 780 (1,236)
--------- ---------
Net loss before income taxes.............................. (160,188) (339,032)
Provision for income taxes................................ 1,091 8,592
--------- ---------
Net loss.................................................. $(161,279) $(347,624)
========= =========
Basic and diluted net loss per share...................... $ (0.63) $ (1.48)
========= =========
Weighted-average shares used in computing basic and
diluted net loss per share.............................. 255,625 235,285
========= =========
22
Comparison of the Three Months Ended December 31, 2001 and 2000
Revenues
License
License revenues for the quarter ended December 31, 2001 were $23.7 million,
an 82% decrease from license revenues of $128.9 million for the quarter ended
December 31, 2000. The decrease is primarily attributed to the reduced number
of license sales, a different product mix and lower selling prices attributable
to fewer large licensing deals in the quarter ended December 31, 2001
reflecting the economic slowdown and the significant decline in information
technology spending. We expect the economic slowdown to continue to adversely
impact our business for at least the next few quarters and perhaps
significantly longer.
Maintenance and service
Maintenance and service revenues for the quarter ended December 31, 2001
were $31.6 million, a 24% decrease from maintenance and service revenues of
$41.3 million for the quarter ended December 31, 2000. The decrease is
primarily attributable to the decline in license sales which resulted in a
decrease in revenues from customer implementations, training fees and
maintenance contracts and a decline in hosted licenses which are included as
service revenues.
Cost of Revenues
License
Cost of license revenues was $378,000 for the quarter ended December 31,
2001, a decrease of 96% from cost of license revenues of $8.7 million for the
quarter ended December 31, 2000. The decrease is primarily related to lower
co-sale fees due to the reduced number of certain alliance partners, reduced
royalties payable to third parties for integrated technology and to a lesser
extent, a reduction in product costs associated with major upgrade
introductions of our products.
Maintenance and service
Cost of maintenance and service revenues was $9.7 million for the quarter
ended December 31, 2001, a decrease of 57% from cost of maintenance and service
revenues of $22.6 million for the quarter ended December 31, 2000. The decrease
is primarily attributable to reduced license sales resulting in decreased
utilization of internal consultants related to implementations, customer
support and training costs and to a lesser extent, a reduction in product costs
associated with major upgrade introductions of our products.
Operating Expenses
Sales and marketing
Sales and marketing expenses for the quarter ended December 31, 2001 were
$28.1 million, a decrease of 66% from sales and marketing expenses of $83.7
million for the quarter ended December 31, 2000. The decrease is primarily
attributable to a decrease in compensation and benefits for worldwide sales and
marketing personnel due to the reductions in force in fiscal 2001 and the
quarter ended December 31, 2001, a decrease in sales commissions due to a
decline in overall sales activity, a reduction in our provision for doubtful
accounts and, to a lesser extent, reduced overhead. Although we anticipate that
the recent restructuring of our operations will reduce our sales and marketing
expenses for at least the next quarter compared to the quarter ended December
31, 2001, these expenses may increase over the longer term.
23
Research and development
Research and development expenses for the quarter ended December 31, 2001
were $15.6 million, a decrease of 25% from research and development expenses of
$20.8 million for the quarter ended December 31, 2000. The decrease is
primarily attributable to a decrease in compensation and benefits for research
and development personnel due to the reductions in force in fiscal 2001 and the
quarter ended December 31, 2001, a decrease in localization of our software
and, to a lesser extent, reduced 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. Although we anticipate that the recent restructuring of our
operations will reduce our research and development personnel expenses for at
least the next quarter compared to the quarter ended December 31, 2001, these
expenses may increase over the longer term.
General and administrative
General and administrative expenses for the quarter ended December 31, 2001
were $10.5 million, a decrease of 36% from general and administrative expenses
of $16.4 million for the quarter ended December 31, 2000. The decrease is
primarily attributable to a decrease in compensation and benefits for finance,
accounting, legal, human resources and information technology support personnel
due to the reductions in force in fiscal 2001 and the quarter ended December
31, 2001, a decrease in fees paid to outside professional service providers due
to a significant reduction in information technology infrastructure costs and,
to a lesser extent, reduced overhead. Although we anticipate that the recent
restructuring of our operations will reduce our general and administrative
expenses for at least the next quarter compared to the quarter ended December
31, 2001, these expenses may increase over the longer term.
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
a total of $3.1 billion in goodwill and other intangible assets representing
the excess of the purchase price paid over the fair value of net assets
acquired related to these acquisitions in fiscal 2000.
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 purchase 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 purchase
agreement.
The total amortization of goodwill and other intangible assets was $145.4
million and $328.5 million for the quarters ended December 31, 2001 and 2000,
respectively. In addition, we recorded $3.4 million of business partner warrant
expense for the three months ended December 31, 2000, related to the
amortization of vested warrants classified as intangible assets which are
included in the accompanying condensed consolidated statements of operations as
business partner warrant expense. There was no business partner warrant expense
for the quarter ended December 31, 2001.
We anticipate that the unamortized balance of $732.4 million of goodwill and
other intangible assets associated with acquisitions and strategic
relationships will be amortized on a straight-line basis over their expected
useful lives ranging from two years to three years, subject to certain effects
of the new accounting pronouncements described below under Recent Accounting
Pronouncements.
24
Business partner warrants
In the past, we have issued warrants for the purchase of our common stock to
certain business partners which vested either immediately or vest contingently
upon the achievement of certain milestones related to targeted revenue. For the
quarters ended December 31, 2001 and 2000, we recognized business partner
warrant expenses associated with these warrants totaling $0 and $12.8 million,
respectively. See note 6 of notes to condensed consolidated financial
statements for more detailed information.
In February 2000, in connection with a sales and marketing alliance
agreement with a third party, we issued unvested warrants to purchase up to
4,800,000 shares of our common stock at various exercise prices based on future
prices of our common stock or at predetermined exercise prices. In December
2001, all of these warrants were cancelled in connection with an amendment of
the related sales and marketing agreement. Business partner warrant expense
related to these warrants was insignificant for all periods.
In March 2000, in connection with a sales and marketing alliance agreement
with a third party, we issued an unvested warrant to purchase up to 3,428,572
shares of our common stock at an exercise price of $87.50 per share. 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 our products. The business partner can partially vest in
this warrant each quarter upon attainment of certain periodic milestones
related to revenue targets associated with our sales to third parties under
registered co-sale transactions and referrals or resale to third parties by the
business partner. The warrant generally expires as to any earned or earnable
portion when the milestone period expires or eighteen months after the specific
milestone is met. The warrant can be earned over approximately a five-year
period. From March 2000 through December 2001, the business partner vested in
982,326 shares of this warrant. During the quarter ended December 31, 2001, the
business partner did not vest in any shares of this warrant. Accordingly, $0
and $9.3 million of business partner warrant expense was recorded for this
warrant for the quarters ended December 31, 2001 and 2000, respectively. No
amounts related to the unvested warrants are reflected in the accompanying
condensed consolidated financial statements.
In April 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 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 this agreement, 1,936,000 shares
of our common stock underlying the warrants were immediately vested. In the
quarter ended June 30, 2000, we 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. The agreement provided that we will receive
$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
accordingly, the net amount of $31.2 million was recorded as an intangible
asset. The guaranteed gainshare of $25.0 million was recorded as a receivable
in "Other Current Assets" and as of December 31, 2001, $20.0 million remains
outstanding to be collected. The intangible asset was being amortized over the
expected term of the arrangement of three years. For the quarter ended December
31, 2000, approximately $2.8 million of the intangible asset was amortized to
business partner warrant expense. During fiscal 2001, we determined that the
carrying value of the intangible asset was impaired due to communications from
the partner that the establishment of vertical marketplaces would significantly
underperform original plans and as a result, recorded a $17.7 million
impairment charge to business partner warrant expense to write off the
remaining net book value. The remaining 4,840,000 shares of our common stock
underlying the warrants vest upon attainment of certain milestones related to
contingent revenues (gainshare) to be received by us under the terms of a
related arrangement. The warrants generally expire when the milestone period
expires or one year after the specific milestone is met. As of December 31,
2001, no portion of the remaining warrants had vested or were deemed probable
of vesting or are reflected in the accompanying condensed consolidated
financial statements.
25
Stock-based compensation
We have recognized deferred stock-based compensation associated with stock
options granted to employees at prices below market value on the date of grant,
unvested stock options issued to employees in conjunction with the consummation
of the SupplierMarket acquisition in August 2000 and the issuance of restricted
shares of common stock to certain senior executives, officers and employees.
These amounts are included as a component of stockholders' equity and are
charged to operations over the vesting period of the options or the lapse of
restrictions in the case of restricted stock, consistent with the method
described in FIN No. 28. Stock-based compensation expense is presented as a
separate line item in our condensed consolidated statements of operations, net
of the effects of reversals for cancellation of unvested stock options
previously amortized to expense under FIN No. 28. Unamortized amounts related
to the cancellation of unvested stock options during the quarter ended December
31, 2001 resulted in a reduction of deferred stock-based compensation of
approximately $32.0 million. For the quarters ended December 31, 2001 and 2000,
stock-based compensation expense, net of the effects of cancellations, is
attributable to various operating expense categories as follows (in thousands):
Three months ended
December 31,
------------------
2001 2000
------- -------
Cost of revenues...................................... $ 671 $ 1,494
Sales and marketing................................... (1,003) 7,723
Research and development.............................. 35 2,927
General and administrative............................ 3,665 8,187
------- -------
Total.............................................. $ 3,368 $20,331
======= =======
As of December 31, 2001, we had an aggregate of approximately $5.8 million
of deferred stock-based compensation remaining to be amortized.
Restructuring and lease abandonment costs
In fiscal 2001, we initiated a restructuring program to conform our expense
and revenue levels and to better position us for growth and profitability. As
part of the restructuring program, we restructured our worldwide operations
including a worldwide reduction in workforce and the consolidation of excess
facilities. For the quarter ended December 31, 2001, total accrued charges for
severance and benefits amounted to $4.9 million, of which $4.7 million had been
paid or used by quarter end. As of December 31, 2001, the remaining accrued
balance of approximately $1.1 million in severance and benefits charges
consists primarily of COBRA benefits, outplacement costs and involuntary
termination costs related to our international workforce, which we expect will
result in cash expenditures being completed by the quarter ending June 30, 2002.
In addition, we abandoned certain excess leased facilities for the remaining
lease terms. Total lease abandonment costs include the impairment of leasehold
improvements, remaining lease liabilities and brokerage fees offset by
estimated sublease income. The estimated net costs of abandoning these leased
facilities, including estimated sublease costs and income, were based on market
information trend analyses provided by a commercial real estate brokerage firm
retained by us. For the quarter ended December 31, 2001, we recorded
restructuring expense of $696,000 related to the abandonment of an
international facility. As of December 31, 2001, $24.3 million of lease
abandonment costs, net of anticipated sublease income, remains accrued and is
expected to be utilized by fiscal 2013. Actual future cash requirements and
lease abandonment costs may differ materially from the accrual at December 31,
2001, particularly if actual sublease income is significantly different from
current estimates. See note 3 of notes to condensed consolidated financial
statements for additional information.
26
Interest Income
Interest income for the quarter ended December 31, 2001 was $2.5 million, a
decrease of 57% from interest income of $5.9 million for the quarter ended
December 31, 2000. The decrease is attributable to lower average cash and
investment balances during the quarter ended December 31, 2001.
Minority Interest
In December 2000, our consolidated subsidiary, Nihon Ariba K.K., issued and
sold approximately 41% of its common stock for cash consideration of
approximately $40.0 million to Softbank and its affiliate. In April 2001, Nihon
Ariba K.K. issued and sold an additional 2% of its common stock for cash
consideration of approximately $4.0 million to third parties. Prior to the
transactions, 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 December 31, 2001, minority interest of approximately $11.0 million is
recorded on the condensed consolidated balance sheets in order to reflect the
share of the net assets of Nihon Ariba K.K. held by minority investors. In
addition, we recognized approximately $644,000 as an increase to other income
and approximately $153,000 as an increase to other loss for the minority
interest's share of Nihon Ariba K.K.'s loss and income for the quarters ended
December 31, 2001 and 2000, respectively.
In April 2001, our consolidated subsidiary, Ariba Korea, Ltd., issued and
sold approximately 42% of its common stock for cash consideration of
approximately $8.0 million to Softbank and its affiliate. Prior to the
transaction, we 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 our products in Korea.
As of December 31, 2001, minority interest of approximately $2.5 million is
recorded on the condensed consolidated balance sheets in order to reflect the
share of the net assets of Ariba Korea, Ltd. held by minority investors. In
addition, we recognized approximately $223,000 as an increase to other income
for the minority interest's share of the Ariba Korea, Ltd. loss for the quarter
ended December 31, 2001.
Provision for Income Taxes
We incurred operating losses for the quarters ended December 31, 2001 and
2000. We have recorded a valuation allowance for the full amount of the net
deferred tax assets, as sufficient uncertainty exists that it is more likely
than not that the deferred tax assets would not be realized. During the quarter
ended December 31, 2001, we incurred income tax expense of $1.1 million
primarily attributable to our international subsidiaries. For the quarter ended
December 31, 2000, we recorded income tax expense of $8.6 million which was
reversed in subsequent quarters due to projected taxable income that did not
materialize.
Liquidity and Capital Resources
As of December 31, 2001, we had $178.3 million in cash, cash equivalents and
short-term investments, $60.3 million in long-term investments and $33.1
million in restricted cash, for total cash and investments of $271.6 million
and $9.6 million in working capital.
Net cash used in operating activities was approximately $18.3 million for
the quarter ended December 31, 2001, compared to $21.9 million of net cash
provided by operating activities for the quarter ended December 31, 2000. Net
cash used in operating activities for the quarter ended December 31, 2001 was
primarily attributable to an increase in the net loss for the period (less
non-cash expenses) and decreases in accrued compensation and related
liabilities, deferred revenue, accrued restructuring and lease abandonment
costs and accounts payable. These cash flows used in operating activities were
partially offset by decreases in accounts receivable and, to a lesser extent,
prepaid expenses and other current assets and increases in accrued liabilities.
27
Net cash provided by investing activities was approximately $16.4 million
for the quarter ended December 31, 2001, which primarily reflects redemption of
our investments offset by the purchases of property and equipment. Although we
anticipate that the recent restructuring of our operations will reduce our
capital expenditures over the near term, these expenditures may increase over
the longer term.
Net cash provided by financing activities was approximately $2.1 million for
the quarter ended December 31, 2001, primarily from the proceeds from the
exercise of stock options offset by the repurchase of our common stock.
In March 2000, we entered into a new facility lease agreement for
approximately 716,000 square feet constructed in four office buildings and an
amenities building in Sunnyvale, California as our headquarters. The operating
lease term commenced in phases from January through April 2001 and ends on
January 24, 2013. Minimum monthly lease payments are $2.1 million and will
escalate annually with the total future minimum lease payments amounting to
$362.2 million over the lease term. We also contributed $79.9 million towards
leasehold improvement costs of the facility and for the purchase of equipment
and furniture which were paid in full as of December 31, 2001, and of which
approximately $49.2 million was written down in connection with the abandonment
of excess facilities. As part of this agreement, we are required to hold two
certificates of deposit, $25.7 million as a form of security through fiscal
2013 and $2.5 million as security until construction is complete which is
expected to occur in the quarter ending March 31, 2002. These two certificates
of deposit are classified as restricted cash on the condensed consolidated
balance sheets.
Future minimum lease payments under all noncancelable capital and operating
leases are as follows as of December 31, 2001 (in thousands):
Capital Operating
Year Ending December 31, Leases Leases
------------------------ ------- ---------
2002........................................ $307 $ 33,680
2003........................................ 38 43,766
2004........................................ -- 42,951
2005........................................ -- 41,295
2006........................................ -- 38,285
Thereafter.................................. -- 205,389
---- --------
Total minimum lease payments............. $345 $405,366
==== ========
Operating lease payments shown above exclude any adjustment for lease income
due under noncancelable subleases of excess facilities, which amounted to $96.0
million as of December 31, 2001. Interest expense related to capital lease
obligations is immaterial for all periods presented.
We do not have commercial commitments under lines of credit, standby lines
of credit, guarantees, standby repurchase obligations or other such
arrangements.
We expect to incur significant operating expenses, particularly research and
development and sales and marketing expenses, for the foreseeable future in
order to execute our business plan. We anticipate that such operating expenses,
as well as planned capital expenditures, will constitute a material use of our
cash resources. As a result, our net cash flows will depend heavily on the
level of future sales, our ability to restructure operations successfully, our
ability to manage infrastructure costs and our assumptions about estimated
sublease income related to the estimated costs of abandoning excess leased
facilities.
Although our existing cash, cash equivalent and investment balances together
with our anticipated cash flows from operations will be sufficient to meet our
working capital and operating resource expenditure requirements for at least
the next 12 months, given the significant changes in our business and results
of operations in fiscal 2002, the fluctuation in cash, cash equivalents and
investments balances may be greater than presently anticipated. After fiscal
2002, 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.
28
Recent Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. SFAS No. 141 also specifies criteria for determining
intangible assets acquired in a purchase method business combination that must
be recognized and reported apart from goodwill, noting that any purchase price
allocable to an assembled workforce may not be accounted for separately.
SFAS No. 142 requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead be tested for impairment at
least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142
also requires that intangible assets with definite useful lives be amortized
over their respective estimated useful lives to their estimated residual
values, and reviewed for impairment in accordance with SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of. We have adopted the provisions of SFAS No. 141 and are required to
adopt SFAS No. 142 effective October 1, 2002. Goodwill and intangible assets
acquired in business combinations completed before July 1, 2001 will continue
to be amortized prior to the adoption of SFAS No. 142. The adoption of SFAS No.
141 did not have a significant impact on our consolidated financial statements.
Because of the extensive effort needed to comply with adopting SFAS No. 142,
which we will adopt on October 1, 2002, it is not practicable to reasonably
estimate the impact of adopting this statement on our consolidated financial
statements at the date of this report, including whether any transitional
impairment losses will be required to be recognized as the cumulative effect of
a change in accounting principle.
In June 2001, the FASB issued Statement No. 143, Accounting for Asset
Retirement Obligations, which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. The standard applies to legal
obligations associated with the retirement of long-lived assets that result
from the acquisition, construction, development and/or normal use of the asset.
SFAS No. 143 requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The fair value of the liability
is added to the carrying amount of the associated asset and this additional
carrying amount is depreciated over the life of the asset. The liability is
accreted at the end of each period through charges to operating expense. If the
obligation is settled for other than the carrying amount of the liability, we
will recognize a gain or loss on settlement. We are required and plan to adopt
the provisions of SFAS No. 143 for the quarter ending December 31, 2002. To
accomplish this, we must identify all legal obligations for asset retirement
obligations, if any, and determine the fair value of these obligations on the
date of adoption. The determination of fair value is complex and will require
us to gather market information and develop cash flow models. Additionally, we
will be required to develop processes to track and monitor these obligations.
Because of the effort necessary to comply with the adoption of SFAS No. 143, it
is not practicable for us to estimate the impact of adopting this Statement at
the date of this report.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, which supersedes both SFAS Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of and the accounting and reporting provisions of APB Opinion
No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions, for the disposal of a segment of a business
(as previously defined in that Opinion). SFAS No. 144 retains the fundamental
provisions in SFAS No. 121 for recognizing and measuring impairment losses on
long-lived assets held for use and long-lived assets to be disposed of by sale,
while also resolving significant implementation issues associated with
SFAS 121. For example, SFAS No. 144 provides guidance on how a long-lived asset
that is used as part of a group should be evaluated for impairment, establishes
criteria for when a long-lived asset is held for sale, and prescribes the
accounting for a long-lived asset that will be disposed of other than by sale.
SFAS No. 144 retains the basic provisions of APB No. 30 on how to present
discontinued operations in the statement of operations but broadens that
presentation to include a component of an entity (rather than a segment of a
business). Unlike SFAS No. 121 an impairment assessment under SFAS No. 144 will
never result in a write-down of goodwill.
29
Rather, goodwill is evaluated for impairment under SFAS No. 142, Goodwill and
Other Intangible Assets. We are required to adopt SFAS No. 144 no later than
the fiscal year beginning after December 15, 2001, and plan to adopt its
provisions for the quarter ending December 31, 2002. Management does not expect
the adoption of SFAS No. 144 related to these types of activities to have a
material impact on our financial statements.
In November 2001, the Emerging Issues Task Force (EITF) reached consensus on
EITF No. 01-9, Accounting for Consideration Given by a Vendor to a Customer or
a Reseller of the Vendor's Products. EITF No. 01-9 addresses the accounting for
consideration given by a vendor to a customer and is a codification of EITF No.
00-14, Accounting for Certain Sales Incentives, EITF No. 00-22, Accounting for
'Points' and Certain Other Time-Based or Volume-Based Sales Incentives Offers
and Offers for Free Products or Services to be Delivered in the Future, and No.
00-25, Vendor Income Statement Characterization of Consideration Paid to a
Reseller of the Vendor's Products. We are required to adopt EITF No. 01-9 no
later than in the financial statements for annual or interim periods beginning
after December 15, 2001, and plan to adopt its provisions for the quarter
ending March 31, 2002. We are evaluating the impact of EITF No. 01-9 and do not
believe that upon adoption it will have a material impact on our financial
statements.
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, 2001, 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 predecessor to the Ariba Supplier Network in
April 1999. We began shipping Ariba Dynamic Trade in February 2000 following
our acquisition of TradingDynamics, Ariba Marketplace in March 2000 following
our acquisition of Tradex, and Ariba Sourcing in August 2000 following our
acquisition of SupplierMarket. Ariba Dynamic Trade and Ariba Sourcing were
subsequently incorporated into Ariba Enterprise Sourcing. 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 will 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 spend management software applications and services is at an
early stage of development. Our success depends on a significant number of
large buying organizations implementing our products and services. 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 $3.7 billion as of December
31, 2001. We expect to incur significant losses for the foreseeable future for
a number of reasons, including the following:
. Revenues from products and services have declined in each of the last four
quarters ended December 31, 2001;
30
. Although we have implemented a program to further reduce expense levels,
we may not reduce expenses to sufficient levels;
. We have significant cash commitments under noncancelable leases for excess
office space. Net cash commitments, related expense accruals and possible
future restructuring charges will depend on the level of sublease income
we receive for this office space; and
. 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 December 31, 2001, we had unamortized goodwill and other intangible
assets of approximately $732.4 million and anticipate amortization of these
costs on a straight-line basis over their expected useful lives ranging from
two years to three years, subject to the effects of the new accounting
pronouncement SFAS No. 142, Goodwill and Other Intangible Assets. As of
December 31, 2001, we had deferred stock-based compensation of approximately
$5.8 million, which is being amortized to expense over periods ranging from two
to five years. As a result of these intangible assets and deferred stock-based
compensation charges, we expect to incur significant losses at least through
fiscal 2006 and perhaps beyond, even if our results of operations excluding
amortization of intangibles, deferred charges and other special charges would
otherwise be profitable.
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 December 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 have varied or may vary depending on a
number of factors, including the following:
Risks Related to Revenues
. fluctuations in demand for our products and services;
. declines in the average selling price of our products;
. changes in the timing of sales of our products and services;
. changes in the mix and number of our products and services;
. changes in the mix of our licensing arrangements and related timing of
revenue recognition;
. actions taken by our competitors, including new product introductions and
enhancements; and
. the current economic slowdown and recession affecting the economy
generally or our industry in particular.
Risks Related to Expense
. 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 managing planned reductions in
expense levels;
. costs resulting from the write off of intangible assets relating to recent
and any future acquisitions; and
. fluctuations in non-cash charges related to the issuance of warrants to
purchase common stock due to 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;
31
. 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.
The Continuing Economic Slowdown, Particularly in Information Technology
Spending, Will Adversely Impact Our Business.
Our business has been adversely impacted by the economic slowdown,
particularly the decline in information technology spending. We expect the
economic slowdown to continue to adversely impact our business for at least the
next few quarters and perhaps significantly longer and, as a result of the
economic slowdown and other factors, we anticipate that total license revenues
in fiscal 2002 will decline compared to fiscal 2001. The adverse impacts from
the slowdown include longer sales cycles, lower average selling prices and
reduced bookings and revenues.
Our Success Depends on Retaining Our Current Key Personnel and Attracting
Additional Key Personnel.
Our future performance depends on the continued service of our senior
management, product development and sales personnel, in particular Robert
Calderoni, who was elected President and Chief Executive Officer in October
2001. 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. In
addition, our success depends on our continuing ability to attract, hire, train
and retain a selected number of highly skilled managerial, technical, sales,
marketing and customer support personnel. Our ability to retain key employees
may be harder, given recent adverse changes in our business. 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.
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, including average selling prices, 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 Signed That Quarter.
We frequently enter into contracts where we recognize only a portion of the
total 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 delivery of future product or service elements. As a
result, revenues in any given quarter may vary to the extent we enter into
contracts where revenue under those contracts is recognized in future periods.
Our 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 December 31, 2001, we had an
aggregate of $732.4 million 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
32
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
And Require Further Reductions in Our Operating Expense Levels.
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. We
incurred restructuring and lease abandonment charges of $5.6 million in the
first quarter of fiscal 2002 as a result of our workforce reductions and other
actions in response to declines in revenue. We may incur additional
restructuring charges if we experience additional revenue declines.
In the Future, We May Need to Raise Additional Capital in Order to Remain
Competitive in the Electronic Commerce Industry. This Capital May Not Be
Available on Acceptable Terms, If at All.
Although our existing cash, cash equivalent and investment balances together
with our anticipated cash flow from operations will be sufficient to meet our
working capital and operating resource expenditure requirements for at least
the next 12 months, given the significant changes in our business and results
of operations in fiscal 2002, the fluctuations in cash, cash equivalents and
investments balances may be greater than presently anticipated. After fiscal
2002, 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.
Implementation of Our Products by Large Customers Is Complex, Time Consuming
and Expensive. We Frequently Experience Long Sales and Implementation Cycles.
Ariba Buyer, Ariba Enterprise Sourcing and our other products 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,
reliability and return on investment. Furthermore, 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 parties and/or professional services organizations.
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 December 31, 2001, revenues from
Ariba Buyer and related products were more than a majority of our total
revenues, even though we experienced a decline in the average selling price of
these products. Consequently, if we continue to experience price declines or
fail to achieve broad market acceptance of Ariba Buyer, our business would be
seriously harmed. In addition, for the quarter ended December 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.
33
Electronic Commerce Networks, Including the Ariba Supplier Network, Are at an
Early Stage of Development and Market Acceptance.
We began operating the Ariba Supplier Network, formerly known as the Ariba
Commerce Services Network, in April 1999. Our business would be seriously
harmed if the Ariba Supplier Network and other electronic commerce purchasing
networks do not achieve broad and timely market acceptance. Market acceptance
of these networks is subject to a number of significant risks. These risks
include:
. 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 increases in the number of buyers and suppliers may cause
slower response times and other problems;
. our need to enhance the interface between Ariba Buyer, Ariba Enterprise
Sourcing, our other Ariba products and the Ariba Supplier Network;
. our need to significantly enhance the features and services of the Ariba
Supplier 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 Supplier Network.
If a Sufficient Number of Suppliers Do Not Join and Maintain Their
Participation In the Ariba Supplier Network, the Network Will Not Attract a
Sufficient Number of Buyers and Other Sellers Required to Make the Network
Successful.
We depend on suppliers joining the Ariba Supplier Network. Any failure of
suppliers to join the Ariba Supplier Network in sufficient numbers, or of
existing suppliers to maintain their participation in the Ariba Supplier
Network, would make the network less attractive to buyers and consequently
other suppliers. In order to provide buyers on the Ariba Supplier Network an
organized method for accessing goods and services, we rely on suppliers to
maintain web-based product catalogs, 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
Supplier Network.
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 Supplier 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
Supplier Network. Services provided by these parties include managing the Ariba
Supplier 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 have
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
Supplier Network to perceive our network as functioning improperly and to use
other methods to buy goods and services.
We Depend on Strategic Relationships with Our Partners.
We have established strategic relationships with certain outside companies.
These companies are entitled to resell our products and/or to host our products
for their customers. These relationships are new and this strategy is unproven.
We cannot be assured that any of these resellers, ASP partners or hosting
partners, or those we may contract with in the future, will be able to resell
our products to an adequate number of customers. If our current or future
strategic partners are not able to successfully resell our products, our
business could be seriously
34
harmed. For example, we have formed a strategic alliance with IBM to market and
sell targeted solutions. We also have strategic relationships with Softbank and
its affiliates, as a minority shareholder of our Japanese and Korean
subsidiaries, Nihon Ariba K.K. and Ariba Korea, Ltd. There is no guarantee that
these alliances will be successful in creating a larger market for our product
offerings. If these alliances are not successful, our business, operating
results and financial position could be seriously harmed.
We Face Intense Competition From Many Participants in the 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 has
resulted in price reductions and reduced gross margins, and could result in
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 they offer. In addition, because spend management is a relatively new
software category, we expect additional competition from other established and
emerging companies as this market continues to expand. 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 other companies who introduce
Internet-based spend management solutions.
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, Our Business Will Be Seriously Harmed.
We may fail to introduce or deliver new releases of our products 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 characterized by rapid
technological change, changing customer needs and evolving industry standards.
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 market
requirements or achieve market acceptance.
35
The introduction of Version 7.0 of Ariba Buyer was delayed significantly in
the first quarter of fiscal 2001, and we have experienced delays in the
introduction of other products and releases in the past. If new releases of our
products or potential new products are delayed, we could experience a delay or
loss of revenues and customer dissatisfaction.
Our Business Will Be Seriously Harmed If We Fail to Establish and Maintain
Relationships With Third Parties That Will Effectively Implement Ariba Buyer,
Ariba Enterprise Sourcing and Our Other Products.
We rely on a number of third parties to implement Ariba Buyer, Ariba
Enterprise Sourcing 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 IBM, Accenture, Arthur Andersen,
Cap Gemini Ernst & Young, Deloitte Consulting, KPMG Consulting and
PricewaterhouseCoopers 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 systems integrators, and these systems integrators may be more
likely to recommend competitors' products and services 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 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 year 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
receivable.
New Versions and Releases of Our Products May Contain Errors or Defects.
Ariba Buyer, Ariba Enterprise Sourcing 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
fiscal 2000 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.
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 June 5, 2001, several purported shareholder class
action complaints were filed in the United States District Court for the
Southern District of New York against us, certain of our officers or former
officers and directors and three of the underwriters of our initial public
offering. These actions purport to be brought on behalf of purchasers of our
common stock in the period from June 23, 1999, the date of our initial
36
public offering, to December 23, 1999 (in some cases, to December 5 or 6,
2000), and make certain claims under the federal securities laws, including
Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a)
of the Securities Exchange Act of 1934, relating to our initial public
offering. Specifically, among other things, these actions allege the prospectus
pursuant to which shares of common stock were sold in our initial public
offering, which was incorporated in a registration statement filed with the
SEC, contained certain false and misleading statements or omissions regarding
the practices of our underwriters with respect to their allocation of shares of
common stock in our initial public offering to their customers and their
receipt of commissions from those customers related to such allocations, and
that such statements and omissions caused our post-initial public offering
stock price to be artificially inflated. The actions seek compensatory damages
in unspecified amounts as well as other relief.
On June 26, 2001, these actions were consolidated into a single action
bearing the title In re Ariba, Inc. Securities Litigation, 01 CIV 2359. On
August 9, 2001, that consolidated action was further consolidated before a
single judge with cases brought against over a hundred additional issuers and
their underwriters that make similar allegations regarding the initial public
offerings of those issuers. The latter consolidation was for purposes of
pretrial motions and discovery only. We 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 Our Products and Services or Products and
Services Purchased Through the Ariba Supplier 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 Supplier Network provides our customers with indices of products
that can be purchased from suppliers participating in the Ariba Supplier
Network. The law relating to the liability of providers of listings of products
and services sold over the Internet for errors, defects or other performance
problems with respect to those products and services is currently unsettled. We
do not pre-screen the types of products and services that may be purchased
through the Ariba Supplier Network. Some of these products and services could
contain performance or other problems. We may not successfully avoid civil or
criminal liability for problems related to the products and services sold
through the Ariba Supplier 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 Supplier Network or other
electronic networks using our market maker applications.
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
37
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 Supplier 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, Our Business Will be Harmed.
Even after giving effect to our recent workforce reductions, the scope of
our operations and our workforce has expanded significantly over a relatively
short period. This expansion has placed a significant strain upon our
management systems and resources. If we are unable to manage our expanded
operations, our business will be seriously harmed. 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 workforce. We have implemented new systems to manage our
financial and human resources infrastructure. We may find that these systems
and our personnel, procedures and controls are inadequate to support our future
operations.
Our Business Is Susceptible to Numerous Risks Associated with International
Operations.
We have committed and expect to continue to commit significant resources to
our international sales and marketing activities. We are subject to a number of
risks associated with these 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;
38
. 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.
Our international sales are denominated in U.S. dollars and in foreign
currencies. An increase in the value of the U.S. dollar relative to foreign
currencies could make our products more expensive and, therefore, potentially
less competitive in foreign markets. For international sales and expenditures
denominated in foreign currencies, we are subject to risks associated with
currency fluctuations. We hedge risks associated with foreign currency
transactions in order to minimize the impact of changes in foreign currency
exchange rates on earnings. We utilize forward contracts to hedge trade and
intercompany receivables and payables. All hedge contracts are marked to market
through earnings every period. There can be no assurance that such hedging
strategy will be successful and that currency exchange rate fluctuations will
not have a material adverse effect on our operating results.
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 provider
of Internet-based trading applications, and Tradex Technologies, a provider of
solutions for electronic marketplaces. In the quarter ended September 30, 2000,
we acquired SupplierMarket.com, a 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.
For example, in the second quarter of fiscal 2001, we entered into, but
subsequently terminated, an agreement to acquire Agile Software Corporation. If
our acquisition 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 Acquisitions Are, and Any Future Acquisitions Will Be, Subject to a
Number of Risks.
Our 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 our ongoing businesses;
. 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.
39
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 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 prices and volumes, which are particularly
common among highly volatile securities of software and Internet-based
companies.
We Disclose Pro Forma Financial Information.
We prepare and release quarterly unaudited financial statements prepared in
accordance with generally accepted accounting principles ("GAAP"). We also
disclose and discuss certain pro forma financial information in the related
earnings release and investor conference call. This pro forma financial
information excludes certain non-cash and special charges, consisting primarily
of the amortization of goodwill and other intangible assets, impairment of
goodwill, other intangible assets and equity investments, business partner
warrants expense, stock-based compensation and restructuring and lease
abandonment costs. We believe the disclosure of the pro forma financial
information helps investors more meaningfully evaluate the results of our
ongoing operations. However, we urge investors to carefully review the GAAP
financial information included as part of our Quarterly Reports on Form 10-Q,
our Annual Reports on Form 10-K, and our quarterly earnings releases, compare
GAAP financial information with the pro forma financial results disclosed in
our quarterly earnings releases and investor calls, and read the associated
reconciliation.
We Are at Risk of Further 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, including certain anti-takeover provisions, 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.
40
We Depend on Increasing Use of the Internet. If the Use of the Internet Does
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 a limited
number of 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 innovations 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 Supplier 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.
41
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 Supplier 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 Supplier 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 Supplier 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 November 1, 2003. Failure to enact or
renew this legislation could allow various states to impose taxes on electronic
commerce, and the imposition of these taxes could seriously harm our business.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market Risk
In the normal course of business, we are exposed to market risk related to
fluctuations in interest rates, market prices and foreign currency exchange
rates. We address these risks through a risk management program that includes
the use of derivative financial instruments. Under established procedures and
controls, we enter into contractual arrangements or derivatives to hedge our
exposure to foreign exchange rate risk. The counter parties to these
contractual arrangements are major financial institutions. We do not use
derivative financial instruments for speculative or trading purposes.
We develop products in the United States and market our products in the
United States, Latin America, Europe, Canada, Asia Pacific and Asia. As a
result, our financial results could be affected by factors such as changes in
foreign currency exchange rates or weak economic conditions in foreign markets.
Since the majority of our sales are currently made in U.S. dollars, a
strengthening of the dollar could make our products less competitive in foreign
markets. If any of the events described above were to occur, our net sales
could be seriously impacted, since a significant portion of our net sales are
derived from international operations. For the quarters ended December 31, 2001
and 2000, approximately 43% and 25%, respectively, of our total net sales were
derived from customers outside of the United States. As a result, our U.S.
dollar earnings and net cash flows from international operations may be
adversely affected by changes in foreign currency exchange rates.
Foreign Currency Exchange Rate Risk
We use derivative instruments to manage risks associated with foreign
currency transactions in order to minimize the impact of changes in foreign
currency exchange rates on earnings. We utilize forward contracts to reduce our
net exposures, by currency, related to the monetary assets and liabilities of
our operations denominated in non-functional currency. In addition, from time
to time, we may enter into forward exchange contracts to establish with
certainty the U.S. dollar amount of future firm commitments denominated in a
foreign currency. The forward contracts do not qualify for hedge accounting and
accordingly, all of these instruments are
42
marked to market at each balance sheet date through earnings every period. We
believe that these forward contracts do not subject us to undue risk due to
foreign exchange movements because gains and losses on these contracts are
generally offset by losses and gains on the underlying assets and liabilities.
We do not use derivatives for trading or speculative purposes.
All contracts have a maturity of less than one year and we do not defer any
gains and losses, as they are all accounted for through earnings every period.
The following table provides information about our foreign exchange forward
contracts outstanding as of December 31, 2001, (in thousands):
Contract Value Unrealized
-------------- Gain/(Loss)
Foreign Currency Buy/Sell Currency USD in USD
---------------- -------- -------- ----- -----------
AUD.................................... Sell (900) $(466) $ 9
CHF.................................... Buy 500 $ 306 $( 3)
EUR.................................... Buy 900 $ 814 $(15)
The unrealized gain/loss represents the difference between the contract
value and the current value of the contract based on market rates. Ariba had no
foreign exchange forward contracts in place prior to fiscal 2001.
Given our foreign exchange position, a ten percent change in foreign
exchange rates upon which these forward exchange contracts are based would
result in exchange gains and losses. In all material aspects, these exchange
gains and losses would be fully offset by exchange losses and gains on the
underlying net monetary exposures for which the contracts are designated as
hedges. We do not expect material exchange rate gains and losses from other
foreign currency exposures.
Interest Rate Risk
Our exposure to market risk for changes in interest rates relate primarily
to our investment portfolio. We do not use derivative financial instruments in
our investment portfolio. The primary objective of our 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. We do hold investments in both
fixed rate and floating rate interest earning instruments which carry a degree
of interest rate risk. Fixed rate securities may have their fair market value
adversely impacted due to a rise in interest rates, while floating rate
securities may produce less income than expected if interest rates fall.
Due in part to these factors, our future investment income may fall short of
expectations due to changes in interest rates or we may suffer losses in
principal if forced to sell securities which have declined in market value due
to changes in interest rates. Our investments may fall short of expectations
due to changes in market conditions and as such we may suffer losses at the
time of sale due to the decline in market value. All investments in the table
below are carried at market value, which approximates cost.
Our interest rate risk has been minimal as interest expense related to lease
commitments has been immaterial for the quarter ended December 31, 2001.
43
The table below represents principal (or notional) amounts and related
weighted-average interest rates by year of maturity of our investment portfolio
(in thousands except for interest rates).
Year ending Year ending Year ending Year ending Year ending
December 31, December 31, December 31, December 31, December 31,
2002 2003 2004 2005 2006 Thereafter Total
------------ ------------ ------------ ------------ ------------ ---------- --------
Cash equivalents............. $ 78,260 -- -- -- -- -- $ 78,260
Average interest rate........ 2.36% -- -- -- -- -- 2.36%
Investments.................. $109,279 $38,851 $21,428 -- -- -- $169,558
Average interest rate........ 3.97% 5.00% 3.54% -- -- -- 4.15%
Total investment securities.. $187,539 $38,851 $21,428 -- -- -- $247,818
Note that these amounts exclude equity investments and uninvested cash.
44
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
Between March 20, 2001 and June 5, 2001, several purported shareholder class
action complaints were filed in the United States District Court for the
Southern District of New York against us, certain of our officers or former
officers and directors and three of the underwriters of our initial public
offering. These actions purport to be brought on behalf of purchasers of our
common stock in the period from June 23, 1999, the date of our initial public
offering, to December 23, 1999 (in some cases, to December 5 or 6, 2000), and
make certain claims under the federal securities laws, including Sections 11
and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, relating to our initial public offering.
Specifically, among other things, these actions allege the prospectus pursuant
to which shares of common stock were sold in our initial public offering, which
was incorporated in a registration statement filed with the SEC, contained
certain false and misleading statements or omissions regarding the practices of
our underwriters with respect to their allocation of shares of common stock in
our initial public offering to their customers and their receipt of commissions
from those customers related to such allocations, and that such statements and
omissions caused our post-initial public offering stock price to be
artificially inflated. The actions seek compensatory damages in unspecified
amounts as well as other relief.
On June 26, 2001, these actions were consolidated into a single action
bearing the title In re Ariba, Inc. Securities Litigation, 01 CIV 2359. On
August 9, 2001, that consolidated action was further consolidated before a
single judge with cases brought against over a hundred additional issuers and
their underwriters that make similar allegations regarding the initial public
offerings of those issuers. The latter consolidation was for purposes of
pretrial motions and discovery only. We intend to defend against the complaints
vigorously.
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. We have accrued for estimated losses in the accompanying financial
statements for those matters where we believe that the likelihood that a loss
has occurred is probable and the amount of loss is reasonably estimable.
Although management currently believes that the outcome of other outstanding
legal proceedings, claims and litigation involving us will not have a material
adverse effect on our business, results of operations or financial condition,
litigation is inherently uncertain, and there can be no assurance that existing
or future litigation will not have a material adverse effect on our business,
results of operations or financial condition.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Securities Holders
Not applicable.
Item 5. Other Information
Not applicable.
45
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
4.4* First Amended and Restated Shareholders Agreement, dated December 10,
2001, by and among SOFTBANK Corp., SOFTBANK EC Holdings Corp.,
Registrant and Nihon Ariba K.K.
10.22* Letter Agreement, dated October 20, 2001, by and between Registrant
and Lawrence A. Mueller.
10.23* Offer Letter, dated October 16, 2001, by and between Registrant and
James W. Frankola.
10.24* Amendment No. 1 to Stock Purchase Agreement, dated December 10, 2001,
by and among Nihon Ariba K. K., SOFTBANK Corp., and SOFTBANK EC
Holdings Corp.
10.25* Standby Purchase Agreement, dated December 10, 2001, by and among
Registrant, Nihon Ariba K.K. and SOFTBANK EC Holdings Corp.
10.26* Release Reimbursement and Payment Agreement, dated December 10, 2001,
by and among Registrant, Nihon Ariba K.K., SOFTBANK Corp. and
SOFTBANK EC Holdings Corp.
(b) Reports on Form 8-K
Not applicable.
- --------
* Confidential treatment has been requested with respect to certain provisions
of this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission.
46
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.
By: /s/ JAMES W. FRANKOLA
__________________________________
James W. Frankola
Executive Vice President and Chief
Financial Officer (Principal
Financial and Accounting Officer)
Date: February 14, 2002
47
EXHIBIT INDEX
Exhibit
No. Exhibit Title
- ------- -------------
4.4* First Amended and Restated Shareholders Agreement, dated December 10, 2001, by and among
SOFTBANK Corp., SOFTBANK EC Holdings Corp., the Registrant and Nihon Ariba K.K.
10.22* Letter Agreement, dated October 20, 2001, by and between the Registrant and Lawrence A. Mueller.
10.23* Offer Letter, dated October 16, 2001, by and between the Registrant and James W. Frankola.
10.24* Amendment No. 1 to Stock Purchase Agreement, dated December 10, 2001, by and among Nihon
Ariba K.K., SOFTBANK Corp. and SOFTBANK EC Holdings Corp.
10.25* Standby Purchase Agreement, dated December 10, 2001, by and among Nihon Ariba K.K., the
Registrant and SOFTBANK EC Holding Corp.
10.26* Release, Reimbursement and Payment Agreement, dated December 10, 2001, by and among the
Registrant, Nihon Ariba K.K., SOFTBANK Corp. and SOFTBANK EC Holdings Corp.
- --------
* Confidential treatment has been requested with respect to certain portions
of this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission.