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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ___________ to ____________
Commission file number 000-26299
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ARIBA, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-439730
(State or other jurisdiction (IRS Employer
ofincorporation or organization) Identification Number)
807 11th Ave.,
Sunnyvale, California 94089
(Address of principal executive (Zip Code)
offices)
(650) 390-1000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
None
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.002 par value
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
As of November 30, 2001, there were 261,887,628 shares of the Registrant's
Common Stock outstanding. The aggregate market value of the Common Stock held
by non-affiliates of the Registrant (based on the closing price for the Common
Stock on the Nasdaq Stock Market on November 30, 2001) was approximately $1.03
billion.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III is incorporated by reference to
specified portions of the Registrant's definitive Proxy Statement to be issued
in conjunction with the Registrant's 2002 Annual Meeting of Stockholders, which
is expected to be filed not later than 120 days after the Registrant's fiscal
year ended September 30, 2001.
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ARIBA, INC.
FORM 10-K
September 30, 2001
TABLE OF CONTENTS
Page
Item No.
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PART I
1. Business............................................................................. 3
2. Properties........................................................................... 26
3. Legal Proceedings.................................................................... 27
4. Submission of Matters to a Vote of Security Holders.................................. 27
4A. Executive Officers of the Registrant................................................. 28
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters................ 29
6. Selected Consolidated Financial Data................................................. 29
7. Management's Discussion and Analysis of Financial Condition and Results of Operations 30
7A. Quantitative and Qualitative Disclosures About Market Risk........................... 50
8. Financial Statements and Supplementary Data.......................................... 53
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 87
PART III
10. Directors and Executive Officers of the Registrant................................... 88
11. Executive Compensation............................................................... 88
12. Security Ownership of Certain Beneficial Owners and Management....................... 88
13. Certain Relationships and Related Transactions....................................... 88
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...................... 89
SIGNATURES................................................................................ 91
PART I
ITEM 1. BUSINESS
The information in this report 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 elsewhere in this report in the section entitled "Risk Factors" and
the risks discussed in our other Securities and Exchange Commission ("SEC")
filings including our Form 10-Q for the quarter ended June 30, 2001 filed with
the SEC on August 14, 2001.
Overview
Ariba is a leading spend management software solutions provider. Ariba
provides software, services and network access to enable corporations to
evaluate and manage the cash costs associated with running their business
(their "spend"). The 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. Our products are
designed to integrate with our customers' existing applications and
infrastructure to enable them to more quickly realize savings.
The Ariba Enterprise Spend Management solution is designed to address three
primary business needs: the identification of savings opportunities, the
realization of such savings, and the ability to sustain such savings through
ongoing purchasing compliance. The Ariba Enterprise Spend Management solution
addresses these needs through three component solutions: Ariba Analysis, Ariba
Enterprise Sourcing, and Ariba Procurement.
Ariba Analysis consists of services designed to allow our customers to
analyze their aggregated spend across all of their suppliers and purchase areas
and to identify their greatest savings opportunities. Ariba Enterprise Sourcing
is a comprehensive product and services solution that enables companies to
manage their broad supplier interactions, from their initial "requests for
information" or "requests for quotes" through their final supplier selection.
Ariba Procurement is a suite of applications, including our market leading
Ariba Buyer application, that enables companies to manage their internal
purchasing processes, supplier relationships and supplier catalogs, and to
ensure purchasing compliance across their entire organizations. Our Ariba
Supplier Network provides scalable infrastructure to allow our customers to
connect to and transact with their suppliers. Ariba also offers a number of
services to our customers, providing them with domain expertise to complement
their implementations of Ariba products. We sell our products and related
services and currently market them in 25 countries in North America, Latin
America, Europe, Australia and Asia, primarily through our direct sales force
and indirect sales channels.
Ariba was incorporated in Delaware in September 1996 and from that date
through March 1997 was in the development stage, conducting research and
developing our initial products. Our principal executive offices are located at
807 11th Ave., Sunnyvale, California 94089.
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The Ariba Enterprise Spend Management Platform
The Ariba Enterprise Spend Management platform is a solution designed to
help organizations manage their spending activities. Our targeted customers are
large corporations and public sector institutions, whose large spending power
and distributed organization make them the most likely beneficiaries of our
solutions. We believe our solutions provide the following benefits to our
customers:
Significantly Reduced Processing Costs and Increased Productivity. By
automating the spend management process, including the procurement and sourcing
processes, our Ariba Procurement and Ariba Enterprise Sourcing solutions allow
organizations to achieve significant cost savings and productivity
enhancements. Ariba Procurement and Ariba Enterprise Sourcing enable an
organization to streamline and automate complex business processes. The Ariba
Supplier Network allows customers to connect once to a network with
pre-integrated suppliers, supplier profiles and supplier content. These
solutions also take advantage of existing investments in financial, human
resource and enterprise resource planning systems, thereby reducing or
eliminating the need to manually enter data into these systems. We believe this
increased productivity allows organizations to focus on other strategic
activities, such as negotiating better discounts with preferred suppliers.
Substantially Reduced Costs of Goods and Services. The Ariba solution
enables organizations to maximize procurement economies of scale, lowering the
overall costs of goods and services. Ariba Analysis enables our customers to
identify opportunities for cost savings. Ariba Procurement provides
company-wide data analysis and reporting tools on buying patterns. Ariba
Enterprise Sourcing enables organizations to identify preferred suppliers and
negotiate more favorable contracts with them, and through integration with
Ariba Buyer, enables transactions to be automatically routed to these preferred
suppliers. Moreover, our solutions are accessible on every desktop, are easy to
use and streamline the sourcing and procurement processes. These benefits
typically minimize unauthorized or noncompliant purchasing, further enabling
organizations to take advantage of negotiated discounts with suppliers.
Simultaneous Interaction with Multiple Enterprise Systems. Ariba's solutions
connect to, and work with, leading finance, human resource management and
enterprise resource planning systems from vendors such as PeopleSoft, SAP and
Oracle. In addition, they connect to and work with other legacy systems through
adapters that are sold as separate products. A single Ariba Buyer installation
can connect with multiple enterprise applications simultaneously through
real-time or scheduled interfaces.
Increased Adoption as a Result of User-Friendly, Web-based Interfaces. Our
products' browser-based user interfaces enable users throughout an organization
to take full advantage of Ariba solutions from their desktops, with minimal
training. Wizards, software that provides automated assistance, guide
less-experienced users through the business process, while an advanced user
interface makes the system more productive for experienced users.
Automation of Electronic Business Processes. Ariba's solutions provide
flexible workflow capabilities to streamline and automate even the most complex
or unusual business processes of large, multinational organizations. This
flexible workflow can be customized by the user for the unique processes of an
organization and can be tailored to respond to end-user input, system events or
any extrinsic or intrinsic data in the procurement cycle.
Integration with the Ariba Supplier Network. Ariba's solutions allow
organizations to automate commerce transactions with suppliers over the
Internet and through the Ariba Supplier Network. By adhering to open standards,
Ariba's solutions provide a variety of methods for buyers to communicate
electronically with supplier organizations through the Ariba Supplier Network.
Ariba Buyer also allows suppliers to take advantage of their existing web-based
catalogs to provide product information to buyers, while Ariba Enterprise
Sourcing allows suppliers to publish their capabilities in a database
containing detailed descriptions of supplier capabilities, products, and
operations.
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Ariba Products and Services
Our Ariba Enterprise Spend Management platform consists of three component
solutions: Ariba Analysis, Ariba Enterprise Sourcing, and Ariba Procurement. We
provide our customers with access to the Ariba Supplier Network, allowing them
to connect to and transact with their suppliers. Through our Global Services
Division, we provide our customers implementation services using our AribaLive
methodology, whereby our products are installed, customized and integrated at
our customer locations.
Ariba Analysis
Ariba Analysis currently consists of Ariba Benchmarking and Performance
Management Services, a service offering designed to enable our customers to
maximize the value of their spend management strategy. In addition, we are
currently developing Ariba Analysis, a product designed to capture and analyze
an organization's spending data. We currently expect to introduce the Ariba
Analysis product during the first half of calendar 2002. We may not be able to
successfully introduce this application on a timely or cost-effective basis.
Ariba Analysis helps a company's procurement manager analyze spend across
the entire organization. With visibility into historical spend, procurement
managers are able to discover savings opportunities, new spending patterns, and
uncategorized or unauthorized spend. Savings opportunities are frequently
identified through supplier fragmentation and comparison against industry
benchmark analysis.
Ariba Benchmarking and Performance Management services include
pre-implementation, implementation, and post-implementation services designed
to increase our customers' potential savings using Ariba products. During the
pre-sales process, Ariba Value Assessments are conducted to identify specific
savings opportunities based on each customer's historical spending patterns.
These assessments can enhance the value of each Ariba product implementation by
providing a baseline for recommended implementation and spend management
strategies. Finally, we conduct post-implementation reviews designed to provide
our customers with a general or industry-specific comparative ranking of the
success of their spend management strategies and efforts, creating the
opportunity for changes in strategy to increase their realized savings.
Using Ariba Analysis, a company's procurement group can focus on strategic
activities such as creating category plans and identifying savings
opportunities. By providing clear data and analysis, Ariba Analysis helps
management identify and implement spend reduction programs.
Ariba Enterprise Sourcing
Ariba Enterprise Sourcing is designed to handle the typical business
interactions between our customers and their suppliers. The Ariba Enterprise
Sourcing solution consists of Ariba Enterprise Sourcing, our enterprise-based
sourcing and supplier management product, and Ariba Event Support and
Consulting services. The Ariba Enterprise Sourcing product works in conjunction
with Ariba Buyer to establish contracts based on sourcing results. This
integration helps to ensure ongoing compliance with favorable contract terms
negotiated during the sourcing process. In addition, the Ariba Contracts
product, which is expected to be made generally available during the first half
of calendar 2002, is designed to handle the creation and management of supplier
contracts and the management of purchases against the terms of those contracts.
We may not be able to successfully introduce this application on a timely or
cost-effective basis.
We believe Ariba Enterprise Sourcing is the first solution on the market
specifically designed to be deployed on an enterprise-wide basis to help
businesses better manage spend through more effective sourcing. The Ariba
Enterprise Sourcing solution helps streamline and automate the entire sourcing
process, from a customer's definition and aggregation of spending requirements
to supplier management, negotiation, and establishment of optimal contracts
with suppliers. Ariba Sourcing supports the sharing of documents between a
buyer and its suppliers, public or private question and answer sessions between
a buyer and its suppliers, and
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online negotiation. These features reduce the sourcing workload, reduce
sourcing cycle time and provide an audit trail. Ariba Enterprise Sourcing can
be deployed as a hosted or an installed application.
Ariba Enterprise Sourcing helps our customers to:
Define and Aggregate their Buying Needs. Our customers can define their
buying needs using our step-by-step RFxBuilder(TM). RFx is a term that
describes all of the sourcing processes supported by Ariba Enterprise Sourcing,
including requests for information, requests for proposals, requests for
quotes, and negotiation-based events. The RFx processes provide our customers
with the ability to obtain competitive quotes while complying with their
internal procurement policies.
Manage their Supplier Relationships and Interactions. Our customers can
search for and capture the information they need about their suppliers.
Suppliers can in turn collaborate with our customers to communicate their
capabilities through the multi-stage RFx process and additional messaging
functionality within the Ariba Enterprise Sourcing product.
Improve their Sourcing Processes. Our customers can automate and manage all
the stages of the sourcing process, from requests for information through final
negotiations. Our customers use the customizable RFx templates to communicate
detailed requirements to suppliers. Ariba Sourcing's bid-scoring and
optimization features help our customers establish a supplier base optimally
suited to their needs, while reducing their purchasing costs.
Establish and Execute Supplier Contracts. The integration of Ariba
Enterprise Sourcing with Ariba Buyer enables our customers to more easily
transfer data into systems that drive procurement execution and compliance, so
that our customers' purchases will be made via negotiated prices with selected
suppliers. Ariba Enterprise Sourcing works with Ariba Buyer to allow users to
establish purchase requisitions or master purchase agreements.
Ariba's Event Support and Consulting services are designed to help our
customers realize the benefits of their sourcing strategy rapidly. These
services provide our customers with commodity and domain expertise to assist in
managing their internal sourcing activities. Ariba Event Support Services offer
customers assistance in event management and support throughout the RFx
lifecycle. These services are provided by our experienced in-house sourcing
specialists.
Ariba Procurement
Ariba Procurement is a suite of applications that enables companies to
manage their internal purchasing processes, supplier relationships and supplier
catalogs, and to promote purchasing compliance across their entire
organizations. Ariba Procurement consists of our market leading Ariba Buyer
application, as well as Ariba Workforce, Ariba Travel and Expense and Ariba
eForms. In addition, Ariba Invoice and Ariba Contracts, which we expect to
introduce in the first half of calendar 2002, are designed to streamline and
optimize invoicing and reconciliation and contract creation, respectively.
Ariba Buyer. Ariba Buyer is the cornerstone application of the Ariba
Procurement solution. It is a robust, scalable and reliable application that
enables organizations to reduce processing costs, improve productivity and
achieve compliance on enterprise-wide contracts by automating the procurement
cycle, linking end-users throughout the organization with approvers, and
linking the procurement application to back-end financial, purchasing and human
resource systems.
Through Ariba Buyer, our customers are able to achieve cost savings by
reducing transaction expenses, decreasing cycle times, and leveraging existing
supplier relationships. The compliance mechanisms provided by Ariba Buyer allow
our customers to achieve these savings. Ariba Buyer allows customers to attain
global user and supplier adoption, enforce compliance, and measure progress. It
also allows customers to automate
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commerce transactions securely with suppliers on the Internet through the Ariba
Supplier Network. Ariba Buyer works with multiple enterprise systems
simultaneously, in addition to providing electronic access to important
procurement information, such as supplier product information, price lists, web
sites and order status.
Ariba Workforce. Released in October 2001, Ariba Workforce helps companies
facilitate the complex process of procuring and managing temporary workers,
contractors and consultants. Ariba Workforce provides a single, comprehensive
system for companies to gain visibility into and control over their workforce
procurement and management lifecycle. In particular, Ariba Workforce enables
organizations to: increase usage of preferred suppliers and benefit from
discounted supplier contracts; minimize billing inaccuracies through automated
and collaborative management of bill tracking, change order, service delivery,
and volume discount processes with suppliers online; and collaborate online
with multiple suppliers and contractors to exchange and gather complex
information and increase process efficiencies. We license the core technology
for our Ariba Workforce product from our partner Cascadeworks. Ariba Workforce
integrates with Ariba Buyer and can be accessed by our customers' users from
their desktops.
Ariba Travel and Expense. Ariba Travel and Expense is designed as an
easy-to-use web-based application for corporate travel and expense management.
The application automates manual processes facilitating most phases of company
travel, including approvals, expense reports, data analysis and reporting. We
believe automation of travel and expense processes increases expense policy
compliance, decreases administrative costs, and reduces cycle times. Ariba
Travel and Expense provides a robust set of features to generate expense
reports automatically from travel card or procurement card data feeds and can
route expense reports to functional, travel and expense managers.
Ariba eForms. Ariba eForms allows organizations to automate non-standard
business processes outside of the core requisitioning process. Users are able
to attach custom forms to existing Ariba applications or create new
applications for nearly any type of operating resource request. Ariba eForms
are created using XML (eXtensible Markup Language), a robust definition
language that allows organizations to design forms that capture information
from end-users and route the information for internal approval. Each Ariba
eForm can have its own approval rules and can incorporate standard data from
Ariba Buyer, including financial accounting and human resources information.
Ariba Contracts. Ariba Contracts is a web-based application designed to help
purchasing organizations manage the contracts process. Ariba Contracts is
designed to reduce the inefficiencies traditionally associated with the
negotiation, creation, compliance and management of purchase contracts. We
believe Ariba Contracts will allow companies to: accelerate the contract
renewal and negotiation process; improve compliance with contracted pricing;
and gain visibility into their contract activities and performance. Ariba
Contracts is expected to be introduced in the first half of calendar 2002.
Ariba Invoice. Ariba Invoice is an enterprise solution for streamlining and
optimizing invoicing and reconciliation. We believe Ariba Invoice will allow
our customers to gain more control of the invoice processing cycle; automate
data entry, matching, and exception resolution processes; foster stronger
partner relationships with more prompt and accurate handling of invoices; and
centralize invoicing data. Ariba Invoice is designed to decrease the
traditional cost of invoice reconciliation, exception handling, and supplier
communication, while improving the efficiency of the payment process. Ariba
Invoice is expected to be made available for general release in the first half
of calendar 2002.
We may not be able to successfully develop and introduce Ariba Contracts and
Ariba Invoice on a timely and cost-effective basis.
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Ariba Enterprise Adaptors
Ariba enterprise adapters are designed specifically to integrate Ariba
products with leading enterprise resource planning (ERP) systems for data and
transactions related to accounting, human resource management and purchasing.
Integration refers to the ability of Ariba adapters to exchange information
with an organization's enterprise systems, eliminating the need for manual
transfer of critical information from Ariba products to these systems. Ariba
enterprise adapters can integrate with standard implementations of these
systems or can be configured to integrate with custom installations of these
enterprise systems. These adapters enable a single Ariba product installation
to integrate with multiple enterprise applications simultaneously.
We currently offer the following adapters:
Ariba SAP Adapter. Ariba SAP Adapter provides integration with SAP
applications through standard programming interfaces and pre-built adapters for
financial, purchasing and human resources information.
Ariba PeopleSoft Adapter. Ariba PeopleSoft Adapter allows integration with
PeopleSoft applications through standard programming interfaces and pre-built
adapters for financial, human resources and purchasing information.
Ariba Oracle Adapter. Ariba Oracle Adapter allows integration with Oracle
applications via general APIs and pre-built adapters for financial and
purchasing information.
Ariba Authentication Adapter. Ariba Authentication Adapter provides
integration with standard user authentication and directory services such as
LDAP and Microsoft's Active Directory.
Ariba Generic API Adapter. Ariba Generic API Adapter provides integration
with existing and legacy enterprise systems to interface information with Ariba
Buyer.
Customers who purchase our software products receive a capacity-based
license. The license fee for a capacity license is based on the customer's
employee count, and may in addition be based on the annual volume of business
document transactions on the Ariba Supplier Network.
Employee-based capacity licensing allows customers to scale the total cost
of their Ariba Spend Management system implementation to their needs. The
business document capacity license enables customers to utilize the licensed
volume of business document transactions on the Ariba Supplier Network during
each annual license term period. Customers who exceed their estimated volume
can purchase additional capacity.
The Ariba Supplier Network
The Ariba Supplier Network connects buyers and suppliers via the Internet
and offers electronic payment, catalog and content management, transaction
routing and multi-protocol support for numerous electronic commerce standards.
Businesses can: search an open directory of trading partners, including over
26,000 suppliers worldwide; subscribe to and manage catalog content; and
conduct transactions, including order management and fulfillment, invoicing,
and settlement. By using the Ariba Supplier Network, companies can realize cost
savings through greater process efficiencies, better employee and contract
compliance, reduced inventories and fair pricing opportunities.
Our multi-protocol network allows buyers to send transactions from Ariba
Buyer in one standard format. It then converts the order into the supplier's
preferred transaction format, such as cXML (Commerce eXtensible Markup
Language), a format used on the Internet to describe commerce data and
documents, or EDI (Electronic Data Interchange), a format used to exchange data
and documents electronically. This feature gives suppliers the freedom to
transact in their preferred protocols.
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The Ariba Supplier Network also allows suppliers to utilize their existing
electronic commerce systems to provide information about their products and
services. Suppliers can send electronic catalogs through standard formats such
as CIF (Catalog Interchange Format), a format commonly used to transfer catalog
information electronically, and cXML. In addition, buyers can link to a
supplier's web site using a technology called cXML PunchOut. cXML PunchOut
allows a buyer to select a product by accessing a supplier's web site while
keeping the purchasing process within our Ariba Buyer system for internal
approval, accounting and administrative controls. This feature is particularly
useful for suppliers with robust web sites, electronic product configuration
systems and large product catalogs. In addition, suppliers can utilize their
existing investments in electronic commerce systems, including catalogs and
product web pages.
The key features of the Ariba Supplier Network are:
Open Standards Multi-Protocol Transaction Network. The Ariba Supplier
Network automatically routes and translates documents between buyers and
suppliers using most major electronic commerce standards, including cXML;
Internet EDI; VAN EDI (Value Added Networks for EDI); HTML (Hyper-Text Markup
Language), a format commonly used to define content for web pages; e-mail;
auto-fax and CIF. This enables buyers to conduct business with suppliers
independent of the type of electronic commerce systems used by the supplier.
Content Management. Ariba provides robust, flexible content tools and
services to help suppliers easily create, syndicate and manage comprehensive
product and service information. From electronic-formatted catalogs to complex
content, Ariba and its partners empower suppliers to take control of their most
important asset (i.e., their product data) and reap the benefits of electronic
commerce. Ariba Supplier Network allows suppliers to take advantage of existing
web-based catalogs through CIF, cXML and cXML PunchOut. Additionally, suppliers
can lower commerce costs by publishing catalogs to multiple buyers and
marketplaces and receiving all of their orders through a single channel. With
Ariba PunchOut, suppliers can reuse their existing web infrastructure to
provide the custom and dynamic content that most effectively meets customers'
needs, resulting in rapid return on investment. Buyers can then easily find and
configure products without dealing with large catalogs.
Supplier Self-management and Registration. To transact with all buying
organizations using Ariba Buyer, suppliers need to register just once and can
continue to manage their relationships online, using their preferred
transaction routing method and configurations without the need for additional
software.
News, Information and Services. The Ariba Supplier Network provides news,
information and services of interest to business buyers and suppliers such as
sourcing, supplier, financial and industry information.
Strategic Relationships
We believe that strategic partnerships can assist us in gaining broader
market acceptance as well as enhance our marketing, sales and distribution
capabilities. Accordingly, we have established strategic relationships with
organizations in five general categories: hardware platforms; software; network
service providers; resellers and hosting/application service provider (ASP)
partners; and systems integrators.
Our hardware platform partners include Dell, Hewlett-Packard, IBM and Sun
Microsystems. These relationships help ensure the reliability, scalability and
performance of the Ariba solution on these platforms. Our software partners
include BEA Systems, Cascadeworks (from whom we license the core technology for
our Ariba Workforce product), TIBCO, Altavista and Dash. These software
partners offer technology that is integral to our products and services. Our
network service providers, such as American Express and Verisign, enrich
services offered by the Ariba Supplier Network.
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We have reselling and hosting relationships with IBM, J.D. Edwards, Unisys,
EDS, Core Harbor, Genuity, Surebridge, US Internetworking, and Integris. We
also have strategic relationships with Softbank in Japan and Korea, and
Telefonica to resell our products in Europe and Latin America
We have systems integrator relationships with IBM, Accenture, Arthur
Andersen, Cap Gemini Ernst & Young, Deloitte Consulting, KPMG Consulting and
PricewaterhouseCoopers, as well as with over 100 regional consulting firms.
These partners implement our products and assist us with sales lead generation.
We have certified and trained consultants in these organizations for the
implementation and operation of our products.
We rely, and expect to increasingly rely, on a number of third parties to
implement, support and recommend our products and services during the
evaluation stage of a customer's purchase process. If we are unable to maintain
or increase the number and quality of our relationships with providers that
recommend, implement or support goods and services management systems, our
business will be seriously harmed. A number of our competitors, including
Oracle, SAP and PeopleSoft, have significantly more established relationships
with such providers and, as a result, these firms may be more likely to
recommend competitors' products and services rather than our products and
services. Furthermore, it is possible that our current implementation partners,
many of which have significantly greater financial, technical, marketing and
other resources than we have, could begin to market software products and
services that compete with our products and services.
Sales and Implementation
We sell our software primarily through our worldwide direct sales
organization. As of September 30, 2001, our direct sales force consisted of 289
sales professionals and supporting personnel located in several domestic
locations and offices in North America, Europe, Asia, Australia and Latin
America. Application specialists that provide pre-sales support to potential
customers on product information and deployment capabilities complement our
direct sales force.
During our sales process, we typically engage senior executive management
teams including the chief financial officer, chief procurement officer, chief
information officer and chief executive officer of our potential customers. We
utilize sales teams consisting of both sales and technical professionals who
work with our strategic partners to create organization-specific proposals,
presentations and demonstrations that address the specific needs of each
potential customer.
Ariba provides professional services to augment the implementation efforts
of customers and systems integrators. This organization provides professional
services on the strategy, methodology and technical implementation of the Ariba
products.
Our strategic partners often work with us and participate in joint sales
calls to several of our large accounts. See "Strategic Relationships."
Marketing
We focus our marketing efforts toward educating our target market,
generating new sales opportunities, and creating awareness for our spend
management solutions. We conduct a variety of marketing programs worldwide to
educate our target market. We have engaged in marketing activities such as
business seminars, trade shows, press relations and industry analyst programs
and advisory councils.
Our marketing organization also serves an integral role in acquiring,
organizing and prioritizing customer and industry feedback in order to help
provide product direction to our development organizations. We formalized this
customer-driven approach by establishing advisory council meetings, made up of
numerous industry experts, to provide forums for discussing customer needs and
requirements. In addition to providing information to prospective customers,
advisory council meetings provide a useful forum in which to share
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information, test product concepts and collect data on customer and industry
needs. We have also augmented advisory council meetings with a detailed product
management process that surveys customer and market needs to predict and
prioritize future customer requirements. We intend to continue to pursue these
programs in the future.
Customer Service, Training and Support
We believe that customer satisfaction is essential for our long-term success
and offer comprehensive customer assistance programs. Our technical support
provides response to and resolution of customer technical inquiries and is
available to clients by telephone, over the web or by electronic mail. We use a
customer service automation system to track each customer inquiry until it is
resolved. Our education services group delivers education and training to our
clients and partners. We offer a comprehensive series of classes to provide the
knowledge and skills to successfully deploy, use and maintain our products and
solutions. These courses focus on the technical aspects of our products as well
as real-world business issues and processes. All of our classes include
lecture, demonstration, discussion and hands-on use of our solutions. Classes
are held regularly in our training facilities at our headquarters in Sunnyvale,
California and in London, United Kingdom.
Research and Development
We introduced our initial product, Ariba Buyer, in May 1997 and have
released a number of product enhancements in six subsequent major releases. We
introduced Ariba Sourcing in August 2000, following our acquisition of
SupplierMarket. We began to operate the Ariba Supplier Network in April 1999
and continue to provide enhancements to this Internet platform on an ongoing
basis. Research and development expenses were $90.9 million, $39.0 million and
$11.6 million for the fiscal years ended September 30, 2001, 2000 and 1999,
respectively. In addition, for fiscal year 2000, we recorded charges of $27.4
million for acquired in-process research and development costs in connection
with our acquisitions of TradingDynamics, Tradex and SupplierMarket. In
addition, for the years ended September 30, 2001 and 2000, we recorded
amortization of acquired core technology of $2.8 million and $2.9 million,
respectively in connection with these acquisitions.
Our research and development operations focus on Ariba Analysis, Ariba
Enterprise Sourcing, Ariba Procurement and the Ariba Supplier Network. We
currently anticipate introducing Ariba Analysis, Ariba Invoice and Ariba
Contracts in the first half of calendar 2002. Our research and development
organization has several teams that include server and infrastructure
development, user interface and Internet application design, tools development,
enterprise integration, operations, quality assurance, documentation, release
management and advanced development. The Ariba Analysis, Ariba Enterprise
Sourcing, Ariba Procurement and Ariba Supplier Network teams regularly share
resources and collaborate on code development, quality assurance and
documentation.
We cannot be sure that existing and future development efforts will be
completed within our anticipated schedules or that, if completed, they will
have the features or quality necessary to make them successful in the
marketplace. Further, despite testing by us and by current and potential
customers, errors could be found in our products. We may not be able to
successfully correct these errors in a timely and cost-effective manner. If we
are unable to develop new products or enhancements to existing products or
corrections on a timely and cost-effective basis, or if these new products or
enhancements do not have the features or quality necessary to make them
successful in the marketplace, our business will be seriously harmed.
We expect that most of our enhancements to existing and future products will
be developed internally or perhaps through acquisitions. However, we currently
license certain externally-developed technologies and will continue to evaluate
externally-developed technologies to integrate with our solutions. These
externally-developed technologies, if suffering from defects, quality issues or
the lack of product functionality required to make our solutions successful in
the marketplace, may seriously impact and harm our business.
11
International Operations
The Company has established twenty subsidiaries, namely Ariba Holdings, Inc.
in Cayman Islands, Ariba Technologies Ireland Limited in Ireland, Ariba Canada,
Inc. in Canada, Ariba U.K. Limited in the United Kingdom, Ariba Sweden AB in
Sweden, Ariba Italia S.r.l. in Italy, Ariba Technologies Netherlands B.V. in
the Netherlands, Ariba Technologies India Private Limited in India, Ariba
Iberia, S.L. in Spain, Ariba Latin America, Inc. in Latin America, Ariba
Argentina in Argentina, Ariba Brazil Limitada in Brazil, Ariba Deutschland GmbH
in Germany, Ariba Korea, Ltd. in Korea, Ariba France Sarl in France, Ariba
(China) Limited in Hong Kong, Ariba Australia Pty Ltd in Australia, Ariba New
Zealand in New Zealand, Ariba Switzerland GmbH/Sarl/Ltd liab Co. in
Switzerland, Ariba Singapore Ltd. in Singapore and Nihon Ariba K.K. in Japan.
All of the subsidiaries are wholly-owned except our Japanese subsidiary, Nihon
Ariba K.K., and our Korean subsidiary, Ariba Korea, Ltd., in which Softbank and
other strategic partners have purchased minority equity interests. Revenue from
our international customers was $106.8 million, $61.5 million and $6.7 million
for the fiscal years ended September 30, 2001, 2000 and 1999, respectively.
Competition
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 offered. We compete with several major client server enterprise
software manufacturers including SAP, Oracle, and PeopleSoft. We have also
encountered competition with respect to different aspects of our solution from
a variety of vendors including Commerce One, Peregrine and i2 Technologies. In
the area of sourcing software specifically, we compete with services companies
such as FreeMarkets, as well as other relatively small software companies. 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 develop and expand.
We believe that the principal competitive factors affecting our market
include a significant base of reference customers, breadth and depth of
solution, product quality and performance, customer service, core technology,
product features, ability to implement solutions and value of solutions, and
size of vendor. Although we believe that our solutions currently compete
favorably with respect to these factors, our market is evolving rapidly. We may
not be able to maintain our competitive position against current and potential
competitors, especially those with significantly greater financial, marketing,
service, support, technical and other resources.
Many of our competitors have longer operating histories, significantly
greater current and potential 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 other
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.
Intellectual Property and Other Proprietary Rights
We depend on our ability to develop and maintain the proprietary aspects of
our technology. To protect our proprietary technology, we rely primarily on a
combination of contractual provisions, confidentiality procedures, trade
secrets, and patent, copyright and trademark laws.
12
We license rather than sell our software products and require our customers
to enter into license agreements, which impose restrictions on their ability to
utilize the software. In addition, we seek to avoid disclosure of our trade
secrets through a number of means, including but not limited to, requiring
those persons with access to our proprietary information to execute
confidentiality agreements with us and restricting access to our source code.
We seek to protect our software, documentation and other written materials
under trade secret and copyright laws, which afford only limited protection. We
cannot assure you that any of our proprietary rights with respect to the Ariba
Supplier Network will be viable or of value in the future since the validity,
enforceability and type of protection of proprietary rights in Internet-related
industries are uncertain and still evolving.
We presently have one U.S patent issued and six U.S. patent applications
pending. We also have filed patent applications in other countries. It is
possible that the patents that we have applied for, if issued, or our potential
future patents may be successfully challenged or that no patents will be issued
from our pending patent applications. It is also possible that we may not
develop proprietary products or technologies that are patentable, that any
patent issued to us may not provide us with any competitive advantages, or that
the patents of others will seriously harm our ability to do business.
We rely on technology that we license from third parties, including software
that is integrated with internally developed software and used in our software
products to perform key functions. For example, we license reporting software
from Actuate and integration software from TIBCO for Ariba Buyer. In addition,
our Ariba Workforce product consists of core technology we license from our
partner, Cascadeworks. If we are unable to continue to license any of this
software on commercially reasonable terms, we will face delays in releases of
our software until equivalent technology can be identified, licensed or
developed, and integrated into our current product. These delays, if they
occur, could seriously harm our business.
Ariba and the Ariba logo are registered as trademarks in the United States.
In addition, we have the following trademarks registered in one or more foreign
countries: Ariba, the Ariba logo and the Ariba "boomerang" design. We also have
filed applications to register these trademarks in several additional
countries. The above mentioned trademark applications are subject to review by
the applicable governmental authority, may be opposed by private parties, and
may not issue.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Policing unauthorized use of our products is
difficult, and while we are unable to determine the extent to which piracy of
our software products exists, software piracy can be expected to be a
persistent problem. In addition, the laws of some foreign countries do not
protect our proprietary rights to as great an extent as do the laws of the
United States. Our means of protecting our proprietary rights may not be
adequate and our competitors may independently develop similar technology,
duplicate our products or design around patents issued to us or our other
intellectual property.
There has been a substantial amount of litigation in the software and
Internet industries regarding intellectual property rights. It is possible that
in the future third parties may claim that we or our current or potential
future products infringe their intellectual property. We expect that software
product developers and providers of electronic commerce solutions will
increasingly be subject to infringement claims as the number of products and
competitors in our industry segment grows and the functionality of products in
different industry segments overlaps. Any claims, with or without merit, could
be time-consuming, result in costly litigation, cause product shipment delays
or require us to enter into royalty or licensing agreements. Royalty or
licensing agreements, if required, may not be available on terms acceptable to
us or at all, which could seriously harm our business.
Acquisitions
In January 20, 2000, we acquired TradingDynamics, Inc. ("TradingDynamics"),
a provider of Internet-based trading applications. On March 8, 2000, we
acquired Tradex Technologies, Inc. ("Tradex"), a provider of
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solutions for enabling online marketplaces and exchanges. On August 20, 2000,
we acquired SupplierMarket.com, Inc. ("SupplierMarket"), a provider of online
collaborative sourcing technologies. See Management's Discussion and Analysis
of Financial Condition and Results of Operations--Overview and Note 5 of Notes
to Consolidated Financial Statements for more detailed information.
Employees
As of September 30, 2001, we had a total of 1,124 employees, including 327
in research and development, 339 in sales and marketing, 317 in customer
support, professional services and training, and 141 in administration and
finance. Of these employees, 838 were located in the United States and 286 were
located outside the United States. During fiscal 2001, we significantly reduced
our workforce by approximately 1,100 employees to better align expenses and
revenue levels. In addition, we have implemented a further reduction of our
worldwide workforce during the quarter ending December 31, 2001. None of our
employees is represented by a collective bargaining agreement, nor have we
experienced any work stoppage. We consider our relations with our employees to
be good.
Our future operating results depend in significant part on the continued
service of our key technical, sales and senior management personnel, none of
whom is bound by an employment agreement. Our future success also depends on
our continuing ability to attract and retain highly qualified technical, sales
and senior management personnel. Competition for these personnel is intense,
and we may not be able to retain our key technical, sales and senior management
personnel or attract these personnel in the future. We have experienced
difficulty in recruiting qualified technical, sales and senior management
personnel, and we expect to experience these difficulties in the future. If we
are unable to hire and retain qualified personnel in the future, this inability
could seriously harm our business.
Risk Factors
In addition to other information in this Form 10-K, 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-K, and the risks
discussed in Ariba's other Securities and Exchange Commission filings, actual
results could differ materially from those projected in any forward-looking
statements.
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 Trading Dynamics, 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
14
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 $3.5 billion as of September
30, 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
three quarters ended September 30, 2001 and are expected to decline
further in the quarter ending December 31, 2001;
. 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 September 30, 2001, we had unamortized goodwill and other intangible
assets of approximately $877.8 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
September 30, 2001, we had deferred compensation of approximately $33.0 million
which is being amortized to expense over periods ranging from two to five
years. As a result of these intangible assets and deferred 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 each of the three quarters ended September 30, 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 of our products and services and related margins;
. 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.
15
Risks Related to Expenses
. payment of compensation to sales personnel based on achieving sales quotas
and co-sale payments, referral fees and other commissions to our strategic
partners based on our sales;
. royalties paid to third parties for technology incorporated into our
products and services;
. our ability to control costs, including managing planned reductions in
expense levels;
. costs resulting from the write off of intangible assets relating to recent
and any future acquisitions;
. 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;
. 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 quarter and perhaps 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.
16
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 September 30, 2001, we had an
aggregate of $877.8 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 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 $70.0 million and $63.5
million in the third and fourth quarters of fiscal 2001, respectively, 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 are
expected to decline further during fiscal 2002, we believe that our existing
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 2001, the decline 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
17
purchase of our products is often discretionary and generally involves a
significant commitment of capital and other resources by a customer. It
frequently takes several months to finalize a sale and requires approval at a
number of management levels within the customer organization. The
implementation and deployment of our products requires a significant commitment
of resources by our customers and third-party and/or professional services
organizations.
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 year ended September 30, 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 year ended September 30, 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.
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 and increasing
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.
18
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 reselling, ASP and hosting relationships with
certain outside companies. These companies are entitled to resell to, and/or
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 harmed. For example, we have formed a
strategic alliance with IBM to market and sell targeted solutions. We also have
strategic relationships with Softbank, 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.
19
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.
The introduction of Version 7.0 of Ariba Buyer was delayed significantly,
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.
20
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 the
past we discovered problems with respect to the ability of software written in
Java to scale to allow for large numbers of concurrent users of Ariba Buyer. We
have experienced delays in release, lost revenues and customer frustration
during the periods required to correct these errors. We may in the future
discover errors and additional scalability limitations in new releases or new
products after the commencement of commercial shipments.
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 two 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 Section 10(b) 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
21
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 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.
22
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;
. 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.
23
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.
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, 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, or Annual Reports on
Form 10-K, and our quarterly earnings releases and compare that GAAP financial
information with the pro forma financial results disclosed in our quarterly
earnings releases and investor calls.
24
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.
We Depend on Increasing Use of the Internet and on the Growth of Electronic
Commerce. If the Use of the Internet and Electronic Commerce Do Not Grow as
Anticipated, Our Business Will Be Seriously Harmed.
Our business depends on the increased acceptance and use of the Internet as
a medium of commerce. Rapid growth in the use of the Internet is a recent
phenomenon. As a result, acceptance and use may not continue to develop at
historical rates and a sufficiently broad base of business customers may not
adopt or continue to use the Internet as a medium of commerce. Demand and
market acceptance for recently introduced services and products over the
Internet are subject to a high level of uncertainty, and there exist 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
25
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.
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 2. PROPERTIES
Our principal sales, marketing, research, development, and administrative
offices occupy approximately 278,000 square feet in a newly constructed 716,000
square foot, five building office park in Sunnyvale, California which is our
corporate headquarters. Our lease for the entire office park commenced January
25, 2001 and expires on January 24, 2013. We currently sublease one building of
175,100 square feet to a third party. This sublease expires on July 31, 2007.
Our regional offices are located in Tampa, Florida, Alpharetta, Georgia, Lisle,
Illinois, Burlington, Massachusetts, Bridgewater, New Jersey and Dallas, Texas.
These leases total approximately 168,700 square feet and expire at various
dates between 2004 and 2007. We are in the process of subleasing some of our
surplus properties located in Sunnyvale and Mountain View, California, Tampa,
Florida, Alpharetta, Georgia, Lisle, Illinois, Burlington, Massachusetts,
Florham Park, New Jersey, and Dallas, Texas and Singapore for the remaining
lease terms.
Prior to moving to our new corporate headquarters, we leased 131,560 square
feet in Mountain View, California under a lease that expires October 31, 2006.
We are currently subleasing 75,800 square feet of this
26
facility to a third party under a sublease that expires May 31, 2003. We also
leased 45,800 square feet in Mountain View, California under a lease that
expires April 30, 2005, and we are subleasing this entire facility to a third
party for the remaining lease term. We leased an additional 33,000 square feet
in Sunnyvale, California under a lease that expires on August 31, 2004. We are
currently subleasing this facility to a third party for the remaining lease
term. Our North American sales and support offices leases are in the
metropolitan areas of Cleveland, Ohio, Dallas and Houston, Texas, Detroit,
Michigan, Los Angeles, California, Minneapolis, Minnesota, New York, New York,
Philadelphia, Pennsylvania, Seattle, Washington, St. Louis, Missouri,
Washington D.C., and Montreal and Toronto, Canada. We also lease sales and
support offices outside of North America including locations in Australia,
France, Germany, Hong Kong, Ireland, Italy, Japan, Mexico, The Netherlands,
Singapore, Spain, Switzerland, Taiwan and the United Kingdom.
ITEM 3. 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 two 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 Section 10(b) 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 of financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
27
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of Ariba and their ages as of November 30, 2001 are
as follows:
Name Age Position(s)
---- --- -----------
Robert M. Calderoni......... 42 President and Chief Executive Officer and a Director
James W. Frankola........... 37 Executive Vice President and Chief Financial Officer
James W. Steele............. 46 Executive Vice President of Worldwide Sales
Eileen McPartland (Basho)... 47 Executive Vice President of Solutions Development and
Delivery
Michael Schmitt............. 44 Executive Vice President and Chief Marketing Officer
Robert M. Calderoni has served as Ariba's President and Chief Executive
Officer and a Director since October 2001. From October 2001 to November 2001,
Mr. Calderoni also served as Ariba's Interim Chief Financial Officer. From
November 2000 to October 2001, Mr. Calderoni served as Ariba's Executive Vice
President and Chief Financial Officer. From November 1997 to November 2000, he
was Chief Financial Officer at Avery Dennison Corporation, a manufacturer of
pressure-sensitive materials and office products. From June 1996 to November
1997, Mr. Calderoni was Senior Vice President of Finance at Apple Computer,
Inc. Prior to that time, Mr. Calderoni held various positions with IBM Storage
Systems Division, most recently as Vice President of Finance. Mr. Calderoni
holds a Bachelor of Science degree in Accounting and Finance from Fordham
University.
James W. Frankola has served as Ariba's Executive Vice President and Chief
Financial Officer since November 2001. From December 1997 to November 2001, Mr.
Frankola held various positions with Avery Dennison Corporation, a manufacturer
of pressure-sensitive materials and office products, most recently as Vice
President of Finance and IS, Fasson Roll Worldwide. From May 1995 to December
1997, Mr. Frankola held various positions with IBM Storage Systems Division,
most recently as Director of Financial Analysis. Mr. Frankola holds a Bachelor
of Science degree in accounting from Pennsylvania State University and a Master
of Business Administration from New York University.
Eileen McPartland (Basho) has served as Ariba's Executive Vice President of
Solutions Development and Delivery since February 2000. From September 1998 to
September 1999, Ms. McPartland was a partner at Andersen Consulting,
responsible for developing the strategic offerings and market direction for
Enterprise Business Solutions, a line of business comprised of more than 6,000
consultants. From July 1994 to August 1998, Ms. Basho worked at SAP America,
Inc., serving as Executive Vice President from January 1996 to August 1998 and
responsible for SAP's consulting business, worldwide partnering program and
global accounts. Ms. McPartland holds a Bachelor of Science degree from the
Philadelphia College of Textiles and Sciences.
James W. Steele has served as Ariba's Executive Vice President of Worldwide
Sales since February 2001. From February 1996 to January 2001, Mr. Steele held
various positions with IBM Corporation, most recently as Vice President and
General Manager, Western Area. Mr. Steele holds a Bachelor of Science degree in
Civil Engineering from Bucknell University.
Michael Schmitt has served as Ariba's Executive Vice President and Chief
Marketing Officer since February 2001. From June 1992 to July 2000, Mr. Schmitt
held various positions with J. D. Edwards, a business software company, most
recently as Senior Vice President, Sales and Marketing. Mr. Schmitt holds a
Bachelor of Science degree in Business Administration and Marketing from
California Polytechnic State University, San Luis Obispo.
28
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq Stock Market under the symbol
"ARBA." Our initial public offering of stock was June 23, 1999 at $5.75 per
share. The price range per share in the table below reflects the highest and
lowest sale prices for our stock as reported by the Nasdaq Stock Market during
the last two fiscal years. Our present policy is to retain earnings, if any, to
finance future growth. We have never paid cash dividends and have no present
intention to pay cash dividends. At November 30, 2001, there were approximately
1,861 stockholders of record and the closing price per share of our common
stock was $4.28.
Price Range
Per Share
--------------
Three Months Ended: High Low
------------------- ------- ------
September 30, 2001.................................. $ 6.89 $ 1.42
June 30, 2001....................................... $ 9.69 $ 3.64
March 31, 2001...................................... $ 54.50 $ 7.13
December 31, 2000................................... $141.50 $43.56
September 30, 2000.................................. $168.75 $91.13
June 30, 2000....................................... $105.38 $50.00
March 31, 2000...................................... $165.50 $75.06
December 31, 1999................................... $ 91.50 $36.87
The above information has been adjusted to reflect the two-for-one stock
splits, each effected in the form of a stock dividend to each stockholder, on
November 16, 1999 and March 2, 2000.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and the notes to the
consolidated financial statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," which are included elsewhere in
this report. The consolidated statements of operations data for each of the
five years in the period ended September 30, 2001, and the consolidated balance
sheet data as of the years then ended, are derived from our audited
consolidated financial statements (in thousands, expect per share data).
Year Ended September 30,
---------------------------------------------------
2001 2000 1999 1998 1997
----------- --------- -------- -------- -------
Consolidated Statements of Operations
Data:
Total revenues......................... $ 408,848 $ 279,039 $ 45,372 $ 8,363 $ 760
Gross profit (loss).................... $ 322,839 $ 231,520 $ 36,559 $ 6,825 $ (180)
In-process research and development.... $ -- $ 27,350 $ -- $ -- $ --
Restructuring and lease abandonment
costs................................ $ 133,582 $ -- $ -- $ -- $ --
Impairment of goodwill, other
intangible assets and equity
investments.......................... $ 1,437,572 $ -- $ -- $ -- $ --
Net loss............................... $(2,680,671) $(792,775) $(29,300) $(10,953) $(4,679)
Net loss per share--basic and diluted.. $ (10.96) $ (4.10) $ (0.42) $ (0.48) $ (1.83)
Weighted average shares used in
computing basic and diluted net loss
per share............................ 244,614 193,417 70,064 23,048 2,558
29
September 30,
----------------------------------------------------
2001 2000 1999 1998 1997
----------- ---------- -------- -------- -------
(in thousands)
Consolidated Balance Sheets Data:
Cash, cash equivalents and investments... $ 261,011 $ 334,191 $152,440 $ 13,932 $15,471
Working capital.......................... $ 57,608 $ 153,597 $ 58,988 $ 6,127 $13,685
Total assets............................. $ 1,288,047 $3,815,878 $170,021 $ 18,771 $16,800
Restructuring and lease abandonment costs $ 12,855 $ -- $ -- $ -- - $ --
Long-term obligations.................... $ 106 $ 402 $ 781 $ 647 $ 140
Minority interest........................ $ 15,720 $ -- $ -- $ -- - $ --
Accumulated deficit...................... $(3,518,378) $ (837,707) $(44,932) $(15,632) $(4,679)
Total stockholders' equity............... $ 925,918 $3,498,192 $122,183 $ 9,959 $14,517
See Note 11 of Notes to Consolidated Financial Statements for an explanation
of the determination of the number of shares used to compute basic and diluted
net loss per share. The Company has paid no cash dividends during the five year
period ended September 30, 2001. The above information has been restated to
reflect the two-for-one stock splits, each effected in the form of a stock
dividend to each stockholder, on November 16, 1999 and March 2, 2000.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION, AND
RESULTS OF OPERATIONS
The information in this report 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 elsewhere in this report in the section entitled "Risk Factors" and
the risks discussed in our other Securities and Exchange Commission ("SEC")
filings including our Form 10-Q for the quarter ended June 30, 2001 filed with
the SEC on August 14, 2001.
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.
30
Our Ariba Enterprise Spend Management solution consists of three component
solutions: Ariba Analysis, Ariba Enterprise Sourcing and Ariba Procurement. Our
primary software products in fiscal 2001 were Ariba Buyer, Ariba Sourcing,
Ariba Dynamic Trade and Ariba Marketplace. 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, and our primary product in fiscal 1999 was Ariba Buyer.
Through September 30, 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. Our license agreements for such 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 do not expect to generate significant revenues
from offering access to our Ariba Supplier Network.
We recognize revenue on our software products in accordance with Statement
of Position (SOP) 97-2, Software Revenue Recognition, as amended by SOP 98-4
and SOP 98-9. We also adopted Staff Accounting Bulletin (SAB) 101, Revenue
Recognition in Financial Statements in the first quarter of fiscal 2001. The
adoption of SAB 101 did not have did not have a significant impact on our
consolidated 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.
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 hosted applications 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 vendor specific objective evidence of fair
value for undelivered elements.
31
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 of our products is 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.
During the year ended September 30, 2001, we recognized an immaterial amount of
software license revenues from such transactions. We did not have any of these
transactions in fiscal 2000 or fiscal 1999.
Accounts receivable include amounts due from customers for which revenue has
been recognized. Deferred revenue includes amounts received from customers for
which revenue has not been recognized that generally results from 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.
We have incurred significant losses since inception. As of September 30,
2001, we had an accumulated deficit of $3.5 billion, including amortization of
goodwill and other intangible assets totaling $941.5 million, $34.0 million of
business partner warrant expense which includes $17.7 million due to impairment
of a business partner warrant, amortization of stock-based compensation of
$36.6 million, $133.6 million for restructuring and lease abandonment costs, a
$1.4 billion charge due to impairment of goodwill and other intangible assets
and $28.7 million due to impairment of equity investments recorded in fiscal
2001.
Included in our operating expenses is the amortization of goodwill and other
intangible assets. These expenses are for the amortization of goodwill and
other intangible assets we have recorded in our acquisitions of
TradingDynamics, Tradex and SupplierMarket and for the amortization of an
intellectual property agreement we have entered into with a third party. During
the year ended September 30, 2000, we also had a charge related to the purchase
of in-process research and development related to the acquisitions. See
subsection Accounting for Acquisitions and Note 5 of Notes to Consolidated
Financial Statements for more detailed information.
Also included in our operating expenses is the non-cash expense for business
partner warrants. This non-cash expense relates to warrants that have been
earned or deemed probable of being earned by our business partners. If and when
it becomes probable that a business partner will earn any warrants, we
recognize a non-cash expense for these warrants. Business partner warrant
expense also includes the impairment of an intangible asset recorded in
connection with a business partner warrant. See subsection Goodwill and Other
Intangible Assets and Note 10 of Notes to Consolidated Financial Statements for
more detailed information.
In connection with the granting of stock options to our employees, stock
options issued related to the SupplierMarket acquisition and issuance of
restricted common stock to certain senior executives, officers and employees,
we have recorded deferred stock-based compensation totaling approximately
$187.1 million from inception through September 30, 2001. Of this amount,
$124.6 million related to the acquisition of
32
SupplierMarket. Deferred stock-based compensation is included as a component of
stockholders' equity and is being amortized by charges to operations over the
vesting period of the options and restricted stock, consistent with the method
described in Financial Accounting Standards Boards Interpretation No. 28 (FIN
28). During the year ended September 30, 2001, we recorded $36.6 million of
related stock-based compensation amortization expense. As of September 30,
2001, we had an aggregate of approximately $33.0 million of related deferred
stock-based compensation remaining to be amortized. The amortization of the
remaining deferred stock-based compensation will result in additional charges
to operations through fiscal 2006. The amortization of stock-based compensation
is presented as a separate component of operating expenses in our Consolidated
Statements of Operations. See Note 10 of Notes to Consolidated Financial
Statements for more detailed information.
In the third quarter of fiscal 2001, we initiated a restructuring program to
conform our expense and revenue levels to better our position for growth and
profitability. As part of this program, we restructured our worldwide
operations including a reduction in workforce of approximately 1,100
individuals and the consolidation of our operating facilities. The
restructuring resulted in a charge for the year ended September 30, 2001 of
$133.6 million which includes severance and benefits charges, and lease
abandonment costs and leasehold impairment charges. Total lease abandonment
costs of $116.1 million include the for impairment of leasehold improvements
related to abandoned leased facilities totaling $66.6 million. For the year
ended September 30, 2001, total charges for severance and benefits amounted to
$17.5 million, of which $16.6 million has been paid or used by fiscal year end.
As of September 30, 2001, our restructuring accrual of $31.2 million,
consisting of severance and benefits and consolidation of our operating
facilities, is expected to be utilized by 2013. Actual future cash requirements
may differ materially from the accrual at September 30, 2001, particularly if
actual sublease income is significantly different from current estimates. See
Note 7 of Notes to Consolidated Financial Statements for additional information.
We had 1,124 full-time employees as of September 30, 2001 which represents a
reduction of approximately 33% from September 30, 2000. In addition, we
implemented a further reduction of our worldwide workforce during the quarter
ending December 31, 2001. Our recent restructurings have placed significant
demands on our management and operational resources. To position our Company
for future growth, we must continue to invest in and implement scalable
operational systems, procedures and controls. We must also be able to recruit
and retain qualified employees and expect any future expansion to continue to
challenge our ability to hire, train, manage and retain our employees.
In connection with the acquisitions of TradingDynamics, Tradex and
SupplierMarket during fiscal 2000, we recorded a total of $3.1 billion in
goodwill and other intangible assets. In the quarter ended March 31, 2001, we
recorded a $1.4 billion impairment charge relating to goodwill and other
intangible assets acquired in the Tradex acquisition. Additionally, we
determined that certain equity investments of privately held companies had
incurred a decline in value which resulted in an impairment charge of $28.7
million in our results of operations for fiscal 2001. See subsection Goodwill
and Other Intangible Assets and Notes 4 and 5 of Notes to Consolidated
Financial Statements for more detailed information.
We believe our success 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 Consolidated Financial Statements, and we may have substantial
non-cash expenses related to warrants to purchase our common stock. These
warrant related expenses will not be recognized until the warrants are earned
and will fluctuate depending on the market value of our common stock. We
therefore expect to continue to incur substantial operating losses for the
foreseeable future.
In December 2000, our consolidated Japanese subsidiary, Nihon Ariba K.K.
issued and sold approximately 41% of its common stock for cash consideration of
approximately $40.0 million to a third party. In April 2001, this subsidiary
issued and sold an additional 2% of its common stock for cash consideration of
approximately
33
$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. The proceeds are reflected as a capital contribution in our
consolidated financial statements. See Note 8 of Notes to Consolidated
Financial Statements for additional information.
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 a third party. 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. The proceeds are reflected as a capital
contribution in our consolidated financial statements. See Note 8 of Notes to
Consolidated Financial Statements for additional information.
Our limited operating history makes the prediction of future operating
results very difficult. We believe that period-to-period comparisons of
operating results should not be relied upon as predictive of future
performance. Our operating results are expected to vary significantly from
quarter to quarter and are difficult or impossible to predict. Our prospects
must be considered in light of the risks, expenses and difficulties encountered
by companies at an early stage of development, particularly 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.
Accounting for Acquisitions
Acquisitions
In fiscal 2000, we acquired three companies using the purchase method of
accounting. Accordingly, the purchase price for each company was allocated to
the assets acquired and liabilities assumed based on their estimated fair
values on the acquisition date.
In January 2000, we acquired TradingDynamics, which provided Internet-based
trading applications. The purchase price of approximately $465.0 million
consisted of an exchange of 7,274,656 shares of our common stock with a fair
value of $371.9 million, and assumed stock options with a fair value of $91.7
million, and other acquisition related expenses of approximately $1.4 million
consisting primarily of payments for financial advisor and other professional
fees. Of the total purchase price, $224,000 was allocated to property and
equipment, $13.4 million was allocated to net liabilities assumed, excluding
property and equipment, and the remainder was allocated to intangible assets,
including in-process research and development ($950,000), core technology ($4.4
million), covenants not-to-compete ($1.3 million), assembled workforce ($1.1
million) and goodwill ($470.5 million).
In March 2000, we acquired Tradex, which provided solutions for enabling
online marketplaces and exchanges. The purchase price of approximately $2.3
billion consisted of an exchange of 34,059,336 shares of our common stock with
a fair value of $2.1 billion, assumed stock options with a fair value of
approximately $207.5 million, and other acquisition related expenses of
approximately $28.8 million consisting primarily of payments for financial
advisor and other professional fees. Of the total purchase price, $3.5 million
was allocated to property and equipment, $75.6 million was allocated to net
assets acquired, excluding property and equipment, and the remainder was
allocated to intangible assets, including in-process research and development
($11.8 million), core technology ($7.9 million), trademarks ($2.0 million),
assembled workforce ($5.4 million) and goodwill ($2.2 billion).
In August 2000, we acquired SupplierMarket, a provider of online
collaborative sourcing technologies. The total purchase price of approximately
$607.1 million consisted of an exchange of 5,249,330 shares of our common stock
with a fair value of $478.7 million, assumed stock options with a fair value of
approximately $108.4 million, and other acquisition related expenses of
approximately $20.0 million consisting primarily of payments for financial
advisor and other professional fees. Of the total purchase price, $3.1 million
was allocated
34
to property and equipment, $4.2 million was allocated to net assets acquired,
excluding property and equipment, $124.6 million was allocated to deferred
compensation and the remainder was allocated to intangible assets, including
in-process research and development ($14.6 million), core technology ($7.9
million), assembled workforce ($6.5 million) and goodwill ($446.1 million).
Goodwill and Other Intangible Assets
We recorded a total of $3.1 billion in goodwill and other intangible assets
in fiscal 2000 relating to the acquisitions of TradingDynamics, Tradex and
SupplierMarket. We incurred amortization expense relating to this goodwill and
other intangible assets of $679.2 million and $539.4 million for the years
ended September 30, 2001 and 2000, respectively.
In the quarter ended March 31, 2001, we recorded a $1.4 billion impairment
charge relating to goodwill and other intangible assets acquired in the Tradex
acquisition. As of September 30, 2001, we had $877.8 million of goodwill and
other intangible assets relating to the acquisition of TradingDynamics, Tradex
and SupplierMarket, an intellectual property agreement and business partner
warrant agreements, after giving effect to previous amortization and impairment
charges. We will periodically review our long-lived assets and may incur
additional impairment charges in the future, and we will have significant
expenses going forward related to the amortization of our goodwill and other
intangible assets, except for the effects of certain new accounting
pronouncements as described in Note 1 of Notes to Consolidated Financial
Statements.
During fiscal 2001, we continually evaluated our long-lived assets,
consisting primarily of goodwill and other intangible assets. During the third
quarter of fiscal 2001, we determined that an intangible asset recorded in
connection with the prior issuance of a business partner warrant was impaired.
As a result, we recorded a $17.7 million impairment charge to business partner
warrant expense to write off the remaining net book value of this intangible
asset.
See Notes 5 and 10 of Notes to Consolidated Financial Statements for more
detailed information about the accounting treatment of the TradingDynamics,
Tradex and SupplierMarket acquisitions and business partner warrants.
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.
Each participating employee will receive, 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 will have terms and
conditions that are substantially the same as those of the canceled options.
The exchange program is not expected to result in any additional compensation
charges or variable plan accounting. Members of our Board of Directors and our
officers and senior executives were not eligible to 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,
35
impairment of goodwill, other intangible assets and equity investments,
business partner warrants, 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,
or Annual Reports on Form 10-K, and our quarterly earnings releases and compare
that GAAP financial information with the pro forma financial results disclosed
in our quarterly earnings releases and investor calls.
Results of Operations
The following table sets forth the statements of operations for the periods
indicated (in thousands, except per share data). These statements have been
derived from the consolidated financial statements contained in this report.
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 included in this report.
Year Ended September 30,
---------------------------------
2001 2000 1999
----------- ---------- --------
Revenues:
License...................................................................................... $ 269,272 $ 198,790 $ 26,768
Maintenance and service...................................................................... 139,576 80,249 18,604
----------- ---------- --------
Total revenues............................................................................ 408,848 279,039 45,372
----------- ---------- --------
Cost of revenues:
License...................................................................................... 17,801 12,572 724
Maintenance and service (exclusive of stock-based compensation expense of $3,442, $1,458 and
$1,084 for the years ended September 30, 2001, 2000 and 1999, respectively)................ 68,208 34,947 8,089
----------- ---------- --------
Total cost of revenues.................................................................... 86,009 47,519 8,813
----------- ---------- --------
Gross profit................................................................................. 322,839 231,520 36,559
----------- ---------- --------
Operating expenses:
Sales and marketing (exclusive of stock-based compensation expense of $13,796, $7,425 and
$6,569 for the years ended September 30, 2001, 2000 and 1999, respectively and exclusive of
$34,075 and $29,251 of business partner warrant expense for the years ended September 30,
2001 and 2000, respectively)............................................................... 269,686 207,234 33,859
Research and development (exclusive of stock-based compensation expense of $4,009, $3,475 and
$2,998 for the years ended September 30, 2001, 2000 and 1999, respectively)................ 90,879 39,017 11,620
General and administrative (exclusive of stock-based compensation expense of $15,389, $5,693
and $3,933 for the years ended September 30, 2001, 2000 and 1999, respectively)............ 64,409 29,172 7,917
Amortization of goodwill and other intangible assets......................................... 941,526 688,588 --
In-process research and development.......................................................... -- 27,350 --
Business partner warrants.................................................................... 34,075 29,251 --
Stock-based compensation..................................................................... 36,636 18,051 14,584
Restructuring and lease abandonment costs.................................................... 133,582 -- --
Impairment of goodwill, other intangible assets and equity investments....................... 1,437,572 -- --
Merger related costs......................................................................... 9,185 -- --
----------- ---------- --------
Total operating expenses.................................................................. 3,017,550 1,038,663 67,980
----------- ---------- --------
Loss from operations......................................................................... (2,694,711) (807,143) (31,421)
Interest income.............................................................................. 18,629 15,748 2,434
Interest expense............................................................................. (434) (220) (126)
Other income (expense)....................................................................... 2,155 803 (89)
----------- ---------- --------
Net loss before income taxes................................................................. (2,674,361) (790,812) (29,202)
Provision for income taxes.................................................................... 6,310 1,963 98
----------- ---------- --------
Net loss...................................................................................... $(2,680,671) $ (792,775) $(29,300)
=========== ========== ========
Net loss per share--basic and diluted......................................................... $ (10.96) $ (4.10) $ (0.42)
=========== ========== ========
Weighted average shares used in computing basic and diluted net loss per share................ 244,614 193,417 70,064
=========== ========== ========
36
Comparison of the Fiscal Years Ended September 30, 2001 and 2000
Revenues
License
License revenues for the year ended September 30, 2001 were $269.3 million,
a 35% increase over license revenues of $198.8 million for the year ended
September 30, 2000. This increase was primarily attributable to continued
market acceptance of and demand for our products, an increase in sales to new
customers resulting from increased headcount in our sales force, the
establishment of several strategic relationships and the expansion of our
business domestically and internationally. This increase, which occurred
primarily in the first half of the fiscal year, was offset by a decline in
demand for our products in the third and fourth quarters of fiscal 2001
resulting in a reduced number of license sales and a modest decline in average
selling prices due to an 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 quarter and perhaps 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.
Maintenance and Service
Maintenance and service revenues for the year ended September 30, 2001 were
$139.6 million, a 74% increase over maintenance and service revenues of $80.2
million for the year ended September 30, 2000. The increase is primarily
attributable to the growth of our licensing activity described above, which has
resulted in increased revenues from customer implementations and maintenance
contracts and, to a lesser extent, renewals of recurring maintenance and
training fees.
During each of the years ended September 30, 2001 and 2000, no single
customer accounted for more than 10% of total revenues. Revenues from
international sales were approximately $106.8 million and $61.4 million for the
years ended September 30, 2001 and 2000, respectively. Our international
revenues were derived from sales in Europe, Asia, Asia Pacific and Latin
America. Revenues are attributed to countries based on the location of our
customers.
Cost of Revenues
License
Cost of license revenues was $17.8 million for the year ended September 30,
2001, an increase of 41% over cost of license revenues of $12.6 million for the
year ended September 30, 2000. The increase in cost of license revenues is
primarily related to increased sales volumes, product costs associated with
major upgrade introductions of our products, an increase in royalties payable
to third parties for integrated technology, and an increase in co-sale fees due
to higher alliance partner sales occurring primarily in the first half of the
fiscal year. This increase was offset by a general decline in demand for our
products resulting in a reduction of license sales and the related cost of
license revenues in the third and fourth quarters of fiscal 2001.
Maintenance and Service
Cost of maintenance and service revenues was $68.2 million for the year
ended September 30, 2001, an increase of 95% over cost of maintenance and
service revenues of $34.9 million for the year ended September 30, 2000. The
increase is primarily attributable to increased Ariba Supplier Network
engineering costs, growth in licensing activity resulting in additional service
costs related to implementations, customer support and training costs, and
costs associated with major upgrade introductions of our products.
37
Operating Expenses
Sales and Marketing
Sales and marketing expenses for the year ended September 30, 2001 were
$269.7 million, an increase of 30% over sales and marketing expenses of $207.2
million for the year ended September 30, 2000. The increase is primarily
attributable to increased compensation for sales and marketing personnel,
domestically and internationally, as a result of increased sales through
internal growth and acquisitions, increases in management bonuses, expanded
marketing programs for tradeshows and customer advisory council meetings, the
expansion of our corporate headquarters and international sales offices, an
increase in our allowance for doubtful accounts and, to a lesser extent,
related overhead. For the years ended September 30, 2001 and 2000, we recorded
provisions for doubtful accounts of $27.9 million and $14.2 million,
respectively. Provisions for doubtful accounts were increased substantially
during the first two quarters of fiscal 2001 as a result of the effects of the
economic slowdown and its impact on the operations of certain emerging
electronic commerce customers together with the rapid increase of sales for all
products since the latter part of fiscal 2000. We have enhanced our efforts to
manage our accounts receivable balance. Although we have not made significant
changes in payment terms, we have taken steps to focus additional resources on
collection efforts and we have reviewed our credit approval policies. Although
we anticipate that the recent restructuring of our operations will reduce
sequential quarterly sales and marketing expenses over the near term, these
expenses may increase over the longer term.
Research and Development
Research and development expenses for the year ended September 30, 2001 were
$90.9 million, an increase of 133% over research and development expenses of
$39.0 million for the year ended September 30, 2000. The increase is primarily
attributable to increases in compensation for research and development
personnel due to internal growth and acquisitions from the prior year,
globalization of our products and increases in localization of our software
and, to a lesser extent, related overhead. To date, all software development
costs have been expensed in the period incurred. We believe that continued
investment in research and development is critical to attaining our strategic
objectives. Although we anticipate that the recent restructuring of our
operations will reduce sequential quarterly research and development personnel
expenses over the near term, these expenses may increase over the longer term.
General and Administrative
General and administrative expenses for the year ended September 30, 2001
were $64.4 million, an increase of 121% over general and administrative
expenses of $29.2 million for the year ended September 30, 2000. The increase
is primarily attributable to an increase in compensation for finance,
accounting, legal, human resources and information technology support personnel
from our internal growth and acquisitions both domestically and
internationally, fees paid to outside professional service providers, increased
management bonuses, and implementation costs to expand our financial and human
resources infrastructure and, to a lesser extent, related overhead. Although we
anticipate that the recent restructuring of our operations will reduce
sequential quarterly general and administrative expenses over the near term,
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
goodwill and other intangible assets representing the excess of the purchase
price paid over the fair value of net assets acquired. The aggregate
amortization of goodwill and other intangible assets related to these
acquisitions was $679.2 million and $539.4 million for the years ended
September 30, 2001 and 2000, respectively.
In fiscal 2000, we sold 5,142,858 shares of common stock with a fair market
value of $834.4 million to an independent third party in connection with an
intellectual property agreement. As part of the sale we received
38
intellectual property and $47.5 million in cash. The intellectual property is
valued at the difference between the fair market value of the stock being
exchanged and the cash received, which is $786.9 million. This amount is
classified within other intangible assets and is being amortized over three
years based on the terms of the related intellectual property agreement. The
total amortization of this intellectual property agreement was $262.3 million
and $149.1 million for the years ended September 30, 2001 and 2000,
respectively.
The total amortization of goodwill and other intangible assets was $967.1
million and $694.2 million for the years ended September 30, 2001 and 2000,
respectively. These amounts include $25.6 million and $5.6 million of business
partner warrant expense and related impairment charge recorded for the years
ended September 30, 2001 and 2000, respectively, that are included in the
accompanying Consolidated Statements of Operations as business partner warrant
expense. See the section Impairment of Goodwill, Other Intangible Assets and
Equity Investments below and Notes 5 and 10 of Notes to Consolidated Financial
Statements for additional information.
We anticipate that the unamortized balance of $877.8 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, respectively, subject to
certain effects of the new accounting pronouncements described below.
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (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
are required to adopt the provisions of SFAS No. 141 immediately, and those of
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 by 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-Process Research and Development
In connection with the acquisitions of TradingDynamics, Tradex and
SupplierMarket we allocated $950,000, $11.8 million, and $14.6 million,
respectively, as in-process research and development for a total of $27.4
million for the year ended September 30, 2000. There were no acquisitions
completed in the year ended September 30, 2001. See Note 5 of Notes to
Consolidated Financial Statements for more detailed information regarding the
accounting treatment of the TradingDynamics, Tradex and SupplierMarket
acquisitions.
No assurance can be given that actual revenues and operating profit
attributable to acquired in-process research and development will not deviate
from the projections used to value such research and development in connection
with each of the respective acquisitions.
Business Partner Warrants
We have issued warrants for the purchase of our common stock to certain
business partners which vest either immediately or based upon the achievement
of certain milestones related to targeted revenue. For the years
39
ended September 30, 2001 and 2000, we recognized business partner warrant
expenses associated with these warrants in the aggregate amounts of $34.1
million and $29.2 million, respectively. See Note 10 of Notes to Consolidated
Financial Statements for more detailed information.
In the quarter ended June 30, 2000, we entered into an agreement with a
third party as part of our vertical industry strategy to obtain a major partner
in the financial services industry. In connection with the agreement, we issued
warrants to purchase up to 6,776,000 shares of our common stock. A warrant to
purchase 1,936,000 of these shares was immediately vested. The remaining
warrants vest upon attainment of certain milestones related to contingent
revenues (contingent gainshare) to be received by us under the terms of the
concurrent software licensing arrangement. The warrants generally expire when
the milestone period expires or one year after the specific milestone is met.
Through September 30, 2001, none of the remaining warrants have vested. The
vested warrant was recorded as an intangible asset in the amount of $31.2
million in the accompanying consolidated financial statements. The intangible
asset was being amortized over the expected term of the arrangement of three
years. For the years ended September 30, 2001 and 2000 approximately $7.9
million and $5.6 million was amortized to business partner warrant expense,
respectively. During the third quarter of fiscal 2001, we determined that the
carrying value of this intangible asset was impaired and recorded a $17.7
million impairment charge to business partner warrant expense to write off the
remaining net book value of this asset. See Note 10 of Notes to Consolidated
Financial Statements for additional information.
In the quarter ended 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. 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. No amounts related to the unvested portion of this warrant
are reflected in the accompanying consolidated financial statements. During the
years ended September 30, 2001 and 2000, this business partner warrant holder
vested in 982,326 shares and 468,041 shares, respectively, of such warrant.
Accordingly, $8.5 million and $23.6 million of business partner warrant expense
was recorded for this warrant for the years ended September 30, 2001 and 2000,
respectively.
Stock-based Compensation
We have recognized deferred stock-based compensation associated with stock
options granted to employees with an exercise price below market value on the
date of grant, unvested stock options issued to employees in conjunction with
the consummation of the SupplierMarket acquisition 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 being amortized by charges 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 28. We recorded $4.0 million of
stock-based compensation expense for the grant of 2.0 million restricted shares
in connection with the severance of a former executive classified as a general
and administrative expense. The amortization of stock-based compensation is
presented as a separate line in our Consolidated Statements of Operations. For
the years ended September 30, 2001, 2000 and 1999, amortization of deferred
stock-based compensation is attributable to various cost categories as follows
(in thousands):
2001 2000 1999
------- ------- -------
Cost of revenues.......... $ 3,442 $ 1,458 $ 1,084
Sales and marketing....... 13,796 7,425 6,569
Research and development.. 4,009 3,475 2,998
General and administrative 15,389 5,693 3,933
------- ------- -------
Total.................. $36,636 $18,051 $14,584
======= ======= =======
40
As of September 30, 2001, we had an aggregate of approximately $33.0 million
of deferred stock-based compensation remaining to be amortized.
Restructuring and Lease Abandonment Costs
During the third quarter of fiscal 2001, we initiated a restructuring
program to conform our expense and revenue levels to better our position for
growth and profitability as a result of the continuing economic slowdown,
particularly due to the decline in information technology spending. As part of
the restructuring program, we restructured our worldwide operations including a
reduction in workforce of approximately 1,100 individuals and the consolidation
of our operating facilities. The restructuring resulted in a total charge for
the year ended September 30, 2001 of $133.6 million which includes of severance
and benefits charges, lease abandonment costs and leasehold impairment changes.
In connection with the restructuring program, we implemented a further
reduction of our worldwide workforce during the quarter ending December 31,
2001. See Note 7 of Notes to Consolidated Financial Statements for more
detailed information.
Impairment of Goodwill, Other Intangible Assets and Equity Investments
In the quarter ended March 31, 2001, we recorded a $1.4 billion impairment
charge relating to goodwill and other intangible assets acquired in the Tradex
acquisition as a result of an ongoing impairment assessment of goodwill and
identifiable assets recorded in connection with our various acquisitions. The
assessment was performed primarily due to the significant decline in our stock
price, the net book value of our assets significantly exceeding our market
capitalization, the significant underperformance of the Tradex acquisition
relative to projections and the overall decline in industry growth rates which
indicated that this trend might continue for an indefinite period.
During the year ended September 30, 2001, we determined that certain equity
investments in privately held companies had incurred a decline in value that
was considered other-than-temporary primarily as a result of the continuing
economic slowdown, particularly in the technology sector. An impairment review
is performed whenever events or changes in circumstances indicate that the
carrying value of our equity investments 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 expected
operating results of our investees, significant changes in the manner of use of
the acquired assets or the strategy for our overall business and significant
negative industry or economic trends. We determined that the carrying value of
the equity investments may not be recoverable based upon the existence of one
or more of the above indicators of impairment. The impairment charge reduced
the equity investments to their estimated fair value consistent with the
general economic environment within the technology sector resulting in a charge
of $28.7 million in our results of operations.
There was no impairment charge related to goodwill, other intangible assets
and equity investments recorded in fiscal 2000 or 1999. See subsection
Accounting for Acquisitions and Notes 4 and 5 of Notes to Consolidated
Financial Statements for more detailed information.
Merger Related Costs
On January 29, 2001, we signed a definitive agreement to acquire Agile
Software Corporation ("Agile"), a provider of collaborative commerce solutions.
However, Ariba and Agile mutually agreed to terminate their proposed merger
without payment of any termination fees due to the challenging economic and
market conditions. We incurred merger related costs totaling $9.2 million
related to financial advisor and other professional fees, all of which were all
expensed during the quarter ended March 31, 2001.
41
Interest Income
During the year ended September 30, 2001, interest income was $18.6 million,
an increase of 18% over interest income of $15.7 million for the year ended
September 30, 2000. The increase is attributable to higher average cash
balances during fiscal 2001.
Minority Interest
In December 2000, our consolidated subsidiary, Nihon Ariba K.K., issued and
sold 38,000 shares, or approximately 41% of its common stock, for cash
consideration of approximately $40.0 million to a third party. 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 September 30, 2001, minority interest of approximately $12.9 million
is recorded on the Consolidated Balance Sheet in order to reflect the share of
the net assets of Nihon Ariba K.K. held by minority investors. In addition, we
recognized approximately $4.3 million as an increase to other income for the
minority interest's share of Nihon Ariba K.K.'s loss for the year ended
September 30, 2001.
In April 2001, our consolidated subsidiary, Ariba Korea, Ltd., issued and
sold 3,800 shares, or approximately 42% of its common stock for cash
consideration of approximately $8.0 million to a third party. 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 September 30, 2001, minority interest of approximately $2.8 million is
recorded on the Consolidated Balance Sheet in order to reflect the share of the
net assets of Ariba Korea, Ltd. held by minority investors. We also recognized
approximately $370,000 as other income for the minority interest's share of the
Ariba Korea, Ltd. loss for the year ended September 30, 2001.
Provision for Income Taxes
We recorded income tax expenses of $6.3 million relating to our
international subsidiaries for the year ended September 30, 2001.
As of September 30, 2001, we had net operating loss carryforwards for
federal and state tax purposes of approximately $1.1 billion and $387.0
million, respectively. These federal and state carryforwards expire in various
years through fiscal year 2021 and 2006, respectively. We had research credit
carryforwards for federal and state tax purpose of approximately $24.8 million
and $18.0 million, respectively. If not utilized, the federal research credit
carryforwards will expire in various years through fiscal year 2021. The state
research credit will carry forward indefinitely. We also had manufacturer's
credit carryforwards for state tax purposes of approximately $1.9 million,
which will expire in various years through fiscal year 2009.
The Internal Revenue Code of 1986, and applicable state tax laws, impose
substantial restrictions on our ability to utilize net operating losses and tax
credit carryforwards in the event of an "ownership change," as defined in
Section 382 of the Internal Revenue Code. Our federal and state tax losses and
tax credit carryover incurred through that date of change are subject to an
annual limitation.
42
Comparison of the Fiscal Years Ended September 30, 2000 and 1999
Revenues
License
License revenues for the year ended September 30, 2000 were $198.8 million,
a 643% increase over license revenues of $26.8 million for the year ended
September 30, 1999. This increase was primarily attributable to increased
market acceptance of our products, domestically and internationally, an
increase in sales to new customers resulting from increased headcount in our
sales force, increased demand for electronic commerce solutions across a broad
range of industries, new strategic products and solutions, including those
resulting from our acquisitions, and an increased number of and success from
strategic relationships designed to help promote and sell our products
domestically and internationally.
Maintenance and Service
Maintenance and service revenues for the year ended September 30, 2000 were
$80.2 million, a 331% increase over maintenance and service revenues of $18.6
million for the year ended September 30, 1999. This increase was primarily
attributable to the increased licensing activity described above, which
resulted in increased revenues from customer implementations and maintenance
contracts and, to a lesser extent, accelerated customer implementations and
renewals of recurring maintenance.
During the years ended September 30, 2000 and 1999, no customer and one
customer, respectively, accounted for more than 10% of total revenues. Revenues
from international sales were $61.4 million and $6.7 million for the years
ended September 30, 2000 and 1999. Our international revenues were derived from
sales in Canada, Europe, Asia, Asia Pacific and Latin America. Revenues are
attributed to countries based on the location of our customers.
Cost of Revenues
License
Cost of license revenues was $12.6 million for the year ended September 30,
2000, an increase of 1,636% over cost of license revenues of $724,000 for the
year ended September 30, 1999. The increase in the cost of license revenues was
primarily attributable to royalties due to third parties for integrated
technology.
Maintenance and Service
Cost of maintenance and service revenues was $34.9 million for the year
ended September 30, 2000, an increase of 332% over cost of maintenance and
service revenues of $8.0 million for the year ended September 30, 1999. The
increase was primarily attributable to personnel costs associated with
increases in the number of implementation, training and technical support
personnel from our internal growth and as a result of our acquisitions and due
to an increase in licensing activity during the year resulting in increased
implementation, customer support and training costs.
Operating Expenses
Sales and Marketing
Sales and marketing expenses for the year ended September 30, 2000 were
$207.2 million, an increase of 512% over sales and marketing expenses of $33.8
million for the year ended September 30, 1999. The increase was primarily
attributable to increased compensation for sales and marketing personnel as a
result of increased sales through internal growth and acquisitions,
advertising, employer payroll taxes on stock options in our foreign
subsidiaries, customer advisory council meetings, increases in management
bonuses, fees paid to outside
43
professional service providers, an increase in our allowance for doubtful
accounts, the expansion of our corporate headquarters and international sales
offices, and, to a lesser extent, related overhead. For the years ended
September 30, 2000 and 1999, we recorded provisions for doubtful accounts of
$14.2 million and $20,000, respectively. The increase in fiscal 2000 was
primarily due to the rapid growth of our sales and expansion of our customer
base, including smaller and less mature companies.
Research and Development
Research and development expenses for the year ended September 30, 2000 were
$39.0 million, an increase of 236% over research and development expenses of
$11.6 million for the year ended September 30, 1999. The increase was primarily
attributable to increases in compensation for research and development
personnel due to our internal growth and acquisitions, technology costs related
to the expansion of our headquarters and to a lesser extent, related overhead.
For the year ended September 30, 2000, all research and development costs have
been expensed in the period incurred.
General and Administrative
General and administrative expenses for the year ended September 30, 2000
were $29.2 million, an increase of 268% over general and administrative
expenses of $7.9 million for the year ended September 30, 1999. The increase
was primarily attributable to an increase in compensation associated with
additional employees in finance, accounting, legal, human resources and
information technology personnel from our internal growth and acquisitions, an
increase in fees paid to outside professional service providers, an increase in
communication costs, particularly to remote offices, the implementation costs
to install our financial and human resources infrastructure and, to a lesser
extent, related overhead.
Amortization of Goodwill and Other Intangible Assets
Our acquisitions of TradingDynamics, Tradex and SupplierMarket were
accounted for under the purchase method of accounting. Accordingly, we recorded
goodwill and other intangible assets representing the excess of the purchase
price paid over the fair value of net tangible assets acquired. The aggregate
amortization of goodwill and these other intangible assets was $539.4 million
in fiscal 2000. There were no acquisitions in fiscal 1999. In March 2000, we
sold 5,142,858 shares of common stock with a fair market value of $834.4
million to an independent third party in connection with an intellectual
property agreement. As part of the sale we received intellectual property and
$47.5 million in cash. The intellectual property is valued at the difference
between the fair market value of the stock being exchanged and the cash
received, which is $786.9 million. This amount is classified within other
intangible assets and is being amortized over three years based on the terms of
the related intellectual property agreement. The aggregate amortization of this
intellectual property agreement was $149.1 million in fiscal 2000. The related
amortization expense for goodwill and other intangible assets totaled $694.2
million for the year ended September 30, 2000 which includes $5.6 million of
business partner warrant expense for the year ended September 30, 2000. There
was no amortization of goodwill or other intangible assets during fiscal 1999.
In-Process Research and Development
TradingDynamics
In connection with the acquisition of TradingDynamics we allocated $950,000
of the $465.0 million purchase price as in-process research and development.
The acquired in-process research and development related to the TradingDynamics
acquisition are technologies representing the processes and expertise employed
to design and develop electronic commerce solutions. As of the acquisition
date, this in-process research and development consisted of TradingDynamics'
Market Suite Product, Version 1.5. We determined the acquired in-process
research and development had not reached technological feasibility and had no
alternative future uses
44
based on a review by our software engineers. The efforts required to complete
the acquired in-process research and development included the completion of all
planning, designing and testing activities that were necessary to establish
that the product could be produced to meet its design requirements, including
functions, features and technical performance requirements. As of September 30,
2000, we had incorporated and released this technology as our Dynamic Trade
product.
The value of the acquired in-process research and development was computed
using a discounted rate of 25% on the anticipated income stream of the related
product revenues. The discount rate was applied giving specific consideration
to the risks and attributes of the subject assets. The discounted cash flow
analysis was based on management's forecast of future revenues which assumed a
compound annual growth rate of 151%. These forecasts were based on management's
estimates and the estimated growth potential of the market. The discounted cash
flow analysis was also based on management's forecasts of cost of revenues and
operating expenses related to the products and technologies purchased from
TradingDynamics. The calculation of value was then adjusted to reflect only the
value creation efforts of TradingDynamics prior to the close of the
acquisition. At the time of the acquisition, the product was approximately 90%
complete. The remaining costs to complete the project, which were not
significant, were incurred in fiscal 2000. The resultant value of in-process
research and development was further reduced by the estimated value of core
technology and was expensed in the period the transaction was consummated.
Tradex
In connection with the acquisition of Tradex we allocated $11.8 million of
the $2.3 billion purchase price as in-process research and development. The
acquired in-process research and development related to the acquisition are
technologies representing the processes and expertise employed to design and
develop completely new platform architecture based on Enterprise Java Beans,
Uses XML documents, and Use of Entity Beans. As of the acquisition date, this
in-process research and development consisted of Tradex's product, Commerce
Center Version 8.0. We determined that the in-process research and development
acquired had not reached technological feasibility and had no alternative
future uses based on a review by our software engineers. The efforts required
to complete the acquired in-process research and development included the
completion of all planning, designing and testing activities that are necessary
to establish that the product can be produced to meet its design requirements,
including functions, features and technical performance requirements. As of
September 30, 2000, we had incorporated and released this technology as our
Ariba Marketplace Standard Edition product.
The value of the acquired in-process research and development was computed
using a discounted rate of 22% on the anticipated income stream of the related
product revenues. The discount rate was applied giving specific consideration
to the risks and attributes of the subject assets. The discounted cash flow
analysis was based on management's forecast of future revenues which assumed a
compound annual growth rate of 87.6%. These forecasts were based on
management's estimates and the estimated growth potential of the market. The
discounted cash flow analysis was also based on management's forecasts of cost
of revenues and operating expenses related to the products and technologies
purchased from Tradex. The calculation of value was then adjusted to reflect
only the value creation efforts of Tradex prior to the close of the
acquisition. At the time of the acquisition, the product was approximately 33%
complete with approximately $693,000 in estimated costs remaining,
substantially all of which were incurred in fiscal 2000. The resultant value of
in-process research and development was further reduced by the estimated value
of core technology. The acquired in-process research and development was
expensed in the period the transaction was consummated.
SupplierMarket
In connection with the acquisition of SupplierMarket we allocated $14.6
million of the $607.1 purchase price as in-process research and development.
The acquired in-process research and development related to the acquisition are
technologies representing the processes and expertise employed to design and
develop new application servers with increased scalability and customer
functionality. As of the acquisition date,
45
SupplierMarket had yet to commence shipments of its products and these
in-process technologies consisted of its new product architecture. We
determined the in-process research and development acquired had not reached
technological feasibility and had no alternative future uses based on a review
by our software engineers. The efforts required to complete the acquired
in-process research and development included the completion of all planning,
designing and testing activities that are necessary to establish that the
product can be produced to meet its design requirements, including functions,
features and technical performance requirements. During the quarter ended
December 31, 2000, we incorporated and released this technology as our sourcing
product.
The value of the acquired in-process research and development was computed
using a discounted rate of 19% on the anticipated income stream of the related
product revenues. The discount rate was applied giving specific consideration
to the risks and attributes of the subject assets. The discounted cash flow
analysis was based on management's forecast of future revenues which assumed a
compound annual growth rate of 131.79%. These forecasts were based on
management's estimates and the estimated growth potential of the market. The
discounted cash flow analysis was also based on management's forecast of cost
of revenues and operating expenses related to the products and technologies
purchased from SupplierMarket. The calculation of value was then adjusted to
reflect only the value creation efforts of SupplierMarket prior to the close of
the acquisition. At the time of the acquisition, the product was approximately
53% complete with approximately $158,000 in estimated costs remaining, all of
which was incurred by the end of the fiscal quarter ended December 31, 2000.
The resultant value of in-process research and development was further reduced
by the estimated value of core technology. The acquired in-process research and
development was expensed in the period the transaction was consummated.
The selection of discount rates for application in each acquisition were
based on the consideration of: (i) the weighted average cost of capital, which
measures a company's cost of debt and equity financing weighted by the
percentage of debt and percentage of equity in its target capital structure;
(ii) the corresponding weighted average return on assets, which measures the
after-tax return required on the assets employed in the business weighted by
each asset group's percentage of the total asset portfolio; and (iii) venture
capital required rates of return which typically relate to equity financing for
relatively high-risk businesses or business projects.
Business Partner Warrants
We have issued warrants for the purchase of our common stock to certain
business partners which vest based upon the achievement of certain milestones
for sales of our products to third parties. During the year ended September 30,
2000, we recognized business partner warrant expenses associated with two sales
and marketing alliance agreements in the aggregate amount of $29.2 million. See
Note 10 of Notes to Consolidated Financial Statements for more detailed
information. In the quarter ended June 30, 2000, 1,936,000 shares of our common
stock underlying a warrant were earned upon signing of a sales and marketing
alliance agreement. Through September 30, 2000, none of the remaining warrants
had vested. A total of $31.2 million was recorded as an intangible asset for
this sales and marketing alliance based on the fair market value of the
warrant. This intangible asset is being amortized over the expected term of the
arrangement of three years which resulted in $5.6 million of amortization
during the year ended September 30, 2000. As of September 30, 2000, an
intangible asset of $25.6 million remains to be amortized. During the year
ended September 30, 2000, 468,041 shares of our common stock underlying a
warrant were earned upon attainment of certain milestones related to revenue
targets. A total of $23.6 million in amortization expense was recorded for the
year ended September 30, 2000.
Stock-based Compensation
We recognized stock-based compensation expense associated with stock options
granted to employees with an exercise price below market value on the date of
grant and unvested stock options issued to employees in conjunction with the
SupplierMarket acquisition. These amounts are included as a component of
stockholders' equity and are being amortized by charges to operations over the
vesting period of the options, consistent with the method described in FIN 28.
The amortization of stock-based compensation is presented as a separate
46
component of operating expenses in our Consolidated Statements of Operations.
For the years ended September 30, 2000 and 1999, amortization of stock-based
compensation is attributable to various cost categories as follows (in
thousands):
2000 1999
------- -------
Cost of revenues.......... $ 1,458 $ 1,084
Sales and marketing....... 7,425 6,569
Research and development.. 3,475 2,998
General and administrative 5,693 3,933
------- -------
Total.................. $18,051 $14,584
======= =======
As of September 30, 2000, we had an aggregate of $130.0 million of deferred
stock-based compensation remaining to be amortized.
Interest Income
Interest income totaled $15.7 million for the year ended September 30, 2000,
an increase of 547% over interest income of $2.4 million for the year ended
September 30, 1999. This increase is primarily attributable to interest income
resulting from higher average cash balances during fiscal 2000.
Provision for Income Taxes
We recorded income tax expenses of $1.9 million relating to our
international subsidiaries for the year ended September 30, 2000.
Liquidity and Capital Resources
As of September 30, 2001, we had $217.9 million in cash, cash equivalents
and short-term investments, $43.1 million in long-term investments and $32.6
million in restricted cash, for total cash and investments of $293.6 million,
and $57.6 million in working capital. During the year ended September 30, 2001,
we received $44.0 million and $8.0 million in cash and cash equivalents from
the issuance of common stock in our Japanese and Korean subsidiaries,
respectively, to a third party.
Net cash used in operating activities was approximately $64.5 million for
the year ended September 30, 2001, compared to $111.0 million net cash provided
by operating activities for the year ended September 30, 2000. Net cash used in
operating activities for the year ended September 30, 2001 was primarily
attributable to an increase in the net loss for the period (less non-cash
expenses) and decreases in deferred revenue and accounts payable. These cash
flows used in operating activities were partially offset by increases in
accrued liabilities and accrued restructuring and lease abandonment costs. We
expect to continue to use net cash in operating activities in fiscal 2002 but
at reduced levels compared to fiscal 2001.
Net cash used in investing activities was approximately $139.7 million for
the year ended September 30, 2001, which primarily reflects purchases of
property and equipment, purchase and redemption of our investments and the
increase in restricted cash. We expect net cash used in investing activities to
decline in fiscal 2002 compared to fiscal 2001, primarily as a result of lower
anticipated expenditures for property and equipment.
Net cash provided by financing activities was approximately $83.3 million
for the year ended September 30, 2001, primarily from the issuance of common
stock of our Japanese and Korean subsidiaries to third parties and by proceeds
from the exercise of stock options.
Capital expenditures were $91.2 million and $47.1 million for the years
ended September 30, 2001 and 2000, respectively. Our capital expenditures
consisted of purchases of operating resources to manage our
47
operations, primarily including leasehold improvements for our headquarters in
Sunnyvale, California and to a lesser extent, including computer hardware and
software and office furniture and equipment. As of September 30, 2001, we had
no significant capital expenditure commitments other than lease commitments of
$402,000. 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.
In March 2000, we entered into a new facility lease agreement for
approximately 716,000 square feet to be constructed in four office buildings
and an amenities building in Sunnyvale, California as our headquarters. The
lease term commenced in phases from January through April 2001, upon completion
of construction and possession of each building 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 $378.2 million over the
lease term. We have also contributed a significant amount towards leasehold
improvement costs of the facility. As of September 30, 2001, we paid $79.2
million for leasehold improvements to the facility. The total estimated cost of
leasehold improvements is approximately $80.1 million, but is subject to
change. These leasehold improvement payments are estimated to be fully paid
during the quarter ending December 31, 2001. 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 during the remaining
construction, which are classified as restricted cash on the Consolidated
Balance Sheets.
In connection with our restructuring program initiated in the third quarter
of fiscal 2001, we consolidated our operating facilities. Lease termination
costs include the abandonment of certain excess leased facilities in Mountain
View and Sunnyvale, California; Tampa, Florida, Alpharetta, Georgia, Lisle,
Illinois, Burlington, Massachusetts, Florham Park, New Jersey, Dallas, Texas,,
and Singapore for the remaining lease terms. This cost totaled $116.1 million,
which includes the impairment of leasehold improvements related to the
abandoned leased facilities totaling $66.6 million. Total lease termination
costs include the abandonment of leasehold improvements and the remaining lease
liabilities and brokerage fees, offset by estimated sublease income. The
estimated costs of abandoning these leased facilities, including estimated
costs to sublease, were based on market information trend analyses provided by
a commercial real estate brokerage firm retained by us. As of September 30,
2001, $30.3 million of lease termination costs, net of anticipated sublease
income, remains accrued and is expected to be utilized by fiscal 2013. See Note
7 of Notes to Consolidated Financial Statements for additional information.
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 and
our ability to manage infrastructure costs.
Although our existing cash, cash equivalent and investment balances are
expected to decline further during fiscal 2002, we believe that our existing
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 2001, the decline 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.
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,
48
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 are required to adopt the provisions of SFAS No.
141 immediately, and 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 by 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 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 Accounting Principles Board (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. 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 related to long-lived assets held for use because the
impairment assessment under SFAS No. 144 is largely unchanged from SFAS No.
121. The provisions of SFAS No. 144 for assets held for sale or other disposal
generally are required to be applied prospectively after the adoption date to
newly initiated disposal activities. Therefore, management cannot determine the
potential effects that adoption of SFAS No. 144 will have on our financial
statements.
In November 2001, the Emerging Issues Task Force (EITF) reached consensus on
EITF No. 01-09, 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 evaluating the impact of EITF No.
01-09 and do not believe that upon adoption will have a significant impact on
our financial statements. Nonetheless, any impact on the Company's previously
issued financial statements would be limited to a reclassification of amounts
between operating expenses and revenues.
49
ITEM 7A. 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 years ended September 30, 2001,
2000 and 1999, approximately 26%, 22% and 15%, 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 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 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 US Dollar amount of
future firm commitments denominated in a foreign currency. All hedge
instruments are marked to market 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 offset by losses and
gains on the underlying assets and liabilities.
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 September 30, 2001, (in thousands):
Contract Value
--------------- Fair Value
Foreign Currency Buy/Sell Currency USD in USD
- ---------------- -------- -------- ------ ----------
JPY......................................... Buy 100,000 $ 851 $ 849
CAD......................................... Buy 700 $ 446 $ 445
SEK......................................... Buy 4,700 $ 445 $ 436
EUR......................................... Buy 3,300 $3,029 $3,042
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 unhedged
foreign currency exposures.
50
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. During the first quarter of fiscal 2001, we
entered into a high grade investment at a cost of $7.0 million, with a maturity
date in the first quarter of fiscal 2002. During fiscal 2001, the sale of this
investment resulted in a realized loss of $1.4 million. 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 have been immaterial for the year ended September 30, 2001.
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 Year Year Year Year
ending ending ending ending ending
Sept. 30, Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2002 2003 2004 2005 2006 Thereafter Total
--------- --------- --------- --------- --------- ---------- --------
Cash equivalents........... $ 87,534 -- -- -- -- -- $ 87,534
Average interest rate...... 3.42% -- -- -- -- -- 3.42%
Investments................ $145,931 $21,899 $21,202 -- -- -- $189,032
Average interest rate...... 3.81% 6.56% 4.73% -- -- -- 4.23%
Total investment securities $233,464 $21,899 $21,202 -- -- -- $276,566
Note that these amounts exclude equity investments as described below.
Other Investments
Other assets include investments in equity instruments of privately held
companies which amounted to $1.3 million and $30.5 million as of September 30,
2001 and 2000, respectively. These investments are accounted for using the cost
method and consist of common stock, preferred stock and warrants for common
stock. Of these amounts, $715,000 and $13.7 million at September 30, 2001 and
2000, respectively, were received as consideration in connection with software
licensing transactions with customers and business partners.
We determine the fair value for common stock and preferred stock equity
investments based on amounts paid by independent third parties in the
investees' most recent capital transactions. The fair value of the common stock
warrants received is determined using a Black-Scholes option pricing model. The
fair value of these equity investments in private companies totaled
approximately $507,000 and $4.4 million at September 30, 2001 and 2000,
respectively. These investments are reviewed each reporting period for declines
considered other-than-temporary, and, if appropriate, written down to their
estimated fair value.
During the year ended September 30, 2001, we determined that these
investments had incurred a decline in value that was other-than-temporary and
reduced the equity investments to an estimated fair value by a charge of $28.7
million to the Consolidated Statement of Operations.
51
Equity investments in publicly traded companies for which we do not have the
ability to exercise significant influence are classified as available-for-sale
and stated at fair value based on quoted market prices. Adjustments to the fair
value of available-for-sale investments are recorded as a component of other
comprehensive income (loss).
During the year ended September 30, 2001, we also sold common stock held in
two public companies for proceeds of approximately $310,000. Common stock in
public companies is subject to significant risk based on the recent volatility
of stock markets around the world. As of September 30, 2001 we held one
investment in a publicly traded company totaling approximately $7,400 which is
classified as a long-term investment.
52
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements, and the related notes
thereto, of Ariba and the Report of Independent Auditors are filed as a part of
this Form 10-K.
Page
Number
------
Independent Auditors' Report.................................................................... 53
Consolidated Balance Sheets as of September 30, 2001 and 2000................................... 54
Consolidated Statements of Operations and Comprehensive Loss for the years ended September 30,
2001, 2000 and 1999........................................................................... 55
Consolidated Statements of Stockholders' Equity for the years ended September 30, 2001, 2000 and
1999.......................................................................................... 56
Consolidated Statements of Cash Flows for the years ended September 30, 2001, 2000 and 1999..... 57
Notes to Consolidated Financial Statements...................................................... 58
53
Independent Auditors' Report
To The Board of Directors and
Stockholders of Ariba, Inc.:
We have audited the accompanying consolidated balance sheets of Ariba, Inc.
and subsidiaries (the Company) as of September 30, 2001 and 2000, and the
related consolidated statements of operations and comprehensive loss,
stockholders' equity, and cash flows for each of the years in the three-year
period ended September 30, 2001. Our audits also included the related financial
statement schedule listed in Item 14(a). These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Ariba, Inc. and subsidiaries at September 30, 2001 and 2000, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended September 30, 2001 in conformity with
accounting principles generally accepted in the United States of America. Also
in our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
/s/ KPMG LLP
Mountain View, California
October 19, 2001
54
ARIBA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, September 30,
2001 2000
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 71,971 $ 195,241
Short-term investments.......................................................... 145,931 84,974
Restricted cash................................................................. 2,800 3,500
Accounts receivable, net of allowance for doubtful accounts of $14,454 and
$13,791 in 2001 and 2000, respectively........................................ 27,336 61,892
Prepaid expenses and other current assets....................................... 35,963 26,817
----------- ----------
Total current assets........................................................ 284,001 372,424
Property and equipment, net........................................................ 50,353 56,049
Long-term investments.............................................................. 43,109 53,976
Restricted cash.................................................................... 29,771 28,537
Other assets....................................................................... 3,007 42,754
Goodwill and other intangible assets, net.......................................... 877,806 3,262,138
----------- ----------
Total assets................................................................ $ 1,288,047 $3,815,878
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................ $ 28,395 $ 54,458
Accrued compensation and related liabilities.................................... 53,285 54,421
Accrued liabilities............................................................. 56,072 8,167
Restructuring costs............................................................. 18,339 --
Deferred revenue................................................................ 70,006 101,245
Current portion of other long-term liabilities.................................. 296 536
----------- ----------
Total current liabilities................................................... 226,393 218,827
Restructuring costs, net of current portion........................................ 12,855 --
Deferred revenue, net of current portion........................................... 107,055 98,457
Other long-term liabilities, net of current portion................................ 106 402
----------- ----------
Total liabilities........................................................... 346,409 317,686
----------- ----------
Minority interests................................................................. 15,720 --
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock, $.002 par value; 20 million shares authorized; no
shares issued and outstanding as of September 30, 2001 and 2000, respectively. -- --
Common stock, $.002 par value; 1.5 billion shares authorized; 259,850,000
and 247,816,682 shares issued and outstanding as of September 30, 2001
and 2000, respectively........................................................ 520 495
Additional paid-in capital...................................................... 4,477,971 4,466,325
Deferred stock-based compensation............................................... (33,023) (130,003)
Accumulated other comprehensive loss............................................ (1,172) (918)
Accumulated deficit............................................................. (3,518,378) (837,707)
----------- ----------
Total stockholders' equity.................................................. 925,918 3,498,192
----------- ----------
Total liabilities and stockholders' equity............................... $ 1,288,047 $3,815,878
=========== ==========
See accompanying notes to consolidated financial statements.
55
ARIBA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(in thousands, except per share data)
Year Ended September 30,
---------------------------------
2001 2000 1999
----------- ---------- --------
Revenues:
License....................................................................... $ 269,272 $ 198,790 $ 26,768
Maintenance and service....................................................... 139,576 80,249 18,604
----------- ---------- --------
Total revenues............................................................. 408,848 279,039 45,372
----------- ---------- --------
Cost of revenues:
License....................................................................... 17,801 12,572 724
Maintenance and service (exclusive of stock-based compensation expense of
$3,442, $1,458 and $1,084 for the years ended September 30, 2001, 2000 and
1999, respectively).......................................................... 68,208 34,947 8,089
----------- ---------- --------
Total cost of revenues..................................................... 86,009 47,519 8,813
----------- ---------- --------
Gross profit.................................................................. 322,839 231,520 36,559
----------- ---------- --------
Operating expenses:
Sales and marketing (exclusive of stock-based compensation expense of
$13,796, $7,425 and $6,569 for the years ended September 30, 2001, 2000
and 1999, respectively and exclusive of $34,075 and $29,251 of business
partner warrant expense for the years ended September 30, 2001 and 2000,
respectively)................................................................ 269,686 207,234 33,859
Research and development (exclusive of stock-based compensation expense of
$4,009, $3,475 and $2,998 for the years ended September 30, 2001, 2000 and
1999, respectively).......................................................... 90,879 39,017 11,620
General and administrative (exclusive of stock-based compensation expense of
$15,389, $5,693 and $3,933 for the years ended September 30, 2001, 2000
and 1999, respectively)...................................................... 64,409 29,172 7,917
Amortization of goodwill and other intangible assets.......................... 941,526 688,588 --
In-process research and development........................................... -- 27,350 --
Business partner warrants..................................................... 34,075 29,251 --
Stock-based compensation...................................................... 36,636 18,051 14,584
Restructuring and lease abandonment costs..................................... 133,582 -- --
Impairment of goodwill, other intangible assets and equity investments........ 1,437,572 -- --
Merger related costs.......................................................... 9,185 -- --
----------- ---------- --------
Total operating expenses................................................... 3,017,550 1,038,663 67,980
----------- ---------- --------
Loss from operations.......................................................... (2,694,711) (807,143) (31,421)
Interest income............................................................... 18,629 15,748 2,434
Interest expense.............................................................. (434) (220) (126)
Other income (expense)........................................................ 2,155 803 (89)
----------- ---------- --------
Net loss before income taxes.................................................. (2,674,361) (790,812) (29,202)
Provision for income taxes....................................................... 6,310 1,963 98
----------- ---------- --------
Net loss......................................................................... $(2,680,671) $ (792,775) $(29,300)
=========== ========== ========
Net loss per share--basic and diluted............................................ $ (10.96) $ (4.10) $ (0.42)
=========== ========== ========
Weighted average shares used in computing basic and diluted net loss per share... $ 244,614 $ 193,417 $ 70,064
=========== ========== ========
Comprehensive loss:
Net loss......................................................................... $(2,680,671) $ (792,775) $(29,300)
----------- ---------- --------
Unrealized gain (loss) on investments......................................... 2,184 (523) (283)
Foreign currency translation adjustment....................................... (2,438) (174) 1
----------- ---------- --------
Other comprehensive loss......................................................... (254) (697) (282)
----------- ---------- --------
Comprehensive loss............................................................... $(2,680,925) $ (793,472) $(29,582)
=========== ========== ========
See accompanying notes to consolidated financial statements.
56
ARIBA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share amounts)
Convertible
Preferred Stock Common Stock Additional Deferred Accumulated Total
----------------- ------------------ Paid-In Stock-Based Comprehensive Accumulated Stockholders'
Shares Amount Shares Amount Capital Compensation Loss Deficit Equity
---------- ------ ----------- ------ ---------- ------------ ------------- ----------- -------------
Balances at September
30, 1998............... 4,461,294 $ 9 76,368,160 $152 $ 28,104 $ (2,735) $ 61 $ (15,632) $ 9,959
Exercise of stock
options................ -- -- 13,765,792 28 5,948 -- -- -- 5,976
Issuance of common stock -- -- 23,028,800 46 121,212 -- -- -- 121,258
Exercise of warrants
for common stock....... -- -- 2,011,388 4 (4) -- -- -- --
Conversion of preferred
stock.................. (4,461,294) (9) 71,380,704 142 (133) -- -- -- --
Repurchase of common
stock.................. -- -- (4,798,580) (8) (4) -- -- -- (12)
Deferred stock-based
compensation........... -- -- -- -- 36,027 (36,027) -- -- --
Amortization of
stock-based
compensation........... -- -- -- -- -- 14,584 -- -- 14,584
Unrealized investment
loss, net.............. -- -- -- -- -- -- (283) -- (283)
Foreign currency
translation adjustment. -- -- -- -- -- -- 1 -- 1
Net loss................ -- -- -- -- -- -- -- (29,300) (29,300)
---------- --- ----------- ---- ---------- --------- ------- ----------- -----------
Balances at September
30, 1999............... -- $-- 181,756,264 $364 $ 191,150 $ (24,178) $ (221) $ (44,932) $ 122,183
Exercise of stock
options................ -- -- 12,715,386 25 19,240 -- -- --
Issuance of common stock -- -- 6,657,881 13 843,504 -- -- -- 843,517
Issuance of common
stock related to
acquisitions........... -- -- 46,583,322 92 3,333,403 -- -- -- 3,333,495
Exercise of warrants
for common stock....... -- -- 264,779 1 (1) -- -- -- --
Repurchase of common
stock.................. -- -- (160,950) -- (77) -- -- -- (77)
Deferred stock-based
compensation........... -- -- -- -- (744) 744 -- -- --
Deferred stock-based
compensation related
to acquisition......... -- -- -- -- -- (124,620) -- -- (124,620)
Business partner warrant -- -- -- -- 79,850 -- -- -- 79,850
Amortization of
stock-based
compensation........... -- -- -- -- -- 18,051 -- -- 18,051
Unrealized investment
loss, net.............. -- -- -- -- -- -- (523) -- (523)
Foreign currency
translation adjustment. -- -- -- -- -- -- (174) -- (174)
Net loss................ -- -- -- -- -- -- -- (792,775) (792,775)
---------- --- ----------- ---- ---------- --------- ------- ----------- -----------
Balances at September
30, 2000............... -- $-- 247,816,682 $495 $4,466,325 $(130,003) $ (918) $ (837,707) $ 3,498,192
Exercise of stock
options................ -- -- 8,161,098 17 21,191 -- -- -- 21,208
Issuance of common stock -- -- 1,641,402 3 11,363 -- -- -- 11,366
Exercise of warrants
for common stock....... -- -- 387,027 1 (1) -- -- -- --
Repurchase of common
stock.................. -- -- (1,898,709) (4) (640) -- -- -- (644)
Issuance of restricted
stock.................. -- -- 3,742,500 8 (8) -- -- -- --
Deferred stock-based
compensation, net
warrant................ -- -- -- -- (64,344) 64,344 -- -- --
Business partner........ -- -- -- -- 8,485 -- -- -- 8,485
Amortization of
stock-based
compensation........... -- -- -- -- -- 32,636 -- -- 32,636
Gain on sale of
subsidiaries common
stock.................. -- -- -- -- 31,600 -- -- -- 31,600
Stockholder contribution -- -- -- -- 4,000 -- -- -- 4,000
Unrealized investment
gain, net.............. -- -- -- -- -- -- 2,184 -- 2,184
Foreign currency
translation adjustment. -- -- -- -- -- -- (2,438) -- (2,438)
Net loss................ -- -- -- -- -- -- -- (2,680,671) (2,680,671)
---------- --- ----------- ---- ---------- --------- ------- ----------- -----------
Balances at September
30, 2001............... -- $-- 259,850,000 $520 $4,477,971 $ (33,023) $(1,172) $(3,518,378) $ 925,918
========== === =========== ==== ========== ========= ======= =========== ===========
See accompanying notes to consolidated financial statements
57
ARIBA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended September 30,
----------------------------------
2001 2000 1999
----------- ---------- ---------
Operating activities:
Net loss................................................................... $(2,680,671) $ (792,775) $ (29,300)
Adjustments to reconcile net loss to net cash used in operating activities:
Provisions for doubtful accounts....................................... 27,953 14,200 20
Depreciation and amortization.......................................... 971,830 696,283 1,417
Stock-based compensation............................................... 36,636 18,051 14,584
In-process research and development.................................... -- 27,350 --
Impairment of equity investments....................................... 28,665 -- --
Impairment of goodwill and other intangible assets..................... 1,408,907 -- --
Impairment of leasehold improvements................................... 66,647 -- --
Non-cash warrant expense, net.......................................... 34,076 28,278 27
Minority interests in net loss of consolidated subsidiaries............ (4,632) -- --
Changes in operating assets and liabilities:
Accounts receivable.................................................... 4,955 (61,092) (3,048)
Prepaid expenses and other assets...................................... 992 (42,074) (1,756)
Accounts payable....................................................... (26,841) 49,544 2,884
Accrued compensation and related liabilities........................... (5,156) 42,947 5,255
Accrued liabilities.................................................... 63,584 (17,454) 3,570
Restructuring costs.................................................... 31,194 -- --
Deferred revenue....................................................... (22,641) 146,739 26,795
----------- ---------- ---------
Net cash provided by (used in) operating activities........................ (64,482) 110,997 20,448
----------- ---------- ---------
Investing activities:
Purchases of property and equipment, net of acquisitions................. (91,255) (47,186) (7,581)
Proceeds from the sales of investments................................... 211,475 109,960 10,069
Purchase of investments.................................................. (259,379) (133,299) (106,880)
Cash acquired from acquisitions.......................................... -- 104,480 --
Direct merger costs...................................................... -- (43,566) --
Increase in restricted cash.............................................. (534) (31,237) (800)
----------- ---------- ---------
Net cash used in investing activities.................................... (139,693) (40,848) (105,192)
----------- ---------- ---------
Financing activities:
Principal payments on lease obligations.................................. (537) (794) (499)
Proceeds from issuance of common stock................................... 32,574 75,853 127,234
Proceeds from subsidiary stock offering.................................. 51,951 -- --
Repurchase of common stock............................................... (644) (77) (12)
----------- ---------- ---------
Net cash provided by financing activities................................ 83,344 74,982 126,723
----------- ---------- ---------
Net increase (decrease) in cash and cash equivalents....................... (120,831) 145,131 41,979
Effect of exchange rates on cash and cash equivalents...................... (2,439) (174) --
Cash and cash equivalents at beginning of year............................. 195,241 50,284 8,305
----------- ---------- ---------
Cash and cash equivalents at end of year................................... $ 71,971 $ 195,241 $ 50,284
=========== ========== =========
Supplemental disclosures of cash flow information:
Cash paid for interest................................................... $ 415 $ 194 $ 100
=========== ========== =========
Cash paid for taxes...................................................... $ 1,190 $ 134 $ --
=========== ========== =========
Non-cash investing and financing activities:
Assets recorded under capital leases..................................... $ -- $ -- $ 1,021
=========== ========== =========
Common stock and options issued for acquisitions, net of cash acquired... $ -- $3,229,015 $ --
=========== ========== =========
Common stock issued for intellectual property, net of cash acquired...... $ -- $ 786,929 $ --
=========== ========== =========
Stockholder contribution................................................. $ 4,000 $ -- $ --
=========== ========== =========
See accompanying notes to consolidated financial statements
58
ARIBA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Acquisitions
To date, business combinations have been accounted for under the purchase
method of accounting. The Company includes the results of operations of the
acquired business from the acquisition date. Net assets of the companies
acquired are recorded at their fair value at the acquisition date. The excess
of the purchase price over the fair value of net assets acquired is included in
goodwill and other intangible assets in the accompanying consolidated balance
sheet. Amounts allocated to in-process research and development are expensed in
the period in which the acquisition is consummated.
Basis of presentation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation. As of September 31, 2001, the Company
had two subsidiaries with less than 100% ownership, Nihon Ariba K.K and Ariba
Korea, Ltd. In accordance with Staff Accounting Bulletin, (SAB) 51, the Company
has recorded the gains from sales of subsidiary stock as a capital transaction.
Use of estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported results of operations during the reporting period.
Actual results could differ from those estimates. In particular, actual
sublease income attributable to the consolidation of excess facilities might
deviate from the assumptions used to calculate the Company's accrual for lease
abandonment costs.
Cash and cash equivalents and restricted cash
The Company considers all highly liquid investments with original maturity
dates of 90 days or less at the date of acquisition to be cash equivalents.
Cash equivalents consist of money market funds, commercial paper,
government/federal notes and bonds, certificates of deposit, and auction rate
preferred stock. Restricted cash comprises amounts held in deposits that are
required as collateral under the Company's facilities operating lease agreement.
Investments
The Company's marketable securities are classified as available-for-sale as
of the balance sheet date and are reported at fair value, with unrealized gains
and losses, net of tax, recorded in stockholders' equity. Realized
59
gains or losses and permanent declines in value, if any, on available-for-sale
securities will be reported in other income or expense as incurred. The Company
uses the cost method to account for certain equity securities in which it has a
minority interest and does not exercise significant influence. The Company
periodically reviews these investments for other-than-temporary impairment.
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.
Significant customer information is as follows:
% of Total % of Accounts
Revenues Receivable
-------------- --------------
2001 2000 1999 2001 2000 1999
---- ---- ---- ---- ---- ----
Customer A............................. -- -- 12% -- -- --
Customer B............................. -- -- -- -- -- 11%
Customer C............................. -- -- -- -- -- 12%
Customer D............................. -- -- -- -- 12% --
Customer E............................. -- -- -- 11% -- --
Derivative Financial Instruments
The Company uses derivative financial instruments for the purpose of
reducing its exposure to adverse fluctuations in foreign exchange rates. While
these hedging instruments are subject to fluctuations in value, such
fluctuations are generally offset by the value of the underlying exposures
being hedged. The Company is not a party to leveraged derivatives and does not
hold or issue financial instruments for speculative purposes.
Foreign Currency Management
The Company routinely uses forward exchange contracts to hedge its net
exposures, by currency, related to the monetary assets and liabilities of its
operations denominated in non-functional currency. The Company utilizes forward
exchange contracts to hedge trade and intercompany receivables and payables. In
addition, from time to time, the Company 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 primary business objective
of this hedging program is to minimize the gains and losses resulting from
exchange rate changes.
All hedge contracts are marked to market through earnings every period. The
forward foreign exchange contracts requires the Company to exchange foreign
currencies for U.S. dollars or vice versa and generally mature in one month or
less. As of September 30, 2001, the Company had $4.8 million of outstanding
foreign exchange contracts in Canadian Dollars (CAD), Swedish Krona (SEK),
Japanese Yen (JPY) and European Currency Units (EURO), that had remaining
maturities of one month or less. As of September 30, 2000, the company had no
outstanding foreign exchange contracts.
60
Adoption of Accounting Standard
In the first quarter of fiscal 2001, the Company adopted the Statement of
Financial Accounting Standards No. 133, (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 which establishes
accounting and reporting standards for derivative financial instruments and
hedging activities related to those instruments, as well as other hedging
activities. Accordingly, the adoption of SFAS No. 133 which occurred in the
quarter ended December 2000, did not have a material impact on the Company's
financial position, results of operations or cash flows.
Property and equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation and amortization are computed using the straight-line method over
the shorter of the estimated useful lives of the assets, generally two to five
years, or the lease term, if applicable. Gains and losses on disposals are
included in income at amounts equal to the difference between the net book
value of the disposed assets and the proceeds received upon disposal.
Expenditures for replacements and betterments are capitalized, while
expenditures for maintenance and repairs are charged against earnings as
incurred.
Software developed for internal use
During fiscal 2000, the Company adopted Statement of Position (SOP) 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use, which requires that certain costs for the development of internal
use software should be capitalized, including the costs of coding, software
configuration, upgrades and enhancements. Approximately $4.4 million and $4.8
million of internal use software was capitalized during the years ended
September 30, 2001 and 2000, respectively, which is presented on the
accompanying consolidated balance sheet as a component of property and
equipment.
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 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 expected operating results, significant changes in the manner of
use of the acquired assets or the strategy for the Company's overall business,
significant negative industry or economic trends, a significant decline in the
Company's stock price for a sustained period, and the Company's market
capitalization relative to net book value. When the Company determines that the
carrying value of goodwill may not be recoverable, the Company measures any
impairment using a projected discounted cash flow model with a discount rate
commensurate with the risk inherent in the Company's 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. The Company's primary software products in fiscal
61
2001 were Ariba Buyer, Ariba Sourcing, Ariba Dynamic Trade and Ariba
Marketplace. 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, and the Company's
primary product in fiscal 1999 was Ariba Buyer.
The Company licenses its products through its direct sales force and
indirectly through resellers. The Company's license agreements for such
products do not provide for a right of return, 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 does not expect to generate significant revenues from offering
access to its Ariba Supplier Network.
The Company recognizes revenue on its software products in accordance with
Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended by
SOP 98-4 and SOP 98-9. The Company also adopted Staff Accounting Bulletin (SAB)
101, Revenue Recognition in Financial Statements in the first quarter of fiscal
2001. The adoption of SAB 101 did not have a significant impact on the
Company's consolidated 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.
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 hosted applications 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 vendor specific objective evidence 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.
62
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 of the Company's products is
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. During the year ended September
30, 2001, the Company recognized an immaterial amount of software license
revenues from such transactions. The Company did not have any of these
transactions in fiscal 2000 or fiscal 1999.
Accounts Receivable
Accounts receivable include amounts due from customers for which revenue has
been recognized. Deferred revenue includes amounts received from customers for
which revenue has not been recognized that generally results from 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.
Research and development
In accordance with SFAS No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed, software development costs
are expensed as incurred until technological feasibility has been established,
at which time such costs are capitalized until the product is available for
general release to customers. To date, the Company's software has been
available for general release concurrent with the establishment of
technological feasibility and, accordingly, no development costs have been
capitalized.
Advertising expense
Advertising costs are expensed as incurred and totaled $2.2 million, $7.6
million and $129,000 during the years ended September 30, 2001, 2000 and 1999,
respectively.
Stock-based compensation
The Company accounts for its employee stock-based compensation plans in
accordance with APB Opinion No. 25 (APB Opinion No. 25), Accounting for Stock
Issued to Employees and Financial Accounting Standards Board Interpretation No.
44 (FIN 44), Accounting for Certain Transactions Involving Stock
Compensation--an Interpretation of APB Opinion No. 25, and complies with the
disclosure provisions of SFAS No. 123 (SFAS No. 123), Accounting for
Stock-Based Compensation. 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 for each stock option. The Company accounts for
equity instruments issued to non-employees in accordance with the provisions of
SFAS No. 123 and Emerging Issues Task Force (EITF) 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services.
63
Equity instruments received in conjunction with licensing transactions
Equity instruments received in conjunction with licensing transactions are
recorded at their estimated fair market value and included in the measurement
of the related license revenue in accordance with EITF No. 00-8, Accounting by
a Grantee for an Equity Investment to Be Received in Conjunction with Providing
Goods and Services.
Income taxes
Income taxes are computed using an asset and liability approach, which
requires the recognition of taxes payable or refundable for the current year
and deferred tax assets and liabilities for the future tax consequences of
events that have been recognized in the Company's consolidated financial
statements or tax returns. The measurement of current and deferred tax assets
and liabilities is based on provisions of the enacted tax law; the effects of
future changes in tax laws or rates are not anticipated. The measurement of
deferred tax assets is reduced, if necessary, by the amount of any tax benefits
that, based on available evidence, are not expected to be realized.
Net loss per share
Net loss per share is calculated in accordance with SFAS No. 128, Earnings
per Share. Under the provisions of SFAS No. 128, basic net loss per share is
computed by dividing the net loss available to common stockholders for the
period by the weighted average number of common shares outstanding during the
period, excluding shares subject to repurchase and in escrow related to
acquisitions. Diluted net loss per share is computed by dividing the net loss
for the period by the weighted average number of common and potential common
shares outstanding during the period if their effect is dilutive. Potential
common shares are comprised of shares of restricted common stock, shares held
in escrow, and incremental common shares issuable upon the exercise of stock
options and warrants.
Comprehensive income
The Company reports comprehensive income or loss in accordance with the
provisions of SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130
establishes standards for reporting comprehensive income and its components in
financial statements. Comprehensive income or loss, as defined, includes all
changes in equity (net assets) during a period from non-owner sources. Tax
effects of other comprehensive income or loss are not considered material for
any period.
Foreign currency translation
The Company translates the assets and liabilities of international
subsidiaries whose functional currency is the local currency rather than the
U.S. dollar, into dollars at the current rates of exchange in effect at the
balance sheet date. Local functional currencies used in non-US subsidiaries
consist of the following: Argentina (ARS), Australia (AUD), Brazil (BRL),
Canada (CAD), European Union, (EURO), Hong Kong (HKD), Italy (ITL), India
(INR), Japan (JPY), Korea (KRW), Mexico (MXN), New Zealand (NZD), Singapore
(SGD), Sweden (SEK), Switzerland (CHF), Taiwan (TWD) and United Kingdom (GBP).
Revenues and expenses are translated using rates that approximate those in
effect during the period. Gains and losses from translation adjustments are
included in stockholders' equity in the consolidated balance sheet caption
"Accumulated other comprehensive loss." Currency transaction gains or losses,
derived on monetary assets and liabilities stated in a currency other than the
functional currency, are recognized in current operations and have not been
significant to the Company's operating results in any period.
Segment and geographic information
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. This Statement establishes standards for
the way companies report information about operating
64
segments in annual financial statements. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. In accordance with the provisions of SFAS No. 131, the Company has
determined that it does not have separately reportable operating segments. The
Company operates in one principal business segment across domestic and
international markets. Substantially all of the Company's identifiable assets
are in the United States.
Reclassifications
Certain reclassifications, none of which affected net income, have been made
to prior year amounts to conform to the current year presentation.
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.
The Company is required to adopt the provisions of SFAS No. 141 immediately,
and 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 by 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 August 2001, the Financial Accounting Standards Board 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 related to long-lived
assets held for use because the impairment assessment under SFAS
65
No. 144 is largely unchanged from SFAS No. 121. The provisions of SFAS No. 144
for assets held for sale or other disposal generally are required to be applied
prospectively after the adoption date to newly initiated disposal activities.
Therefore, management cannot determine the potential effects that adoption of
SFAS No. 144 will have 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 evaluating the impact of EITF
No. 01-9 and does not believe that upon adoption it will have a significant
impact on the Company's financial statements. Nonetheless, any impact would be
limited to a reclassification of amounts between operating expenses and
revenues.
Note 2--Balance Sheet Components
Accounts receivable consisted of the following as of September 30, 2001 and
2000 (in thousands):
September 30,
------------------
2001 2000
-------- --------
Accounts receivable.............................. $ 41,790 $ 75,683
Allowance for doubtful accounts.................. (14,454) (13,791)
-------- --------
Accounts receivable, net......................... $ 27,336 $ 61,892
======== ========
The provision for doubtful accounts amounted to approximately $27.9 million
and $14.2 million for the years ended September 30, 2001 and 2000,
respectively, and is classified as a sales and marketing expense in the
Company's Consolidated Statements of Operations.
Prepaid expenses and other current assets consisted of the following as of
September 30, 2001 and 2000 (in thousands):
September 30,
---------------
2001 2000
------- -------
Business partner receivable.................... $20,000 $13,750
Other receivables.............................. 5,149 5,269
Prepaid rent................................... 4,659 3,952
Other prepaid expenses......................... 6,155 3,846
------- -------
Total prepaid expenses and other current assets $35,963 $26,817
======= =======
In the quarter ended June 30, 2000, the Company entered into an agreement
with a third party. The business partner relationship was undertaken as part of
the Company's vertical industry strategy to obtain a major partner in the
financial services industry. The agreement provides that the Company will
receive $25.0 million in guaranteed gainshare revenues to be paid over a period
of two years and as of September 30, 2001, $20.0 million remains outstanding to
be collected. As of September 30, 2000, $13.8 million represented the current
portion of the guaranteed gainshare and the non-current portion of $11.2
million is classified as other assets. See Note 10 of Notes to Consolidated
Financial Statements for further discussion of this arrangement.
Other receivables for fiscal 2001 and 2000 primarily consists of interest
receivable and employee advances. Other prepaid expenses for fiscal 2001 and
2000 consists of prepaid software licenses and maintenance for software for
internal use and prepaid royalties.
66
Property and equipment consisted of the following (in thousands):
September 30,
-----------------
2001 2000
-------- -------
Computer equipment and software....................... $ 41,182 $26,250
Office equipment...................................... 8,910 4,233
Furniture and fixtures................................ 17,131 3,825
Leasehold improvements................................ 21,913 31,609
-------- -------
89,136 65,917
Less accumulated depreciation and amortization........ (38,783) (9,868)
-------- -------
Total property and equipment, net..................... $ 50,353 $56,049
======== =======
During the year ended September 30, 2001, the Company recorded a charge of
$66.6 million related to the impairment of leasehold improvements of abandoned
facilities. See Note 7 of Notes to Consolidated Financial Statements for more
detailed information.
Certain computer equipment, software and office equipment are recorded under
capital leases that aggregated $1.3 million as of September 30, 2001 and 2000,
respectively. As of September 30, 2001 and 2000, property and equipment under
capital leases carried a net book value of $0 and $344,000, respectively.
Depreciation and amortization expense of property and equipment totaled
$28.9 million, $7.7 million and $1.4 million for the years ended September 30,
2001, 2000 and 1999, respectively.
Accrued liabilities consisted of the following (in thousands):
September 30,
--------------
2001 2000
------- ------
Professional and consulting fees...................... $ 2,932 $1,834
Accrued marketing expenses............................ 10,511 --
Customer deposits..................................... 12,082 --
Accrued taxes......................................... 13,349 4,983
Deferred rent......................................... 5,823 2,064
Other accrued liabilities............................. 11,375 1,120
------- ------
Total accrued liabilities............................. $56,072 $8,167
======= ======
Note 3--Investments
The following is a summary of available for sale securities (in thousands):
September 30, 2001
----------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
Money market funds.................... $ 52,843 $ -- $ -- $ 52,843
Certificate of deposit................ 63,618 -- -- 63,618
Government notes and bonds............ 41,598 1,085 -- 42,683
Corporate notes/bonds................. 78,644 1,407 -- 80,051
Auction rate preferred stock.......... 4,800 -- -- 4,800
Equity investments in public companies 1,061 -- (1,053) 7
-------- ------ ------- --------
$242,563 $2,493 $(1,053) $244,002
======== ====== ======= ========
Included in cash and cash equivalents. $ 54,963 $ -- $ -- $ 54,963
Included in short-term investments.... 145,127 804 -- 145,931
Included in long-term investments..... 42,474 1,689 (1,053) 43,109
-------- ------ ------- --------
$242,563 $2,493 $(1,053) $244,002
======== ====== ======= ========
67
September 30, 2000
------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
Money market funds............................... $185,055 $ -- $ -- $185,055
Certificate of deposit........................... 3,003 -- -- 3,003
Commercial paper................................. 9,770 -- -- 9,770
Government notes and bonds....................... 54,156 122 (137) 54,141
Corporate notes/bonds............................ 66,600 121 (153) 66,568
Auction rate preferred stock..................... 11,690 -- (28) 11,662
Equity investments in public companies........... 1,371 316 (985) 702
-------- ---- ------- --------
$331,645 $559 $(1,303) $330,901
======== ==== ======= ========
Included in cash and cash equivalents............ $191,932 $ 17 $ -- $191,949
Included in short-term investments............... 85,078 33 (137) 84,974
Included in long-term investments................ 54,633 509 (1,166) 53,976
-------- ---- ------- --------
$331,645 $559 $(1,303) $330,899
======== ==== ======= ========
The following is a summary of the Company's available for sale securities,
excluding equity investments, based on contractual maturities. (in thousands):
September 30,
-----------------
2001 2000
-------- --------
Due in one year or less............................... $145,931 $ 84,974
Due after one year through two years.................. 21,899 43,957
Due after two years through three years............... 21,202 9,319
-------- --------
$189,032 $138,250
======== ========
Note 4--Other Assets
Other assets include investments in equity instruments of privately held
companies which amounted to $1.3 million and $30.5 million as of September 30,
2001 and 2000, respectively. These investments are accounted for using the cost
method and consist of common stock, preferred stock and warrants for common
stock. Of these amounts, $715,000 and $13.7 million at September 30, 2001 and
2000, respectively, were received as consideration in connection with software
licensing transactions with customers and business partners.
The Company determines the fair value for common stock and preferred stock
equity investments based on amounts paid by independent third parties in the
investees' most recent capital transactions. The fair value of the common stock
warrants received is determined using a Black-Scholes option pricing model. The
fair value of these warrant investments in private companies totaled
approximately $507,000 and $4.4 million at September 30, 2001 and 2000,
respectively. These investments are reviewed each reporting period for declines
considered other-than-temporary, and, if appropriate, written down to their
estimated fair value.
During the year ended September 30, 2001, the Company determined that these
investments had incurred a decline in value that was other-than-temporary
primarily as a result of the continuing economic slowdown, particularly in the
technology sector. An impairment review is performed whenever events or changes
in circumstances indicate that the carrying value of the Company's equity
investments 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 expected operating
results of the Company's
68
investees, significant changes in the manner of use of the acquired assets or
the strategy for the Company's overall business and significant negative
industry or economic trends. The Company determined that the carrying value of
the equity investments had a decline that was other than temporary based upon
the existence of one or more of the above indicators of impairment. The
impairment charge reduced the equity investments to an estimated fair value
consistent with the general economic environment within the technology sector
resulting in a charge of $28.7 million to the Consolidated Statement of
Operations.
Note 5--Goodwill and Other Intangible Assets
Goodwill and other intangible assets as of September 30, 2001 and 2000
consisted of the following (in thousands):
September 30,
----------------------
2001 2000
---------- ----------
Goodwill................................. $ 907,103 $3,101,697
Assembled workforce...................... 11,127 13,000
Covenants not-to-compete................. 1,300 1,300
Trademarks............................... -- 2,000
Core technology.......................... 17,392 20,200
Intellectual property agreement.......... 786,929 786,929
Business partner warrants................ 11 31,221
---------- ----------
1,723,862 3,956,347
Less: accumulated amortization........... (846,056) (694,209)
---------- ----------
Goodwill and other intangible assets, net $ 877,806 $3,262,138
========== ==========
Amortization of goodwill and other intangible assets was $967.1 million and
$694.2 million for the years ended September 30, 2001 and 2000, respectively.
These amounts include $25.6 million and $5.6 million of business partner
warrant expense and related impairment charge recorded for the years ended
September 30, 2001 and 2000, respectively.
Acquisitions
TradingDynamics
On January 20, 2000, the Company acquired TradingDynamics, Inc.
("TradingDynamics"), which provided Internet-based trading applications. The
acquisition was accounted for using the purchase method of accounting and
accordingly, the purchase price was allocated to the assets acquired and
liabilities assumed based on their estimated fair values on the acquisition
date. Since January 20, 2000, TradingDynamics' results of operations have been
included in the Company's Consolidated Statements of Operations. The fair value
of the intangible assets acquired was determined based upon a valuation using a
combination of methods, including a cost approach for the assembled workforce,
an income approach for the covenants not-to-compete and an income approach for
the core technology.
The purchase price of approximately $465.0 million consisted of an exchange
of 7,274,656 shares of the Company's common stock with a fair value of $371.9
million, and assumed stock options with a fair value of $91.7 million. The fair
value of the common stock options was determined using a Black-Scholes option
pricing model with the following assumptions: risk-free rate of 6.53%, expected
life of 3.0 years, expected dividend rate of 0%, and volatility of 96%. There
were also $1.4 million of direct transaction costs related to the merger,
consisting primarily of payments for financial advisor and other professional
fees. Of the total purchase price, $224,000 was allocated to property and
equipment, $13.4 million was allocated to net liabilities assumed, excluding
property and equipment, and the remainder was allocated to intangible assets,
including in-process
69
research and development ($950,000), core technology ($4.4 million), covenants
not-to-compete ($1.3 million), assembled workforce ($1.1 million) and goodwill
($470.5 million). The acquired in-process research and development related to
the acquisition are technologies representing the processes and expertise
employed to design and develop electronic commerce solutions. As of the
acquisition date, this in-process research and development consisted of
TradingDynamics' Market Suite Product Version 1.5. The Company determined the
acquired in-process research and development had not reached technological
feasibility and had no alternative future uses based on a review by the
Company's software engineers. The efforts required to complete the acquired
in-process research and development included the completion of all planning,
designing and testing activities that were necessary to establish that the
product would be produced to meet its design requirements, including functions,
features and technical performance requirements. As of September 30, 2000, the
Company had incorporated and released this technology as its Dynamic Trade
product.
The value of the acquired in-process research and development was computed
using a discounted rate of 25% on the anticipated income stream of the related
product revenues. The discount rate was applied giving specific consideration
to the risks and attributes of the subject assets. The discounted cash flow
analysis was based on management's forecast of future revenues which assumed a
compound annual growth rate of 151%. These forecasts were based on management's
estimates and the growth potential of the market. The discounted cash flow
analysis was also based on management's forecast of cost of revenues and
operating expenses related to the products and technologies purchased from
TradingDynamics. The calculation of value was then adjusted to reflect only the
value creation efforts of TradingDynamics prior to the close of the
acquisition. At the time of the acquisition, the product was approximately 90%
complete. The remaining costs to complete the project, which were not
significant, were incurred in fiscal 2000. The resultant value of in-process
research and development was further reduced by the estimated value of core
technology and was expensed in the period the transaction was consummated. The
acquired intangible assets are being amortized over their estimated useful
lives of three years. Goodwill is being amortized using the straight-line
method over three years, resulting in an aggregate quarterly charge of $39.7
million during the amortization period, subject to the effects of certain new
accounting pronouncements as described in Note 1 of Notes to Consolidated
Financial Statements. For the year ended September 30, 2001, amortization of
goodwill and other intangible assets associated with this acquisition totaled
$159.4 million.
The following is a summary of the allocation of the purchase price in the
acquisition of TradingDynamics (in thousands):
Property and equipment................................... $ 224
Net liabilities assumed, excluding property and equipment (13,447)
Identifiable intangible assets........................... 6,800
In-process research and development...................... 950
Goodwill................................................. 470,537
--------
Total................................................. $465,064
========
Tradex Technologies, Inc.
On March 8, 2000, the Company acquired Tradex Technologies, Inc. ("Tradex"),
which provided solutions for enabling online marketplaces and exchanges. The
acquisition was accounted for using the purchase method of accounting and
accordingly, the purchase price was allocated to the assets acquired and
liabilities assumed based on their estimated fair values on the acquisition
date. Since March 8, 2000, the results of operations of Tradex have been
included in the Company's Consolidated Statements of Operations. The fair value
of the intangible assets was determined based upon a valuation using a
combination of methods, including an income approach for the core technology,
an income approach for the trademarks and a cost approach for the assembled
workforce.
The purchase price of approximately $2.3 billion consisted of an exchange of
34,059,336 shares of the Company's common stock with a fair value of $2.1
billion and assumed stock options with a fair value of
70
approximately $207.5 million. The fair value of the common stock options was
determined using a Black- Scholes option pricing model with the following
assumptions: risk free rate of 6.55%, expected life of 3.0 years, expected
dividend rate of 0%, and volatility of 96%. There were also $28.8 million of
direct transaction costs related to the merger, consisting primarily of
payments for financial advisor and other professional fees. Of the total
purchase price, $3.5 million was allocated to property and equipment, $75.6
million was allocated to net assets acquired, excluding property and equipment,
and the remainder was allocated to intangible assets, including in-process
research and development ($11.8 million), core technology ($7.9 million),
trademarks ($2.0 million), assembled workforce ($5.4 million) and goodwill
($2.2 billion). There was one project included in in-process research and
development for Tradex. The acquired in-process research and development
related to the acquisition are technologies representing the processes and
expertise employed to design and develop completely new platform architecture
based on Enterprise Java Beans, Uses XML documents, and Use of Entity Beans. As
of the acquisition date, this in-process research and development consisted of
Tradex's product, Commerce Center Version 8.0. The Company determined that the
acquired in-process research and development had not reached technological
feasibility and had no alternative future uses based on a review by the
Company's software engineers. The efforts required to complete the acquired
in-process research and development included the completion of all planning,
designing and testing activities that are necessary to establish that the
product can be produced to meet its design requirements, including functions,
features and technical performance requirements. As of September 30, 2000, the
Company had incorporated and released this technology as its Ariba Marketplace
Standard Edition product.
The value of the acquired in-process research and development was computed
using a discounted rate of 22% on the anticipated income stream of the related
product revenues. The discount rate was applied giving specific consideration
to the risks and attributes of the subject assets. The discounted cash flow
analysis was based on management's forecast of future revenues which assumed a
compound annual growth rate of 87.6%. These forecasts were based on
management's estimates and the estimated growth potential of the market. The
discounted cash flow analysis was also based on management's forecast of cost
of revenues and operating expenses related to the products and technologies
purchased from Tradex. The calculation of value was then adjusted to reflect
only the value creation efforts of Tradex prior to the close of the
acquisition. At the time of the acquisition, the product was approximately 33%
complete with approximately $693,000 in estimated costs remaining,
substantially all of which were incurred in fiscal 2000. The resultant value of
in-process research and development was further reduced by the estimated value
of core technology. The acquired in-process research and development was
expensed in the period the transaction was consummated. Subsequent to the
impairment charge discussed below, the acquired Tradex intangible assets are
being amortized over their remaining estimated useful lives of two years,
subject to the effects of certain new accounting pronouncements as described in
Note 1 of Notes to Consolidated Financial Statements. For the year ended
September 30, 2001, amortization of goodwill and other intangible assets
associated with this acquisition totaled $371.8 million.
The following is a summary of the allocation of the purchase price in the
acquisition of Tradex (in thousands):
Property and equipment.............................. $ 3,502
Net assets assumed, excluding property and equipment 75,679
Identifiable intangible assets...................... 15,300
In-process research and development................. 11,800
Goodwill............................................ 2,185,000
----------
Total............................................ $2,291,281
==========
SupplierMarket
On August 28, 2000, the Company acquired SupplierMarket.com, Inc.
("SupplierMarket"), a provider of online collaborative sourcing technologies.
The acquisition was accounted for using the purchase method of
71
accounting and accordingly, the purchase price was allocated to the assets
acquired and liabilities assumed based on their estimated fair values on the
acquisition date. Since August 28, 2000, the results of operations of
SupplierMarket have been included in the Company's Consolidated Statements of
Operations. The fair value of the intangible assets was determined based upon a
valuation using a combination of methods, including an income approach for the
in-process and core technology, and a cost approach for the value of the
assembled workforce.
The total purchase price of approximately $607.1 million consisted of an
exchange of 5,249,330 shares of the Company's common stock with a fair value of
$478.7 million and assumed stock options with a fair value of approximately
$108.4 million. The fair value of the common stock options was determined using
a Black-Scholes option pricing model with the following assumptions: risk-free
rate of 6.13%, expected life of 3.0 years, expected dividend rate of 0%, and
volatility of 102%. There were also $20.0 million of direct transaction costs
related to the merger, consisting primarily of payments for financial advisor
and other professional fees. Of the total purchase price, $3.1 million was
allocated to property and equipment, $4.2 million was allocated to net assets
acquired, excluding property and equipment, $124.6 million was allocated to
deferred compensation and the remainder was allocated to intangible assets,
including in-process research and development ($14.6 million), core technology
($7.9 million), assembled workforce ($6.5 million) and goodwill ($446.1
million). There was one project included in in-process research and development
for SupplierMarket. The acquired in-process research and development related to
the acquisition are technologies representing the processes and expertise
employed to design and develop new application servers with increased
scalability and customer functionality. As of the acquisition date,
SupplierMarket had yet to commence shipments of its products and this
in-process research and development consisted of its new product architecture.
The Company determined the acquired in-process research and development had not
reached technological feasibility and had no alternative future uses based on a
review by the Company's software engineers. The efforts required to complete
the acquired in-process research and development included the completion of all
planning, designing and testing activities that are necessary to establish that
the product can be produced to meet its design requirements, including
functions, features and technical performance requirements. During the quarter
ended December 31, 2000, the Company incorporated and released this research
and development as its sourcing product.
The value of the acquired in-process research and development was computed
using a discounted rate of 19% on the anticipated income stream of the related
product revenues. The discount rate was applied giving specific consideration
to the risks and attributes of the subject assets. The discounted cash flow
analysis was based on management's forecast of future revenues which assumed a
compound annual growth rate of 131.79%. These forecasts were based on
management's estimates and the growth potential of the market. The discounted
cash flow analysis was also based on management's forecast of cost of revenues
and operating expenses related to the products and technologies purchased from
SupplierMarket. The calculation of value was then adjusted to reflect only the
value creation efforts of SupplierMarket prior to the close of the acquisition.
At the time of the acquisition, the product was approximately 53% complete with
approximately $158,000 in estimated costs remaining, all of which were incurred
by the end of the fiscal quarter ended December 31, 2000. The resultant value
of in-process research and development was further reduced by the estimated
value of core technology. The acquired in-process research and development was
expensed in the period the transaction was consummated.
The Company recorded deferred stock-based compensation associated with
unvested stock options issued to employees in conjunction with the acquisition.
This amount is included as a component of stockholders' equity and is being
amortized by charges to operations over the vesting period of the options,
consistent with the method described in Financial Accounting Standards Board
Interpretation No. 28. The amortization for the year ended September 30, 2001
is approximately $23.8 million.
The acquired intangible assets are being amortized over their estimated
useful lives of three years. Goodwill is being amortized using the
straight-line method over three years, resulting in an aggregate quarterly
charge of $37.2 million during the amortization period, subject to the effects
of certain new accounting pronouncements as described in Note 1 of Notes to
Consolidated Financial Statements. For the year ended September 30, 2001,
amortization of goodwill and other intangible assets associated with this
acquisition totaled $148.3 million.
72
The following is a summary of the allocation of the purchase price in the
acquisition of SupplierMarket (in thousands):
Property and equipment.............................. $ 3,165
Net assets assumed, excluding property and equipment 4,228
Deferred compensation............................... 124,620
Identifiable intangible assets...................... 14,400
In-process research and development................. 14,600
Goodwill............................................ 446,158
--------
Total............................................ $607,171
========
No assurance can be given that actual revenues and operating profit
attributable to acquired in-process research and development will not deviate
from the projections used to value such research and development in connection
with each of the respective acquisitions. Ongoing operations and financial
results for acquired businesses and the Company as a whole are subject to a
variety of factors which may not have been known or estimable at the date of
such acquisition.
Pro Forma Results (Unaudited)
The following unaudited pro forma summary presents the Company's
consolidated results of operations for the years ended September 30, 2000 and
1999 as if the preceding three acquisitions had been consummated at the
beginning of fiscal 1999. The pro forma consolidated results of operations for
the year ended September 30, 2000 include certain adjustments, including
amortization of goodwill and other intangible assets, amortization of deferred
compensation, the elimination of the charge for acquired in-process research
and development and inclusion of the preferred stock dividend payable for the
Tradex acquisition.
Pro forma results for the years ended September 30, 2000 and 1999 are as
follows (in thousands, except per share amounts):
2000 1999
----------- -----------
Revenues............................ $ 290,972 $ 50,621
Net loss............................ (1,390,223) (1,163,090)
Net loss per share basic and diluted $ (5.79) $ (10.40)
The pro forma results are not necessarily indicative of those that would
have actually occurred had the acquisitions taken place at the beginning of
fiscal 1999.
Impairment
During the second quarter of fiscal 2001, the Company performed an
impairment assessment of goodwill and identifiable intangible assets recorded
in connection with its various acquisitions. The assessment was performed
primarily due to the significant decline in the Company's stock price, the net
book value of assets significantly exceeding the Company's market
capitalization, the significant underperformance of the Tradex acquisition
relative to projections and the overall decline in industry growth rates which
indicated that this trend might continue for an indefinite period. As a result,
the Company recorded a $1.4 billion impairment charge in the quarter ended
March 31, 2001 to reduce goodwill and other intangible assets associated with
the Tradex acquisition to their estimated fair value. The estimate of fair
value was based upon the discounted estimated cash flows from the sale of the
Marketplace Standard Edition product for the succeeding three years using a
discount rate of 18% and an estimated terminal value. The assumptions
supporting the estimated cash flows, including the discount rate and an
estimated terminal value, reflect management's best estimates. The discount
rate was based upon the weighted average cost of capital for comparable
companies. Of the total write down, $1.3 million was
73
applied to reduce trademarks to zero with the balance applied to reduce
goodwill to $4.7 million. Other remaining intangible assets associated with the
Tradex acquisition consist of core technology and assembled workforce valued at
$8.5 million which the Company concluded were not impaired. The remaining
goodwill and identifiable intangible assets of Tradex will be amortized using
the straight-line method over the remaining life of two years, resulting in an
aggregate quarterly charge of $1.7 million, except for the effects of certain
new accounting pronouncements as described in Note 1 of Notes to Consolidated
Financial Statements.
During fiscal 2001, the Company evaluated the remaining long-lived assets
consisting primarily of goodwill and other intangible assets, and determined
that an intangible asset recorded in connection with the issuance of a business
partner warrant was impaired. The assessment was performed due to
communications from the partner that the establishment of vertical marketplaces
would significantly underperform original plans and estimated future cash flows
were determined to be zero. As a result, the Company determined that the
carrying value of the intangible asset was not recoverable and recorded a $17.7
million charge to business partner warrant expense to write-off the remaining
net book value of this intangible asset. See Note 10 of Notes to Consolidated
Financial Statements for additional information.
Note 6--Income Taxes
Income taxes for the years ended September 30, 2001, 2000 and 1999 were
comprised of the following (in thousands):
Current Deferred Total
------- -------- ------
2001:
Federal....... $ -- $ -- $ --
State......... 550 -- 550
Foreign....... 5,760 -- 5,760
------ ---- ------
Total..... $6,310 $ -- $6,310
====== ==== ======
2000:
Federal....... $ -- $ -- $ --
State......... 534 -- 534
Foreign....... 1,429 -- 1,429
------ ---- ------
Total..... $1,963 $ -- $1,963
====== ==== ======
1999:
Federal....... $ -- $ -- $ --
State......... -- -- --
Foreign....... 98 -- 98
------ ---- ------
Total..... $ 98 $ -- $ 98
====== ==== ======
The Company's pretax income (loss) from operations for the fiscal years
ended September 30, 2001, 2000 and 1999 consisted of the following components
(in thousands):
2001 2000 1999
----------- --------- --------
Domestic............. $(2,587,980) $(793,090) $(29,510)
Foreign.............. $ (86,381) 2,278 308
----------- --------- --------
Total pretax loss. $(2,674,361) $(790,812) $(29,202)
=========== ========= ========
74
The reconciliation between the amount computed by applying the U.S. federal
statutory tax rate of 35% to the loss before income taxes and actual income
taxes for the years ended September 30, 2001 and 2000, and of 34% to the loss
before income taxes and actual income taxes for the year ended September 30,
1999, is as follows (in thousands):
2001 2000 1999
--------- --------- -------
Tax expense/(benefit)............................... $(936,026) $(276,784) $(9,929)
State taxes......................................... 550 534 --
Nondeductible goodwill.............................. 726,245 188,012 --
Nondeductible expenses.............................. (8,282) 9,010 5,230
Foreign tax differential............................ 5,760 1,429 98
Net operating loss for which no benefit was realized 218,063 79,762 4,699
--------- --------- -------
Total............................................ $ 6,310 $ 1,963 $ 98
========= ========= =======
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets as of September 30, 2001 and 2000 are as
follows (in thousands):
2001 2000
--------- ---------
Accruals and allowances............ $ 229,987 $ 100,830
Depreciation and amortization...... 13,220 --
Deferred start-up costs............ 6,098 144
Credit carryforwards............... 44,700 2,134
Net operating loss carryforwards... 409,337 252,434
--------- ---------
Total gross deferred tax assets. 703,342 355,542
Valuation allowance................ (695,943) (342,563)
--------- ---------
7,398 12,979
Acquired intangibles............... (7,398) (12,889)
Depreciation and amortization...... -- (90)
--------- ---------
Net deferred tax assets......... $ -- $ --
========= =========
The Company has provided a valuation allowance due to the uncertainty of
generating future profits that would allow for the realization of such deferred
tax assets. The net increase in the total valuation allowance for the years
ended September 30, 2001 and 2000, was approximately $353.4 million and $330.4
million, respectively. Included in the net operating loss carryforwards is a
tax benefit attributable to noncompensatory stock options of $281.2 million at
September 30, 2001 which, when realized, will be a credit to additional
paid-in-capital.
As of September 30, 2001, the Company has net operating loss carryforwards
for federal and state tax purposes of approximately $1.1 billion and $387.0
million, respectively. These federal and state carryforwards expire in various
years through fiscal 2021 and 2006, respectively. The Company has research
credit carryforwards for federal and state tax purpose of approximately $24.8
million and $18.0 million, respectively. If not utilized, the federal
carryforwards will expire in various years through fiscal 2021. The state
research credit will carry forward indefinitely. The Company also has
manufacturer's credit carryforwards for state tax purposes of approximately
$1.9 million, which will expire in various years through fiscal 2009.
The Internal Revenue Code of 1986, and applicable state tax laws, impose
substantial restrictions on the ability of the Company to utilize net operating
losses and tax credit carryforwards in the event of an "ownership change," as
defined in Section 382 of the Internal Revenue Code. The Company's federal and
state tax losses and tax credit carryover incurred through that date of change
are subject to an annual limitation.
75
Note 7--Commitments and Contingencies
Leases
In March 2000, the Company entered into a facility lease agreement for
approximately 716,000 square feet to be constructed in four office buildings
and an amenities building in Sunnyvale, California as the Company's
headquarters. The operating lease term commenced in phases from January through
April 2001, upon completion of construction and possession of each building,
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 $378.2 million over the lease term. The Company has also
contributed a significant amount towards leasehold improvement costs of the
facility. As of September 30, 2001, the Company has paid $79.2 million for
leasehold improvements to the facility. The estimated total costs of leasehold
improvements is approximately $80.1 million, but is subject to change. These
leasehold improvement payments are estimated to be fully paid during the
quarter ending December 31, 2001. 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 during the remaining
construction, which are classified as restricted cash on the Consolidated
Balance Sheets.
The Company leases certain equipment, software and its facilities under
various noncancelable operating and capital leases with various expiration
dates through 2013. Rental expense was approximately $37.3 million, $10.6
million and $3.6 million for the years ended September 30, 2001, 2000 and 1999,
respectively. As of September 30, 2001, estimated future rents receivable from
signed sublease agreements amount to $80.3 million through fiscal 2007.
Operating lease payments in the table below represent properties currently
occupied by the Company and does not include operating lease commitments for
any abandoned properties.
Future minimum lease payments under noncancelable capital and operating
leases are as follows as of September 30, 2001 (in thousands):
Capital Operating
Year Ending September 30, Leases Leases
- ------------------------- ------- ---------
2002.......................................... $315 $ 14,489
2003.......................................... 108 12,439
2004.......................................... -- 11,818
2005.......................................... -- 11,538
2006.......................................... -- 11,538
Thereafter.................................... -- 75,234
---- --------
Total minimum lease payments.................. 423 $125,518
========
Less: Amount representing imputed interest.... (21)
----
Present value of minimum lease payments....... 402
Less: current portion......................... 296
----
Capital lease obligation, less current portion $106
====
Interest expense related to capital lease obligations is immaterial for all
periods presented.
Restructuring and Lease Abandonment Costs
During the third quarter of fiscal 2001, the Company initiated a
restructuring program to conform its expense and revenue levels to better
position the Company for growth and profitability. As part of this program, the
Company restructured its worldwide operations including a reduction in
workforce of approximately 1,100 individuals and the consolidation of its
operating facilities. The restructuring resulted in a total charge of $133.6
million which was classified within operating expenses. The following
paragraphs provide detailed information relating to the restructuring and lease
abandonment costs which were recorded in fiscal 2001.
76
The following table details restructuring activity through September 30,
2001 (in thousands):
Severance Lease
and abandonment Leasehold
benefits costs impairment Total
--------- ----------- ---------- --------
Balance at September 30, 2000..................... $ -- $ -- $ -- $ --
Total charge to operating expense................. 17,493 49,442 66,647 133,582
Cash paid......................................... (16,642) (19,099) -- (35,741)
Asset impairments applied......................... -- -- (66,647) (66,647)
-------- -------- -------- --------
Balance at September 30, 2001..................... $ 851 $ 30,343 $ -- 31,194
======== ======== ========
Less: current portion............................. 18,339
--------
Accrued restructuring and lease abandonment costs,
less current portion............................ $ 12,855
========
Worldwide Workforce Reduction
Severance and related charges 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. For the year ended September 30, 2001, total accrued
charges for severance and benefits amounted to $17.5 million, of which $16.6
million had been paid or used by fiscal year end. As of September 30, 2001, the
remaining accrued balance of approximately $851,000 in severance and related
charges consists primarily of COBRA benefits and outplacement costs, which the
Company expects will result in cash expenditures in the quarter ending December
31, 2001.
Consolidation of Excess Facilities
In the third quarter of fiscal 2001, the Company adopted a plan to
consolidate its operating facilities and recorded related restructuring expense
of $56.8 million. Lease termination costs relate to the abandonment of certain
excess leased facilities in Mountain View and Sunnyvale, California, Tampa,
Florida, Alpharetta, Georgia, Burlington, Massachusetts, Florham Park, New
Jersey, Lisle, Illinois, Dallas, Texas and Singapore for the remaining lease
terms. Total lease termination costs include the impairment of leasehold
improvements, remaining lease liabilities and brokerage fees offset by
estimated sublease income. The estimated costs of abandoning these leased
facilities, including estimated costs to sublease, were based on market
information trend analyses provided by a commercial real estate brokerage firm
retained by the Company.
In the fourth quarter of fiscal 2001, the Company revised its estimates and
expectations with respect to its corporate headquarters and field offices
disposition efforts due to further consolidation and abandonment of additional
facilities beyond those initially planned and revised estimates of sublease
commencement dates and rental rate projections to reflect continued sharp
declines in market conditions. Based on the factors above, an additional charge
to lease abandonment costs of $59.2 million was recorded in the fourth quarter
of fiscal 2001. For the year ended September 30, 2001, lease abandonment costs
totaled $116.1 million, which includes the impairment of leasehold improvements
related to the abandoned leased facilities totaling $66.6 million.
Net cash payments through September 30, 2001 related to abandoned facilities
amounted to $19.1 million. Actual future cash requirements may differ
materially from the accrual at September 30, 2001, particularly if actual
sublease income is significantly different from current estimates. As of
September 30, 2001, $30.3 million of lease termination costs, net of
anticipated sublease income of $188.2 million related to facilities not yet
subleased, remains accrued and is expected to be utilized by fiscal 2013.
77
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 two 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 Section
10(b) 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 common 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.
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 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 estimatable. 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 of financial condition.
Note 8--Minority Interests in Subsidiaries
In December 2000, the Company's consolidated subsidiary, Nihon Ariba K.K.,
issued and sold 38,000 shares, or approximately 41% of its common stock, for
cash consideration of approximately $40.0 million to a third party. 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, the Company held 100% of the equity of Nihon Ariba K.K. in the
form of common stock. Nihon Ariba K.K.'s operations consist of the marketing,
distribution, service and support of the Company's products in Japan. Under the
terms of the agreement, the third party has the right to resell Ariba products
in the Japanese market.
As of September 30, 2001, minority interest of approximately $12.9 million
is recorded on the Consolidated Balance Sheet in order to reflect the share of
the net assets of Nihon Ariba K.K. held by minority investors. In addition, the
Company recognized approximately $4.3 million as an increase to other income
for the minority interest's share of Nihon Ariba K.K.'s loss for the year ended
September 30, 2001.
In April 2001, the Company's consolidated subsidiary, Ariba Korea, Ltd.,
issued and sold 3,800 shares, or approximately 42% of its common stock, for
cash consideration of approximately $8.0 million to a third party.
78
Prior to the transaction, the Company held 100% of the equity of Ariba Korea,
Ltd. in the form of common stock. Ariba Korea, Ltd.'s operations consist of the
marketing, distribution, service and support of the Company's products in
Korea. Under the terms of the agreement, the third party has the right to
resell Ariba products in the Korean market.
As of September 30, 2001, minority interest of approximately $2.8 million is
recorded on the Consolidated Balance Sheet in order to reflect the share of the
net assets of Ariba Korea, Ltd. held by minority investors. The Company also
recognized approximately $370,000 as other income for the minority interest's
share of the Ariba Korea, Ltd. loss for the year ended September 30, 2001.
Note 9--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 operates in one segment, electronic commerce 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 years ended September 30, 2001, 2000
and 1999, and information regarding long-lived assets in geographic areas as of
September 30, 2001 and 2000, are as follows (in thousands):
For the Years Ended September 30,
---------------------------------
2001 2000 1999
-------- -------- -------
Revenues:
United States. $302,012 $217,554 $38,660
International. 106,836 61,485 6,712
-------- -------- -------
Total..... $408,848 $279,039 $45,372
======== ======== =======
As of September 30,
-------------------
2001 2000
-------- ----------
Long-Lived Assets:
United States.. $923,351 $3,341,016
International.. 6,477 3,175
-------- ----------
Total...... $929,828 $3,344,191
======== ==========
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 $42.2 million for its international locations as of September 30, 2001.
Note 10--Stockholders' Equity
Incorporation and Authorized Capital
The Company's Certificate of Incorporation, as amended, authorizes the
Company to issue 1.5 billion shares of common stock, $0.002 par value per
share, and 20 million shares of preferred stock, $0.002 par value per share.
79
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. Each participant employee will receive, 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 will have
terms and conditions that are substantially the same as those of the canceled
options. The exchange program is not expected to result in any additional
compensation charges or variable plan accounting. Members of the Company's
Board of Directors and its officers and senior executives were not eligible to
participate in this program.
Warrants
In August 1998, in connection with an additional lease line arrangement, the
Company issued warrants entitling the holder to purchase 58,176 shares of
common stock for a fair value of $31,000. In December 2000, these warrants were
fully exercised.
In January 2000, in connection with a sales and marketing alliance agreement
with a third party, the Company issued warrants to purchase up to approximately
11,600,000 shares of the Company's common stock if certain revenue milestones
were achieved. None of the specified milestones were considered probable and as
a result, no stock-based compensation associated with these warrants was
recognized. Effective December 2000, all of these warrants were cancelled in
connection with an amendment of the related sales and marketing agreement.
In February 2000, in connection with a sales and marketing alliance
agreement with a third party, the Company issued unvested warrants to purchase
up to 4,800,000 shares of the Company's common stock at various exercise prices
based on future prices of the Company's common stock or at predetermined
exercise prices. The alliance relationship was entered into to broaden and
accelerate adoption of the Company's products in certain international markets.
As of September 30, 2001, none of these warrants were vested or were deemed
probable of vesting.
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.
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.
The Company has accounted for the warrant in accordance with the provisions
of EITF No. 96-18. At the end of each quarter, the Company determines which
revenue milestones have been met and those milestones for which achievement is
considered probable. Business partner warrant expense is measured at the end of
a quarter by determining the total fair value of the tranche or tranches of
warrants underlying a revenue milestone for which achievement is considered
probable. The amount of warrant expense that is recorded in a given quarter is
equal to the proportionate share of the expected total warrant expense that was
earned by the business partner during the quarter. The fair value of the
warrant is determined using the Black-Scholes option pricing model. The
80
amount of warrant expense associated with a given revenue milestone is
remeasured at the end of each subsequent quarter until the given revenue
milestone is achieved and the related tranche of the warrant vests, at which
time the fair value attributable to that tranche of the 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
tranche of the warrant, a cumulative adjustment of warrant expense is made in
the current quarter.
During the years ended September 30, 2001 and 2000, this business partner
vested in 982,326 shares and 468,041 shares of this warrant, respectively.
Accordingly, $8.5 million and $23.6 million of business partner warrant expense
was recorded for this warrant for the years ended September 30, 2001 and 2000,
respectively. No amounts related to the unvested portion of this warrant are
reflected in the accompanying consolidated financial statements.
In the quarter ended June 30, 2000, the Company entered into an agreement
with a third party. The business partner relationship was undertaken as part of
the Company's vertical industry strategy to obtain a major partner in the
financial services industry. In connection with the agreement, the Company
issued warrants to purchase up to 6,776,000 shares of the Company's common
stock at an exercise price based on the ten-day average of the Company's stock
price up to and including the vesting date of when the warrant is earned. Upon
signing of this agreement, 1,936,000 shares of the Company's common stock
underlying the warrants were immediately vested. The remaining warrants vest
upon attainment of certain milestones related to contingent revenues
(gainshare) to be received by the Company under the terms of a related
arrangement. The warrants generally expire when the milestone period expires or
one year after the specific milestone is met. As of September 30, 2001, no
portion of the remaining warrants have vested or were deemed probable of
vesting.
In accordance with EITF No. 96-18, 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 provides 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
classified as "Other Current Assets" and as of September 30, 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
years ended September 30, 2001 and 2000, approximately $7.9 million and $5.6
million of the intangible asset was amortized to business partner warrant
expense, respectively. No amounts related to the unvested warrants are
reflected in the accompanying consolidated financial statements.
During fiscal 2001, the Company performed an impairment assessment of all
identifiable intangible assets including the $31.2 million recorded in
connection with these warrants. Factors the Company considers important which
could trigger an impairment review include, but are not limited to, significant
underperformance relative to historical or expected operating results,
significant changes in the manner of use of the acquired assets or the strategy
for the Company's overall business and significant negative industry or
economic trends. The Company's impairment assessment of this asset was
performed due to communications from the partner that the establishment of
vertical marketplaces would significantly underperform original plans and
estimated future cash flows were determined to be zero. The Company determined
that the carrying value of the intangible asset, relating to the business
partner in the financial services industry, was impaired and as a result,
recorded a $17.7 million impairment charge to business partner warrant expense
in the quarter ended June 30, 2001 to write off the remaining net book value of
this intangible asset.
Depending on the trading price of the Company's common stock at the end of
each quarter, and on whether subsequent milestones are achieved or considered
probable of being achieved, the total amount of the business partner warrant
expense recognized could still be substantial.
81
Contribution from Stockholder
During fiscal 2001, a significant stockholder and officer of the Company was
deemed to have contributed $4.0 million to the Company in connection with the
hiring of an executive officer. This amount has been recorded as a capital
contribution in accordance with an Interpretation of APB No. 25 and reflected
in the Company's Consolidated Statement of Stockholders' Equity as of September
30, 2001.
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 third and fourth quarters of fiscal 2001, 4.1 million restricted
shares of common stock and stock options with exercise prices below current
fair market value were issued to certain senior executives, officers and
employees of the Company. Restrictions on these restricted shares and stock
options lapse ratably over a two to three year period or have up to five year
vesting periods that are subject to acceleration if individual performance
goals are achieved. Based on the intrinsic value at the date of grant, the
Company recorded approximately $24.0 million of deferred stock-based
compensation related to the issuance of the restricted common stock and stock
options. At September 30, 2001, the weighted-average fair value of restricted
stock granted in fiscal 2001 was $2.81. In addition, the Company recorded $4.0
million of stock-based compensation expense for the grant of 2.0 million
restricted shares in connection with the severance of a former executive.
The Company has recorded deferred stock-based compensation totaling
approximately $187.1 million from inception through September 30, 2001. Of this
amount, $124.6 million related to the acquisition of SupplierMarket,
consummated in August 2000. These amounts are being amortized in accordance
with FASB Interpretation No. 28 over the vesting period of the individual
options and restricted common stock, generally between 2 to 5 years.
Amortization of deferred stock-based compensation totaled $36.6 million, $18.0
million and $14.6 million for the years ended September 30, 2001, 2000 and
1999, respectively.
1996 Stock Plan
The Company's 1996 Stock Plan ("1996 Stock Plan"), in effect until the
Company's initial public offering, authorized the granting of incentive and
nonstatutory common stock options to employees, directors, and consultants at
exercise prices no less than 100% and 85%, respectively, of the fair market
value of the common stock on the grant date, as determined by the Board of
Directors. Stock options generally vest 25% after one year of service and
thereafter ratably over 36 months of service and generally have a term of ten
years. The 1996 Stock Plan also allowed for exercise of unvested options.
Shares of common stock issued to employees upon exercise of unvested options
are subject to repurchase by the Company at the original exercise price. The
Company's ability to repurchase these shares expires at a rate consistent with
the vesting schedule of each option. Any right to repurchase shares upon an
employee's termination of service lapses and all shares vest if the Company is
subject to a change in control unless the Company's repurchase right is assumed
by the acquiring entity. As of September 30, 2001, 2,896,968 shares of common
stock that had been issued upon the exercise of unvested options were subject
to repurchase under the 1996 Stock Plan. Options that expire under the 1996
Stock Plan will be available for future grants under the 1999 Equity Incentive
Plan. As no options could be granted out of the 1996 Stock Plan after the
Company's initial public offering, there were no shares available for option
grants under the 1996 Stock Plan at September 30, 2001.
82
1999 Equity Incentive Plan
The Company's Board of Directors approved the 1999 Equity Incentive Plan
("Incentive Plan") on April 20, 1999. The Incentive Plan was amended on October
4, 2001. Under the Incentive Plan, 9,600,000 shares were reserved for issuance.
In addition, any shares not issued under the 1996 Stock Plan and any shares
repurchased pursuant to the 1996 Stock Plan will also be available for grant
under the Incentive Plan. The number of shares reserved under the Incentive
Plan automatically increases annually on January 1 by the lesser of 8,000,000
shares or 5% of the total number of shares of common stock outstanding on that
date. Under the Incentive Plan, eligible employees may be granted stock
options, stock appreciation rights, restricted shares, and stock units. The
exercise price for incentive stock options and non-qualified options may not be
less than 100% and 85%, respectively, of the fair value of common stock at the
option grant date. As of September 30, 2001, approximately 36,903,793 shares of
common stock have been reserved for issuance and 20,190,200 shares are
available for grant under the Incentive Plan, respectively.
1999 Directors' Stock Option Plan
The Company's Board of Directors adopted the 1999 Directors' Stock Option
Plan ("Directors Plan") on April 20, 1999, as amended May 15, 2000, under which
2,000,000 shares were reserved for issuance. Each non-employee joining the
Board of Directors after June 22, 1999 automatically receives options to
purchase 25,000 shares of common stock. In addition, each non-employee director
automatically receives options to purchase 10,000 shares of common stock at
each annual meeting of the Company's stockholders beginning after January 1,
2000. Each option will have an exercise price equal to the fair value of the
common stock on the grant date. As of September 30, 2001, there have been
140,000 options granted under the Directors Plan and 1,860,000 shares are
available for future issuance.
Employee Stock Purchase Plan
The Company's Board of Directors adopted the Employee Stock Purchase Plan
("Purchase Plan") on April 20, 1999 under which 16,000,000 shares were reserved
for issuance. The number of shares reserved under the Purchase Plan
automatically increases on January 1 of each year by the lesser of 3,000,000
shares or 2% of the total amount of common stock shares outstanding on that
date. Under the Purchase Plan, eligible employees may purchase common stock in
an amount not to exceed 15% of the employees' cash compensation. The purchase
price per share will be 85% of the common stock's fair value at the lower of
certain plan defined dates. As of September 30, 2001 there have been 3,156,424
shares issued under the Purchase Plan and 18,843,576 shares are available for
future issuance.
The Company has, in connection with the acquisitions of TradingDynamics,
Tradex and SupplierMarket, assumed the stock option plans of each acquired
company.
TradingDynamics Stock Plans
On January 20, 2000, the Company assumed the TradingDynamics 1998 Stock Plan
and 1999 Stock Plan ("TradingDynamics Plans"). The TradingDynamics Plans
provided for the grant of incentive stock options and non-qualified stock
options to employees and consultants at prices from 85% to 110% of the fair
market value of the common stock on the date of grant as determined by the
Board of Directors. Generally, options granted were immediately exercisable and
the resulting shares issued to optionees under the TradingDynamics Plans were
subject to certain repurchase rights, also assumed by the Company. As of
September 30, 2001, there were 76,062 shares of the Company's common stock
issued pursuant to the TradingDynamics Plans that were subject to repurchase by
the Company. These repurchase rights generally lapse over a 48-month period,
and options generally vest at the rate of 25% of the grant after 12 months of
service and 1/48 of the grant per month thereafter. Options expire no later
than ten years from the date of grant. A total of 2,086,119 shares of the
Company's common stock were reserved for issuance upon the exercise of stock
options assumed in connection with the
83
acquisition of TradingDynamics and upon exercise of options granted subsequent
to the acquisition of TradingDynamics by the Company under the TradingDynamics
Plans, and 2,917,016 shares are available for grant under the TradingDynamics
Plans as of September 30, 2001.
Tradex Stock Plans
On March 8, 2000, the Company assumed the Tradex 1997 Employee Stock Option
Plan and 1999 Employee Stock Option/Stock Issuance Plan ("Tradex Plans"). The
Tradex Plans provided for the grant of incentive stock options and
non-qualified stock options, as well as grants of shares of common stock, to
employees and consultants at prices from 85% to 110% of the fair market value
of the common stock on the date of grant as determined by the Board of
Directors. Generally, options granted were immediately exercisable and the
resulting shares issued to optionees under the Tradex Plans were subject to
certain repurchase rights, also assumed by the Company. As of September 30,
2001, there were 7,400 shares of the Company's common stock issued pursuant to
the Tradex Plans that were subject to repurchase by the Company. These
repurchase rights generally lapse over a 48-month period, and options generally
vest at the rate of 25% of the grant after 12 months of service and 1/48 of
the grant per month thereafter. Options expire no later than ten years from the
date of grant. A total of 2,249,658 shares of the Company's common stock were
reserved for issuance upon the exercise of stock options assumed in connection
with the acquisition of Tradex and upon the exercise of options granted
subsequent to the acquisition of Tradex by Company under the Tradex Plans, and
1,618,672 shares are available for grant under the Tradex Plans as of September
30, 2001.
SupplierMarket Stock Plan
On August 28, 2000, the Company assumed the SupplierMarket.com 1999 Stock
Option Plan ("SupplierMarket Plan"). The SupplierMarket Plan provided for the
grant of incentive stock options and non-qualified stock options to employees
and consultants at prices from 85% to 110% of the fair market value of the
common stock on the date of grant as determined by the Board of Directors.
Under the SupplierMarket Plan, options generally vest over a 48-month period at
the rate of 12.5% of the grant after six months of service and 1/48 of the
grant per month thereafter. Options expire no later than ten years from the
date of grant. A total of 2,472,690 shares of the Company's common stock were
reserved for issuance upon the exercise of stock options assumed in connection
with the acquisition of SupplierMarket and upon the exercise of options granted
subsequent to the acquisition of SupplierMarket by the Company under the
SupplierMarket Plan, and 3,443,096 shares are available for grant under the
SupplierMarket Plan as of September 30, 2001.
84
A summary of the status of the Company's stock option plans as of September
30, 2001, 2000 and 1999 and changes during the years ended on those dates is
presented below:
Years Ended September 30,
--------------------------------------------------------------------
2001 2000 1999
---------------------- ---------------------- ----------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------- --------- ----------- --------- ----------- ---------
Outstanding at beginning of year. 46,889,463 $28.91 41,351,180 $ 3.39 14,275,840 $ 0.19
Granted......................... 22,964,662 17.35 21,782,681 62.34 41,799,532 3.46
Exercised....................... (8,161,098) 2.60 (12,715,386) 1.51 (13,765,792) 0.47
Forfeited....................... (36,664,158) 41.38 (3,529,012) 37.85 (958,400) 1.39
Outstanding at end of year....... 25,028,869 $ 8.23 46,889,463 $28.91 41,351,180 $ 3.39
----------- ----------- -----------
Exercisable at end of year....... 8,881,862 $13.14 30,823,408 $ 3.31 38,613,180 $ 1.32
----------- ----------- -----------
Weighted-average fair value of
options granted during the year
at market...................... 22,737,662 $13.11 14,133,000 $88.80 5,650,000 $18.16
Weighted-average fair value of
options granted during the year
at less than market............ 195,000 $ 2.06 7,638,881 $53.36 36,149,532 $ 1.16
Weighted-average fair value of
options granted during the year
at greater than market......... 32,000 $34.59 10,800 $60.39 -- --
The following table summarizes information about stock options outstanding
as of September 30, 2001:
Outstanding Exercisable
--------------------------------- -------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices of Shares Life (years) Price of Shares Price
--------------- ---------- ------------ --------- --------- ---------
$0.0020-$ 0.42 3,113,963 7.02 $ 0.27 1,445,427 $ 0.27
$ 0.50-$ 0.81 4,584,068 7.38 $ 0.69 1,543,896 $ 0.69
$ 1.36-$ 3.00 2,962,168 7.65 $ 2.15 933,314 $ 2.17
$ 3.32-$ 4.50 1,477,983 8.01 $ 4.18 625,973 $ 4.21
$ 4.81 9,069,803 9.51 $ 4.81 2,087,388 $ 4.81
$ 5.13-$ 33.63 2,680,131 8.61 $ 22.06 1,418,630 $ 26.41
$ 34.06-$136.13 1,067,753 8.55 $ 69.97 792,671 $ 72.37
$139.75 3,000 8.87 $139.75 813 $139.75
$165.50 60,000 8.43 $165.50 31,250 $165.50
$166.44 10,000 8.93 $166.44 2,500 $166.44
---------- ---------
$0.0020-$166.44 25,028,869 8.36 $ 8.23 8,881,862 $ 13.14
========== =========
85
Had compensation cost been recognized based on the fair value at the date of
grant for options granted and Purchase Plan issuances during 2001, the pro
forma amounts of the Company's net loss and net loss per share would have been
as follows for the years ended September 30, 2001, 2000 and 1999 (in thousands,
except per share amounts):
Year Ended September 30,
--------------------------------
2001 2000 1999
----------- --------- --------
Net loss--as reported............................ $(2,680,671) $(792,775) $(29,300)
Net loss--pro forma.............................. (2,620,999) (999,529) (30,425)
Basic and diluted net loss per share--as reported (10.96) (4.10) (0.42)
Basic and diluted net loss per share--pro forma.. $ (10.71) $ (5.17) $ (0.87)
The fair value for the options granted during the years ended September 30,
2001, 2000 and 1999 was estimated at the date of grant using the Black-Scholes
option pricing model and the following assumptions:
Year Ended September 30,
-----------------------
2001 2000 1999
---- ---- ----
Risk-free interest rate.. 2.97% 6.02% 5.09%
Expected lives (in years) 1.5 3 3
Dividend yield........... 0.0% 0.0% 0.0%
Expected volatility...... 119% 100% 80%
To comply with the pro forma reporting requirements of SFAS No. 123
compensation cost is also estimated for the fair value of future employee stock
purchase plan issuances which is included in the pro forma totals above. The
fair value of purchase rights granted under the Purchase Plan is estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions for the year ended September 30, 2001:
no expected dividends; expected volatility of 119%; risk-free interest rate of
2.97%; and expected life of approximately six months. The weighted-average fair
value of the purchase rights granted under the Purchase Plan during fiscal 2001
was $6.92.
Note 11--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):
Year Ended September 30,
---------------------------------
2001 2000 1999
----------- --------- ---------
Net loss.................................................... $(2,680,671) $(792,775) $(29,3000)
----------- --------- ---------
Weighted average shares outstanding......................... 254,666 216,215 104,184
Weighted average common shares issued subject to repurchase
agreement................................................. (7,892) (20,350) (34,120)
Weighted average shares held in escrow related to
acquisitions.............................................. (2,160) (2,448) --
----------- --------- ---------
Shares used in computation of basic and diluted net loss per
share..................................................... 244,614 193,417 70,064
=========== ========= =========
Basic and diluted loss per share............................ $ (10.96) $ (4.10) $ (0.42)
=========== ========= =========
At September 30, 2001, 2000 and 1999, 33,210,370, 64,303,857 and 70,609,132
potential common shares, respectively, are excluded from the determination of
diluted net loss per share, as the effect of such shares is anti-
86
dilutive. Further, the potential common shares for the year ended September 30,
2001 and 2000 exclude 7,246,246 shares and 26,243,568 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 $8.23,
$28.91 and $3.39 as of September 30, 2001, 2000 and 1999, respectively. The
weighted average repurchase price of unvested stock was $0.27, $0.36 and $0.19
as of September 30, 2001, 2000 and 1999, respectively. The weighted average
exercise price of warrants outstanding was $67.17, $68.79 and $0.80 as of
September 30, 2001, 2000 and 1999, respectively.
Note 12--Related Party Transactions
In the second and third quarters of fiscal 2001, the Company has sold
approximately 43% of its consolidated subsidiary, Nihon Ariba K.K. and
approximately 42% of its consolidated subsidiary, Ariba Korea, Ltd.,
respectively, to a third party which also received the right to distribute
Ariba products from the subsidiary in its jurisdiction ("the Minority
Shareholder").
In April 2001, the Chief Executive Officer of the Minority Shareholder was
appointed to the Company's Board of Directors. For the year ended September 30,
2001, the Company has recorded revenue of $6.9 million related to transactions
with the Minority Shareholder. There was no minority shareholder in fiscal 2000
and 1999.
Note 13--Supplementary Quarterly Data (Unaudited)
Fiscal 2001 Fiscal 2000
For the Quarter Ended For the Quarter Ended
-------------------------------------------- --------------------------------
Sept. 30 June 30 March 31 Dec. 31 Sept. 30 June 30 March 31
--------- --------- ----------- --------- --------- --------- ---------
(in thousands, except per share data)
Consolidated Statements of Operations Data:
Total revenues............................. $ 62,634 $ 85,328 $ 90,653 $ 170,233 $ 134,853 $ 80,665 $ 40,042
Gross profit............................... $ 50,239 $ 69,836 $ 63,862 $ 138,902 $ 111,216 $ 66,672 $ 33,595
Impairment of goodwill, other intangible
assets and equity investments............. $ 4,280 $ -- $ 1,433,292 $ -- $ -- $ -- $ --
Restructuring and lease abandonment costs.. $ 63,541 $ 70,041 $ -- $ -- $ -- $ -- $ --
In-process research and development........ $ -- $ -- $ -- $ -- $ 14,600 $ -- $ 12,750
Net loss................................... $(224,347) $(273,524) $(1,835,176) $(347,624) $(339,337) $(317,159) $(125,945)
Net loss per share--basic and diluted...... $ (0.89) $ (1.10) $ (7.60) $ (1.48) $ (1.50) $ (1.45) $ (0.70)
Weighted average shares used in computing
basic and diluted net loss per share...... 252,652 249,103 241,417 235,285 225,491 218,478 179,241
Dec. 31
--------
Consolidated Statements of Operations Data:
Total revenues............................. $ 23,479
Gross profit............................... $ 20,037
Impairment of goodwill, other intangible
assets and equity investments............. $ --
Restructuring and lease abandonment costs.. $ --
In-process research and development........ $ --
Net loss................................... $(10,334)
Net loss per share--basic and diluted...... $ (0.07)
Weighted average shares used in computing
basic and diluted net loss per share...... 155,980
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
87
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See the information set forth in the section entitled "Proposal No.
1--Election of Directors" in the Company's Proxy Statement for the 2002 Annual
Meeting of Stockholders to be filed with the Securities and Exchange Commission
within 120 days after the end of the Company's fiscal year ended September 30,
2001 (the "2002 Proxy Statement"), which is incorporated herein by reference,
and the information set forth in the section entitled "Executive Officers of
the Registrant" in Part I, Item 4A of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
See the information set forth in the section entitled "Executive
Compensation and Related Information" in the 2002 Proxy Statement, which is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See the information set forth in the section entitled "Stock Ownership of
Certain Beneficial Owners and Management" in the 2002 Proxy Statement, which is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See the information set forth in the section entitled "Certain Relationships
and Related Transactions" in the 2002 Proxy Statement, which is incorporated
herein by reference.
88
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
See Item 8 of this Form 10-K.
2. FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule of Ariba for each of the years
ended September 30, 2001, 2000 and 1999 should be read in conjunction with the
Consolidated Financial Statements, and related notes thereto, of Ariba.
Page Number
-----------
Schedule II--Valuation and Qualifying Accounts S-1
Schedules other than those listed above have been omitted since they are
either not required, not applicable, or the information has otherwise been
included.
3. EXHIBITS
The exhibits listed on the accompanying index to exhibits immediately
following the financial statement schedule are filed as part of, or
incorporated by reference into, this Form 10-K.
Exhibit
No. Description
- ------- -----------
3.1 Amended and Restated Certificate of Incorporation of the Registrant including all amendments to date
(which are incorporated herein by reference to Exhibit 3.1 to Registrant's 10-K dated December 29,
2000).
3.2 Amended and Restated Bylaws of the Registrant (which are incorporated herein by reference to
Exhibit 3.4 to the Registrant's Form S-1 Registration No. 333-76953).
4.1 Amended and Restated Investors' Rights Agreement, dated April 17, 1998 (which is incorporated
herein by reference to Exhibit 4.1 to the Registrant's Form S-1 Registration No. 333-76953).
4.2 Specimen Certificate of the Registrant's common stock (which is incorporated herein by reference to
Exhibit 4.2 to the Registrant's Form S-1 Registration No. 333-76953).
4.3 Amended and Restated Investors' Rights Agreement, dated June 7, 1999 (which is incorporated
herein by reference to Exhibit 4.3 to the Registrant's Form S-1 Registration No. 333-76953).
10.1 Form of Indemnification Agreement entered into between the Registrant and its directors and
executive officers (which is incorporated herein by reference to Exhibit 10.1 to the Registrant's
Form S-1 Registration No. 333-76953).
10.2 1996 Stock Plan, as amended (which is incorporated herein by reference to Exhibit 10.2 to the
Registrant's Form S-1 Registration No. 333-76953).
10.3 1999 Equity Incentive Plan, as amended.
10.4 1999 Directors' Stock Option Plan (which is incorporated herein by reference to Exhibit 10.4 to the
Registrant's Form S-1 Registration No. 333-76953).
10.5 Employee Stock Purchase Plan (which is incorporated herein by reference to Exhibit 10.5 to the
Registrant's Form S-1 Registration No. 333-76953).
10.6 Industrial Complex Lease, dated August 11, 1997, by and between MP Caribbean, Inc. and the
Registrant (which is incorporated herein by reference to Exhibit 10.6 to the Registrant's Form S-1
Registration No. 333-76953).
89
Exhibit
No. Description
- ------- -----------
10.7 Lease Agreement, dated June 12, 1996, by and between Charleston Place Associates and
U.S. Robotics Access Corp., as amended (which is incorporated herein by reference to Exhibit 10.7 to
the Registrant's Form S-1 Registration No. 333-76953).
10.8 Sublease, dated February 1999, by and between 3Com Corporation, successor in interest to
U.S. Robotics Access Corp., and the Registrant (which is incorporated herein by reference to
Exhibit 10.8 to the Registrant's Form S-1 Registration No. 333-76953).
10.9 Sublease, dated October 1999, by and between the Registrant and ChainLink Technologies, Inc.
(which is incorporated herein by reference to Exhibit 10.9 to the Registrant's 10-K dated
December 23, 1999).
10.10 Lease agreement, dated March 15, 2000, by and between Moffett Park Drive LLC and the Registrant
(which is incorporated herein by reference to Exhibit 10.10 to the Registrant's 10-Q dated May 15, 2000).
10.11 Amended and Restated Sublease, dated August 6, 2001, between Registrant and Interwoven, Inc.
10.12* Stock Purchase Agreement, dated October 19, 2000, by and among Nihon Ariba K.K., Softbank Corp.
and Softbank E-Commerce Corp. (which is incorporated herein by reference to Exhibit 10.16 to
Registrant's 10-Q dated February 14, 2001).
10.13 Offer Letter, dated November 22, 2000, by and between the Registrant and Robert M. Calderoni (which
is incorporated herein by reference to Exhibit 10.17 to Registrant's 10-Q dated February 14, 2001).
10.14* Letter Agreement, dated November 29, 2000, by and between the Registrant and Edward P. Kinsey
(which is incorporated herein by reference to Exhibit 10.18 to Registrant's 10-Q dated February 14,
2001).
10.15 Warrant Termination Agreement, dated December 21, 2000, by and among Electronic Data Systems
Corporation, EDS CoNext, Inc. and the Registrant (which is incorporated herein by reference to
Exhibit 10.19 to Registrant's 10-Q dated February 14, 2001).
10.16 Offer Letter, dated January 22, 2001, by and between the Registrant and James W. Steele (which is
incorporated herein by reference to Exhibit 10.20 to Registrant's 10-Q dated May 15, 2001).
10.17 Offer Letter, dated February 21, 2001, by and between the Registrant and Michael Schmitt (which is
incorporated herein by reference to Exhibit 10.21 to Registrant's 10-Q dated May 15, 2001).
10.18 Amendment to Offer Letter, dated July 18, 2001, by and between Registrant and Robert M. Calderoni.
10.19** Severance Agreement, dated July 18, 2001, by and between Registrant and Robert M. Calderoni.
10.20** Loan Agreement, dated February 1, 2001, by and between Robert M. Calderoni and Golden Bear Real
Estate, L.L.C..
10.21** Promissory Note, dated February 1, 2001, by and between Robert M. Calderoni and Golden Bear Real
Estate, L.L.C.
21.1 Subsidiaries.
23.1 Consent of Independent Auditors.
- --------
* Confidential treatment has been granted with respect to certain portions of
this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission.
** Confidential treatment has been requested with respect to certain portions
of this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission.
(b) REPORTS ON FORM 8-K
Not applicable.
90
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this Form 10-K to be
signed on its behalf by the undersigned, who is duly authorized, in the City of
Sunnyvale, State of California on this day of December, 2001.
ARIBA, INC.
ROBERT M. CALDERONI
By: _________________________________
Robert M. Calderoni
President and Chief Executive
Officer
and a Director
(Principal Executive Officer)
JAMES W. FRANKOLA
By: _________________________________
James W. Frankola
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Robert M. Calderoni and Jim Frankola, and each
of them, his true and lawful attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any amendments to this
Report on Form 10-K, and to file the same, with Exhibits thereto and other
documents in connection therewith with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorneys-in-fact, or
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Form 10-K has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
------------------- President and Chief Executive December , 2001
Robert M. Calderoni Officer and a Director (Principal
Executive Officer)
------------------- Executive Vice President and Chief December , 2001
James W. Frankola Financial Officer (Principal
Financial and Accounting
Officer)
------------------- Chairman of the Board of Directors December , 2001
Keith Krach
91
Signature Title Date
--------- ----- ----
--------------- Director December , 2001
Paul Hegarty
--------------- Director December , 2001
Robert C. Kagle
--------------- Director December , 2001
Masayoshi Son
--------------- Director December , 2001
Robert Knowling
92
ARIBA, INC.
Schedule II
Valuation and Qualifying Accounts
Years ended September 30, 2001, 2000 and 1999
Balance at Costs Balance at
Beginning of and Deductions/ the End of
Classification Period Expenses Write-offs Period
-------------- ------------ -------- ----------- ----------
Year ended September 30, 2001
Allowance for doubtful accounts $13,791 $27,953 $27,290 $14,454
Year ended September 30, 2000
Allowance for doubtful accounts $ 20 $14,200 $ 429 $13,791
Year ended September 30, 1999
Allowance for doubtful accounts $ -- $ 20 $ -- $ 20
S-1
INDEX TO EXHIBITS
Exhibit
No. Description
- ------- -----------
3.1 Amended and Restated Certificate of Incorporation of the Registrant including all amendments to date
(which are incorporated herein by reference to Exhibit 3.1 to Registrant's 10-K dated December 29,
2000).
3.2 Amended and Restated Bylaws of the Registrant (which are incorporated herein by reference to
Exhibit 3.4 to the Registrant's Form S-1 Registration No. 333-76953).
4.1 Amended and Restated Investors' Rights Agreement, dated April 17, 1998 (which is incorporated
herein by reference to Exhibit 4.1 to the Registrant's Form S-1 Registration No. 333-76953).
4.2 Specimen Certificate of the Registrant's common stock (which is incorporated herein by reference to
Exhibit 4.2 to the Registrant's Form S-1 Registration No. 333-76953).
4.3 Amended and Restated Investors' Rights Agreement, dated June 7, 1999 (which is incorporated
herein by reference to Exhibit 4.3 to the Registrant's Form S-1 Registration No. 333-76953).
10.1 Form of Indemnification Agreement entered into between the Registrant and its directors and
executive officers (which is incorporated herein by reference to Exhibit 10.1 to the Registrant's
Form S-1 Registration No. 333-76953).
10.2 1996 Stock Plan, as amended (which is incorporated herein by reference to Exhibit 10.2 to the
Registrant's Form S-1 Registration No. 333-76953).
10.3 1999 Equity Incentive Plan, as amended.
10.4 1999 Directors' Stock Option Plan (which is incorporated herein by reference to Exhibit 10.4 to the
Registrant's Form S-1 Registration No. 333-76953).
10.5 Employee Stock Purchase Plan (which is incorporated herein by reference to Exhibit 10.5 to the
Registrant's Form S-1 Registration No. 333-76953).
10.6 Industrial Complex Lease, dated August 11, 1997, by and between MP Caribbean, Inc. and the
Registrant (which is incorporated herein by reference to Exhibit 10.6 to the Registrant's Form S-1
Registration No. 333-76953).
10.7 Lease Agreement, dated June 12, 1996, by and between Charleston Place Associates and
U.S. Robotics Access Corp., as amended (which is incorporated herein by reference to Exhibit 10.7 to
the Registrant's Form S-1 Registration No. 333-76953).
10.8 Sublease, dated February 1999, by and between 3Com Corporation, successor in interest to
U.S. Robotics Access Corp., and the Registrant (which is incorporated herein by reference to
Exhibit 10.8 to the Registrant's Form S-1 Registration No. 333-76953).
10.9 Sublease, dated October 1999, by and between the Registrant and ChainLink Technologies, Inc.
(which is incorporated herein by reference to Exhibit 10.9 to the Registrant's 10-K dated
December 23, 1999).
10.10 Lease agreement, dated March 15, 2000, by and between Moffett Park Drive LLC and the Registrant
(which is incorporated herein by reference to Exhibit 10.10 to the Registrant's 10-Q dated May 15,
2000).
10.11 Amended and Restated Sublease, dated August 6, 2001, between Registrant and Interwoven, Inc.
10.12* Stock Purchase Agreement, dated October 19, 2000, by and among Nihon Ariba K.K., Softbank Corp.
and Softbank E-Commerce Corp. (which is incorporated herein by reference to Exhibit 10.16 to
Registrant's 10-Q dated February 14, 2001).
10.13 Offer Letter, dated November 22, 2000, by and between the Registrant and Robert M. Calderoni
(which is incorporated herein by reference to Exhibit 10.17 to Registrant's 10-Q dated February 14,
2001).
Exhibit
No. Description
- ------- -----------
10.14* Letter Agreement, dated November 29, 2000, by and between the Registrant and Edward P. Kinsey
(which is incorporated herein by reference to Exhibit 10.18 to Registrant's 10-Q dated February 14,
2001).
10.15 Warrant Termination Agreement, dated December 21, 2000, by and among Electronic Data Systems
Corporation, EDS CoNext, Inc. and the Registrant (which is incorporated herein by reference to
Exhibit 10.19 to Registrant's 10-Q dated February 14, 2001).
10.16 Offer Letter, dated January 22, 2001, by and between the Registrant and James W. Steele (which is
incorporated herein by reference to Exhibit 10.20 to Registrant's 10-Q dated May 15, 2001).
10.17 Offer Letter, dated February 21, 2001, by and between the Registrant and Michael Schmitt (which is
incorporated herein by reference to Exhibit 10.21 to Registrant's 10-Q dated May 15, 2001).
10.18 Amendment to Offer Letter, dated July 18, 2001, by and between Registrant and Robert M. Calderoni.
10.19** Severance Agreement, dated July 18, 2001, by and between Registrant and Robert M. Calderoni.
10.20** Loan Agreement, dated February 1, 2001, by and between Robert M. Calderoni and
Golden Bear Real Estate, L.L.C.
10.21** Promissory Note, dated February 1, 2001, by and between Robert M. Calderoni and Golden Bear Real
Estate.
21.1 Subsidiaries.
23.1 Consent of Independent Auditors.
- --------
* Confidential treatment has been granted with respect to certain portions of
this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission.
** 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.