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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, 1999
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 77-0439730
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
1565 CHARLESTON ROAD, MOUNTAIN VIEW, 94043
CALIFORNIA (Zip Code)
(Address of principal executive
offices)
(650) 930-6200
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) 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, 1999, there were 91,905,632 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 National Market on November 30, 1999) was approximately
$6,675,558,578
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 2000 Annual Meeting of Stockholders, which
is expected to be filed not later than 120 days after the Registrant's fiscal
year ended September 30, 1999.
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ARIBA, INC.
FORM 10-K
SEPTEMBER 30, 1999
TABLE OF CONTENTS
ITEM PAGE NO.
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PART I
1. Business.................................................... 3
2. Properties.................................................. 29
3. Legal Proceedings........................................... 29
4. Submission of Matters to a Vote of Security Holders......... 29
4A. Executive Officers of the Registrant........................ 29
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 31
6. Selected Consolidated Financial Data........................ 33
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 34
7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 45
8. Financial Statements and Supplementary Data................. 45
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 68
PART III
10. Directors and Executive Officers of the Registrant.......... 68
11. Executive Compensation...................................... 68
12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 68
13. Certain Relationships and Related Transactions.............. 68
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 69
SIGNATURES.......................................................................... 71
2
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 Registration Statement on Form S-1 declared effective on
June 22, 1999 by the SEC (File No. 333-76953) and in our Form 10-Q filed
August 16, 1999.
OVERVIEW
Ariba is a leading provider of Internet-based business-to-business
electronic commerce solutions for operating resources. The Ariba Network is a
single global business-to-business electronic commerce network that enables
buyers and suppliers to automate business transactions on the Internet. Our
Operating Resource Management System, the Ariba ORMS application, enables
organizations to automate the procurement cycle within their "intranets,"
internal computer networks which are based on the Internet protocol, lowering
the costs associated with operating resources and other materials. Since we
began marketing the Ariba platform, it has been licensed by large, multinational
industry leaders and public sector organizations including Andersen Consulting,
Cisco Systems, Federal Express Corporation, Hewlett-Packard, Philips, U S WEST
and Visa, among others.
Our objective is to create the leading Internet-based business-to-business
electronic commerce network platform. Our strategy to achieve this objective is
to take advantage of the buying power of a large multinational customer base to
attract leading operating resource suppliers to the Ariba Network. We believe a
growing number of suppliers in the Ariba Network will in turn draw more buyers
to our network. We also believe this growth cycle will help create a network
effect, where the value to each participant in the network increases with the
addition of each new participant, increasing the overall value of our Ariba
solution.
Ariba was incorporated in Delaware in September 1996. Our principal
executive offices are located at 1565 Charleston Road, Mountain View, California
94043.
RECENT EVENTS
On November 15, 1999, we signed a definitive agreement to acquire
TradingDynamics, Inc., a leading provider of business-to-business Internet
trading applications. The agreement is structured as a tax-free stock for stock
merger and will be accounted for as a purchase transaction. We will issue stock
worth approximately $500 million, based on current trading ranges, to
TradingDynamics shareholders. We expect that the transaction will close in the
quarter ending March 31, 2000. We have also entered into a loan agreement with
TradingDynamics to loan TradingDynamics up to $2,000,000.
On November 16, 1999, the Board of Directors authorized a two-for-one stock
split of our common stock, to be effected in the form of a stock dividend. The
stock split will be effected by distribution to each stockholder of record as of
December 3, 1999 of one share of our common stock
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for each share of common stock held. The financial information included in this
report has been restated to give effect to the stock split.
On December 16, 1999, we signed a definitive agreement to acquire TRADEX
Technologies, Inc., a leading provider of solutions for Net Markets. The
agreement is structured as a stock-for-stock merger and will be accounted for as
a purchase transaction. We will issue stock worth approximately $2 billion,
based on current trading ranges, to TRADEX stockholders. We expect that the
transaction will close in the quarter ending June 30, 2000.
INDUSTRY BACKGROUND
GROWTH OF THE INTERNET AND BUSINESS-TO-BUSINESS ELECTRONIC COMMERCE
The Internet has emerged as the fastest growing communication medium in
history. With over 97 million users at the end of 1998, growing to 320 million
users by 2002, as estimated by International Data Corporation, the Internet is
dramatically changing how businesses and individuals communicate and share
information. The Internet has created new opportunities for conducting commerce,
such as business-to-consumer and person-to-person electronic commerce. Recently,
the widespread adoption of intranets and the acceptance of the Internet as a
business communications platform has created a foundation for
business-to-business electronic commerce that will enable organizations to
streamline complex processes, lower costs and improve productivity.
With this foundation, Internet-based business-to-business electronic
commerce is poised for rapid growth and is expected to represent a significantly
larger opportunity than business-to-consumer or person-to-person electronic
commerce. According to Forrester Research, business-to-business electronic
commerce is expected to grow from $43 billion in 1998 to $1.3 trillion in 2003,
accounting for more than 90% of the dollar value of electronic commerce in the
United States. This market is expected to create a substantial demand for
Internet-based electronic commerce applications. According to International Data
Corporation, the worldwide market for Internet-based electronic commerce
procurement and order management applications alone is expected to experience
tremendous growth, increasing from $187 million in 1998 to $8.5 billion in 2003.
TRADITIONAL APPROACHES TO BUYING OPERATING RESOURCES
Operating resources are the goods and services required to operate a
company, ranging from significant items, such as information technology,
telecommunications equipment and professional services, to recurring items, such
as MRO (Maintenance, Repair and Operations) supplies, travel and entertainment
expenses, and office equipment. Operating resource expenditures are distinct
from manufacturing resource expenditures, such as raw materials and other costs
of goods sold, and from human resource expenditures, such as wages, salaries and
benefits. According to Killen & Associates, operating resource expenditures are
often the largest segment of corporate expenditures, representing approximately
33% of an average company's total revenues.
Today, most organizations buy operating resources through paper-based or
semi-automated processes. These processes are costly, time consuming and complex
and often include the re-keying of information, lengthy approval cycles and
significant involvement of financial and administrative personnel. AMR estimates
that the cost per procurement transaction ranges from $75 to $175, often
exceeding the cost of the items being purchased. In addition, these time
consuming processes often result in fulfillment delays to end-users, leading to
productivity losses.
Beyond the time and expense associated with manual processing costs,
organizations suffer even greater costs when they cannot fully exploit
procurement economies of scale. Most organizations lack the systems that enable
them to monitor purchases and compile data necessary to negotiate better volume
discounts with preferred suppliers. In addition, most organizations suffer from
a problem
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known as "maverick buying," which occurs when personnel do not follow internal
guidelines as to which suppliers to use for operating resource purchases. When
preferred suppliers are not used, organizations pay a premium. AMR estimates
that maverick buying accounts for one-third of operating resource expenditures,
costing organizations a 15% to 27% premium on those purchases.
Traditional procurement processes also result in missed revenue
opportunities and additional costs to suppliers. When buyers are unable to
channel purchases to preferred suppliers, these suppliers lose revenue.
Suppliers also suffer from inefficient, error prone and manually-intensive order
fulfillment processes. Many suppliers dedicate significant resources to the
manual entry of information from faxed or phoned-in purchase orders and the
manual processing of paper checks, invoices and ship notices. Suppliers also
spend significant resources on customer acquisition and sales costs, including
the production and distribution of paper catalogs. Without fully automated and
integrated electronic commerce technologies, both buyers and suppliers incur
substantial extraneous costs in conducting commerce.
OPPORTUNITY FOR BUSINESS-TO-BUSINESS ELECTRONIC COMMERCE SOLUTIONS
Over the past 30 years, information technologies have brought automation to
departmental operations such as manufacturing resource planning, financial
management, sales force automation and human resource management. However, the
information technology platforms that made departmental automation possible did
not provide enterprise-wide connectivity within organizations or connectivity
between organizations. Thus, the processes linking end-users to approvers and
organizations to suppliers for operating resources are today largely
paper-based. With the widespread implementation of intranets and the adoption of
the Internet as a business communication platform, organizations can now
automate enterprise-wide and inter-organizational commerce activities. The
availability of this technology creates a significant market opportunity for
Internet-based business-to-business electronic commerce solutions for operating
resources.
For buyers, a solution must include a user-friendly, intranet-based system
that links end-users, approvers and administrative personnel with an integrated
global network that connects buying organizations with suppliers. This system
must be flexible enough to meet the unique business process requirements of
large, multinational organizations and must be highly scalable, reliable and
rapidly deployable. It must take advantage of an organization's existing
investments in information technologies by working with and connecting to
multiple financial, human resource and enterprise resource planning systems. The
system must provide data reporting and analytical tools that enable analysis of
end-user spending patterns and provide insight into savings opportunities. For
suppliers, the solution must be easy to implement, based on open standards and
build upon existing investments in on-line catalogs and order processing
technologies. Additionally, the solution should offer suppliers the opportunity
to expand their customer base by providing access to a critical mass of buyers.
Addressing these requirements for both buyers and suppliers is critical to
enabling full scale business-to-business electronic commerce for operating
resources.
THE ARIBA NETWORK PLATFORM
Ariba is a leading provider of Internet-based business-to-business
electronic commerce solutions for operating resources. Our solution consists of
two components, our intranet-based Ariba ORMS (Operating Resource Management
System) network application and our Internet-based Ariba Network. Ariba ORMS is
a robust, scalable and reliable network application that operates primarily
within a buying organization's intranet. Ariba ORMS enables an organization to
reduce processing costs and improve productivity by automating the procurement
cycle and linking end-users throughout an organization with internal approvers
and financial systems. Ariba ORMS also enables organizations to reduce the cost
of operating resources by channeling purchases to preferred suppliers. The Ariba
Network is a single global business-to-business electronic commerce network,
enabling buyers and
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suppliers to automate transactions on the Internet. Together, Ariba ORMS and the
Ariba Network combine intranet-based network applications with an Internet-based
network to create a business-to-business electronic commerce platform benefiting
both buyers and suppliers.
We believe our solution provides the following benefits:
BENEFITS TO BUYERS:
SIGNIFICANTLY REDUCED PROCESSING COSTS AND INCREASED PRODUCTIVITY. By
automating the operating resource procurement process, our Ariba ORMS solution
allows organizations to achieve significant cost savings and productivity
enhancements. Ariba ORMS enables an organization to streamline and automate
complex and unusual business processes. Ariba ORMS also takes advantage of
existing investments in financial, human resource and enterprise resource
planning systems, which reduces or eliminates the need to manually enter data
into these systems. As a result, our Ariba solution allows organizations to
focus on value-added activities such as negotiating better discounts with
preferred suppliers. Through our solution, end-users can order and receive
requested items more quickly and with less effort, improving overall
productivity.
SUBSTANTIALLY REDUCED COSTS OF OPERATING RESOURCES. Our Ariba solution
enables organizations to maximize procurement economies of scale, lowering the
overall costs of operating resources. Ariba ORMS provides corporate-wide data
analysis and reporting tools on buying patterns, enabling organizations to
negotiate more favorable contracts with preferred suppliers. Our Ariba solution
in turn routes transactions to these preferred suppliers automatically.
Moreover, Ariba ORMS is accessible on every desktop, is easy-to-use and
streamlines the procurement process. These benefits minimize the frustration to
end-users that often results in maverick buying, further enabling organizations
to take advantage of negotiated discounts with preferred suppliers.
BENEFITS TO SUPPLIERS:
INCREASED VOLUME AND REVENUE OPPORTUNITIES. Ariba ORMS and the Ariba
Network enable buyers to channel spending to preferred suppliers, providing
these suppliers the opportunity to increase revenues. The Ariba Network provides
suppliers with greater access to new and existing customers through a global
presence and availability 24 hours a day, seven days a week. In addition, by
taking advantage of suppliers' web-based catalog capabilities, our solution
enables suppliers to differentiate and market their goods and services in their
preferred format.
REDUCED SALES COSTS. The Ariba Network platform enables suppliers to reduce
sales costs in several ways. By automating transactions, suppliers can reduce
the costs associated with, and reduce the potential for error inherent in,
paper-based ordering and payment processes. Product information can be
distributed electronically, reducing the cost of printed product catalog
distribution. In addition, suppliers can utilize their existing investments in
electronic commerce systems, including catalogs and product web pages.
We believe that the benefits of the Ariba Network platform will create a
growth cycle that increases the value of the Ariba Network to both buyers and
suppliers over time. As buyers benefit from the efficiencies of the Ariba
solution, we believe suppliers will be drawn to the Ariba Network by the
aggregated purchasing power of buyers using our network. As more suppliers offer
products and services through the network, more buyers are encouraged to join
our network.
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THE ARIBA GROWTH STRATEGY
Our objective is to create the leading Internet-based business-to-business
electronic commerce network platform. Key elements of our strategy to achieve
this objective include:
TARGET LARGE MULTINATIONAL BUYERS IN A BROAD RANGE OF INDUSTRIES. We intend
to continue to target large, multinational corporations and public sector
institutions, benefiting from our first-mover advantage with many of these
organizations. We believe these organizations will be the most likely early
beneficiaries of an automated, reliable, robust and scalable procurement
solution and can provide strong customer references. Furthermore, we believe the
large spending power these organizations can channel through the Ariba Network
will attract suppliers to the network. Finally, these organizations have
demanding requirements and rigorously test our products, assisting us in
designing a robust, reliable and scalable solution.
CREATE A NETWORK EFFECT BY ATTRACTING THE LARGEST BUYERS AND SUPPLIERS TO
THE ARIBA NETWORK. As Ariba ORMS is deployed to a critical mass of large buyers
in numerous industries, we intend to build upon the buying power of these large
organizations to attract suppliers to the Ariba Network. We believe a growing
number of suppliers in the Ariba Network will in turn draw more buyers to our
network. We also believe this growth cycle will help create a network effect,
where the value to each participant in the network increases with the addition
of each new participant, increasing the overall value of our Ariba solution.
EXTEND AND BUILD UPON THE ARIBA COMMUNITY OF PARTNERS. We intend to build
upon our strategic relationships with industry leaders in the areas of
electronic commerce systems, information technology consulting, distribution and
content aggregation. We are working with these partners to accelerate the Ariba
Network rollout, provide additional customer implementation capabilities, expand
our customer base and increase the content available on the Ariba Network. These
relationships allow us to focus on our core area of expertise, while taking
advantage of the strengths of complementary technologies and the influence of
these industry leaders. We believe that these relationships, as well as others
that we intend to pursue, will enable the rapid and widespread deployment of our
electronic commerce network platform.
PROVIDE SUPERIOR CUSTOMER SATISFACTION. We believe a loyal base of
reference customers affords us a significant competitive advantage. Therefore,
we intend to continue to focus significant resources on customer satisfaction
programs. In order to foster a culture of customer satisfaction as our highest
priority, all of our employees with variable compensation are paid in part based
on customer satisfaction as measured by an independent third party organization.
We continue to make use of a number of other programs to promote superior
customer satisfaction including our customer-driven development process and our
frequent customer advisory councils.
EXPAND GLOBAL OPERATIONS. We intend to aggressively grow our global
presence by expanding our worldwide field sales, marketing and services
organizations. To complement this strategy, we intend to continue to globalize
our operations and expand our corporate and administrative organizations and
systems. We also intend to enter into a strategic relationship with a third
party to expand the computer and communications equipment and software required
to support the day-to-day operations of the Ariba Network on a global basis.
ARIBA PRODUCTS AND SERVICES
Ariba provides a comprehensive intranet- and Internet-based
business-to-business electronic commerce solution for operating resources. This
solution consists of two components, Ariba ORMS and the Ariba Network. Ariba
ORMS is a network application that operates primarily within a buying
organization's internal network. Ariba ORMS enables organizations to reduce
processing costs and improve productivity by automating the procurement cycle,
linking end-users throughout the
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organization with approvers and financial systems. Ariba ORMS also enables
organizations to reduce the cost of operating resources by channeling purchases
to preferred suppliers. As orders are generated and approved, Ariba ORMS
automates commerce transactions securely with suppliers on the Internet through
the Ariba Network. The Ariba Network is a global business-to-business electronic
commerce network that enables buying organizations, suppliers and distributors
to automate transactions on the Internet. Together, Ariba ORMS and the Ariba
Network combine intranet-based network applications with an Internet-based
network to create a business-to-business electronic commerce platform benefiting
both buyers and suppliers.
ARIBA ORMS
Ariba ORMS is a robust, scalable and reliable network application that
operates primarily within a buying organization's intranet. Ariba ORMS enables
organizations to reduce processing costs and improve productivity by automating
the procurement cycle, linking end-users throughout the organization with
approvers and financial systems. Ariba ORMS also enables organizations to reduce
the cost of operating resources by channeling purchases to preferred suppliers.
Ariba ORMS is designed to connect large numbers of end-users, approvers and
administrative personnel through web-based applications that automate
procurement and finance processes. Ariba ORMS works with multiple enterprise
systems simultaneously, in addition to providing real-time electronic access to
important procurement information, such as supplier product specifications,
price lists, web sites and order status.
The primary characteristics of Ariba ORMS are:
USER FRIENDLY, WEB-BASED INTERFACES. The browser-based user interface
enables users throughout an organization to take full advantage of Ariba ORMS
from their desktop and with minimal training. Wizards, software that provides
automated assistance, guide less experienced users through the acquisition
process, while an advanced user interface makes the system more productive for
experienced users.
ELECTRONIC BUSINESS PROCESS AUTOMATION. Ariba ORMS provides flexible
workflow capable of streamlining and automating even the most complex or unusual
business processes of large, multinational organizations. This flexible workflow
can be customized 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.
SIMULTANEOUS INTERACTION WITH MULTIPLE ENTERPRISE SYSTEMS. Ariba ORMS works
with and connects to leading finance, human resource management and enterprise
resource planning systems from vendors such as PeopleSoft, SAP and Oracle. In
addition, Ariba ORMS provides a comprehensive API (Application Programming
Interface) to connect and work with other legacy systems through adapters that
are sold as separate products. A single Ariba ORMS installation can connect with
multiple enterprise applications simultaneously through real-time or scheduled
interfaces. These interfaces also enable Ariba ORMS to utilize standard user
authentication and directory services such as LDAP (Lightweight Directory Access
Protocol) and Microsoft's Active Directory.
INFORMATION ACCESS. With powerful analytical and reporting tools, Ariba
ORMS enables organizations to evaluate data collected throughout the process of
acquiring, receiving and paying for operating resources. By employing these
analytical tools, an organization can analyze purchasing patterns to streamline
the procurement process, negotiate more favorable terms with preferred suppliers
and gain insight into additional savings opportunities.
INTERFACE WITH THE ARIBA NETWORK. Ariba ORMS allows organizations to
automate commerce transactions with suppliers over the Internet and through the
Ariba Network. By adhering to open standards, Ariba ORMS provides a variety of
methods for suppliers to communicate electronically with
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buying organizations through the Ariba Network. Ariba ORMS also allows suppliers
to take advantage of their existing web-based catalogs to provide product
information to buyers.
MULTI-PLATFORM ARCHITECTURE. The Ariba ORMS server currently supports
industry-standard approaches to high-performance databases and multi-processor
hardware. Ariba ORMS currently supports Microsoft Windows NT and Unix platforms
including Hewlett-Packard HP-UX and Sun Solaris.
ARIBA ORMS MODULES
Ariba ORMS modules are designed specifically for the procurement and
management of different operating resources. Each module contains powerful
reporting and data analysis tools that enable operations managers to monitor the
requisition process and identify areas for cost reductions.
The Ariba ORMS modules are:
ARIBA MRO. Ariba MRO allows organizations to manage purchases associated
with maintenance, repair and operations supplies. These items are primarily
ordered through electronic catalogs and may include office products, information
technologies and facilities items.
ARIBA SERVICES. Ariba Services are specifically designed to address the
unique data collection requirements for the procurement of professional
services, such as facility, legal, temporary and maintenance services.
Purchasing professional services, unlike commodities, involves a number of
different variables, such as scope of services needed, qualification of
personnel and duration of the services. Ariba Services can integrate this data
to process requisitions obtained from the end-user at various points in the
requisitioning, procurement and receiving cycle.
ARIBA CAPITAL EQUIPMENT. Ariba Capital Equipment addresses the specific
needs of capital equipment purchases such as manufacturing, facilities or
information technology equipment. The procurement of capital equipment often
requires unique data such as different accounting, asset identification and
tracking information. Ariba Capital Equipment can be easily configured to suit
an organization's specific accounting and tracking needs.
ARIBA EFORMS. Ariba eForms allow organizations to create custom forms,
which can be attached to existing Ariba applications or used to 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 ORMS
including financial accounting and human resources information.
ARIBA EXPENSE MANAGEMENT. Ariba Expense Management automates the expense
reporting process associated with expenditures such as travel and entertainment.
Ariba Expense Management provides a robust set of features to generate expense
reports automatically from electronic credit card, travel card or procurement
card data feeds and can route expense reports to functional, travel and expense
managers.
ARIBA P-CARD RECONCILIATION. Ariba P-Card Reconciliation provides support
for the use of P-Cards, which are credit cards designed specifically for
business procurement. P-Cards can be allocated to a given user or an accounting
entity. Electronic P-Card statements from financial institutions can be read
automatically by Ariba ORMS and reconciled against purchases made, flagging any
exceptions or inconsistencies.
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ARIBA ORMS ENTERPRISE ADAPTERS
Ariba ORMS enterprise adapters are designed specifically to connect to or
integrate with leading finance, human resource management and enterprise
resource and planning systems. Integration refers to the ability of Ariba ORMS
adapters to exchange information with an organization's enterprise systems,
eliminating the need for manual transfer of critical information from Ariba ORMS
to these systems. Ariba ORMS enterprise adapters can integrate with standard
implementations of these systems or can be configured to integrate with custom
installations of the enterprise system. These adapters enable a single Ariba
ORMS installation to integrate with multiple enterprise applications
simultaneously.
ARIBA SAP ADAPTER. Ariba SAP Adapter provides real-time and scheduled
integration with SAP applications through standard programming interfaces for
personnel, accounting, distribution, supplier and financial information.
ARIBA PEOPLESOFT ADAPTER. Ariba PeopleSoft Adapter allows real-time and
scheduled integration with PeopleSoft finance, distribution and human resources
management systems through PeopleSoft's message agent for administrative,
personnel, accounting, distribution, supplier and financial information.
ARIBA ORACLE ADAPTER. Ariba Oracle Adapter allows real-time and scheduled
integration with Oracle applications for personnel, accounting, distribution,
supplier and financial 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 GENERAL API ADAPTER. Ariba General API Adapter provides integration
with existing and legacy enterprise systems to interface information with Ariba
ORMS on a real-time or scheduled basis.
Customers who purchase our software products receive a server capacity
license, one or more of the Ariba ORMS modules and adapters to interface with
enterprise financial and human resource systems. The license fee for the server
capacity license is based on the customer's annual volume of line items of
purchasing transactions. The license fees for the software modules and adapters
consist of individual prices for each module or adapter.
The volume licensing of the server capacity allows customers to scale the
total cost of their purchase of the Ariba ORMS system to their needs. The server
capacity license entitles customers to execute the licensed volume of line items
of purchasing transactions during any annual period following their purchase of
the server license. Ariba's customers generally purchase estimated server
capacity at the time of the purchase of the server license. Following the
initial implementation of Ariba ORMS, and based on the reporting and analysis
tools available through Ariba ORMS, our customers are able to understand their
annual transaction volume more fully. Customers who exceed their estimated
volume can purchase additional server capacity. However, there are no recurring
annual license fees.
THE ARIBA NETWORK
The Ariba Network is an Internet-based corporate resource commerce network
designed to provide access to large amounts of supplier product information and
to enable electronic commerce transactions over the Internet. The Ariba Network
bridges buyer and supplier networks on the Internet and offers electronic
payment, catalog and content management, order transaction routing and multi-
protocol support for numerous electronic commerce standards.
Our multi-protocol network allows buyers to send transactions from Ariba
ORMS 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
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and documents, or EDI (Electronic Data Interchange), a format used to exchange
data and documents electronically. This feature eliminates the need for a single
standard for electronic commerce and gives suppliers the freedom to transact in
their preferred protocols.
The Ariba 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 Punch-out. CXML Punch-out
allows a buyer to select a product utilizing a supplier's web site while keeping
the purchasing process within our Ariba ORMS 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 take advantage of their
existing web-based catalog capabilities to differentiate and market their goods
and services.
The key components of the Ariba Network are:
OPEN STANDARDS MULTI-PROTOCOL TRANSACTION NETWORK. The Ariba Network
automatically routes and translates transactions between buyers and suppliers
using most major electronic commerce standards, including: XML; CXML; Internet
EDI; VAN EDI (Value Added Networks for EDI); a subset of the OBI standard (Open
Buying on the Internet), a protocol for buying goods and services on the
Internet; 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.
WEB-BASED CONTENT ACCESS AND INDEXING. The Ariba Network uses a scalable
approach for content management. This approach employs indexing, rather than
content aggregation, to connect buying organizations using Ariba ORMS to
suppliers' existing web-based catalogs. This indexing approach eliminates the
need to aggregate content in a central repository, yet provides robust and
comprehensive searching tools to buyers. In addition, the Ariba Network allows
suppliers to take advantage of existing electronic commerce web-based catalogs
through CIF, CXML and CXML Punch-out.
SUPPLIER SELF-MANAGEMENT AND REGISTRATION. To conduct commerce with all
buying organizations using Ariba ORMS, suppliers need only to register once and
continue to manage their relationships online, in their preferred transaction
standards and configurations without the need for additional software.
NEWS, INFORMATION AND SERVICES. The Ariba Network provides news,
information and services of interest to business buyers and suppliers such as
sourcing, supplier, financial and industry information.
The Ariba Network is designed for high-performance databases and
multi-processing hardware and utilizes a multi-server configuration to allow
workloads to be shared across multiple servers and the site to maintain
availability of online service. We have entered into a relationship with a third
party who has provided hardware to us for the Ariba Network. This network and
platform infrastructure consists of the computer and communications equipment
and software that allow buyers and suppliers to exchange information over the
Ariba Network.
Although we expect to derive a substantial portion of our revenue from the
Ariba Network in the future, we are still developing our pricing, expense and
revenue model for the services associated with our network. If we are unable to
successfully establish a pricing, expense and revenue model acceptable to our
customers, the Ariba Network may not be commercially successful.
11
STRATEGIC RELATIONSHIPS
To ensure that we deliver a comprehensive solution to our customers, we have
established strategic relationships with organizations in four general
categories: hardware platforms; software platforms; electronic commerce; and
systems integrators. Our hardware partners include Cisco Systems, Hewlett-
Packard and Sun Microsystems. These relationships help ensure the reliability,
scalability and performance of the Ariba solution on these platforms. We have
entered into a relationship with a third party who has provided hardware to us
for the Ariba Network. This network and platform infrastructure consists of the
computer and communications equipment and software that allow buyers and
suppliers to exchange information over the Ariba Network. Our electronic
commerce partners include American Express, Sterling Commerce and Visa
International.
We have system integrator relationships with Andersen Consulting, Chicago
Consulting Partners, Deloitte & Touche, EC Soft, Ernst & Young,
PricewaterhouseCoopers, Cambridge Technology Partners, Computer Sciences
Corporation, Core Technologies, SRA International, Tier Technologies and TSA
Associates. These system integrators implement our products and often 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 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 operating resources 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, 1999, our direct sales force consisted of 111
sales professionals located in 17 domestic locations and offices in Canada,
Australia, Belgium, Germany, Japan, The Netherlands, Sweden, Switzerland and the
United Kingdom. Application specialists that provide pre-sales support to
potential customers on product information and deployment capabilities
complement our direct sales force. We plan to expand our direct sales force.
During our sales process, we typically approach senior executive management
teams including the chief financial 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 Ariba
ORMS. As of September 30, 1999, our professional services organization consisted
of 68 employees.
We believe that strategic partnerships will assist us in gaining broad
market acceptance as well as enhance our marketing, sales and distribution
capabilities. We have therefore developed close relationships with a number of
strategic integrators and technology providers. These companies have
12
worked with us and participated 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
business-to-business electronic commerce 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. One of our most recent advisory council meetings was attended by
over 1400 people, including procurement, information technology and finance
executives. In addition to providing information to prospective customers,
advisory council meetings provide a useful forum in which to share 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 also have marketing relationships with Andersen
Consulting, Cisco Systems, Hewlett-Packard, Sun Microsystems and Visa
International. These relationships provide collaborative resources to help
extend the reach of our presence in the marketplace. 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 dependable and timely 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 Mountain View,
California.
RESEARCH AND DEVELOPMENT
We originally introduced Ariba ORMS in May 1997 and have released a number
of product enhancements in five subsequent major releases. We began to operate
the Ariba Network in April 1999 and continue to provide enhancements to this
Internet platform on an ongoing basis. Research and development expenses were
$11.6 million, $4.5 million and $1.9 million for the fiscal years ended
September 30, 1999, 1998 and 1997, respectively.
Our research and development operations are divided into two organizations,
one focusing on Ariba ORMS and the other focusing on the Ariba Network. Our
Ariba ORMS organization has eight teams that include server and infrastructure
development, user interface and application design, tools development,
enterprise integration, quality assurance, documentation, release management and
advanced development. The Ariba Network organization has five teams that include
Internet applications and design, platform and infrastructure engineering,
operations, quality assurance and
13
documentation. Both the Ariba ORMS and the Ariba Network organizations regularly
share resources and collaborate on code development, quality assurance and
documentation.
We believe our software and Internet applications teams and core
technologies represent a significant competitive advantage. The software and
Internet applications development organizations include a number of key members
from past engineering organizations that have developed Internet applications
and services, and have extensive experience with Java programming. We believe a
technically skilled and highly productive development organization is a key
component for the success of new product offerings. We must attract and retain
highly qualified employees to further our research and development efforts. Our
business could be seriously harmed if we are not able to hire and retain a
sufficient number of these individuals.
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 not able 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. 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.
INTERNATIONAL OPERATIONS
The Company has established seven wholly-owned subsidiaries, namely Ariba
Canada, Inc., Ariba U.K. Limited, Ariba Netherlands B.V., Ariba Sweden AB, Ariba
Australia Pty Ltd, Ariba Deutschland GmbH and Ariba Switzerland GmbH/Sarl/Ltd
liab Co., which are located in Canada, the United Kingdom, The Netherlands,
Sweden, Australia, Germany and Switzerland, respectively. Revenue related to our
international operations was $6.7 million, $1.8 million and $0 for the fiscal
years ended September 30, 1999, 1998 and 1997, respectively.
COMPETITION
The market for our solution is intensely competitive, evolving and subject
to rapid technological change. The intensity of competition has increased and is
expected to further increase in the future. This increased competition is likely
to result in price reductions, reduced gross margins and loss of market share,
any one of which could seriously harm our business. Competitors vary in size and
in the scope and breadth of the products and services offered. We have also
increasingly encountered competition with respect to different aspects of our
solution from a variety of vendors including Captura Software, Clarus, Commerce
One, Concur Technologies, Extensity, GE Information Services, Intelysis,
Netscape Communications, a subsidiary of America Online, and TRADEX
Technologies. We also encounter competition from several major enterprise
software developers, such as Oracle, PeopleSoft and SAP. In addition, because
there are relatively low barriers to entry in the operating resource management
software market, we expect additional competition from other established and
emerging companies, as the operational resource management software 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, critical mass of buyers and suppliers, product
14
quality and performance, customer service, core technology, product features,
ability to implement solutions and value of solution. Although we believe that
our solutions currently compete favorably with respect to these factors, our
market is relatively new and 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 financial, technical, marketing and other resources than us,
significantly greater name recognition and a larger installed base of customers.
In addition, many of our competitors have well-established relationships with
our current and potential customers and have extensive knowledge of our
industry. In the past, we have lost potential customers to competitors for
various reasons, including lower prices and 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.
We license rather than sell Ariba ORMS 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 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 two 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 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 Ariba ORMS to
perform key functions. For example, we license reporting software from Actuate
and integration software from Tibco. 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, the Ariba "boomerang" design, Ariba Network,
ORM, ORMS and Walk-Up UI. We also have filed applications to register these
trademarks in several countries. The above mentioned trademark applications are
15
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.
EMPLOYEES
As of September 30, 1999, we had a total of 386 employees, including 98 in
research and development, 140 in sales and marketing, 98 in customer support,
professional services and training, and 50 in administration and finance. Of
these employees, 342 were located in the United States and 44 were located
outside the United States. 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.
16
ARIBA IS AN EARLY-STAGE COMPANY. OUR LIMITED OPERATING HISTORY MAKES IT
DIFFICULT TO EVALUATE OUR FUTURE PROSPECTS.
Ariba was founded in September 1996 and has a limited operating history. Our
limited operating history makes an evaluation of our future prospects very
difficult. We began shipping our first product, the Ariba Operating Resource
Management System, or Ariba ORMS, in June 1997 and began to operate the Ariba
Network in April 1999. We will encounter risks and difficulties frequently
encountered by early-stage companies in new and rapidly evolving markets. Many
of these risks are described in more detail in this "Risk Factors" section. We
may not successfully address any of these risks. If we do not successfully
address these risks, our business would be seriously harmed.
THE MARKET FOR OUR SOLUTIONS IS AT AN EARLY STAGE. WE NEED A CRITICAL MASS
OF LARGE BUYING ORGANIZATIONS AND THEIR SUPPLIERS TO IMPLEMENT OUR
SOLUTIONS.
The market for Internet-based operating resource applications and services
is at an early stage of development. Our success depends on a significant number
of large buying organizations implementing Ariba products and services. The
implementation of Ariba products by large buying organizations is complex, time
consuming and expensive. In many cases, these organizations must change
established business practices and conduct business in new ways. Our ability to
attract additional customers for our Ariba products and services will depend on
using our existing customers as reference accounts. Unless a critical mass of
large buying organizations and their suppliers join the Ariba Network, our
solutions may not achieve widespread market acceptance and our business would be
seriously harmed.
WE HAVE A HISTORY OF LOSSES AND EXPECT TO INCUR LOSSES IN THE FUTURE.
We incurred net losses of $4.7 million in fiscal 1997, $11.0 million in
fiscal 1998 and $29.3 million in fiscal 1999. We expect to derive substantially
all of our revenues for the foreseeable future from licensing Ariba ORMS.
Although these revenues have grown in recent quarters, we may not be able to
sustain these growth rates. In fact, we may not have any revenue growth, and our
revenues could decline. Over the longer term, we expect to derive revenues from
revenues related to network access and network services, which is based on an
unproven business model. Moreover, we expect to incur significant sales and
marketing, research and development, and general and administrative expenses. In
the future, we expect to incur substantial non-cash costs relating to the
amortization of deferred compensation which will contribute to our net losses.
As of September 30, 1999, we had an aggregate of $24.2 million of deferred
compensation to be amortized. As a result, we expect to incur significant losses
for the foreseeable future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
OUR QUARTERLY OPERATING RESULTS ARE VOLATILE AND DIFFICULT TO PREDICT. IF WE
FAIL TO MEET THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS OR INVESTORS, THE
MARKET PRICE OF OUR COMMON STOCK MAY DECREASE SIGNIFICANTLY.
Our quarterly operating results have varied significantly in the past and
will likely vary significantly in the future. We believe that period-to-period
comparisons of our results of operations are not meaningful and should not be
relied upon as indicators of future performance. Our operating results will
likely fall below the expectations of securities analysts or investors in some
future quarter or quarters. Our failure to meet these expectations would likely
adversely affect the market price of our common stock.
Our quarterly operating results may vary depending on a number of factors,
including:
- Demand for Ariba products and services;
17
- Actions taken by our competitors, including new product introductions and
enhancements;
- Delays or reductions in spending for, or the implementation of,
application software by our potential customers as companies attempt to
stabilize their computer systems prior to January 1, 2000 in order to
reduce the risk of computer system problems associated with the Year 2000;
- Ability to scale our network and operations to support large numbers of
customers, suppliers and transactions;
- Ability to develop, introduce and market new products and enhancements to
our existing products on a timely basis;
- Changes in our pricing policies or those of our competitors;
- Ability to expand our sales and marketing operations, including hiring
additional sales personnel;
- Size and timing of sales of our products and services;
- Success in maintaining and enhancing existing relationships and developing
new relationships with strategic partners, including systems integrators
and other implementation partners;
- Compensation policies that compensate sales personnel based on achieving
annual quotas;
- Ability to control costs;
- Technological changes in our markets;
- Deferrals of customer orders in anticipation of product enhancements or
new products;
- Customer budget cycles and changes in these budget cycles; and
- General economic factors.
Our quarterly revenues are especially subject to fluctuation because they
depend on the sale of a small number of relatively large orders for our Ariba
products and related services. As a result, our quarterly operating results may
fluctuate significantly if we are unable to complete one or more substantial
sales in any given quarter. In some cases, we recognize revenues from product
sales on a percentage of completion basis. Accordingly, our ability to recognize
these revenues is subject to delays associated with our customers' ability to
complete the implementation of Ariba products in a timely manner. In some cases,
we recognize revenues on a subscription basis over the life of the subscriptions
specified in the contract, which is typically 12 to 24 months. Therefore, if we
do not book a sufficient number of large orders in a particular quarter, our
revenues in future periods could be lower than expected. We have not fully
developed our business model for the Ariba Network and related services. As this
business model evolves, the potential for fluctuations in our quarterly results
could increase. Furthermore, our quarterly revenues may be affected
significantly by other revenue recognition policies and procedures. These
policies and procedures may evolve or change over time based on applicable
accounting standards and how these standards are interpreted. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
We plan to increase our operating expenses to expand our sales and marketing
operations, fund greater levels of research and development, develop new
partnerships, make tenant improvements to our new facilities, increase our
professional services and support capabilities and improve our operational and
financial systems. If our revenues do not increase along with these expenses,
our business, operating results and financial condition could be seriously
harmed and net losses in a given quarter could be even larger than expected.
In addition, because our expense levels are relatively fixed in the near
term and are based in part on expectations of our future revenues, any decline
in our revenues to a level that is below our expectations would have a
disproportionately adverse impact on our operating results.
18
IMPLEMENTATION OF OUR ARIBA PRODUCTS BY LARGE CUSTOMERS IS COMPLEX, TIME
CONSUMING AND EXPENSIVE. WE FREQUENTLY EXPERIENCE LONG SALES AND
IMPLEMENTATION CYCLES.
Ariba ORMS is an enterprise-wide solution that must be deployed with many
users within a buying organization. Its implementation by large buying
organizations is complex, time consuming and expensive. In many cases, our
customers must change established business practices and conduct business in new
ways. In addition, they must generally consider a wide range of other issues
before committing to purchase our product, including product benefits, ease of
installation, ability to work with existing computer systems, ability to support
a larger user base, functionality and reliability. Furthermore, because we are
one of the first companies to offer an Internet-based operating resource
management system, many customers will be addressing these issues for the first
time in the context of managing and procuring operating resources. As a result,
we must educate potential customers on the use and benefits of our products and
services. In addition, we believe that the purchase of our products is often
discretionary and generally involves a significant commitment of capital and
other resources by a customer. It frequently takes several months to finalize a
sale and requires approval at a number of management levels within the customer
organization. The implementation and deployment of our products requires a
significant commitment of resources by our customers and third-party and/or our
professional services organizations. Because we target large customers, our
sales cycles range from four to 24 months and average approximately nine months.
BUSINESS-TO-BUSINESS ELECTRONIC COMMERCE PURCHASING NETWORKS, INCLUDING THE
ARIBA NETWORK, ARE AT AN EARLY STAGE OF DEVELOPMENT AND MARKET ACCEPTANCE
We began operating the Ariba Network in April 1999. Broad and timely
acceptance of the Ariba Network, which is critical to our future success, is
subject to a number of significant risks. These risks include:
- Operating resource management and procurement on the Internet is a new
market;
- Our network's ability to support large numbers of buyers and suppliers is
unproven;
- Our need to enhance the interface between our Ariba ORMS product and the
Ariba Network;
- Our need to significantly enhance the features and services of the Ariba
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 Network.
Although we expect to derive a significant portion of our long-term future
revenue from the Ariba Network, we have not yet fully evolved our revenue model
for services associated with the Ariba Network. The revenues associated may be a
combination of transaction and/or annual subscription fees. Examples of such
services might include electronic payment, bid/quote and sourcing, among others.
However, we cannot predict whether these services and other functionality will
be commercially successful or whether they will adversely impact revenues from
our Ariba ORMS products and services. We would be seriously harmed if the Ariba
Network is not commercially successful, particularly if we experience a decline
in the growth or growth rate of revenues from our Ariba ORMS solution.
WE WILL 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 NETWORK.
We will 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
Network. Services provided by these parties will include managing
19
the Ariba Network web server, maintaining communications lines and managing
network data centers, which are the locations on our network where data is
stored. If we are unable to contract successfully with third parties for these
services, we would have to perform them ourselves. We may not successfully
obtain or perform these services on a timely and cost effective basis. Since the
installation of the computer and communications equipment and software needed
for the day-to-day operations of the Ariba Network to a significant extent will
be managed by third parties, we will be dependent on those parties to the extent
that they manage, maintain and provide security for it.
20
THE BUSINESS-TO-BUSINESS ELECTRONIC COMMERCE INDUSTRY IS VERY COMPETITIVE,
AND WE FACE INTENSE COMPETITION FROM MANY PARTICIPANTS IN THIS INDUSTRY. IF
WE ARE UNABLE TO COMPETE SUCCESSFULLY, OUR BUSINESS WILL BE SERIOUSLY
HARMED.
The market for our solution is intensely competitive, evolving and subject
to rapid technological change. The intensity of competition has increased and is
expected to further increase in the future. This increased competition is likely
to result in price reductions, reduced gross margins and loss of market share,
any one of which could seriously harm our business. Competitors vary in size and
in the scope and breadth of the products and services offered. We also
increasingly encountered competition with respect to different aspects of our
solution from Captura Software, Clarus, Commerce One, Concur Technologies,
Extensity, GE Information Services, Intellysis, Netscape Communications, a
subsidiary of America Online, and TRADEX Technologies. We also encounter
competition from several major enterprise software developers, such as Oracle,
PeopleSoft and SAP. In addition, because there are relatively low barriers to
entry in the operating resource management software market, we expect additional
competition from other established and emerging companies, as the operational
resource management software market continues to develop and expand. For
example, third parties that currently help implement Ariba ORMS could begin to
market products and services that compete with our own. We could also face
competition from new companies who introduce an Internet-based operating
resource management solution.
Many of our current and potential competitors have longer operating
histories, significantly greater financial, technical, marketing and other
resources than us, significantly greater name recognition and a larger installed
base of customers. In addition, many of our competitors have well-established
relationships with our current and potential customers and have extensive
knowledge of our industry. In the past, we have lost potential customers to
competitors for various reasons, including lower prices and incentives not
matched by us. In addition, current and potential competitors have established
or may establish cooperative relationships among themselves or with third
parties to increase the ability of their products to address customer needs.
Accordingly, it is possible that new competitors or alliances among competitors
may emerge and rapidly acquire significant market share. We also expect that
competition will increase as a result of industry consolidations.
We may not be able to compete successfully against our current and future
competitors.
WE EXPECT REVENUES FROM ARIBA ORMS TO BE CONCENTRATED IN A RELATIVELY SMALL
NUMBER OF CUSTOMERS.
In fiscal 1999, one customer accounted for more than 10% of our total
revenues and, in fiscal 1998, five customers accounted for more than 10% of our
total revenues. We may continue to derive a significant portion of our revenues
from a relatively small number of customers in the future. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
WE RELY ON THIRD PARTIES TO IMPLEMENT ARIBA PRODUCTS.
We rely, and expect to rely increasingly, on a number of third parties to
implement Ariba ORMS at customer sites. If we are unable to establish and
maintain effective, long-term relationships with our implementation providers,
or if these providers do not meet the needs or expectations of our customers,
our business would be seriously harmed. This strategy will also require that we
develop new relationships with additional third-party implementation providers
to provide these services if the number of Ariba ORMS implementations continues
to increase. Our current implementation partners are not contractually required
to continue to help implement Ariba ORMS. 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
20
provide these services internally, which would significantly limit our ability
to meet our customers' implementation needs. A number of our competitors,
including Oracle, SAP and PeopleSoft, have significantly more well-established
relationships with these third parties and, as a result, these third parties may
be more likely to recommend competitors' products and services rather than our
own. In addition, we cannot control the level and quality of service provided by
our current and future implementation partners.
WE DEPEND ON SUPPLIERS FOR THE SUCCESS OF THE ARIBA NETWORK.
We expect to depend on suppliers joining the Ariba Network. Any failure of
suppliers to join the Ariba Network in sufficient and increasing numbers would
make our network less attractive to buyers and consequently other suppliers. In
order to provide buyers on the Ariba Network an organized method for accessing
operating resources, we rely on suppliers to maintain web-based catalogs,
indexing services and other content aggregation tools. Our inability to access
and index these catalogs and services would result in our customers having fewer
products and services available to them through our solution, which would
adversely affect the perceived usefulness of the Ariba Network.
WE DEPEND ON THE INTRODUCTION OF NEW VERSIONS OF ARIBA ORMS AND ON ENHANCING
THE FUNCTIONALITY AND SERVICES OFFERED THROUGH THE ARIBA NETWORK.
If we are unable to develop new software products or enhancements to our
existing products on a timely and cost-effective basis, or if new products or
enhancements do not achieve market acceptance, our business would be seriously
harmed. The life cycles of our products are difficult to predict because the
market for our products is new and emerging, and is characterized by rapid
technological change, changing customer needs and evolving industry standards.
The introduction of products employing new technologies and emerging industry
standards could render our existing products or services obsolete and
unmarketable.
To be successful, our products and services must keep pace with
technological developments and emerging industry standards, address the
ever-changing and increasingly sophisticated needs of our customers and achieve
market acceptance.
In developing new products and services, we may:
- Fail to develop and market products that respond to technological changes
or evolving industry standards in a timely or cost-effective manner;
- Encounter products, capabilities or technologies developed by others that
render our products and services obsolete or noncompetitive or that
shorten the life cycles of our existing products and services;
- Experience difficulties that could delay or prevent the successful
development, introduction and marketing of these new products and
services; or
- Fail to develop new products and services that adequately meet the
requirements of the marketplace or achieve market acceptance.
IF WE FAIL TO RELEASE OUR PRODUCTS IN A TIMELY MANNER, OR IF OUR PRODUCTS DO
NOT ACHIEVE MARKET ACCEPTANCE, OUR BUSINESS WOULD BE SERIOUSLY HARMED.
We may fail to introduce or deliver new potential offerings on a timely
basis or at all. In the past, we have experienced delays in the commencement of
commercial shipments of our new releases. If new releases or potential new
products are delayed or do not achieve market acceptance, we could experience a
delay or loss of revenues and customer dissatisfaction. Customers may delay
purchases of
21
Ariba ORMS in anticipation of future releases. If customers defer material
orders of Ariba ORMS in anticipation of new releases or new product
introductions, our business would be seriously harmed.
NEW VERSIONS AND RELEASES OF ARIBA ORMS MAY CONTAIN ERRORS OR DEFECTS.
Ariba ORMS is complex and, accordingly, may contain undetected errors or
failures when first introduced or as new versions are released. This may result
in loss of, or delay in, market acceptance of our products. We have in the past
discovered software errors in our new releases and new products after their
introduction. In the past, we discovered problems with respect to the ability of
software written in Java to scale to allow for large numbers of concurrent users
of Ariba ORMS. We have experienced delays in release, lost revenues and customer
frustration during the period required to correct these errors. We may in the
future discover errors, including Year 2000 errors and additional scalability
limitations, in new releases or new products after the commencement of
commercial shipments. In addition, a delay in the commercial release of the next
version of Ariba ORMS could also slow the growth of the Ariba Network.
WE COULD BE SUBJECT TO POTENTIAL PRODUCT LIABILITY CLAIMS AND THIRD PARTY
LIABILITY CLAIMS RELATED TO PRODUCTS AND SERVICES PURCHASED THROUGH THE
ARIBA NETWORK.
Our customers use our products and services to manage their operating
resources. Any errors, defects or other performance problems could result in
financial or other damages to our customers. A product liability claim brought
against us, even if not successful, would likely be time consuming and costly
and could seriously harm our business. Although our customer license agreements
typically contain provisions designed to limit our exposure to product liability
claims, existing or future laws or unfavorable judicial decisions could negate
these limitation of liability provisions.
The Ariba Network provides our customers with indices of products that can
be purchased from suppliers participating in the Ariba Network. The law relating
to the liability of providers of listings of products and services sold over the
Internet for errors, defects or other performance problems with respect to those
products and services is currently unsettled. We will not pre-screen the types
of products and services that may be purchased through the Ariba Network. Some
of these products and services could contain performance or other problems. We
may not successfully avoid civil or criminal liability for problems related to
the products and services sold through the Ariba Network. Any claims or
litigation could still require expenditures in terms of management time and
other resources to defend ourselves. Liability of this sort could require us to
implement measures to reduce our exposure to this liability, which may require
us, among other things, to expend substantial resources or to discontinue
certain product or service offerings or to take precautions to ensure that
certain products and services are not available through the Ariba Network.
OUR SUCCESS DEPENDS ON RETAINING OUR CURRENT KEY PERSONNEL AND ATTRACTING
ADDITIONAL KEY PERSONNEL, PARTICULARLY IN THE AREAS OF DIRECT SALES AND
RESEARCH AND DEVELOPMENT.
Our future performance depends on the continued service of our senior
management, product development and sales personnel, in particular Keith Krach,
our President and Chief Executive Officer. None of these persons, including
Mr. Krach, is bound by an employment agreement, and we do not carry key person
life insurance. The loss of the services of one or more of our key personnel
could seriously harm our business. Our future success also depends on our
continuing ability to attract, hire, train and retain a substantial number of
highly skilled managerial, technical, sales, marketing and customer support
personnel. We are particularly dependent on hiring additional personnel to
increase our direct sales and research and development organizations. In
addition, new hires frequently require extensive training before they achieve
desired levels of productivity. Competition for qualified personnel
22
is intense, and we may fail to retain our key employees or to attract or retain
other highly qualified personnel.
IF THE PROTECTION OF OUR INTELLECTUAL PROPERTY IS INADEQUATE, OUR
COMPETITORS MAY GAIN ACCESS TO OUR TECHNOLOGY, AND WE MAY LOSE CUSTOMERS.
We depend on our ability to develop and maintain the proprietary aspects of
our technology. To protect our proprietary technology, we rely primarily on a
combination of contractual provisions, confidentiality procedures, trade
secrets, and patent, copyright and trademark laws.
We license rather than sell Ariba ORMS 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 Network will be viable
or of value in the future because the validity, enforceability and type of
protection of proprietary rights in Internet-related industries are uncertain
and still evolving.
We have no patents, and none may be issued from our existing patent
applications. Our future patents, if any, may be successfully challenged or may
not provide us with any competitive advantages. We may not develop proprietary
products or technologies that are patentable.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Policing unauthorized use of our products is
difficult, and while we are unable to determine the extent to which piracy of
our software products exists, software piracy can be expected to be a persistent
problem. In addition, the laws of some foreign countries do not protect our
proprietary rights to as great an extent as do the laws of the United States.
Our means of protecting our proprietary rights may not be adequate and our
competitors may independently develop similar technology, duplicate our products
or design around patents issued to us or our other intellectual property.
There has been a substantial amount of litigation in the software industry
and the Internet industry regarding intellectual property rights. It is possible
that in the future, third parties may claim that we or our current or potential
future products infringe their intellectual property. We expect that software
product developers and providers of electronic commerce solutions will
increasingly be subject to infringement claims as the number of products and
competitors in our industry segment grows and the functionality of products in
different industry segments overlaps. Any claims, with or without merit, could
be time-consuming, result in costly litigation, cause product shipment delays or
require us to enter into royalty or licensing agreements. Royalty or licensing
agreements, if required, may not be available on terms acceptable to us or at
all, which could seriously harm our business.
We must now, and may in the future have to, license or otherwise obtain
access to intellectual property of third parties. For example, we are currently
dependent on developers' licenses from enterprise resource planning, database,
human resource and other system software vendors in order to ensure compliance
of our Ariba ORMS products with their management systems. We may not be able to
obtain any required third party intellectual property in the future.
23
IN ORDER TO MANAGE OUR GROWTH AND EXPANSION, WE WILL NEED TO IMPROVE AND
IMPLEMENT NEW SYSTEMS, PROCEDURES AND CONTROLS.
We have recently experienced a period of significant expansion of our
operations that has placed a significant strain upon our management systems and
resources. If we are unable to manage our growth and expansion, our business
will be seriously harmed. In addition, we have recently hired a significant
number of employees and plan to further increase our total headcount. We also
plan to expand the geographic scope of our customer base and operations. This
expansion has resulted and will continue to result in substantial demands on our
management resources. Our ability to compete effectively and to manage future
expansion of our operations, if any, will require us to continue to improve our
financial and management controls, reporting systems and procedures on a timely
basis, and expand, train and manage our employee work force. We have implemented
new systems to manage our financial and human resources infrastructure. We may
find that this system, our personnel, procedures and controls may be inadequate
to support our future operations.
OUR BUSINESS COULD BE ADVERSELY AFFECTED IF THE SYSTEMS WE USE ARE NOT YEAR
2000 COMPLIANT OR IF OUR CUSTOMERS OR POTENTIAL CUSTOMERS ALTER THEIR
PURCHASING PATTERNS AS A RESULT OF THE YEAR 2000 PROBLEM.
The risks posed by Year 2000 issues could adversely affect our business in a
number of significant ways. Although we believe that our internally developed
systems and technology are Year 2000 compliant, our information technology
systems nevertheless could be substantially impaired or cease to operate due to
Year 2000 problems. Additionally, we rely on information technology supplied by
third parties, and our participating sellers also are heavily dependent on
information technology systems and on their own third-party vendor systems. Year
2000 problems experienced by us or any of these third parties could materially
adversely affect our business. Additionally, the Internet could face serious
disruptions arising from the Year 2000 problem.
Many of our customers and potential customers have implemented policies that
prohibit or strongly discourage making changes or additions to their internal
computer systems until after January 1, 2000. We will experience fewer sales if
potential customers who might otherwise purchase our Ariba products delay the
purchase and implementation of Ariba products until after January 1, 2000 in an
effort to stabilize their internal computer systems in order to cope with the
Year 2000 problem or because their information technology budgets have been
diverted to address Year 2000 issues. If our potential customers delay
purchasing or implementing Ariba products in preparation for the Year 2000
problem, our business would be seriously harmed. In addition, because the
revenues from some of our customers are recognized on a percentage of completion
basis, any implementation delays by these customers caused by their needs to
address Year 2000 issues will defer our ability to recognize this revenue.
We cannot guarantee that any of our participating sellers or other Internet
vendors will be Year 2000 compliant in a timely manner, or that there will not
be significant interoperability problems among information technology systems.
We also cannot guarantee that buyers and suppliers will be able to utilize the
Ariba Network without serious disruptions arising from the Year 2000 problem.
Given the pervasive nature of the Year 2000 problem, we cannot guarantee that
disruptions in other industries and market segments will not adversely affect
our business. Moreover, the costs related to Year 2000 compliance, which thus
far have not been material, could ultimately be significant. In the event that
we experience disruptions as a result of the Year 2000 problem, our business
could be seriously harmed.
24
IF WE EXPAND OUR INTERNATIONAL SALES AND MARKETING ACTIVITIES, OUR BUSINESS
WILL BE SUSCEPTIBLE TO NUMEROUS RISKS ASSOCIATED WITH INTERNATIONAL
OPERATIONS.
To be successful, we believe we must expand our international operations and
hire additional international personnel. Therefore, we expect to commit
significant resources to expand our international sales and marketing
activities. If successful, we will be subject to a number of risks associated
with international business activities. These risks generally include:
- Currency exchange rate fluctuations;
- Seasonal fluctuations in purchasing patterns;
- Unexpected changes in regulatory requirements;
- Tariffs, export controls and other trade barriers;
- Longer accounts receivable payment cycles and difficulties in collecting
accounts receivable;
- Difficulties in managing and staffing international operations;
- Potentially adverse tax consequences, including restrictions on the
repatriation of earnings;
- The burdens of complying with a wide variety of foreign laws;
- The risks related to the recent global economic turbulence and adverse
economic circumstances in Asia; and
- Political instability.
WE MUST INTEGRATE RECENT ACQUISITIONS, AND WE MAY NEED TO MAKE ADDITIONAL
FUTURE ACQUISITIONS TO REMAIN COMPETITIVE. OUR BUSINESS COULD BE ADVERSELY
AFFECTED AS A RESULT OF THESE ACQUISITIONS.
On November 15, 1999, we entered into a definitive agreement to acquire
TradingDynamics, a leading provider of business-to-business Internet trading
applications. On December 16, 1999, we entered into a definitive agreement to
acquire TRADEX Technologies, a leading provider of solutions for Net Markets.
These acquisitions are expected to be completed in the quarter ending March 31,
2000 and the quarter ending June 30, 2000, respectively, subject to the
satisfaction of standard closing conditions. We may find it necessary or
desirable to acquire additional businesses, products, or technologies. If we
identify an appropriate acquisition candidate, we may not be able to negotiate
the terms of the acquisition successfully, finance the acquisition, or integrate
the acquired business, products or technologies into our existing business and
operations. If our efforts are not successful, it could seriously harm our
business.
Completing the acquisitions of TradingDynamics and TRADEX Technologies, or a
potential future acquisition and integrating such acquisitions will cause
significant diversions of management time and resources. In particular, the
acquisition of TRADEX Technologies will require the integration of two large,
geographically distant organizations. We will issue shares of our common stock
worth approximately $500 million and $2 billion, respectively, based on current
trading ranges, as consideration to TradingDynamics shareholders and TRADEX
Technologies stockholders, which will result in immediate and substantial
dilution to our existing stockholders. Similarly, if we consummate one or more
significant future acquisitions in which the consideration consists of stock or
other securities, our equity could be significantly diluted. If we were to
proceed with one or more significant future acquisitions in which the
consideration included cash, we could be required to use a substantial portion
of our available cash, to consummate any acquisition. Financing for future
acquisitions may not be available on favorable terms, or at all. In addition, in
connection with our pending and future
25
acquisitions we may be required to amortize significant amounts of goodwill and
other intangible assets, which will negatively effect the operating income of
our business.
IN THE FUTURE WE MAY NEED TO RAISE ADDITIONAL CAPITAL IN ORDER TO REMAIN
COMPETITIVE IN THE BUSINESS-TO-BUSINESS ELECTRONIC COMMERCE INDUSTRY. THIS
CAPITAL MAY NOT BE AVAILABLE ON ACCEPTABLE TERMS, IF AT ALL.
We expect that the net proceeds from our initial public stock offering will
be sufficient to meet our working capital and capital expenditure needs for at
least the next 12 months. After that, we may need to raise additional funds and
we cannot be certain that we will be able to obtain additional financing on
favorable terms, if at all. If we cannot raise funds on acceptable terms, if and
when needed, we may not be able to develop or enhance our products and services,
take advantage of future opportunities, grow our business or respond to
competitive pressures or unanticipated requirements, which could seriously harm
our business.
OUR STOCK PRICE IS VOLATILE.
The market price of the common stock may decrease significantly in response
to the following factors, some of which are beyond our control:
- Variations in our quarterly operating results;
- Changes in securities analysts' estimates of our financial performance;
- Announcements that our revenue or income are below analysts' expectations;
- Changes in analysts' estimates of our performance or industry performance;
- Changes in market valuations of similar companies;
- Sales of large blocks of our common stock;
- Announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
- Loss of a major customer or failure to complete significant license
transactions;
- Additions or departures of key personnel; and
- Fluctuations in stock market price and volume, which are particularly
common among highly volatile securities of software and Internet-based
companies.
WE ARE AT RISK OF SECURITIES CLASS ACTION LITIGATION DUE TO OUR STOCK PRICE
VOLATILITY.
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. We may in the future be the target of similar litigation. Securities
litigation could result in substantial costs and divert management's attention
and resources, which could seriously harm our business.
WE HAVE IMPLEMENTED CERTAIN ANTI-TAKEOVER PROVISIONS THAT COULD MAKE IT MORE
DIFFICULT FOR A THIRD PARTY TO ACQUIRE US.
Provisions of our amended and restated certificate of incorporation and
bylaws, as well as provisions of Delaware law, could make it more difficult for
a third party to acquire us, even if doing so would be beneficial to our
stockholders.
26
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.
The Ariba Network depends on the increased acceptance and use of the
Internet as a medium of commerce. Rapid growth in the use of the Internet is a
recent phenomenon. As a result, acceptance and use may not continue to develop
at historical rates and a sufficiently broad base of business customers may not
adopt or continue to use the Internet as a medium of commerce. Demand and market
acceptance for recently introduced services and products over the Internet are
subject to a high level of uncertainty, and there exist few proven services and
products.
Our business would be seriously harmed if:
- Use of the Internet and other online services does not continue to
increase or increases more slowly than expected;
- The technology underlying the Internet and other online services does not
effectively support any expansion that may occur; or
- The Internet and other online services do not create a viable commercial
marketplace, inhibiting the development of electronic commerce and
reducing the need for our products and services.
WE DEPEND ON THE ACCEPTANCE OF THE INTERNET AS A COMMERCIAL MARKETPLACE AND
THIS ACCEPTANCE MAY NOT OCCUR ON A TIMELY BASIS.
The Internet may not be accepted as a viable long-term commercial
marketplace for a number of reasons. These include:
- Potentially inadequate development of the necessary communication and
computer network technology, particularly if rapid growth of the Internet
continues;
- Delayed development of enabling technologies and performance improvements;
- Delays in the development or adoption of new standards and protocols; and
- Increased governmental regulation.
SECURITY RISKS AND CONCERNS MAY DETER THE USE OF THE INTERNET FOR CONDUCTING
ELECTRONIC COMMERCE.
A significant barrier to electronic commerce and communications is the
secure transmission of confidential information over public networks. Advances
in computer capabilities, new discoveries in the field of cryptography or other
events or developments could result in compromises or breaches of our security
systems or those of other web sites to protect proprietary information. If any
well-publicized compromises of security were to occur, it could have the effect
of substantially reducing the use of the web for commerce and communications.
Anyone who circumvents our security measures could misappropriate proprietary
information or cause interruptions in our services or operations. The Internet
is a public network, and data is sent over this network from many sources. In
the past, computer viruses, software programs that disable or impair computers,
have been distributed and have rapidly spread over the Internet. Computer
viruses could be introduced into our systems or those of our customers or
suppliers, which could disrupt the Ariba 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
27
security measures may be inadequate to prevent security breaches, and our
business would be harmed if we do not prevent them.
THE ARIBA NETWORK MAY EXPERIENCE PERFORMANCE PROBLEMS OR DELAYS AS A RESULT
OF HIGH VOLUMES OF TRAFFIC.
If the volume of traffic on the web site for the Ariba Network increases,
the Ariba Network may in the future experience slower response times or other
problems. In addition, users will depend on Internet service providers,
telecommunications companies and the efficient operation of their computer
networks and other computer equipment for access to the Ariba Network. Each of
these has experienced significant outages in the past and could experience
outages, delays and other difficulties due to system failures unrelated to our
systems. Any delays in response time or performance problems could cause users
of the Ariba Network to perceive this service as not functioning properly and
therefore cause them to use other methods to procure their operating resources.
INCREASING GOVERNMENT REGULATION COULD LIMIT THE MARKET FOR, OR IMPOSE SALES
AND OTHER TAXES ON THE SALE OF, OUR PRODUCTS AND SERVICES OR ON PRODUCTS AND
SERVICES PURCHASED THROUGH THE ARIBA NETWORK.
As Internet commerce evolves, we expect that federal, state or foreign
agencies will adopt regulations covering issues such as user privacy, pricing,
content and quality of products and services. It is possible that legislation
could expose companies involved in electronic commerce to liability, which could
limit the growth of electronic commerce generally. Legislation could dampen the
growth in Internet usage and decrease its acceptance as a communications and
commercial medium. If enacted, these laws, rules or regulations could limit the
market for our products and services.
We do not collect sales or other similar taxes in respect of goods and
services purchased through the Ariba 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 Network could seriously harm our business.
Legislation limiting the ability of the states to impose taxes on
Internet-based transactions has been proposed in the U.S. Congress. This
legislation could ultimately be enacted into law or this legislation could
contain a limited time period in which this tax moratorium will apply. In the
event that the tax moratorium is imposed for a limited time period, legislation
could be renewed at the end of this period. Failure to enact or renew this
legislation could allow various states to impose taxes on electronic commerce,
and the imposition of these taxes could seriously harm our business.
28
ITEM 2. PROPERTIES
Our principal sales, marketing, research, development, and administrative
offices occupy approximately 130,000 square feet in Mountain View, California.
Our sublease for this facility expires in October 2006. We are sub-subleasing
approximately 19,000 square feet of the Mountain View facility through
December 1999. Previously our principal sales, marketing, research, development,
and administrative offices occupied approximately 33,000 square feet in
Sunnyvale, California under a lease that expires on August 31, 2004. We are
currently subleasing the Sunnyvale facility. In addition we also lease sales and
support offices in the North American metropolitan areas of Atlanta, Boston,
Chicago, Cleveland, Columbus, Dallas, Denver, Detroit, Los Angeles, Milwaukee,
Minneapolis, New York, Philadelphia, Seattle, St. Louis, Toronto and Washington
D.C. We also lease sales and support offices outside of North America including
locations in Australia, Belgium, Germany, Japan, The Netherlands, Sweden,
Switzerland and the United Kingdom. We believe that our existing facilities will
be adequate to meet our requirements for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of Ariba and their ages as of September 30, 1999 are
as follows:
NAME AGE POSITION(S)
- ---- -------- --------------------------------------------------------
Keith J. Krach 42 President, Chief Executive Officer and Chairman of the
Board of Directors
Edward P. Kinsey 43 Chief Financial Officer, Vice President-Finance &
Administration and Secretary
Shelley C. Brown 47 Vice President-Human Resources
Robert J. DeSantis 36 Vice President-Network Commerce
Rune C. Eliasen 44 Vice President-Customer Services
K. Charly Kleissner 42 Vice President-Engineering
Robert D. Lent 45 Vice President-Corporate Development
Paul L. Melchiorre 38 Vice President-North America Operations
David L. Rome 51 Vice President-Marketing
Paul C.M. Touw 34 Vice President-Corporate Strategy
KEITH J. KRACH, a co-founder of Ariba, has served as Chairman of the Board
of Directors, Chief Executive Officer and President since our inception in
September 1996. From March 1996 to September 1996, Mr. Krach served as an
Entrepreneur in Residence at Benchmark Capital. From October 1988 to
August 1995, Mr. Krach served as Chief Operating Officer of Rasna Corporation, a
mechanical computer-aided design automation software company. Prior to joining
Rasna, Mr. Krach held various positions with General Motors, including General
Manager and Vice President of GMF Robotics. Mr. Krach holds a Bachelor of
Science degree in Industrial Engineering from Purdue University and a Master of
Business Administration from Harvard Business School.
EDWARD P. KINSEY, a co-founder of Ariba, has served as Chief Financial
Officer, Secretary and Vice President of Finance and Administration since our
inception in September 1996. From October 1995 to August 1996, Mr. Kinsey served
as the Chief Financial Officer and Vice President of Finance of CenterView
Software, an Internet development tools company. From March 1994 to
October 1995,
29
Mr. Kinsey served as Corporate Controller of Rasna Corporation and, from
July 1988 to March 1994, Mr. Kinsey served in various capacities at
Zenger-Miller, Inc., a management and supervisory skills training and
development company, most recently as the Chief Financial Officer and Vice
President of Operations. Prior to 1988, Mr. Kinsey held management positions at
Peat Marwick Mitchell and at Price Waterhouse. Mr. Kinsey is a Certified Public
Accountant in California and Ohio and holds a Bachelor of Business
Administration degree in Accounting from the University of Toledo.
SHELLEY C. BROWN has served as Ariba's Vice President of Human Resources
since April 1999. From January 1990 to March of 1998 Ms. Brown served as Vice
President of Corporate Services at Aspect Telecommunications, a provider of
integrated software suites for telecommunication products. Prior to Aspect,
Ms. Brown worked for the Hewlett-Packard Company, a computer manufacturer, for
12 years in several Human Resource management positions. Ms. Brown holds a
Bachelor of Arts degree in Sociology from Stanford University and a Master of
Business Administration from the University of California at Los Angeles.
ROBERT J. DESANTIS, a co-founder of Ariba, has served as Vice President of
Network Commerce since September 1999, as Vice President of International
Operations from July 1998 to September 1999 and Vice President of Sales from our
inception in September 1996 to July 1998. From October 1995 to September 1996,
Mr. DeSantis worked as a consultant in the venture capital community. From
August 1990 to October 1995, Mr. DeSantis served as Vice President of Sales and
Vice President of European Operations at Rasna Corporation. Prior to joining
Rasna, Mr. DeSantis served as Director of Sales for Structural Research and
Analysis Corporation, a design analysis software company, and as a member of the
technical staff of Hughes Aircraft Company. Mr. DeSantis holds a Bachelor of
Science degree in Mechanical Engineering from the University of Rhode Island.
RUNE C. ELIASEN has served as Ariba's Vice President of Customer Services
since March 1997. From August 1995 to February 1997, Mr. Eliasen served as Vice
President of Operations at CBT Systems, Inc., a computer training development
company. From March 1989 to August 1995, Mr. Eliasen served as the Vice
President of Operations at Rasna Corporation. Prior to joining Rasna,
Mr. Eliasen held various senior engineering management positions at General
Motors and Ford Motor Company. Mr. Eliasen holds a Bachelor of Science degree in
Aeronautical and Astronautical Engineering from Purdue University.
K. CHARLY KLEISSNER has served as Ariba's Vice President of Engineering
since July 1997. From June 1996 to July 1997, Dr. Kleissner was Vice President
of Product Development at DataMind Corporation, a data mining software tools
development company. From April 1994 to June 1996, Dr. Kleissner held various
senior engineering management positions at NeXT Software Inc., a software
development company. Prior to joining NeXT, Dr. Kleissner held various senior
engineering management positions at Digital Equipment Corporation and
Hewlett-Packard Company. Dr. Kleissner holds a Ph.D. in Computer Science from
the University of Technology, Vienna and a Master of Science degree in Computer
Science from the Institute of Technology at the University of Vienna.
ROBERT D. LENT, a co-founder of Ariba, has served as Vice President of
Corporate Development since December 1997. From January 1993 to September 1996,
Mr. Lent was Vice President of U.S. Marketing for Inmac, a supplier of
networking and computing equipment. Prior to joining Inmac, he held various
senior product-marketing positions at Quantum, a mass storage company, and
Softbridge Microsystems. Mr. Lent began his career with Deloitte & Touche LLP.
Mr. Lent is a Certified Public Accountant and holds a Bachelor of Science degree
in Business Administration from the University of California at Berkeley and a
Master of Business Administration with distinction from Harvard Business School.
PAUL L. MELCHIORRE has served as Ariba's Vice President of North American
Operations since May 1998. From December 1992 to May 1998, Mr. Melchiorre served
as Senior Vice President of Global Accounts for SAP America, Inc., an enterprise
software company. Prior to joining SAP, he held
30
various sales and management positions with MAI Systems, an accounting software
company, and Automatic Data Processing, a developer of business software.
Mr. Melchiorre holds a Bachelor of Science degree in Marketing from Villanova
University and a Master of Business Administration from Drexel University.
DAVID L. ROME has served as Ariba's Vice President of Marketing since
July 1997. From March 1997 to July 1997, Mr. Rome served as Vice President of
Marketing at Calico Technology, an Internet company focused on enabling
electronic commerce for companies selling complex products and services. From
July 1990 to September 1995, Mr. Rome held several general manager positions at
Lotus Development Corporation. Prior to joining Lotus, Mr. Rome held various
senior sales and marketing management positions with Alliant Computer Systems, a
specialized computer manufacturer, and Data General Corporation, a data storage
products company. Mr. Rome holds a Bachelor of Science degree in Mechanical
Engineering from Purdue University and a Master of Business Administration from
Harvard Business School.
PAUL C. M. TOUW, a co-founder of Ariba, has served as Vice President of
Corporate Strategy since March 1997 and managed marketing and business
development for Ariba from our inception in September 1996 to March 1997. From
September 1995 to July 1996, Mr. Touw managed western area sales and business
development for Open Market, Inc., an Internet commerce software company. From
1991 to September 1995, Mr. Touw held various senior technical and sales
management positions at Rasna Corporation. Prior to joining Rasna, Mr. Touw held
analyst and senior analyst positions at Westinghouse Electric Company, AEC Able
Engineering, and BP Advanced Materials serving primarily in aerospace
engineering and analysis roles. Mr. Touw holds a Bachelor of Science degree in
Mechanical and Physics Engineering from University of the Pacific, School of
Engineering.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq National Market under the symbol
"ARBA." Our initial public offering of stock was June 23, 1999 at $11.50 per
share. The price range per share reflected in the table below, is the highest
and lowest sale price for our stock as reported by the Nasdaq National Market
during each quarter the stock has been publicly traded. 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. In addition, our
existing line of credit agreement currently prohibits the payment of dividends.
At November 30, 1999, there were approximately 294 stockholders of record and
the price per share of our common stock was $90.28.
THREE MONTHS ENDED
--------------------------------------------------------------
DEC. 31, 1998 MAR. 31, 1999 JUNE 30, 1999 SEPT. 30, 1999
------------- ------------- ------------- --------------
Price range per share:
Low....................................... -- -- $30.50 $33.13
High...................................... -- -- $49.53 $99.32
The above information has been restated to reflect a two-for-one stock
split, effected in the form of a stock dividend to each stockholder of record as
of December 3, 1999.
On June 28, 1999, Ariba completed the initial public offering of its common
stock, The managing underwriters in the offering were Morgan Stanley Dean
Witter, Dain Rauscher Wessels (a division of Dain Rauscher Incorporated),
Deutsche Banc Alex. Brown and Merrill Lynch & Company. The shares of the common
stock sold in the offering were registered under the Securities Act of 1933, as
amended, on a Registration Statement on Form S-1 (No. 333-76953). The Securities
and Exchange Commission declared the Registration Statement effective on
June 22, 1999.
31
The offering commenced on June 23, 1999 and terminated on June 28, 1999
after we had sold all of the 11,500,000 shares of common stock registered under
the Registration Statement (including 1,500,000 shares sold in connection with
the exercise of the underwriters' over-allotment option). The initial public
offering price was $11.50 per share for an aggregate initial public offering of
$132.3 million.
We paid a total of $9.3 million in underwriting discounts and commissions
and approximately $1.9 million has been or will be paid for costs and expenses
related to the offering. None of the costs and expenses related to the offering
were paid directly or indirectly to any director, officer, general partner of
Ariba or their associates, persons owning 10 percent or more of any class of
equity securities of Ariba or an affiliate of Ariba.
After deducting the underwriting discounts and commissions and the offering
expenses the estimated net proceeds to Ariba from the offering were
approximately $121.1 million. The net offering proceeds have been used for
general corporate purposes, to provide working capital to develop products and
to expand the Company's operations. Funds that have not been used have been
invested in money market funds, certificate of deposits and other investment
grade securities. We also may use a portion of the net proceeds to acquire or
invest in businesses, technologies, products or services.
Concurrent with the offering we also sold 14,400 shares of common stock to
our Canadian employees at $11.50 per share. The offering costs associated with
the offering of shares to our Canadian employees were not material.
32
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 statement of operations data for each of the three
years in the period ended September 30, 1999, and the consolidated balance sheet
data at September 30, 1999 and 1998, are derived from our audited consolidated
financial statements. Activity for the period from September 17, 1996
(inception) to September 30, 1996 consisted of the sale of common stock and
preferred stock for approximately $6.0 million and earned interest of
approximately $1,000 on this amount.
FISCAL YEAR ENDED SEPTEMBER 30,
---------------------------------------
1999 1998 1997
--------- --------- ---------
CONSOLIDATED STATEMENT OF OPERATIONS DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
License................................................... $ 26,768 $ 6,040 $ 630
Maintenance and service................................... 18,604 2,323 130
-------- -------- -------
Total revenues........................................ 45,372 8,363 760
-------- -------- -------
Cost of revenues:
License................................................... 724 165 13
Maintenance and service................................... 8,089 1,373 927
-------- -------- -------
Total cost of revenues................................ 8,813 1,538 940
-------- -------- -------
Gross profit (loss)......................................... 36,559 6,825 (180)
-------- -------- -------
Operating Expenses:
Sales and marketing....................................... 33,859 10,311 2,235
Research and development.................................. 11,620 4,499 1,899
General and administrative................................ 7,917 2,580 588
Amortization of stock-based compensation.................. 14,584 956 50
-------- -------- -------
Total operating expenses.............................. 67,980 18,346 4,772
-------- -------- -------
Loss from operations........................................ (31,421) (11,521) (4,952)
Other income, net........................................... 2,219 568 273
-------- -------- -------
Net loss before taxes....................................... (29,202) (10,953) (4,679)
Provision for income taxes.................................. 98 -- --
-------- -------- -------
Net loss.................................................... $(29,300) $(10,953) $(4,679)
======== ======== =======
Basic and diluted net loss per share........................ $ (0.84) $ (0.95) $ (3.66)
======== ======== =======
Number of shares used in share computation.................. 35,032 11,524 1,279
======== ======== =======
SEPTEMBER 30,
---------------------------------------
1999 1998 1997
--------- --------- ---------
CONSOLIDATED BALANCE SHEET DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA)
Cash, cash equivalents and investments...................... $152,440 $ 13,932 $15,471
Working capital............................................. 58,988 6,127 13,685
Total assets................................................ 170,021 18,771 16,800
Long-term liabilities....................................... 781 647 140
Accumulated deficit......................................... (44,932) (15,632) (4,679)
Total stockholders' equity.................................. $122,183 $ 9,959 $14,517
- ------------------------
- - See note 1 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 is restricted in paying cash dividends under the terms of its line
of credit agreement and paid no cash dividends during the three-year period.
- - The above information has been restated to reflect a two-for-one stock split,
effected in the form of a stock dividend to each stockholder of record as of
December 3, 1999.
33
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION, AND RESULTS
OF OPERATIONS
The following discussion and analysis of the financial condition and results
of operations of Ariba should be read in conjunction with "Selected Consolidated
Financial Data" and Ariba's consolidated financial statements and related notes
appearing elsewhere in this report. This discussion and analysis contains
forward-looking statements that involve risks, uncertainties and assumptions.
The actual results may differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including but not
limited to, those set forth under "Risk Factors" and the risks discussed in our
other SEC filings including our Registration Statement on Form S-1 declared
effective on June 22, 1999 by the SEC (File No. 333-76953) an in our Form 10-Q
filed August 16, 1999.
OVERVIEW
Ariba is a leading provider of Internet-based business-to-business
electronic commerce solutions for operating resources. We were founded in
September 1996 and from that date through March 1997 were in the development
stage, conducting research and developing our initial products. In March 1997,
we began selling our products and related services and currently market them in
the United States, Europe, Canada, Australia and Asia primarily through our
direct sales force and to a lesser extent through indirect sales channels.
Through September 30, 1999, our revenues have been principally derived from
licenses of our products, from maintenance and support contracts and from the
delivery of implementation consulting and training services. Customers who
license our Ariba Operating Resource Management System ("Ariba ORMS") products
also generally purchase maintenance contracts which provide software upgrades,
technical support and connectivity to the Ariba Network over a stated term,
which is usually a twelve-month period. Customers may purchase implementation
services from us, but we expect to increasingly rely on third-party consulting
organizations to deliver these services directly to our customers. We also offer
fee-based training services to our customers.
On October 1, 1997, we adopted Statement of Position, or SOP, 97-2, SOFTWARE
REVENUE RECOGNITION, which supersedes SOP 91-1, SOFTWARE REVENUE RECOGNITION.
The adoption of SOP 97-2 did not have a material effect on our operating
results. SOP 97-2 generally requires revenues earned on software arrangements
involving multiple elements to be allocated to each element based on the
relative fair values of the elements. Revenue allocated to software licenses is
generally recognized upon delivery of the products or ratably over a contractual
period if unspecified software products are to be delivered during that period.
Starting in fiscal 1999, our standard license agreement provides customers the
right to future unspecified software licenses. Accordingly, payments received
from our customers upon the signing of these license agreements are deferred,
and the revenue is recognized ratably over the contract period. Revenue
allocated to maintenance is recognized ratably over the maintenance term and
revenue allocated to training and other service elements is recognized as the
services are performed.
When we manage the implementation process for our customers, the services
are considered essential to the functionality of the software products.
Accordingly, both the software license revenue and service revenue is recognized
using the percentage of completion method in accordance with the provisions of
SOP 81-1, ACCOUNTING FOR PERFORMANCE OF CONSTRUCTION TYPE AND CERTAIN PRODUCTION
TYPE CONTRACTS. The implementation of our products can take several months or
more depending on the objectives of the customers, the complexity of the
customers' information technology environments and the resources directed by the
customers to the implementation projects.
Customers who license our software products receive a server capacity
license, one or more of the Ariba ORMS modules and adapters to interface with
financial, human resource and other existing enterprise systems. The fee for the
server capacity license is based on the customers' estimated annual
34
volume of line items of purchasing transactions. The license fees for the
software modules and adapters consist of individual prices for each module or
adapter.
The volume licensing of the server capacity allows customers to scale the
total cost of their purchase of our products to their needs. The server capacity
license entitles customers to execute the licensed volume of line items of
purchasing transactions during any annual period following their purchase of the
server license. Our customers generally purchase estimated server capacity at
the time of the purchase of the server license. Following the initial
implementation of our products, and based on the reporting and analysis tools
available through our products, our customers are able to understand their
annual transaction volume more fully. Customers who exceed their estimated
volume can purchase additional server capacity. However, there are no recurring
annual license fees.
Our cost of license revenues includes royalties due to third parties for
integrated technology, the cost of manuals and product documentation, the cost
of production media used to deliver our products and shipping costs, including
the costs associated with the electronic transmission of software to new
customers. Our cost of maintenance and service revenues includes salaries and
related expenses for our customer support, implementation and training services
organizations, costs of third parties contracted to provide consulting services
to customers and an allocation of our facilities, communications and
depreciation expenses.
Our operating expenses are classified into three general categories: sales
and marketing, research and development and general and administrative. We
classify all charges to these operating expense categories based on the nature
of the expenditures. Although each category includes expenses that are unique to
the category type, there are commonly recurring expenditures that are typically
included in these categories in our operating expenses, such as salaries,
employee benefits, incentive compensation, bonuses, sales commissions, travel
and entertainment costs, telephone, communication, rent and facilities costs,
and third-party professional services fees. The sales and marketing category of
operating expenses includes expenditures specific to the marketing group, such
as public relations and advertising, trade shows, marketing collateral materials
and customer advisory council meetings.
We allocate the total costs for overhead and facilities to each of the
functional areas that use the overhead and facilities services based on their
headcount. These allocated charges include facility rent for the corporate
office, communication charges and depreciation expense for office furniture and
equipment.
Although revenues consistently increased from quarter to quarter, we
incurred significant costs to develop our technology and products and to recruit
and train personnel for our engineering, sales, marketing, professional services
and administration departments. As a result, we incurred significant losses
since inception, and, as of September 30, 1999, had an accumulated deficit of
$44.9 million. We believe our success is contingent on increasing our customer
base and developing our products and services. We intend to continue to invest
heavily in sales, marketing, research and development and, to a lesser extent,
support infrastructure. We therefore expect to continue to incur substantial
operating losses for the foreseeable future.
We had 386 full-time employees as of September 30, 1999 and intend to hire a
significant number of employees in the future. This expansion places significant
demands on our management and operational resources. To manage this rapid growth
and increased demand, we must invest in and implement scalable operational
systems, procedures and controls. We must also be able to recruit qualified
candidates to manage our expanding operations. We expect future expansion to
continue to challenge our ability to hire, train, manage and retain our
employees.
In connection with the granting of stock options to our employees, we
recorded deferred stock-based compensation totaling approximately $38.4 million
as of September 30, 1999. This amount represents the difference between the
exercise price and the deemed fair value of our common stock
35
for accounting purposes on the date these stock options were granted. This
amount is included as a component of stockholders' equity and is being amortized
on an accelerated basis by charges to operations over the vesting period of the
options, consistent with the method described in Financial Accounting Standards
Board Interpretation No. 28. During fiscal 1999 and 1998, we recorded
$13.5 million and $830,000, respectively, of related stock-based compensation
amortization expense. As of September 30, 1999, we had an aggregate of
$24.1 million of related deferred compensation to be amortized. The amortization
of the remaining deferred stock-based compensation will result in additional
charges to operations through fiscal 2003. The amortization of stock-based
compensation is presented as a separate component of operating expenses in our
consolidated statement of operations.
Our limited operating history makes the prediction of future operating
results very difficult. We believe that period-to-period comparisons of
operating results should not be relied upon as predictive of future performance.
Our operating results are expected to vary significantly from quarter to quarter
and are difficult or impossible to predict. Our prospects must be considered in
light of the risks, expenses and difficulties encountered by companies at an
early stage of development, particularly companies in new and rapidly evolving
markets. We may not be successful in addressing such risks and difficulties.
Although we have experienced significant percentage growth in revenues in recent
periods, we do not believe that prior growth rates are sustainable or indicative
of future operating results. Please refer to the "Risk Factors" section for
additional information.
RECENT EVENTS
On November 15, 1999, we signed a definitive agreement to acquire
TradingDynamics, Inc., a leading provider of business-to-business Internet
trading applications. The agreement is structured as a tax-free stock for stock
merger and will be accounted for as a purchase transaction. We will issue stock
worth approximately $500 million, based on current trading ranges, to
TradingDynamics shareholders. We expect that the transaction will close in the
quarter ending March 31, 2000. We have also entered into a loan agreement with
TradingDynamics to loan TradingDynamics up to $2,000,000.
On November 16, 1999, the Board of Directors authorized a two-for-one stock
split of our common stock, to be effected in the form of a stock dividend. The
stock split will be effected by distribution to each stockholder of record as of
December 3, 1999 of one share of our common stock for each share of common stock
held. The financial information included in this report has been restated to
give effect to the stock split.
On December 16, 1999, we signed a definitive agreement to acquire TRADEX
Technologies, Inc., a leading provider of solutions for Net Markets. The
agreement is structured as a stock-for-stock merger and will be accounted for as
a purchase transaction. We will issue stock worth approximately $2 billion,
based on current trading ranges, to TRADEX stockholders. We expect that the
transaction will close in the quarter ending June 30, 2000.
RESULTS OF OPERATIONS
The following table sets forth certain statements of operations data in
absolute dollars for the periods indicated. The data has been derived from the
consolidated financial statements contained in this report. The operating
results for any period should not be considered indicative of results for any
future period. Activity for the period from September 17, 1996 (inception) to
September 30, 1996 consisted of the sale of common stock and preferred stock for
approximately $6.0 million and earned interest of approximately $1,000 on this
amount. If the amortization of stock-based compensation was not presented
separately in operating expenses and was included in the specific components of
operating expenses it would increase sales and marketing expense by
$7.7 million and $583,000 in fiscal 1999 and 1998 respectively; research and
development expense by $3.0 million and $178,000 in fiscal 1999 and 1998,
respectively; and general and administrative expense by $3.9 million, $195,000,
and
36
$50,000 in fiscal 1999, 1998, and 1997 respectively. This information should be
read in conjunction with the consolidated financial statements included in this
report.
FISCAL YEAR ENDED SEPTEMBER 30,
------------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
License................................................... $ 26,768 $ 6,040 $ 630
Maintenance and service................................... 18,604 2,323 130
-------- -------- -------
Total revenues.......................................... 45,372 8,363 760
-------- -------- -------
Cost of revenues:
License................................................... 724 165 13
Maintenance and service................................... 8,089 1,373 927
-------- -------- -------
Total cost of revenues.................................. 8,813 1,538 940
-------- -------- -------
Gross profit (loss)......................................... 36,559 6,825 (180)
-------- -------- -------
Operating expenses:
Sales and marketing....................................... 33,859 10,311 2,235
Research and development.................................. 11,620 4,499 1,899
General and administrative................................ 7,917 2,580 588
Amortization of stock-based compensation.................. 14,584 956 50
-------- -------- -------
Total operating expenses................................ 67,980 18,346 4,772
-------- -------- -------
Loss from operations........................................ (31,421) (11,521) (4,952)
Other income, net........................................... 2,219 568 273
-------- -------- -------
Net loss before taxes....................................... (29,202) (10,953) (4,679)
Provision for income taxes.................................. 98 -- --
-------- -------- -------
Net loss.................................................... $(29,300) $(10,953) $(4,679)
======== ======== =======
Basic and diluted net loss per share........................ $ (0.84) $ (0.95) $ (3.66)
======== ======== =======
Number of shares used in share computation.................. 35,032 11,524 1,279
======== ======== =======
COMPARISON OF THE FISCAL YEARS ENDED SEPTEMBER 30, 1999 AND 1998
REVENUES
LICENSE. License revenues for the year ended September 30, 1999 were
$26.8 million, a 343% increase over license revenues of $6.0 million for the
year ended September 30, 1998. This increase was primarily attributable to
increased market acceptance of our products, an increase in sales to new
customers resulting from increased headcount in our sales force and the
expansion of international operations.
MAINTENANCE AND SERVICE. Maintenance and service revenues for the year
ended September 30, 1999 were $18.6 million, a 701% increase over maintenance
and service revenues of $2.3 million for the year ended September 30, 1998. This
increase was primarily attributable to the increased licensing activity
described above, which has resulted in increased revenues from customer
implementations and maintenance contracts and, to a lesser extent, accelerated
customer implementations and renewals of recurring maintenance.
37
During the years ended September 30, 1999 and 1998, one and five customers,
respectively, accounted for more than 10% of total revenues. Revenues from
international sales were $6.7 million in the year ended September 30, 1999 and
were $1.8 million for the year ended September 30, 1998. Our international
revenues were derived from sales in Canada and Europe.
Going forward, we plan to add services and other functionality to the Ariba
Network. As such, we expect to charge fees for these services. The revenues
associated may be a combination of transaction and/or annual subscription fees.
Examples of such services might include electronic payment, bid/quote and
sourcing, among others. We expect these network related revenues to be a
significant contributor to total revenues over time. However, we cannot predict
whether these services and other functionality will be commercially successful
or whether they will adversely impact revenues from our Ariba ORMS products and
services. In general, we expect that total revenue will fluctuate in future
periods depending on the timing and acceptance of new product and service
introductions, customer buying patterns, pricing actions taken by us,
competition and other factors.
COST OF REVENUES
LICENSE. Cost of license revenues were $724,000 in the year ended
September 30, 1999, an increase of 339% over cost of license revenues of
$165,000 for the year ended September 30, 1998. 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 were
$8.1 million in the year ended September 30, 1999, an increase of 489% over cost
of maintenance and service revenues of $1.4 million for the year ended
September 30, 1998. Our cost of maintenance and service revenues includes
salaries and related expenses for our customer support, implementation and
training services organizations, costs of third parties contracted to provide
consulting services to customers and an allocation of our facilities,
communications and depreciation expenses. The increase was primarily
attributable to personnel costs associated with increases in the number of
implementation, training and technical support personnel.
OPERATING EXPENSES
SALES AND MARKETING. During the year ended September 30, 1999, sales and
marketing expenses were $33.9 million, an increase of 228% over sales and
marketing expenses of $10.3 million for the year ended September 30, 1998. The
increase was primarily attributable to increased sales commissions as a result
of increased sales, an increase in the number of sales and marketing employees,
expanded marketing programs for trade shows and customer advisory council
meetings and the expansion of our corporate headquarters and international sales
offices. We believe these expenses will continue to increase in absolute dollar
amounts in future periods as we expect to continue to expand our sales and
marketing efforts.
During the year ended September 30, 1999, sales and marketing expenses
including related stock-based amortization increased to $41.5 million from
$10.9 million for the year ended September 30, 1998. In addition to the
increases mentioned above the increase was also due to a greater number of stock
options being granted during the year below the deemed fair value of our common
stock for accounting purposes. The amortization of stock-based compensation
primarily represents the difference between the exercise price and the deemed
fair value of our common stock for accounting purposes on the date certain stock
options were granted. This amount is included as a component of stockholders'
equity and is being amortized on an accelerated basis by charges to operations
over the vesting period of the options, consistent with the method described in
Financial Accounting Standards Board Interpretation No. 28. As of September 30,
1999, we had an aggregate of $13.5 million of deferred compensation relating to
sales and marketing expense still to be amortized.
38
RESEARCH AND DEVELOPMENT. During the year ended September 30, 1999,
research and development expenses were $11.6 million, an increase of 158% over
research and development expenses of $4.5 million for the year ended
September 30, 1998. The increase was primarily attributable to increases in the
number of research and development personnel. To date, all software development
costs have been expensed in the period incurred. We believe that continued
investment in research and development is critical to attaining our strategic
objectives, and, as a result, we expect research and development expenses to
increase in absolute dollar amounts in future periods.
During the year ended September 30, 1999, research and development expenses
including related stock-based amortization increased to $14.6 million from
$4.7 million for the year ended September 30, 1998. In addition to the increases
mentioned above the increase was also due to a greater number of stock options
being granted during the year below the deemed fair value of our common stock
for accounting purposes. As of September 30, 1999, we had an aggregate of
$4.7 million of deferred compensation relating to research and development
expense still to be amortized.
GENERAL AND ADMINISTRATIVE. During the year ended September 30, 1999,
general and administrative expenses were $7.9 million, an increase of 207% over
general and administrative expenses of $2.6 million for the year ended
September 30, 1998. The increase was primarily attributable to an increase in
the number of finance, accounting, legal, human resources and information
technology personnel, an increase in fees paid to outside professional service
providers, an increase in facility costs, and, to a lesser extent, to increased
communication costs, particularly to remote offices, and the implementation
costs to install our financial and human resources infrastructure. We believe
general and administrative expenses will increase in absolute dollars, as we
expect to add personnel to support our expanding operations, and to incur
additional costs related to the growth of our business and our responsibilities
as a public company.
During the year ended September 30, 1999, general and administrative
expenses including related stock-based amortization increased to $11.9 million
from $2.8 million for the year ended September 30, 1998. In addition to the
increases mentioned above the increase was also due to a greater number of stock
options being granted during the year below the deemed fair value of our common
stock for accounting purposes. As of September 30, 1999, we had an aggregate of
$6.0 million of deferred compensation relating to general and administrative
expense still to be amortized.
OTHER INCOME, NET
Other income, net consists of interest income, interest expense and other
non-operating expenses. During the year ended September 30, 1999, other income,
net was $2.2 million, an increase of 291% over other income, net of $568,000 for
the year ended September 30, 1998. This increase is primarily attributable to
interest income resulting from higher average cash balances during the more
recent period.
PROVISION FOR INCOME TAXES
We incurred operating losses for all periods from inception through
September 30, 1999. We have recorded a valuation allowance for the full amount
of our net deferred tax assets, as the future realization of the tax benefit is
not currently likely. We recorded income tax expense of $98,000 relating to our
international subsidiaries during the year ended September 30, 1999.
As of September 30, 1999, we had net operating loss carryforwards for
federal tax purposes of approximately $24.1 million and for state tax purposes
of approximately $20.3 million. These federal and state tax loss carry-forwards
are available to reduce future taxable income and expire at various dates into
fiscal 2019. Under the provisions of the Internal Revenue Code, certain
substantial changes in our ownership may limit the amount of net operating loss
carry-forwards that could be utilized
39
annually in the future to offset taxable income. There have not been any
substantial changes in our ownership through September 30, 1999.
COMPARISON OF THE FISCAL YEARS ENDED SEPTEMBER 30, 1998 AND 1997
REVENUES
LICENSE. License revenues for the year ended September 30, 1998 increased
to $6.0 million from $630,000 for the year ended September 30, 1997. This
increase was primarily attributable to an increase in sales to new customers
resulting from increased headcount in our sales force. During fiscal 1998, five
customers accounted for more than 10% of total revenues and during fiscal 1997,
three customers accounted for more than 10% of total revenues.
MAINTENANCE AND SERVICE. Maintenance and service revenues for the year
ended September 30, 1998 increased to $2.3 million from $130,000 for the year
ended September 30, 1997. This increase was primarily attributable to an
increase in implementation personnel resources. As these resources grew, our
implementation revenue increased because these resources were providing
implementation services at existing and new customers. Our maintenance revenue
also increased during this period of time as our customer base increased.
COST OF REVENUES
LICENSE. Cost of license revenues for the year ended September 30, 1998
increased to $165,000 from $13,000 for the year ended September 30, 1997. This
increase in the cost of license revenues was primarily attributable to royalties
and, to a lesser extent, packaging costs for shipments to new customers and
shipments of product updates to existing customers.
MAINTENANCE AND SERVICE. Cost of maintenance and service revenues for the
year ended September 30, 1998 increased to $1.4 million from $927,000 for the
year ended September 30, 1997. This increase was primarily attributable to
increases in the number of implementation, training and technical support
personnel.
During the year ended September 30, 1997, we entered into fixed-fee
implementation service contracts with certain customers where we anticipated
losses. Fixed-fee implementation projects can be unprofitable because of the
scope of the work and the amount of changes that can occur after the project
begins. In accordance with the provisions of SOP 81-1, ACCOUNTING FOR
PERFORMANCE OF CONSTRUCTION TYPE AND CERTAIN PRODUCTION TYPE CONTRACTS, whenever
we anticipate a loss from an implementation agreement we accrue for the
estimated amount of the loss. We believed that these fixed-fee projects would be
unprofitable and accordingly accrued for such losses.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses for the year ended
September 30, 1998 increased to $10.3 million from $2.2 million for the year
ended September 30, 1997. The increase was attributable to increased sales
commissions, a larger number of sales and marketing employees and increases in
marketing program spending. In addition to our $10.3 million expense in fiscal
1998, we also recorded $583,000 of stock-based compensation expense related to
sales and marketing.
RESEARCH AND DEVELOPMENT. Research and development expenses for the year
ended September 30, 1998 increased to $4.5 million from $1.9 million for the
year ended September 30, 1997. This increase was attributable to the growing
number of research and development personnel. In addition to our $4.5 million
expense in fiscal 1998, we also recorded $178,000 of stock-based compensation
expense related to research and development.
40
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
year ended September 30, 1998 increased to $2.6 million from $588,000 for the
year ended September 30, 1997. This increase was primarily attributable to the
increase in the number of general and administrative personnel and professional
services fees, and, to a lesser extent, to increased communication costs,
particularly to remote offices, the implementation costs to install our
financial and human resource systems infrastructure and increased facility costs
from our expanded facility. In addition to our $2.6 million and $588,000 of
expenses in fiscal 1998 and 1997, respectively, we also recorded in fiscal 1998
and 1997, $195,000 and $50,000, respectively, of stock-based compensation
expense related to our general and administrative expense.
OTHER INCOME, NET
Other income, net for the year ended September 30, 1998 increased to
$568,000 from $273,000 for the year ended September 30, 1997. This was
attributable to an increase in interest income on our deposits in our operating
and investment accounts.
PROVISION FOR INCOME TAXES
As of September 30, 1998, we had net operating loss carry-forwards for
federal tax purposes of approximately $11.5 million and for state tax purposes
of approximately $8.3 million. These federal and state tax loss carry-forwards
are available to reduce future taxable income and expire at various dates into
fiscal 2012. Under the provisions of the Internal Revenue Code, certain
substantial changes in our ownership may limit the amount of net operating loss
carry-forwards that could be utilized annually in the future to offset taxable
income.
LIQUIDITY AND CAPITAL RESOURCES
In June 1999, we completed the initial public offering of our common stock
and realized net proceeds from the offering of approximately $121.1 million.
Prior to the offering we had financed our operations through private sales of
preferred stock, with net proceeds of $23.2 million, and through bank loans and
equipment leases. As of September 30, 1999 we had outstanding lease liabilities
of $1.5 million and we have a line of credit of $7.0 million that can be used
for working capital purposes. At September 30, 1999 there were no amounts
outstanding under the line of credit. The line of credit contains covenants that
require the Company to maintain certain financial ratios and levels of net
worth. The line of credit also does not permit the payment of dividends to
stockholders. As of September 30, 1999, we had $152.4 million in cash, cash
equivalents and investments, and $59.0 million in working capital.
Net cash provided by operating activities was $20.5 million for the year
ended September 30, 1999. Net cash used in operating activities was
$4.9 million and $3.1 million for the years ended September 30, 1998 and 1997,
respectively. Net cash flows used in operating activities in each period reflect
increasing net losses and, to a lesser extent, increases in accounts receivable.
Net cash flows provided by operating activities in each period are primarily
attributed to deferred revenue from customer payments that were not recognized
as revenue, amortization of stock-based compensation and by increases in accrued
compensation and other accrued liabilities.
Net cash used in investing activities was $105.2 million, $6.5 million and
$1.0 million for the years ended September 30, 1999, 1998 and 1997,
respectively. Cash used in investing activities primarily reflects purchases of
investments for the years ended September 30, 1999 and 1998 and, to a lesser
extent the purchases of property and equipment for all periods. During the year
ended September 30, 1999 these purchases of investments were partially offset by
the proceeds from sales of investments.
Net cash provided by financing activities was $126.7 million for the year
ended September 30, 1999, primarily from the net proceeds of our initial public
offering of $121.1 million, as well as
41
exercises of employee stock options, offset by payments on capital lease
obligations. Net cash provided by financing activities was $4.2 million and
$19.5 million for the years ended September 30, 1998 and 1997, respectively,
primarily from the net proceeds from private sales of preferred stock, as well
as exercises of employee stock options, offset by payments on capital lease
obligations.
Capital expenditures, including capital leases, were $8.6 million,
$2.0 million and $1.0 million for the years ended September 30, 1999, 1998 and
1997, respectively. Our capital expenditures consisted of purchases of operating
resources to manage our operations, including computer hardware and software,
office furniture and equipment and leasehold improvements. We expect that our
capital expenditures will continue to increase in the future. Since inception,
we have generally funded capital expenditures either through the use of working
capital or with capital leases. In connection with the relocation of our
headquarters we expect to spend from $8.5 million to $10.5 million in fiscal
2000 for computer and office equipment, furniture and fixtures and leasehold
improvements. We will also need to purchase additional operating resources. We
expect to fund these commitments from our existing cash and cash equivalents.
We expect to experience significant growth in our operating expenses,
particularly research and development and sales and marketing expenses, for the
foreseeable future in order to execute our business plan. As a result, we
anticipate that such operating expenses, as well as planned capital
expenditures, will constitute a material use of our cash resources. In addition,
we may utilize cash resources to fund acquisitions or investments in
complementary businesses, technologies or product lines. We believe that the net
proceeds from the sale of the common stock in our initial public offering will
be sufficient to meet our working capital and operating resource expenditure
requirements for at least the next year, provided that we do not undertake an
unusual level of acquisition activity, and no such unusual activity is currently
planned. Thereafter, we may find it necessary to obtain additional equity or
debt financing. In the event additional financing is required, we may not be
able to raise it on acceptable terms or at all.
YEAR 2000 READINESS
The "Year 2000 issue" refers generally to the problems that some software
may have in determining the correct century for the year. For example, software
with date-sensitive functions that is not Year 2000 compliant may not be able to
distinguish whether "00" means 1900 or 2000, which may result in failures or the
creation of erroneous results.
We have designed all of our products to be Year 2000 compliant when
configured and used in accordance with the related documentation and provided
that the underlying operating system of the host machine and any other software
used with or in the host machine or our products are Year 2000 compliant. We
continue to respond to customer questions about prior versions of our products
on a case-by-case basis.
Our definition of Year 2000 compliance is:
- There is no value for the current date that will cause any interruption in
operation;
- Date-based functionality must behave consistently for dates prior to,
during and after year 2000;
- In all interfaces and data storage, the century in any date must be
specified either explicitly or by unambiguous algorithms or interfacing
rules; and
- Year 2000 must be recognized as a leap year.
42
We have completed an initial assessment of our material internal information
technology systems, including both our own software products and third party
software and hardware technology. Despite significant testing by us and
assurances from developers of critical products incorporated into our products,
our products may contain undetected errors or defects associated with Year 2000
date functions. We have not completed an assessment of our non-information
technology systems, although we have received a favorable assessment of the Year
2000 compliance of our new headquarters in Mountain View, California. We expect
to continue testing of our information technology systems through the end of
December 1999. To the extent that we are not able to test the technology
provided by third-party vendors, we are seeking assurances from these vendors
that their systems are Year 2000 compliant. To date, we have received assurances
from the vendors of our enterprise resource planning software and technology
support software as to their Year 2000 compliance.
We are not currently aware of any material operational issues or costs
associated with preparing our internal information technology and
non-information technology systems for the Year 2000. However, we may experience
material unanticipated problems and costs caused by undetected errors or defects
in the technology used in our internal information technology and
non-information technology systems, any of which could seriously harm our
business. These include, without limitation, delay or loss of revenues,
diversion of development resources, damage to our reputation, increased service
and warranty costs, or liability from our customers. In addition, some
commentators have predicted significant litigation against software vendors
regarding Year 2000 compliance issues. Because of the unprecedented nature of
any existing or future litigation, it is uncertain whether or to what extent we
may be affected by it.
We do not currently have any information concerning the Year 2000 compliance
status of our customers. Our current or future customers may incur significant
expenses to achieve Year 2000 compliance. If our customers are not Year 2000
compliant, they may experience material costs to remedy problems, or they may
face litigation costs. In either case, Year 2000 issues could reduce or
eliminate the budgets that current or potential customers could have for or
delay purchases of our products and services. As a result, our business could be
seriously harmed.
We have funded our Year 2000 plan from operating cash flows and have not
separately accounted for these costs in the past. To date, these costs have not
been material. We will incur additional costs related to the Year 2000 plan for
administrative personnel to finish managing the project, outside contractor
assistance, technical support for our products, product engineering and customer
satisfaction. In addition, we may experience material problems and costs
associated with Year 2000 compliance that could seriously harm our business.
We have not yet fully developed a contingency plan to address situations
that may result if we are unable to achieve Year 2000 readiness of our critical
operations, and, based on the current results of our Year 2000 compliance
assessment, we do not anticipate the need to do so. The cost of developing and
implementing such a plan may itself be material. Finally, we are also subject to
external forces that might generally affect industry and commerce, such as
utility or transportation company Year 2000 compliance failure interruptions.
Year 2000 issues affecting our business, if not adequately addressed by us,
our third party vendors or suppliers or our customers, could have a number of
"worst case" consequences. These include:
- The inability of our customers to use our products and services to procure
and manage their operating resources;
- Claims from our customers asserting liability, including liability for
breach of warranties related to the failure of our products and services
to function properly, and any resulting settlements or judgments; and
- Our inability to manage our own business.
43
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 establishes accounting and
reporting standards for derivative financial instruments and hedging activities
related to those instruments, as well as other hedging activities. Because we do
not currently hold any derivative instruments and do not engage in hedging
activities, we expect the adoption of SFAS No. 133 will not have a material
impact on our financial position, results of operations or cash flows. We will
be required to adopt SFAS No. 133 in fiscal 2001 in accordance with SFAS
No. 137, which delays the required implementation of SFAS No. 133 for one year.
In March 1998, the Accounting Standards Executive Committee (AcSEC) issued
Statement of Position (SOP) 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE
DEVELOPED OR OBTAINED FOR INTERNAL USE. SOP 98-1 establishes the accounting for
costs of software products developed or purchased for internal use, including
when such costs should be capitalized. We do not expect SOP 98-1 to have a
material effect on our financial position, results of operations or cash flows.
We will adopt SOP 98-1 in fiscal 2000.
In April 1998, the AcSEC issued SOP 98-5, REPORTING ON THE COSTS OF START-UP
ACTIVITIES. Under SOP 98-5, the cost of start-up activities should be expensed
as incurred. We expect that the adoption of SOP 98-5 will not have a material
impact on our financial position, results of operations or cash flows. We will
be required to adopt SOP 98-5 in fiscal 2000.
In December 1998, the American Institute of Certified Public Accountants
(AICPA) issued SOP 98-9, MODIFICATION OF SOP 97-2, SOFTWARE REVENUE RECOGNITION,
WITH RESPECT TO CERTAIN TRANSACTIONS, which amends SOP 97-2, Software Revenue
Recognition, and supercedes SOP 98-4. We do not expect SOP 98-9 to have a
material effect on our financial position, results of operations or cash flows.
We will adopt SOP 98-9 in fiscal 2000.
44
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY RISK
We develop products in the United States and market our products in North
America, Europe, Australia and the Asia-Pacific region. As a result, our
financial results could be affected by factors such as changes in foreign
currency exchange rates or weak economic conditions in foreign markets. As all
sales are currently made in U.S. dollars, a strengthening of the dollar could
make our products less competitive in foreign markets.
INTEREST RATE RISK
The Company's exposure to market risk for changes in interest rates relate
primarily to the Company's investment portfolio. The Company does not use
derivative financial instruments in its investment portfolio. The primary
objective of the Company's investment activities is to preserve principal while
maximizing yields without significantly increasing risk. This is accomplished by
investing in widely diversified investments, consisting primarily of investment
grade securities. Due to the nature of our investments, we believe that there is
no material risk exposure. All investments are carried at market value, which
approximates cost.
The table below represents principal (or notional) amounts and related
weighted-average interest rates by year of maturity for the Company's investment
portfolio.
(IN THOUSANDS, EXCEPT INTEREST RATES) FY 2000 FY 2001 FY 2002 FY 2003 FY 2004 THEREAFTER TOTAL
-------- -------- -------- -------- -------- ---------- --------
Cash equivalents.................... $49,587 -- -- -- -- -- $ 49,587
Average interest rate............. 4.62% -- -- -- -- -- 4.62%
Investments......................... $47,868 $27,564 $26,724 -- -- -- $102,156
Average interest rate............. 5.93% 6.00% 7.05% -- -- -- 6.40%
Total investment securities......... $97,455 $27,564 $26,724 -- -- -- $151,743
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................................ 46
Consolidated Balance Sheets as of September 30, 1999 and
1998...................................................... 47
Consolidated Statements of Operations and Other
Comprehensive Income (Loss) for the years ended
September 30, 1999, 1998 and 1997......................... 48
Consolidated Statements of Stockholders' Equity for the
years ended September 30, 1999, 1998 and 1997............. 49
Consolidated Statements of Cash Flows for the years ended
September 30, 1999, 1998 and 1997......................... 50
Notes to Consolidated Financial Statements.................. 51
45
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, 1999 and 1998, and the
related consolidated statements of operations and other comprehensive income
(loss), stockholders' equity, and cash flows for each of the years in the
three-year period ended September 30, 1999. 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 generally accepted auditing
standards. 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, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended September 30, 1999 in conformity with
generally accepted accounting principles. 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 18, 1999, except as to Note 8,
which is as of December 16, 1999
46
ARIBA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 50,284 $ 8,305
Short-term investments.................................... 47,868 3,603
Restricted cash........................................... 800 --
Accounts receivable, net of allowance of doubtful accounts
of $20 and $0 in 1999 and 1998.......................... 5,157 2,129
Prepaid expenses and other current assets................. 1,936 255
-------- --------
Total current assets.................................... 106,045 14,292
Property and equipment, net................................. 9,402 2,217
Long-term investments....................................... 54,288 2,024
Other assets................................................ 286 238
-------- --------
Total assets............................................ $170,021 $ 18,771
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 3,846 $ 962
Accrued compensation and related liabilities.............. 6,959 1,704
Accrued liabilities....................................... 4,834 1,264
Deferred revenue.......................................... 30,733 3,938
Current portion of long-term debt......................... 685 297
-------- --------
Total current liabilities............................... 47,057 8,165
Long-term debt, net of current portion...................... 781 647
-------- --------
Total liabilities....................................... 47,838 8,812
-------- --------
Commitments
Stockholders' equity:
Convertible preferred stock, $.002 par value; 20,000,000
shares authorized; 0 and 4,461,294 shares issued and
outstanding as of September 30, 1999 and 1998........... -- 9
Common stock, $.002 par value; 200,000,000 shares
authorized; 90,878,132 and 38,184,080 shares issued and
outstanding as of September 30, 1999 and 1998........... 182 76
Additional paid-in capital................................ 191,332 28,180
Deferred stock-based compensation......................... (24,178) (2,735)
Accumulated other comprehensive income (loss)............. (221) 61
Accumulated deficit....................................... (44,932) (15,632)
-------- --------
Total stockholders' equity.............................. 122,183 9,959
-------- --------
Total liabilities and stockholders' equity............ $170,021 $ 18,771
======== ========
See accompanying notes to consolidated financial statements.
47
ARIBA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND OTHER COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
YEARS ENDED SEPTEMBER 30,
-----------------------------------
1999 1998 1997
---------- ---------- ---------
Revenues:
License................................................. $ 26,768 $ 6,040 $ 630
Maintenance and service................................. 18,604 2,323 130
---------- ---------- ---------
Total revenues...................................... 45,372 8,363 760
---------- ---------- ---------
Cost of revenues:
License................................................. 724 165 13
Maintenance and service................................. 8,089 1,373 927
---------- ---------- ---------
Total cost of revenues.............................. 8,813 1,538 940
---------- ---------- ---------
Gross profit (loss)..................................... 36,559 6,825 (180)
---------- ---------- ---------
Operating expenses:
Sales and marketing..................................... 33,859 10,311 2,235
Research and development................................ 11,620 4,499 1,899
General and administrative.............................. 7,917 2,580 588
Amortization of stock-based compensation................ 14,584 956 50
---------- ---------- ---------
Total operating expenses............................ 67,980 18,346 4,772
---------- ---------- ---------
Loss from operations.................................... (31,421) (11,521) (4,952)
Other income, net......................................... 2,219 568 273
---------- ---------- ---------
Net loss before taxes................................... (29,202) (10,953) (4,679)
Provision for income taxes................................ 98 -- --
---------- ---------- ---------
Net loss.................................................. $ (29,300) $ (10,953) $ (4,679)
---------- ---------- ---------
Other comprehensive income (loss):
Unrealized gain (loss) on investments................... (283) 61 --
Foreign currency translation adjustment................. 1 -- --
---------- ---------- ---------
Other comprehensive income (loss)......................... (282) 61 --
---------- ---------- ---------
Comprehensive loss........................................ $ (29,582) $ (10,892) $ (4,679)
========== ========== =========
Basic and diluted net loss per share...................... $ (0.84) $ (0.95) $ (3.66)
========== ========== =========
Shares used in computing basic and diluted net loss per
share................................................... 35,031,804 11,523,824 1,279,174
========== ========== =========
See accompanying notes to consolidated financial statements.
48
ARIBA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
CONVERTIBLE ACCUMULATED
PREFERRED STOCK ADDITIONAL DEFERRED OTHER
--------------------- COMMON STOCK PAID-IN STOCK-BASED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION INCOME (LOSS)
---------- -------- ---------- -------- ---------- ------------ -------------
Issuance of common stock..... -- $ -- 29,075,200 $ 56 $ 152 $ (200) $ --
Issuance of Series A
convertible preferred
stock, net of issuance
costs of $12............... 3,112,800 6 -- -- 6,208 -- --
Issuance of Series B
convertible preferred
stock, net of issuance
costs of $30............... 1,015,100 2 -- -- 12,656 -- --
Issuance of common stock-
options exercised.......... -- -- 10,678,000 20 248 -- --
Repurchase of common stock... -- -- (3,298,400) (4) 2 -- --
Amortization of stock-based
compensation............... -- -- -- -- -- 50 --
Net loss..................... -- -- -- -- -- -- --
---------- ---- ---------- ---- -------- -------- -----
Balance at September 30,
1997....................... 4,127,900 8 36,454,800 72 19,266 (150) --
Issuance of Series B
convertible preferred
stock, net of issuance
costs of $3................ 144,000 -- -- -- 1,798 -- --
Issuance of Series BB
convertible preferred
stock, net of issuance
costs of $7................ 189,394 1 -- -- 2,493 -- --
Issuance of common stock-
options exercised.......... -- -- 2,219,280 4 497 -- --
Repurchase of common stock... -- -- (490,000) -- (12) -- --
Deferred stock-based
compensation............... -- -- -- -- 3,541 (3,541) --
Amortization of stock-based
compensation............... -- -- -- -- -- 956 --
Issuance of warrants for
common stock............... -- -- -- -- 504 -- --
Issuance of warrants for
preferred stock............ -- -- -- -- 93 -- --
Other comprehensive income... -- -- -- -- -- -- 61
Net loss..................... -- -- -- -- -- -- --
---------- ---- ---------- ---- -------- -------- -----
Balance at September 30,
1998....................... 4,461,294 9 38,184,080 76 28,180 (2,735) 61
Issuance of common stock-
options exercised.......... -- -- 6,882,896 14 5,962 -- --
Repurchase of common stock... -- -- (2,399,290) (4) (8) -- --
Deferred stock-based
compensation............... -- -- -- -- 36,027 (36,027) --
Amortization of stock-based
compensation............... -- -- -- -- -- 14,584 --
Conversion of preferred stock
into common stock at
Initial Public Offering.... (4,461,294) (9) 35,690,352 71 (62) -- --
Initial Public Offering, net
of issuance costs of
$1.900..................... -- -- 11,500,000 23 121,069 -- --
Issuance of common stock..... -- -- 14,400 -- 166 -- --
Exercise of common stock
warrants................... -- -- 1,005,694 2 (2) -- --
Other comprehensive loss..... -- -- -- -- -- -- (282)
Net loss..................... -- -- -- -- -- -- --
---------- ---- ---------- ---- -------- -------- -----
Balance at September 30,
1999....................... -- $ -- 90,878,132 $182 $191,332 $(24,178) $(221)
========== ==== ========== ==== ======== ======== =====
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
----------- -------------
Issuance of common stock..... $ -- $ 8
Issuance of Series A
convertible preferred
stock, net of issuance
costs of $12............... -- 6,214
Issuance of Series B
convertible preferred
stock, net of issuance
costs of $30............... -- 12,658
Issuance of common stock-
options exercised.......... -- 268
Repurchase of common stock... -- (2)
Amortization of stock-based
compensation............... -- 50
Net loss..................... (4,679) (4,679)
-------- --------
Balance at September 30,
1997....................... (4,679) 14,517
Issuance of Series B
convertible preferred
stock, net of issuance
costs of $3................ -- 1,798
Issuance of Series BB
convertible preferred
stock, net of issuance
costs of $7................ -- 2,494
Issuance of common stock-
options exercised.......... -- 501
Repurchase of common stock... -- (12)
Deferred stock-based
compensation............... -- --
Amortization of stock-based
compensation............... -- 956
Issuance of warrants for
common stock............... -- 504
Issuance of warrants for
preferred stock............ -- 93
Other comprehensive income... -- 61
Net loss..................... (10,953) (10,953)
-------- --------
Balance at September 30,
1998....................... (15,632) 9,959
Issuance of common stock-
options exercised.......... -- 5,976
Repurchase of common stock... -- (12)
Deferred stock-based
compensation............... -- --
Amortization of stock-based
compensation............... -- 14,584
Conversion of preferred stock
into common stock at
Initial Public Offering.... -- --
Initial Public Offering, net
of issuance costs of
$1.900..................... -- 121,092
Issuance of common stock..... -- 166
Exercise of common stock
warrants................... -- --
Other comprehensive loss..... -- (282)
Net loss..................... (29,300) (29,300)
-------- --------
Balance at September 30,
1999....................... $(44,932) $122,183
======== ========
See accompanying notes to consolidated financial statements.
49
ARIBA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED SEPTEMBER 30,
-------------------------------
1999 1998 1997
--------- -------- --------
OPERATING ACTIVITIES:
Net loss.................................................. $ (29,300) $(10,953) $(4,679)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 1,417 644 112
Amortization of stock-based compensation.................. 14,584 956 50
Non-cash warrant expense.................................. 27 521 --
Loss on disposition of property and equipment............. -- 4 22
Changes in operating assets and liabilities:
Accounts receivable..................................... (3,028) (1,907) (222)
Prepaid expenses and other assets....................... (1,756) (171) (246)
Accounts payable........................................ 2,884 66 896
Accrued compensation and related liabilities............ 5,255 1,589 115
Accrued liabilities..................................... 3,570 704 560
Deferred revenue........................................ 26,795 3,606 332
--------- -------- -------
Net cash provided by (used in) operating activities....... 20,448 (4,941) (3,060)
--------- -------- -------
INVESTING ACTIVITIES:
Purchases of property and equipment....................... (7,581) (896) (995)
Proceeds from the sales of investments.................... 10,069 -- --
Purchases of investments.................................. (106,880) (5,566) --
Allocation to restricted cash............................. (800) -- --
--------- -------- -------
Net cash used in investing activities..................... (105,192) (6,462) (995)
--------- -------- -------
FINANCING ACTIVITIES:
Borrowings under long-term debt........................... -- -- 400
Repayments under long-term debt........................... (499) (544) (20)
Proceeds from sale of convertible preferred stock, net.... -- 4,292 18,872
Proceeds from sale of common stock........................ 127,234 501 276
Repurchase of common stock................................ (12) (12) (2)
--------- -------- -------
Net cash provided by financing activities................. 126,723 4,237 19,526
--------- -------- -------
Net increase (decrease) in cash and cash equivalents........ 41,979 (7,166) 15,471
Cash and cash equivalents at beginning of year.............. 8,305 15,471 --
--------- -------- -------
Cash and cash equivalents at end of year.................... $ 50,284 $ 8,305 $15,471
========= ======== =======
Supplemental disclosures of cash flow information:
Cash paid during period for interest...................... $ 100 $ 120 $ 14
========= ======== =======
Non-cash investing and financing activities:
Assets recorded under capital leases.................... $ 1,021 $ 1,108 --
========= ======== =======
Warrants issued for financing commitments............... -- $ 93 --
========= ======== =======
See accompanying notes to consolidated financial statements.
50
ARIBA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999, 1998 AND 1997
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Ariba, Inc. (Ariba or the Company) is a provider of Internet-based
business-to-business electronic commerce network solutions for operating
resources. Ariba's Operating Resources Management System (ORMS) is a robust,
scalable and reliable network application that operates primarily within a
buying organization's intranet. The Ariba Network is a global
business-to-business electronic commerce network for operating resources,
enabling buyers and suppliers to automate transactions on the Internet. Ariba
ORMS and the Ariba Network enable organizations to automate the procurement
cycle by linking enclosures throughout the organization with approvers and
financial systems and by channeling purchases to preferred suppliers, enabling
reduced operating costs and improved productivity.
The Company was incorporated on September 17, 1996, under the laws of the
state of Delaware and commenced operations on that date. The Company is
headquartered in Mountain View, California, and has offices throughout the
United States. The Company has established seven wholly-owned subsidiaries,
namely Ariba Canada, Inc., Ariba U.K. Limited, Ariba Netherlands B.V., Ariba
Sweden AB, Ariba Australia Pty Ltd, Ariba Deutschland GmbH and Ariba Switzerland
GmbH/Sarl/Ltd liab Co., which are located in Canada, the United Kingdom, The
Netherlands, Sweden, Australia, Germany and Switzerland, respectively.
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared using
an inception date of October 1, 1996, as no significant operating activities
occurred between September 17, 1996, the date of incorporation, and
September 30, 1996. Such activity consisted of the sale of common and preferred
stock for $6,000,000 and interest earned of $1,000 and has been included in the
fiscal 1997 consolidated financial statements. The consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
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.
RECLASSIFICATIONS
Certain reclassifications, none of which affected net income, have been made
to prior year amounts to conform to the current year presentation.
FOREIGN CURRENCY TRANSLATION
The functional currency for the Company's international subsidiaries is the
local currency of the country in which it operates. Assets and liabilities are
translated using the exchange rate at the balance
51
ARIBA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
sheet date. Revenues, expenses, gains, and losses are translated at the exchange
rate on the date those elements are recognized. Translation adjustments, which
have not been material to date, are included in other comprehensive income
(loss).
CASH AND CASH EQUIVALENTS, INVESTMENTS 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. As
of September 30, 1999 and 1998, cash equivalents consist of money market funds,
commercial paper, government/federal notes and bonds, certificates of deposit,
and auction rate preferred stock in the amount of $49,587,000 and $8,288,000,
respectively.
The Company classifies its investments as "available-for-sale." Such
investments are recorded at fair value based on quoted market prices, with
unrealized gains and losses recorded as other comprehensive income (loss) until
realized.
In March 1999, the Company entered into a new facilities operating lease
agreement. As part of this agreement, the Company is required to hold a
certificate of deposit as a form of security. As of September 30, 1999, the
certificate of deposit amounted to $800,000, and this amount is classified as
restricted cash.
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 market value. Financial instruments that subject the Company
to concentrations of credit risk consist primarily of cash and cash equivalents,
investments and trade accounts receivable. Management believes the financial
risks associated with these financial instruments are minimal. 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 and Europe. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral on accounts receivable, as
the Company's customers are large, well-established companies. To date, the
Company has had no write-offs of accounts receivable.
52
ARIBA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Significant customer information is as follows:
% OF TOTAL REVENUES ACCOUNTS RECEIVABLE
------------------------------ ------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
Customer A............................................ -- -- 39% -- -- --
Customer B............................................ -- -- 28% -- -- --
Customer C............................................ -- -- 26% -- -- 45%
Customer D............................................ -- 21% -- -- -- --
Customer E............................................ -- 18% -- -- 15% --
Customer F............................................ -- 13% -- -- -- --
Customer G............................................ -- 13% -- -- 52% --
Customer H............................................ -- 11% -- -- -- --
Customer I............................................ 12% -- -- -- -- --
Customer J............................................ -- -- -- 11% -- --
Customer K............................................ -- -- -- 12% -- --
CAPITALIZED SOFTWARE
Costs related to the research and development of new software products and
enhancements to existing software products are expensed as incurred until
technological feasibility (in the form of a working model) of the product has
been established, at which time such costs are capitalized, subject to expected
recoverability. To date, the Company has not capitalized any development costs
related to software products since the time period between technological
feasibility and general release of a product is not significant and related
costs incurred during that time period have not been material.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is calculated using the straight-line method over the estimated
useful lives of the property and equipment, generally three years for computer
equipment, purchased software and office equipment and five years for furniture
and fixtures. Leasehold improvements are amortized using the straight-line
method over the shorter of the respective lease term or the estimated useful
life of the asset.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates its long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of such assets may
not be recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of any asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceed the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell.
53
ARIBA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
REVENUE RECOGNITION
SOP 97-2 SOFTWARE REVENUE RECOGNITION, 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. License revenue
allocated to software products generally is recognized upon delivery of the
products or ratably over a contractual period if unspecified software products
are to be delivered during that period. Revenue allocated to maintenance is
recognized ratably over the maintenance term and revenue allocated to training
and other service elements is recognized as the services are performed.
If the services are considered essential to the functionality of the
software products, both the software product revenue and service revenue are
recognized using the percentage of completion method in accordance with the
provisions of SOP 81-1, ACCOUNTING FOR PERFORMANCE OF CONSTRUCTION TYPE AND
CERTAIN PRODUCTION TYPE CONTRACTS. Such contracts are generally on a time and
materials basis with a few fixed fee contracts entered into in fiscal 1998 and
1997. The contracts are not subject to renegotiation and range from 5 to
24 months in duration. Revenues and costs are recognized based on the labor
hours incurred to date compared to total estimated labor hours for the contract.
Contract costs include all direct material, direct labor and indirect costs
related to contract performance. Selling, general, and administrative costs are
charged to expense as incurred. Provisions for estimated losses on uncompleted
contracts are recorded in the period in which such losses become probable based
on the current contract estimates.
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 costs.
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.
INCOME TAXES
The Company utilizes the asset and liability method of accounting for income
taxes. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. A valuation allowance is recorded to reduce deferred tax
assets to an amount whose realization is more likely than not. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
STOCK-BASED COMPENSATION
The Company uses the intrinsic value method of accounting for all of its
employee stock-based compensation plans. Expense associated with stock-based
compensation is being amortized on an accelerated basis over the vesting period
of the individual award consistent with the method described in Financial
Accounting Standards Board (FASB) Interpretation No 28.
54
ARIBA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
ACCUMULATED OTHER COMPREHENSIVE INCOME
SFAS No. 130 REPORTING COMPREHENSIVE INCOME, establishes standards of
reporting and display of comprehensive income and its components of net income
and "Other Comprehensive Income" in a full set of general purpose financial
statements. "Other Comprehensive Income" refers to revenues, expenses, gains and
losses that are not included in net income but rather are recorded directly in
stockholders' equity. Tax effects of comprehensive income (loss) are not
considered material.
NET LOSS PER SHARE
Basic net loss per share is computed using the weighted-average number of
vested outstanding shares of common stock. Diluted net loss per share is
computed using the weighted-average number of shares of vested common stock
outstanding and, when dilutive, unvested common stock outstanding, potential
common shares from options and warrants to purchase common stock using the
treasury stock method and from convertible securities using the as-if-converted
basis. All potential common shares have been excluded from the computation of
diluted net loss per share for all periods presented because the effect would be
antidilutive. Pursuant to the Securities and Exchange Commission (SEC) Staff
Accounting Bulletin No. 98, common stock and convertible preferred stock issued
for nominal consideration, prior to the anticipated effective date of an IPO,
are included in the calculation of basic and diluted net loss per share as if
they were outstanding for all periods presented. The Company has not had any
issuances or grants for nominal consideration.
The following table presents the calculation of basic and diluted net loss
per common share as of September 30 (in thousands, except share and per share
data):
1999 1998 1997
------------ ------------ ------------
Net loss............................................ $ (29,300) $ (10,953) $ (4,679)
------------ ------------ ------------
Basic and diluted:
Weighted-average shares of common stock
outstanding..................................... 52,091,454 37,378,518 28,539,988
Less: weighted-average common shares subject to
repurchase...................................... (17,059,650) (25,854,694) (27,260,814)
------------ ------------ ------------
Weighted-average shares used in computing basic and
diluted net loss per common share................. 35,031,804 11,523,824 1,279,174
============ ============ ============
Basic and diluted net loss per common share......... $ (0.84) $ (0.95) $ (3.66)
============ ============ ============
55
ARIBA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Diluted net loss per share does not include the effect of the following
potential common shares at September 30:
1999 1998 1997
---------- ---------- ----------
Shares issuable under stock options...................... 20,675,590 7,137,920 1,306,400
Shares of unvested stock subject to repurchase........... 14,535,888 20,581,520 29,563,600
Shares issuable pursuant to warrants to purchase common
and convertible preferred stock........................ 93,088 1,141,888 --
Shares of convertible preferred stock on an "as if
converted" basis....................................... -- 35,690,352 33,023,200
The weighted-average exercise price of stock options outstanding was $6.77,
$.38 and $.07 as of September 30, 1999, 1998 and 1997, respectively. The
weighted average purchase price of unvested stock was $.38, $.03 and $.01 as of
September 30, 1999, 1998 and 1997, respectively. The weighted average exercise
price of warrants was $1.59 and $1.65 as of September 30, 1999 and 1998,
respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 establishes accounting and
reporting standards for derivative financial instruments and hedging activities
related to those instruments, as well as other hedging activities. Because the
Company does not currently hold any derivative instruments and does not engage
in hedging activities, the Company expects the adoption of SFAS No. 133 will not
have a material impact on its financial position, results of operations or cash
flows. The Company will be required to adopt SFAS No. 133 in fiscal 2001 in
accordance with SFAS No. 137, which delays the required implementation of SFAS
No. 133 for one year.
In March 1998, the Accounting Standards Executive Committee (AcSEC) issued
Statement of Position (SOP) 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE
DEVELOPED OR OBTAINED FOR INTERNAL USE. SOP 98-1 establishes the accounting for
costs of software products developed or purchased for internal use, including
when such costs should be capitalized. The Company does not expect SOP 98-1 to
have a material effect on its financial position, results of operations or cash
flows. The Company will adopt SOP 98-1 in fiscal 2000.
In April 1998, the AcSEC issued SOP 98-5, REPORTING ON THE COSTS OF START-UP
ACTIVITIES. Under SOP 98-5, the cost of start-up activities should be expensed
as incurred. The Company expects that the adoption of SOP 98-5 will not have a
material impact on its financial position, results of operations or cash flows.
The Company will be required to adopt SOP 98-5 in fiscal 2000.
In December 1998, the American Institute of Certified Public Accountants
(AICPA) issued SOP 98-9, MODIFICATION OF SOP 97-2, SOFTWARE REVENUE RECOGNITION,
WITH RESPECT TO CERTAIN TRANSACTIONS, which amends SOP 97-2, Software Revenue
Recognition, and supercedes SOP 98-4. The Company does not expect SOP 98-9 to
have a material effect on our financial position, results of operations or cash
flows. The Company will adopt SOP 98-9 in fiscal 2000.
56
ARIBA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
2. FINANCIAL STATEMENT COMPONENTS
INVESTMENTS
The following is a summary of available for sale securities (in thousands):
SEPTEMBER 30, 1999
----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
Money market funds.................................. $ 35,601 -- -- $ 35,601
Commercial paper.................................... 8,995 -- -- 8,995
Government notes and bonds.......................... 40,953 -- 79 40,874
Corporate notes and bonds........................... 63,385 -- 143 63,242
Certificates of deposit............................. 1,031 -- -- 1,031
Auction rate preferred stock........................ 2,000 -- -- 2,000
-------- --- ------- --------
$151,965 -- $ 222 $151,743
======== === ======= ========
Included in cash and cash equivalents............... $ 49,588 -- $ 1 $ 49,587
Included in short-term investments.................. 47,938 -- 70 47,868
Included in long-term investments................... 54,439 -- 151 54,288
-------- --- ------- --------
$151,965 -- $ 222 $151,743
======== === ======= ========
SEPTEMBER 30, 1998
----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
Money market funds.................................. $ 5,467 -- -- $ 5,467
Government notes and bonds.......................... 8,387 61 -- 8,448
-------- --- ------- --------
$ 13,854 $61 -- $ 13,915
======== === ======= ========
Included in cash and cash equivalents............... $ 8,288 -- -- $ 8,288
Included in short-term investments.................. 3,573 30 -- 3,603
Included in long-term investments................... 1,993 31 -- 2,024
-------- --- ------- --------
$ 13,854 $61 -- $ 13,915
======== === ======= ========
The following is a summary of contractual maturities of the Company's
available for sale securities (in thousands):
SEPTEMBER 30,
-------------------
1999 1998
-------- --------
Amounts maturing within one year............................ $ 47,868 $3,603
Amounts maturing one year through two years................. 27,564 2,024
Amounts maturing two years through three years.............. 26,724 --
-------- ------
Securities available for sale............................... $102,156 $5,627
======== ======
57
ARIBA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
2. FINANCIAL STATEMENT COMPONENTS (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of September 30 (in
thousands):
1999 1998
-------- --------
Computer equipment and purchased software................... $ 5,341 $1,648
Office equipment............................................ 509 300
Furniture and fixtures...................................... 922 609
Leasehold improvements...................................... 4,803 416
------- ------
11,575 2,973
Less accumulated depreciation and amortization.............. 2,173 756
------- ------
$ 9,402 $2,217
======= ======
Certain computer equipment, software and office equipment are recorded under
capital leases that aggregated $2,129,000 and $1,108,000 as of September 30,
1999 and 1998, respectively. Accumulated amortization on the assets recorded
under capital leases aggregated $792,000 and $277,000 as of September 30, 1999
and 1998, respectively.
AMORTIZATION OF STOCK-BASED COMPENSATION
Amortization of stock-based compensation consists of the following (in
thousands):
YEARS ENDED SEPTEMBER 30,
------------------------------------
1999 1998 1997
-------- -------- --------
Sales and marketing......................................... $ 7,653 $583 --
Research and development.................................... 2,998 178 --
General and administrative.................................. 3,933 195 50
------- ---- ---
$14,584 $956 $50
======= ==== ===
OTHER INCOME, NET
Other income, net, consists of the following (in thousands):
YEARS ENDED SEPTEMBER 30,
------------------------------------
1999 1998 1997
-------- -------- --------
Interest income............................................. $2,434 $ 705 $307
Interest expense............................................ (126) (137) (18)
Other expense............................................... (89) -- (16)
------ ----- ----
$2,219 $ 568 $273
====== ===== ====
58
ARIBA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
3. STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
In September 1996 and May 1997, the Company issued 3,112,800 shares of
Series A convertible preferred stock at $2.00 per share. From August 1997
through December 1997, the Company issued 1,159,100 shares of Series B
convertible preferred stock at $12.50 per share. In April 1998, the Company
issued 189,394 shares of Series BB convertible preferred stock at $13.20 per
share. All outstanding shares of the Company's convertible preferred stock
automatically converted into Common Stock on a one-for-four basis upon
completion of the Company's initial public offering. On April 20, 1999, the
Board of Directors increased the number of authorized shares of convertible
preferred stock to 20,000,000 effective after the Company's initial public
offering. The accompanying consolidated financial statements reflect the
increased authorized shares.
WARRANTS
In November 1997, in connection with a lease line arrangement, the Company
issued warrants to purchase 8,000 shares of the Company's Series B convertible
preferred stock at a price of $12.50 per share, the fair value on the date of
issuance. Upon the Company's initial public offering the warrants were converted
into a warrant to purchase 64,000 shares of common stock. The fair value of the
warrants of $62,000 was calculated using the Black-Scholes option pricing model
and is being amortized to interest expense over the term of the lease,
42 months. In October 1999, the Company issued a net of 62,768 shares of common
stock for no proceeds in the cashless exercise of these warrants.
In June 1998, in connection with a marketing arrangement, the Company issued
warrants to purchase 1,048,800 shares of the Company's common stock at a price
of $1.65 per share. The warrants were immediately exercisable and were to expire
on the earliest of (i) January 1, 2002, (ii) the effective date of the Company's
initial public offering, (iii) on a sale or transfer by the Company of all or
substantially all of its assets or (iv) on the acquisition of the Company by
another entity. The fair value of the warrants of $504,000 was calculated using
the Black-Scholes option pricing model and is included in sales and marketing
expense for the year ended September 30, 1998. In June 1999, the Company issued
a net of 1,005,694 shares of common stock for no proceeds in the cashless
exercise of these warrants.
In August 1998, in connection with an additional lease line arrangement, the
Company issued warrants to purchase 3,636 shares of the Company's Series BB
convertible preferred stock at a price of $13.20 per share, the fair value on
the date of issuance. Upon the Company's initial public offering the warrants
were converted into warrants to purchase 29,088 shares of common stock. The
warrants are immediately exercisable and expire on the earliest of
(i) August 26, 2005 or (ii) three years from the effective date of the Company's
initial public offering. The fair value of the warrants of $31,000 was
calculated using the Black-Scholes option pricing model and is being amortized
to interest expense over the term of the lease, 42 months.
COMMON STOCK
In September 1996, 29,075,200 shares of common stock were issued to the
Company's founders at $.00025 per share. Upon issuance, the Company had the
right to repurchase 100% of these shares at $.00025 per share. These shares were
issued subject to vesting based upon continued employment, with
59
ARIBA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
3. STOCKHOLDERS' EQUITY (CONTINUED)
the repurchase right generally expiring ratably through September 2000. As of
September 30, 1999, 4,897,400 shares of common stock issued to the Company's
founders were subject to repurchase. Certain shares immediately vest upon a
change in control of the Company, in an amount equal to the lesser of 50% of
unvested shares or the number of unvested shares, that when added to the vested
shares, equals 75% of shares purchased by that stockholder. Based on
management's estimate of the fair value of these shares, the Company recorded
$200,000 of deferred stock-based compensation expense. This amount is being
amortized over the four-year vesting period. The Company may repurchase all
unvested shares of common stock at the original issuance price upon an
individual's termination of service with the Company.
On June 28, 1999 the Company completed an initial public offering in which
it sold 11,500,000 shares of Common Stock, including 1,500,000 shares in
connection with the exercise of the underwriters' over-allotment option, at
$11.50 per share. The Company received $121.1 million in cash, net of
underwriting discounts, commissions and other offering costs. Concurrent with
the offering the Company also sold 14,400 shares of common stock to its Canadian
employees at $11.50 per share.
1996 STOCK PLAN
The Company's 1996 Stock Plan (the 1996 Stock Plan), in effect through our
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 10 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, 1999, 9,638,488 shares of common stock were issued upon the
exercise of unvested options subject to repurchase under the 1996 Stock Plan. On
October 5, 1998, March 15, 1999 and April 20, 1999, the Board of Directors
increased the number of authorized shares of common stock for issuance under the
1996 Stock Plan by 9,200,000, 4,400,000 and 5,200,000 shares, respectively.
Options that are canceled under the 1996 Stock Plan will be available for future
grants under the Equity Incentive Plan. There were no shares available for
option grants under the 1996 Stock Plan at September 30, 1999.
1999 EQUITY INCENTIVE PLAN
The Company's Board of Directors approved the 1999 Equity Incentive Plan
(the Incentive Plan) on April 20, 1999 under which 4,800,000 shares have been
reserved for issuance. In addition, any shares not issued under the 1996 Stock
Plan will also be available for grant. The number of shares reserved under the
Incentive Plan will automatically increase annually beginning on January 1, 2000
by the lesser of 4,000,000 shares or 5% of the total amount of shares of common
stock outstanding. Under the Incentive Plan, eligible employees may purchase
stock options, stock appreciation rights, restricted shares, and stock units.
The exercise price for incentive stock options and non-qualified options may
60
ARIBA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
3. STOCKHOLDERS' EQUITY (CONTINUED)
not be less than 100% and 85%, respectively, of the fair value of common stock
at the option grant date. Approximately 25,047,000 shares of common stock have
been reserved for issuance under the Incentive Plan as of September 30, 1999. As
of September 30, 1999, the Company has 4,372,284 shares available for grant
under the Incentive Plan.
1999 DIRECTORS' STOCK OPTION PLAN
The Company's Board of Directors adopted the 1999 Directors' Stock Option
Plan (the Directors Plan) on April 20, 1999 under which 1,000,000 shares have
been reserved for issuance. Each non-employee joining the Board of Directors
following June 22, 1999 will automatically receive options to purchase 20,000
shares of common stock. In addition, each non-employee director will
automatically receive options to purchase 5,000 shares of common stock at each
annual meeting of the Board of Directors beginning after January 1, 2000. Each
option will have an exercise price equal to the fair value of the common stock
on the automatic grant date. As of September 30, 1999 there have been no shares
issued under the Directors Plan and 1,000,000 shares are available for future
issuance.
EMPLOYEE STOCK PURCHASE PLAN
The Company's Board of Directors adopted the Employee Stock Purchase Plan
(the Purchase Plan) on April 20, 1999 under which 8,000,000 shares have been
reserved for issuance. The number of shares reserved under the Purchase Plan
will automatically increase beginning on January 1 of each year by the lesser of
1,500,000 shares or 2% of the total amount of common stock shares outstanding.
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 fair value at the lower of certain
plan defined dates. As of September 30, 1999 there have been no shares issued
under the Purchase Plan and 8,000,000 shares are available for future issuance.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company uses the intrinsic value method of accounting for its employee
stock-based compensation plans. Accordingly, no compensation cost is recognized
for any of its stock options when the exercise price of each option equals or
exceeds the fair value of the underlying common stock as of the grant date for
each stock option. With respect to the stock options granted since inception
through September 1999, the Company recorded deferred stock-based compensation
of $38,401,000 for the difference at the grant date between the exercise price
and the fair value of the common stock underlying the options. This amount is
being amortized in accordance with FASB Interpretation No. 28 over the vesting
period of the individual options, generally 4 years.
61
ARIBA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
3. STOCKHOLDERS' EQUITY (CONTINUED)
Had compensation cost been determined in accordance with SFAS No. 123 for
all of the Company's stock-based compensation plans, net loss and net loss per
share would have been changed to the amounts indicated below (in thousands,
except per share data):
YEARS ENDED SEPTEMBER 30,
------------------------------
1999 1998 1997
-------- -------- --------
Net loss:
As reported................................... $(29,300) $(10,953) $(4,679)
Pro forma..................................... (30,425) (11,000) (4,685)
Basic and diluted net loss per share:
As reported................................... (0.84) (0.95) (3.66)
Pro forma..................................... $ (0.87) $ (0.95) $ (3.66)
For all grants that were granted prior to the Company's initial public
offering in June 1999, the fair value of these options was determined using the
minimum value method, which assumes no volatility except for non-employees. The
fair value for the options granted subsequent to the Company's initial public
offering was estimated at the date of grant using a Black-Scholes option pricing
model. The fair value of the Company's stock based awards was estimated assuming
no expected dividends and the following weighted-average assumptions:
YEARS ENDED SEPTEMBER 30,
---------------------------------
1999 1998 1997
--------- --------- ---------
Expected Life................................. 3.0 years 2.5 years 2.6 years
Risk-free interest rate....................... 5.09% 5.50% 6.00%
Volatility.................................... 80% 60% 60%
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. Therefore the Company has estimated the compensation
cost for our first employee stock purchase plan issuance, which will be in
January 2000. 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, 1999: no expected dividends; expected volatility of 80%; risk-free
interest rate of 5.09%; and expected life of approximately 7 months.
62
ARIBA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
3. STOCKHOLDERS' EQUITY (CONTINUED)
A summary of our stock plans is as follows:
YEARS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------
1999 1998 1997
---------------------- ---------------------- -----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- --------- ---------- --------- ----------- ---------
Outstanding at beginning of
period............................ 7,137,920 $ .38 1,306,400 $.07 -- $ --
Granted........................... 20,899,766 6.91 8,544,800 .38 12,040,400 .03
Exercised......................... (6,882,896) .94 (2,203,280) .22 (10,646,000) .03
Forfeited......................... (479,200) 2.78 (510,000) .22 (88,000) .03
---------- ---------- -----------
Outstanding at end of period........ 20,675,590 $ 6.77 7,137,920 $.38 1,306,400 $ .07
========== ========== ===========
Exercisable at end of period........ 19,306,590 $ 2.64 7,137,920 $.38 1,306,400 $ .07
========== ========== ===========
Weighted-average fair value of
options granted during the period
at market......................... 2,825,000 $36.31 2,068,000 $.03 12,040,400 $.005
Weighted-average fair value of
options granted during the period
at less than market............... 18,074,766 $ 2.31 6,476,800 $.59 -- --
The following table summarizes information about stock options outstanding
as of September 30, 1999:
OUTSTANDING EXERCISABLE
------------------------------------- ----------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
NUMBER OF CONTRACTUAL EXERCISE NUMBER OF EXERCISE
RANGE OF EXERCISE PRICES SHARES LIFE (YEARS) PRICE SHARES PRICE
- ------------------------ ---------- ------------ --------- ---------- ---------
$.02--0.83.............................. 5,004,236 8.71 $ .55 5,004,236 $ .55
1.00--1.19.............................. 3,991,412 9.29 1.15 3,991,412 1.15
1.63.................................... 3,604,828 9.46 1.63 3,604,828 1.63
3.00--6.00.............................. 4,721,514 9.54 4.32 4,721,514 4.32
7.50--43.00............................. 2,060,600 9.64 10.00 1,984,600 8.79
55.22-79.13............................. 1,293,000 9.91 66.42 0 0.00
---------- ----------
$.02--79.13............................. 20,675,590 9.31 $ 6.77 19,306,590 $2.64
========== ==========
63
ARIBA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
4. INCOME TAXES
Income taxes for the year ended September 30, 1999 was comprised of the
following (in thousands):
CURRENT DEFERRED TOTAL
-------- -------- --------
1999:
Federal............................................ $-- $-- $--
State.............................................. -- -- --
Foreign............................................ 98 -- 98
--- --- ---
TOTAL............................................ $98 $-- $98
=== === ===
The reconciliation between the amount computed by applying the U.S. federal
statutory tax rate of 34% to income (loss) before income taxes and actual income
taxes as of September 30, 1999, 1998 and 1997 follows (in thousands):
1999 1998 1997
-------- -------- --------
Tax expense (benefit)............................. $(9,929) $(3,724) $(1,591)
Nondeductible expenses............................ 5,230 416 6
Foreign tax differential.......................... 98 -- --
Net operating loss and temporary differences for
which no benefit was realized................... 4,699 3,308 1,585
------- ------- -------
TOTAL......................................... $ 98 $ -- $ --
======= ======= =======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets as of September 30, 1999 and 1998 are as
follows (in thousands):
1999 1998
-------- --------
Accruals and reserves.................................... $ 1,224 $ 1,095
Depreciation and amortization............................ 258 87
Deferred start-up costs.................................. 225 310
Credit carryforwards..................................... 1,130 --
Net operating loss carryforwards......................... 9,367 4,386
-------- -------
TOTAL GROSS DEFERRED TAX ASSETS........................ 12,204 5,878
-------- -------
Valuation allowance...................................... (12,204) (5,878)
-------- -------
NET DEFERRED TAX ASSETS................................ $ -- $ --
======== =======
The Company has provided a valuation allowance for 100% of its deferred tax
assets 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, 1999 and 1998, was
approximately $6,326,000 and $3,394,000, respectively.
As of September 30, 1999, the Company had net operating loss carryforwards
for federal and state tax purposes of approximately $24,068,000 and $20,287,000,
respectively. These federal and state
64
ARIBA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
4. INCOME TAXES (CONTINUED)
carryforwards expire in various years through fiscal year 2019 and 2005. The
Company had research credit carryforwards for federal and state tax purposes of
approximately $675,000 and $689,000, respectively. If not utilized, the federal
carryforwards will expire in various years through fiscal year 2019. The state
credit will carryforward indefinitely.
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. There have not been any
substantial changes in ownership through September 30, 1999. The Company's
federal and state tax losses and tax credit carryover incurred through that date
of change are subject to an annual limitation.
5. LONG-TERM DEBT
Long-term debt consists of future payments under capital lease obligations.
The Company leases certain office equipment, computer equipment and software
under capital leases. The related obligations under capitalized leases represent
the present value of future minimum lease payments. Future minimum lease
payments under capital leases as of September 30, 1999 are as follows (in
thousands):
YEAR ENDING SEPTEMBER 30,
- -------------------------
2000........................................................ $ 770
2001........................................................ 566
2002........................................................ 229
2003........................................................ 59
2004........................................................ --
Thereafter.................................................. --
------
Total minimum lease payments................................ 1,624
Less amount representing imputed interest................... 158
------
Present value of minimum lease payments..................... 1,466
Less current portion........................................ 685
------
Capital lease obligations, less current portion............. $ 781
======
In November 1997, the Company entered into a lease line arrangement with a
lending company in which the Company can obtain financing for up to $2,000,000.
The lease term commenced on January 1, 1998, and is for 42 months.
In August 1998, the Company entered into an additional lease line
arrangement with a lending company in which the Company can obtain financing for
up to $1,000,000. The lease term commenced on August 26, 1998, and is for
42 months.
In May 1999, the Company entered into a credit agreement with a bank, which
expires in March 2000 and is collateralized by certain assets of the Company.
Under the provisions of the credit agreement, the Company may borrow up to
$7.0 million on a revolving line of credit at the prime rate.
65
ARIBA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
5. LONG-TERM DEBT (CONTINUED)
At September 30, 1999 there were no amounts outstanding under the revolving line
of credit. The agreement contains covenants that require the Company to maintain
certain financial ratios and levels of net worth. The agreement also does not
permit the payment of dividends to stockholders.
6. COMMITMENTS
The Company leases certain equipment and its facilities under various
noncancelable operating leases. The leases expire through 2006. Rental expense
was approximately $3,622,000, $865,000 and $371,000 for the years ended
September 30, 1999, 1998 and 1997, respectively. Estimated future rents
receivable from sublease agreements are $101,000 in fiscal 2000. Future minimum
lease payments, net of sublease income as of September 30, 1999, are as follows
(in thousands):
YEAR ENDING SEPTEMBER 30,
- -------------------------
2000........................................................ $ 5,103
2001........................................................ 5,197
2002........................................................ 5,288
2003........................................................ 5,399
2004........................................................ 5,424
Thereafter.................................................. 9,776
-------
Total minimum lease payments................................ $36,187
=======
In October 1999, the Company entered in a new facilities sublease agreement
for its former headquarters. The sublease term commences on December 1, 1999 and
will end on September 13, 2004. Sublease receipts for the Company will be
received on an escalating basis with the total future minimum sublease receipts
amounting to approximately $4,481,000 over the lease term
7. SEGMENT INFORMATION
The Company adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION, in fiscal 1999. SFAS No. 131 supercedes SFAS
No. 14, FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS ENTERPRISE and
establishes standards for reporting information about operating segments.
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance.
The Company operates in one segment, business-to-business electronic
commerce solutions. The Company markets its products in the United States and in
foreign countries through its sales personnel and its subsidiaries. The Chief
Executive Officer has been identified as the Chief Operating Decision Maker
("CODM") because he has final authority over resource allocation decisions and
performance assessment. The CODM does not receive discrete financial information
about individual components of the Company's operations.
66
ARIBA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
7. SEGMENT INFORMATION (CONTINUED)
Information regarding geographic areas for the years ended September 30,
1999, 1998 and 1997 are as follows (in thousands):
1999 1998 1997
-------- -------- --------
REVENUES:
United States..................................... $38,660 $6,591 $760
Netherlands....................................... 5,459 -- --
Canada............................................ 412 1,772 --
Other foreign countries........................... 841 -- --
------- ------ ----
TOTAL........................................... $45,372 $8,363 $760
======= ====== ====
1999 1998 1997
-------- -------- --------
LONG-LIVED ASSETS:
United States..................................... $ 9,497 $2,455 $971
Foreign countries................................. 191 -- --
------- ------ ----
TOTAL........................................... $ 9,688 $2,455 $971
======= ====== ====
Revenues are attributed to countries based on the location of the customers.
Major customer information is included in note 1.
8. SUBSEQUENT EVENTS
On November 15, 1999, the Company signed a definitive agreement to acquire
TradingDynamics, Inc., a leading provider of business-to-business Internet
trading applications. The agreement is structured as a tax-free stock for stock
merger and will be accounted for as a purchase transaction. The Company will
issue stock worth approximately $500 million, based on current trading ranges,
to TradingDynamics shareholders. The Company expects that the transaction will
close in the quarter ending March 31, 2000. The Company has also entered into a
loan agreement with TradingDynamics to loan TradingDynamics up to $2,000,000.
On November 16, 1999, the Board of Directors authorized a two-for-one stock
split of the Company's common stock, to be effected in the form of a stock
dividend. The stock split will be effected by distribution to each stockholder
of record as of December 3, 1999 of one share of the Company's common stock for
each share of common stock held. The financial information included in the
accompanying financial statements has been restated to give effect to the stock
split.
On December 16, 1999, the Company signed a definitive agreement to acquire
TRADEX Technologies, Inc., a leading provider of solutions for Net Markets. The
agreement is structured as a stock-for-stock merger and will be accounted for as
a purchase transaction. The Company will issue stock worth approximately
$2 billion, based on current trading ranges, to TRADEX stockholders. The Company
expects that the transaction will close in the quarter ending June 30, 2000.
67
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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 Ariba's Proxy Statement for the 2000 Annual
Meeting of Stockholders to be filed with the Securities and Exchange Commission
within 120 days after the end of Ariba's fiscal year ended September 30, 1999
(the "2000 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 2000 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 2000 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 2000 Proxy Statement, which is incorporated
herein by reference.
68
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, 1999, 1998 and 1997 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 (which is incorporated herein by reference to
Exhibit 3.2 to the Registrant's Form S-1 Registration No.
333-76953).
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 (which is incorporated herein by
reference to Exhibit 10.3 to the Registrant's Form S-1
Registration No. 333-76953).
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).
69
EXHIBIT
NO. DESCRIPTION
- --------------------- -----------
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.
23.1 Consent of Independent Auditors
27.1 Financial Data Schedule.
(b) REPORTS ON FORM 8-K
A current report on Form 8-K was filed with the Securities and Exchange
Commission by Ariba on November 24, 1999 to report the announcement of the
signing of a definitive agreement to merge with TradingDynamics, Inc. and to
report a two-for-one stock split, to be effected in the form of a stock
dividend.
A current report on Form 8-K will be filed with the Securities and Exchange
Commission by Ariba to report the announcement of the signing of a definitive
agreement to merge with TRADEX Technologies, Inc.
70
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
Mountain View, State of California on this 23rd day of December, 1999.
ARIBA, INC.
By: /s/ EDWARD P. KINSEY
-----------------------------------------
Edward P. Kinsey
CHIEF FINANCIAL OFFICER,
VICE-PRESIDENT-FINANCE AND ADMINISTRATION
AND SECRETARY (PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Keith J. Krach and Edward P. Kinsey, 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, Chief Executive
/s/ KEITH J. KRACH Officer and Chairman of
------------------------------------------- the Board of Directors December 23, 1999
Keith J. Krach (Principal Executive
Officer)
Chief Financial Officer,
Vice-President-Finance
/s/ EDWARD P. KINSEY and Administration and
------------------------------------------- Secretary (Principal December 23, 1999
Edward P. Kinsey Financial and Accounting
Officer)
/s/ PAUL HEGARTY
------------------------------------------- Director December 23, 1999
Paul Hegarty
71
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ROBERT C. KAGLE
------------------------------------------- Director December 23, 1999
Robert C. Kagle
/s/ JOHN B. MUMFORD
------------------------------------------- Director December 23, 1999
John B. Mumford
-------------------------------------------
Hatim A. Tyabji Director December 23, 1999
72
ARIBA, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
(IN THOUSANDS)
BALANCE AT
BEGINNING OF COSTS AND DEDUCTIONS/ BALANCE AT END OF
CLASSIFICATION PERIOD EXPENSES WRITE-OFFS PERIOD
- -------------- ------------ --------- ----------- -----------------
Year ended September 30, 1999 Allowance for
doubtful accounts.......................... -- $20 -- $20
Year ended September 30, 1998 Allowance for
doubtful accounts.......................... -- -- -- --
Year ended September 30, 1997 Allowance for
doubtful accounts.......................... -- -- -- --
S-1
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
------- -----------
3.1 Amended and Restated Certificate of Incorporation of the
Registrant (which is incorporated herein by reference to
Exhibit 3.2 to the Registrant's Form S-1 Registration No.
333-76953).
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 (which is incorporated herein by
reference to Exhibit 10.3 to the Registrant's Form S-1
Registration No. 333-76953).
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.
23.1 Consent of Independent Auditors
27.1 Financial Data Schedule.