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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
OR
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
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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)
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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)
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(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
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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
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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.
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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
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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
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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
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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
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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.
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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;
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- 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.
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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
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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.
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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
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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
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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
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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.
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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.
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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
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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.
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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
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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.
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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:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ---- -------- --------------------------------------------------------
<S> <C> <C>
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
</TABLE>
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,
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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
<PAGE>
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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------
DEC. 31, 1998 MAR. 31, 1999 JUNE 30, 1999 SEPT. 30, 1999
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Price range per share:
Low....................................... -- -- $30.50 $33.13
High...................................... -- -- $49.53 $99.32
</TABLE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
---------------------------------------
1999 1998 1997
--------- --------- ---------
CONSOLIDATED STATEMENT OF OPERATIONS DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
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
======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------------------
1999 1998 1997
--------- --------- ---------
CONSOLIDATED BALANCE SHEET DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
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
</TABLE>
- ------------------------
- - 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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
$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.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
------------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
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
======== ======== =======
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT INTEREST RATES) FY 2000 FY 2001 FY 2002 FY 2003 FY 2004 THEREAFTER TOTAL
-------- -------- -------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
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
</TABLE>
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.
<TABLE>
<CAPTION>
PAGE
NUMBER
--------
<S> <C>
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
</TABLE>
45
<PAGE>
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
<PAGE>
ARIBA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
------------- -------------
<S> <C> <C>
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
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
47
<PAGE>
ARIBA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND OTHER COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------------
1999 1998 1997
---------- ---------- ---------
<S> <C> <C> <C>
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
========== ========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
48
<PAGE>
ARIBA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CONVERTIBLE ACCUMULATED
PREFERRED STOCK ADDITIONAL DEFERRED OTHER
--------------------- COMMON STOCK PAID-IN STOCK-BASED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION INCOME (LOSS)
---------- -------- ---------- -------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
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)
========== ==== ========== ==== ======== ======== =====
<CAPTION>
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
----------- -------------
<S> <C> <C>
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
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
49
<PAGE>
ARIBA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
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 --
========= ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
50
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
% OF TOTAL REVENUES ACCOUNTS RECEIVABLE
------------------------------ ------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
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% -- --
</TABLE>
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
<PAGE>
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
<PAGE>
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):
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
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)
============ ============ ============
</TABLE>
55
<PAGE>
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:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
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
</TABLE>
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
<PAGE>
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):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
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
======== === ======= ========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
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
======== === ======= ========
</TABLE>
The following is a summary of contractual maturities of the Company's
available for sale securities (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1999 1998
-------- --------
<S> <C> <C>
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
======== ======
</TABLE>
57
<PAGE>
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):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
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
======= ======
</TABLE>
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):
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Sales and marketing......................................... $ 7,653 $583 --
Research and development.................................... 2,998 178 --
General and administrative.................................. 3,933 195 50
------- ---- ---
$14,584 $956 $50
======= ==== ===
</TABLE>
OTHER INCOME, NET
Other income, net, consists of the following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Interest income............................................. $2,434 $ 705 $307
Interest expense............................................ (126) (137) (18)
Other expense............................................... (89) -- (16)
------ ----- ----
$2,219 $ 568 $273
====== ===== ====
</TABLE>
58
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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):
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
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)
</TABLE>
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:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
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%
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------
1999 1998 1997
---------------------- ---------------------- -----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- --------- ---------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
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 -- --
</TABLE>
The following table summarizes information about stock options outstanding
as of September 30, 1999:
<TABLE>
<CAPTION>
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
- ------------------------ ---------- ------------ --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
$.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
========== ==========
</TABLE>
63
<PAGE>
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):
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
-------- -------- --------
<S> <C> <C> <C>
1999:
Federal............................................ $-- $-- $--
State.............................................. -- -- --
Foreign............................................ 98 -- 98
--- --- ---
TOTAL............................................ $98 $-- $98
=== === ===
</TABLE>
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):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
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 $ -- $ --
======= ======= =======
</TABLE>
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):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
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................................ $ -- $ --
======== =======
</TABLE>
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
<PAGE>
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):
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30,
- -------------------------
<S> <C>
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
======
</TABLE>
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
<PAGE>
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):
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30,
- -------------------------
<S> <C>
2000........................................................ $ 5,103
2001........................................................ 5,197
2002........................................................ 5,288
2003........................................................ 5,399
2004........................................................ 5,424
Thereafter.................................................. 9,776
-------
Total minimum lease payments................................ $36,187
=======
</TABLE>
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
<PAGE>
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):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
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
======= ====== ====
</TABLE>
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
LONG-LIVED ASSETS:
United States..................................... $ 9,497 $2,455 $971
Foreign countries................................. 191 -- --
------- ------ ----
TOTAL........................................... $ 9,688 $2,455 $971
======= ====== ====
</TABLE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<S> <C>
Schedule II--Valuation and Qualifying Accounts.............. S-1
</TABLE>
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.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------------------- -----------
<C> <S>
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).
</TABLE>
69
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------------------- -----------
<C> <S>
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.
</TABLE>
(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
<PAGE>
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.
<TABLE>
<S> <C> <C>
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)
</TABLE>
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:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
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
</TABLE>
71
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/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
</TABLE>
72
<PAGE>
ARIBA, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING OF COSTS AND DEDUCTIONS/ BALANCE AT END OF
CLASSIFICATION PERIOD EXPENSES WRITE-OFFS PERIOD
- -------------- ------------ --------- ----------- -----------------
<S> <C> <C> <C> <C>
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.......................... -- -- -- --
</TABLE>
S-1
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
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.
</TABLE>
<PAGE>
Exhibit 10.9
SUBLEASE
--------
This Sublease is made and entered into as of the _____ day of October,
1999, by and between Ariba, Inc., a Delaware corporation ("Ariba"), and
ChainLink Technologies, Inc., a Delaware corporation ("Sublessee").
RECITALS
A. Ariba, as Tenant, and MP Caribbean, Inc., as Landlord,
previously entered into an Industrial Complex Lease dated August 11, 1997
(the "Master Lease"), a copy of which is attached hereto as Exhibit A and
incorporated herein by this reference. Pursuant to the Master Lease, MP
Caribbean, Inc. leased to Ariba a portion of the building located at 1314
Chesapeake Terrace in the industrial complex known as Caribbean Corporate
Center in Sunnyvale, California, and more particularly described therein (the
"Premises").
B. Ariba now desires to sublease to Sublessee, and Sublessee now
desires to sublease from Ariba, all of the Premises on the terms and
conditions set forth herein.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, Ariba and Sublessee agree as follows:
AGREEMENT
1. DEFINED TERMS. Terms used in this Sublease as defined terms and
not otherwise defined herein shall have the same meanings as in the Master
Lease.
2. SUBLEASE OF PREMISES. Ariba hereby subleases to Sublessee, and
Sublessee hereby accepts from Ariba, on the terms and conditions hereinafter
set forth, the Premises. Ariba and Sublessee agree that the Premises contain
a rentable area of thirty-two thousand five hundred and seventy-six (32,576)
square feet.
3. RENT.
(a) During the Term of this Sublease (as defined in Paragraph
5 below), Sublessee shall pay to Ariba in equal monthly installments the
following sums, in advance, beginning on the Commencement Date (as defined in
Paragraph 5 below) and continuing on the first day of each calendar month
thereafter during the Term, monthly installments of base rent as provided
below ("Base Rent"):
<TABLE>
<CAPTION>
PERIOD OF TERM MONTHLY BASE RENT
-------------- -----------------
<S> <C>
12/1/1999 - 12/31/1999 FREE
1/1/2000 - 12/31/2000 $73,296
1/1/2001 - 12/31/2001 $76,553
1/1/2002 - 12/31/2002 $79,811
1/1/2003 - 12/31/2003 $83,068
1/1/2004 - 9/13/2004 $86,326
</TABLE>
<PAGE>
(b) The Base Rent and all other sums payable hereunder (such
other sums being referred to herein as "Additional Rent") shall be paid to
Ariba without deduction, set off, prior notice or demand, in lawful money of
the United States of America, at: prior to Commencement Date, Ariba, Inc.,
1585 Charleston Road, Mountain View, CA, 94043, Attn: Chief Financial
Officer; and on or after Commencement Date, Ariba, Inc., 1585 Charleston
Road, Mountain View, California, 94043 Attn: Chief Financial Officer, or at
such other place as Ariba may specify from time to time by written notice to
Sublessee. Base Rent and Additional Rent collectively is referred to herein
as "Rent."
(c) If the Commencement Date should occur on a day other than
the first day of calendar month, or if the last day of the Term should occur
on a day other than the last day of a calendar month, then the Rent payable
for such fractional month shall be prorated on a daily basis.
(d) Notwithstanding Paragraph 3(a) hereof, Sublessee shall
pay Ariba the installments of Base Rent for the second full month of the
lease term (January 2000) concurrently with the execution and delivery of
this Sublease. As such, Sublessee's second payment shall be due on the
commencement of the third month of the lease term (February 1, 2000).
4. OPERATING COSTS.
(a) In addition to the Base Rent provided for in Paragraph 3
above, starting from the Commencement Date, Sublessee shall reimburse Ariba
for all of the costs required to be paid by Ariba as the Tenant under the
Master Lease, directly or indirectly, pursuant to Article 6 and Article 7 of
the Master Lease (collectively, "Operating Costs").
(b) Sublessee shall pay Ariba the Operating Costs on demand,
at intervals not more frequent than monthly, less the amount of any monthly
estimated payments thereof made by Sublessee pursuant to the requirements of
subparagraph 4(c) below. Such demand shall include copies of any statements
furnished to Ariba by the Landlord.
(c) Ariba shall have the right from time to time to prepare
reasonable estimates of the Operating Costs payable by Sublessee hereunder
and to require, by written notice to Sublessee, that Sublessee pay such
estimated amounts to Ariba, in monthly installments, in advance, together
with Sublessee's payments of Base Rent. All such monthly estimated payments
shall be credited against the Operating Costs payable by Sublessee for the
calendar year to which such monthly estimated payments pertain. In the event
Sublessee's monthly estimated payments of Operating Costs for any calendar
year are greater than the Operating Costs payable by Sublessee for such
calendar year, Sublessee shall be entitled to credit the overpayment against
any amounts next coming due from Sublessee hereunder, or, if such overpayment
is of Operating Costs for the calendar year in which the Term ends and no
further estimated monthly payments of Operating Costs are due from Sublessee
to Ariba, Ariba shall refund such overpayment to Sublessee within thirty (30)
days after the time at
2
<PAGE>
which the amount of the Operating Costs payable by Sublessee for such final
calendar year has been determined.
5. TERM AND POSSESSION. The term of this Sublease ("Term") shall
begin on December 1, 1999 (the "Commencement Date") and shall end on
September 13, 2004 (the "Termination Date"), unless sooner terminated by
reason of Sublessee's default or Ariba's exercise of the early termination
right under Exhibit "D" to the Master Lease. If Ariba, for any reason
whatsoever, cannot deliver possession of the Premises to Sublessee, this
Sublease shall not be void or voidable, nor shall Ariba be liable to
Sublessee for any loss or damage resulting therefrom, but in such event the
Commencement Date of this Sublease shall be delayed until Ariba delivers
possession of the Premises has to Sublessee. If Ariba, for any reason
whatsoever, cannot deliver possession of the Premises to Sublessee by February
1, 1999, Sublessee may terminate this Sublease without any further liability
to either party.
6. CONDITION OF PREMISES. Ariba shall clean the carpets, reasonably
clean all walls (but not repaint), and remove all debris. Ariba shall
deliver all HVAC systems in good working order on the Commencement Date.
Except as provided by the previous sentence, Ariba shall deliver the Premises
to Sublessee in their "AS IS" condition, without warranty or representation of
any kind. It shall be Sublessee's responsibility to return the Premises to
Ariba and Master Lessor at the end of the term in a similar condition, normal
wear and tear excepted.
7. USE. Sublessee shall use the Premises for those uses permitted
under the Master Lease, and for no other purpose, without the prior written
consent of Ariba and the Landlord.
8. ALTERATIONS AND IMPROVEMENTS. Sublessee shall not make any
Alterations to the Premises without the prior written consent of the
Landlord, as provided in Article 11 of the Master Lease, and the prior
written consent of Ariba. Ariba agrees that Ariba will not unreasonably
withhold or delay its consent to a proposed Alteration and that Ariba will
reasonably cooperate with Sublessee in seeking approval of the Landlord to
any Alteration proposed by Sublessee which Ariba has approved; provided,
however, that (I) Ariba may withhold Ariba's consent to a particular
Alteration notwithstanding that the Landlord has consented thereto, and (ii)
Ariba may condition its consent to a particular Alteration upon Sublessee's
agreement to remove such Alteration and to restore the Premises to their
condition prior to the construction of such Alteration, all at Sublessee's
sole expense, such removal and restoration to be completed no later than the
last day of the Term, and Ariba may require that Sublessee deliver to Ariba a
cash deposit or other security, in an amount equal to the estimated cost of
such removal and restoration, as reasonably determined by Ariba.
9. PARKING. Sublessee shall have the right to non-exclusive use of
the parking spaces to which Ariba is entitled on the same basis as such are
made available to Ariba under the Master Lease.
3
<PAGE>
10. BROKERAGE COMMISSIONS. Each party represents and warrants to the
other that it has engaged no real estate brokers or finders in connection
with the transactions contemplated by this Sublease, except that Ariba advises
Sublessee that Ariba has agreed to pay Cushman & Wakefield of California,
Inc. ("Cushman") a commission pursuant to a separate agreement between Ariba
and Cushman, payment of which shall be Ariba's sole responsibility.
11. MASTER LEASE.
(a) As applied to this Sublease, the words "Landlord" and
"Tenant" as used in the Master Lease (to the extent incorporated herein)
shall be deemed to refer to Ariba and Sublessee, respectively. Sublessee and
this Sublease shall be subject in all respects to the terms of, and the
rights of Landlord under, the Master Lease. Except as otherwise expressly
provided in Paragraph 11(b) hereof, the covenants, agreements, terms,
provisions and conditions of the Master Lease insofar as they are not
inconsistent with the terms of this Sublease are made a part of and
incorporated into this Sublease as if recited herein in full, and the rights
and obligations of the Landlord and the Tenant under the Master Lease shall
be deemed the rights and obligations of Ariba and Sublessee, respectively,
hereunder and shall be binding upon and inure to the benefit of Ariba and
Sublessee, respectively. As between the parties hereto only, in the event of
a conflict between the terms of the Master Lease and the terms of this
Sublease, the terms of this Sublease shall control.
(b) Sublessee recognizes that Ariba is not in a position to
render any of the services or to perform any of the obligations required of
the Landlord under the Master Lease. Therefore, despite anything to the
contrary in this Sublease, Sublessee agrees that performance by Landlord of
its obligations under the Master Lease shall satisfy Ariba's obligations
hereunder resulting from the incorporation herein of the Master Lease, and
Ariba will not be liable to Sublessee for any failure of the Landlord to so
perform. Sublessee will not have any claim against Ariba based on the
Landlord's failure or refusal to comply with any of the provisions of the
Master Lease unless that failure or refusal is a result of Ariba's act or
failure to act. Ariba shall make reasonable efforts to cooperate with
Sublessee to cause the Landlord to comply with the terms of the Master Lease.
Despite the Landlord's failure or refusal to comply with any of those
provisions of the Master Lease, this Sublease will remain in full force and
effect and Sublessee will pay the Rent without any abatement, deduction or
setoff. Except as otherwise provided in this Sublease, Sublessee agrees to
be subject to, and bound by, all of the covenants, agreements, terms,
provisions and conditions of the Master Lease as though Sublessee was the
Tenant thereunder. To the best of Ariba's knowledge, Ariba is not aware of
any default of the Landlord existing at the time this Sublease is executed.
(c) The following provisions of the Master Lease are not
incorporated herein and shall not apply to this Sublease, or are only
incorporated herein to the extent, or for the purpose, specified below:
(i) The Term of this Sublease and delivery of
possession of the Premises shall be governed by Paragraph 5 of this Sublease;
4
<PAGE>
(ii) The payment by Sublessee of Base Rent shall be
governed by Paragraph 3 of this Sublease;
(iii) Notwithstanding anything to the contrary in
Section 5.1 of the Master Lease (as incorporated into this Sublease), Ariba
shall be permitted to disclose financial reports of Sublessee to the Landlord
if the Landlord requests such reports, without obtaining Sublessee's consent.
(iv) Service and delivery of notices to Ariba and
Sublessee shall be governed by Paragraph 17 of this Sublease, and Section
25.1 of the Master Lease shall not apply thereto;
(v) For purposes of this Sublease, with respect to
those provisions incorporated from the Master Lease, all references to the
"Lease," or the "lease," between Landlord and Ariba shall be deemed to be
references to this "Sublease;"
(vi) Ariba makes no representations or warranties
regarding the Premises, including without limitation any representations or
warranties regarding hazardous materials, zoning, or the suitability of the
Premises for Sublessee's intended use; and
(vii) Neither the Right of First Opportunity nor the
early termination right provided in Exhibit "D" to the Master Lease shall
accrue to the benefit of Sublessee under this Sublease. Ariba shall be
entitled to exercise its rights under Exhibit D to the Master Lease in its
sole discretion. The parties acknowledge that Ariba does not intend to
exercise its right to lease any additional space under the Right of First
Opportunity, and intends to terminate the Master Lease if the opportunity
arises under the terms of said Exhibit D. However, Ariba retains said Right
of First Opportunity and said early termination right for itself, should
either arise under the terms of said Exhibit "D". The provisions of Section
3.2, 3.3, 4.1, 4.2, 4.3, and 26.1, of the Master Lease and the provisions of
Exhibit D of the Master Lease are not incorporated in and shall not apply to
this Sublease, and Sublessee shall have no rights or obligations thereunder.
(d) This Sublease is subordinate to all of the terms and
conditions of the Master Lease. Sublessee acknowledges that the Master Lease
and this Sublease may be further made subordinate to, among other things, the
terms, provisions and liens of ground leases, mortgages and other financing
affecting the Premises. In the event the Master Lease is terminated for any
reason, then, on the date of such termination, this Sublease automatically
shall terminate and be of no further force or effect. If the termination of
the Master Lease (and the resulting termination of this Sublease) occurs
through no breach or default of this Sublease or of the Master Lease by
Ariba, Ariba shall have no liability therefor to Sublessee.
(e) Sublessee agrees that it will not take or permit any
action or fail to perform or observe any obligation, which causes an event of
default under the Master Lease and/or causes the Master Lease to be terminated
or forfeited, and Sublessee shall indemnify, defend, protect and hold
harmless Ariba from and against any and all claims, demands, suits, costs,
expenses, damages and liabilities, including reasonable attorneys' fees,
arising by reason
5
<PAGE>
of any act or omission on the part of the indemnifying party which is in
breach of this Paragraph 11(e).
(f) Notwithstanding any provision of the Master Lease that is
incorporated by reference into this Sublease to the contrary, if by the terms
of such incorporated provision Landlord must approve, disapprove, or
otherwise respond to Sublessee within a specified time period, Ariba shall
have an additional ten (10) business days after expiration of such time
period to approve, disapprove, or otherwise respond to Sublessee with respect
to such matter.
12. EVENTS OF DEFAULT.
(a) In addition to the occurrence of any default (as defined
in Section 22.1 of the Master Lease), each of the following shall constitute
an event of default by Sublessee under this Sublease and shall entitle Ariba
to exercise any and all remedies available to the Landlord under the Master
Lease and/or available to Ariba by operation of law;
(i) Sublessee fails to pay when due any monthly
installment of Base Rent or Operating Costs, or shall fail to pay when due
any other sum payable hereunder, and such failure shall continue for three
(3) days after delivery to Sublessee of Ariba's written notice thereof;
(ii) Sublessee fails in any material respect to
observe or perform any other material term or condition to be observed or
performed by Sublessee hereunder or under the provisions of the Master Lease
which are incorporated into this Sublease under Paragraph 13 hereof, and such
failure shall continue for thirty (30) days after delivery to Sublessee of
Ariba's written notice thereof, unless such failure of performance, by its
nature, cannot be cured within thirty (30) days, in which event, such failure
of performance shall be deemed cured if Sublessee commences to cure the same
within such thirty (30) day period and completes such cure as soon as
reasonably practicable; and
(iii) Sublessee files a petition in bankruptcy or avail
itself of any other state or federal law providing for the relief of debtors.
(b) Notwithstanding any provision of this Paragraph 14 or of
the Master Lease to the contrary, in the event that during any twelve (12)
month period (I) Sublessee fails to pay Rent, Operating Costs or other sums
required to be paid by Sublessee hereunder, or (ii) any other default or
event of default of the same or similar nature occurs, Sublessee shall not be
entitled to any grace period to cure such default or event of default which
occurs thereafter during said twelve (12) month period.
(c) The parties agree that if the rental credit of one
hundred fourteen thousand sixteen dollars ($114,016) provided for in
Section 4.1 of the Maser Lease becomes due and payable to the Landlord by
reason of a default for which Sublessee is responsible, then said payment shall
be made by Sublessee on behalf of Ariba. Such payment by Sublessee is in
addition to any other remedies available to Ariba arising from said default.
6
<PAGE>
13. CONSENT OF LANDLORD; APPROVALS.
(a) Sublessee acknowledges that, under the terms of the
Master Lease, this Sublease requires the prior written consent of the
Landlord (the "Landlord's Consent"). Ariba agrees to use reasonable efforts
to obtain Landlord's Consent, promptly upon delivery to Ariba of at least
three counterparts of this Sublease, duly executed by Sublessee. If Ariba
has not received Landlord's Consent within twenty (20) days after receipt of
such executed counterparts of this Sublease from Sublessee, then either Ariba
or Sublessee shall have the right, by written notice to the other party, to
elect to terminate this Sublease.
(b) Sublessee acknowledges that as to certain matters set
forth in this Sublease, Ariba has rights of approval or disapproval. In
addition, Sublessee acknowledges that as to certain matters set forth in the
Master Lease, Landlord has rights of approval or disapproval. If any matter
requires Landlord's approval under the Master Lease (irrespective of whether
such matter also requires Ariba's consent under this Sublease), Ariba shall
submit the same to Landlord for approval within ten (10) business days after
Ariba's receipt of written request from Sublessee, and provided Ariba
approves such matter Ariba shall use reasonable efforts to obtain Landlord's
approval of such matter. If Landlord disapproves any such matter, Ariba
shall have no liability to Sublessee by reason of such refusal.
14. NOTICES. All notices or demands required or permitted under this
Sublease shall be in writing and shall be addressed as set forth herein below
or to such other address as either party may, by written notice to the other,
specify in writing from time to time. All notices shall be deemed served (I)
upon delivery, if hand-delivered, or (ii) 24 hours after delivery to Federal
Express or another nationally-recognized overnight courier, marked for
overnight delivery, with charges prepaid, if served by overnight courier, or
(iii) three business days after deposited in the United States mail, with
postage prepaid, registered or certified mail, return receipt requested, if
served by mail. Notices hereunder may also be served by facsimile, with a
copy sent by United States mail postage prepaid, and shall be deemed served
when received by the recipient's facsimile machine.
Notices to Ariba shall be addressed as follows:
Ariba, Inc.
1585 Charleston Road
Mountain View, CA 94043
Attn: Real Estate Manager
(408) 543-4061
(408) 543-4171 - FAX
With a copy to:
Ariba, Inc.
1565 Charleston Road
Mountain View, CA 94043
7
<PAGE>
Attn: Legal Department
(408) 990-7519
Notices to Sublessee shall be addressed as set forth on the signature
page hereof, below Sublessee's signature.
15. INSURANCE; WAIVER OF SUBROGATION.
(a) Throughout the Term, Sublessee, at Sublessee's sole
expense, shall obtain and maintain in effect, with respect to the Premises,
for the benefit of Sublessee, Ariba and the Landlord, the policies of
insurance described in Section 15.2 of the Master Lease and shall otherwise
comply with all requirements of such Section 15.2. Ariba shall be named as
an insured, in addition to the Landlord, under any of such policies which,
under the terms of the Master Lease, are required to name the Landlord as an
insured. Sublessee shall deliver certificates of such insurance to Ariba
prior to commencement of the Early Occupancy Period.
(b) Notwithstanding any provision to the contrary in the
Master Lease, Ariba, Sublessee, and (to the extent agreed to by Landlord)
Landlord each (i) hereby waives all claims such party may have against the
other to the extent such claims are covered by insurance carried or required
to be carried under the Master Lease, and (ii) shall cause their respective
insurers to similarly waive all rights of recovery against the others, and
against the officers, employees, partners, agents and representatives of the
others, for loss of or damage to the property of the waiving party or the
property of others under its control, to the extent such loss or damage is
(or would have been) insured against under any insurance policy carried (or
required to be carried) by Landlord, Ariba, or Sublessee hereunder. Each of
Sublessee, Ariba, and (to the extent agreed to by Landlord pursuant to its
consent hereto or otherwise) Landlord shall obtain a clause or endorsement to
the applicable insurance policies carried by such party denying its insurer
any rights of subrogation against the other parties.
16. SECURITY DEPOSIT.
(a) Upon the execution of this Sublease, Sublessee shall
deposit with Ariba an irrevocable letter of credit (the "Letter of Credit")
in form and issued by an institutional lender acceptable to Ariba in the
amount of two hundred nineteen thousand eight hundred and eighty-eight
dollars ($219,888) as security for the prompt and complete performance by
Sublessee of all of the obligations and terms of this Sublease to be
performed by Sublessee, and not as prepayment of Rent. The Letter of Credit
shall (i) show Ariba as the account party, (ii) have a term of not less than
twelve (12) months, (iii) be automatically renewed from time to time
throughout the term of this Sublease not later than thirty (30) days prior to
its expiration (such renewals to be for periods of not less than twelve (12)
months and in the amounts required hereby), (iv) require written notice to
Ariba at least thirty (30) days prior to non-renewal if for any reason the
Letter of Credit will not be renewed, and (v) allow for partial draws
thereon. The term "Letter of Credit" shall, for the purposes of this
Sublease, include any replacement or renewal Letter of Credit.
8
<PAGE>
(b) Upon the occurrence of an event of default by Sublessee
under the terms of this Sublease, Ariba may upon demand draw upon the Letter
of Credit, and Ariba may apply such portion or portions of the Letter of
Credit as are reasonably necessary for the following purposes: (i) to remedy
any default by Sublessee in the payment of Rent under this Sublease; (ii) to
clean, restore and repair the Premises following their surrender to Ariba, if
not surrendered in the condition required pursuant to this Sublease, and
(iii) to remedy any other default of Sublessee hereunder, including, without
limitation, the failure by Sublessee to renew the Letter of Credit as
required hereby. Ariba shall limit the amounts drawn from the Letter of
Credit to the amounts it reasonably deems necessary to cure defaults
hereunder by Sublessee. Any amount of the Letter of Credit that is drawn upon
by Ariba but not applied by Ariba shall be held by Ariba as a security
deposit (the "L-C Security Deposit") which may be applied by Ariba for the
purposes described in this paragraph. In the event the Letter of Credit or
any portion thereof is drawn upon by Ariba, Sublessee shall, within five (5)
days after demand by Ariba, either (i) deposit cash with Ariba in an amount
that, when added to the amount remaining under the Letter of Credit and the
amount of any L-C Security Deposit, shall equal the original amount of the
Letter of Credit, or (ii) deliver written documentation executed by the
issuer of the Letter of Credit and reasonably acceptable to Ariba confirming
that the Letter of Credit has been reinstated to its original amount. Ariba
shall not be deemed a trustee of the L-C Security Deposit. Ariba may use the
L-C Security Deposit in Ariba's ordinary business and shall not be required
to segregate if from Ariba's general accounts. Sublessee shall not be
entitled to any interest on the L-C Security Deposit. The L-C Security
Deposit, less any portion thereof which Ariba is entitled to retain, shall
be returned to Sublessee (or at Ariba's option to the last assignee, if any,
of Sublessee's interest hereunder) within thirty (30) days after the later of
the expiration of the term hereof or the date on which Sublessee vacates the
Premises.
17. GENERAL PROVISIONS.
(a) The waiver by either party hereto of a breach of any
covenant, obligation or condition set forth herein to be performed or
observed by the other party hereto shall not be deemed to be a waiver of any
subsequent breach of the same or of any other covenant, obligation or
condition of this Sublease to be performed or observed by such party.
(b) This Sublease shall be governed by and construed in
accordance with the laws of the State of California.
(c) If any term, covenant or condition of this Sublease or
the application thereof to any person or circumstance shall be held to be or
rendered invalid, unenforceable or illegal, then such term, covenant or
condition shall be considered separate and severable from the remainder of
this Sublease, shall not affect, impair or invalidate the remainder of this
Sublease, and shall continue to be applicable to and enforceable to the
fullest extent permitted by law against any person or circumstances other
then those as to which it has been held or rendered invalid, unenforceable or
illegal.
9
<PAGE>
(d) This Sublease may be executed in one or more
counterparts, each of which shall constitute an original but all of which
together shall constitute one and the same instrument.
(e) This Sublease sets forth all the covenants, promises,
agreements, conditions or understandings between the parties hereto
concerning the Premises and the subject matter of this Sublease. No
alteration, amendment or change of, or addition to this Sublease shall be
binding upon the parties hereto unless in writing and signed by Ariba and
Sublessee.
(f) The captions and Paragraph numbers appearing in this
Sublease are inserted only as a matter of convenience and in no way define,
limit, construe or describe the scope or intent of any of the provisions
hereof nor in any way affect this Sublease.
(g) The words "hereof," "herein," "hereunder" and similar
expressions used in any provision of this Sublease relate to the whole of
this Sublease and not to such provision alone, unless otherwise expressly
provided, and whenever the singular number of a gender is used herein the same
shall be construed as including the plural and the masculine, feminine and
neuter, respectively, where the fact or context so requires.
(h) Time is of the essence of this Sublease and of every part
hereof.
(i) Each party to this Sublease represents and warrants to
the other party hereto that the execution delivery and performance of this
Sublease by the representing and warranting party has been authorized by all
necessary corporate action of such party and that the officer or officers
executing this Sublease on behalf of such party have full power and authority
to do so and to bind such party hereto.
IN WITNESS WHEREOF, Ariba and Sublessee have duly executed this Sublease
as of the day and year first above written.
ARIBA:
Ariba, Inc.,
a Delaware corporation
By: /s/ [ILLEGIBLE]
-------------------------------
Its: CFO
------------------------------
SUBLESSEE:
ChainLink Technologies, Inc.,
10
<PAGE>
a Delaware corporation
----------
By: /s/ Edward P. Kinsey
-------------------------------
Its: CFO
------------------------------
Address for Service of Notices:
Chain Link
----------------------------------
1314 Chesapeake Terrace
----------------------------------
SV, CA 94089
----------------------------------
11
<PAGE>
EXHIBIT A
Master Lease
<PAGE>
INDUSTRIAL COMPLEX LEASE
(California)
Industrial Complex: Caribbean Corporate Center
Landlord: MP Caribbean, Inc.
Tenant: Ariba Technologies, Inc.
Reference Date: August 11, 1997
INDEX TO LEASE
<TABLE>
<CAPTION>
TITLE PAGE
<S> <C>
ARTICLE 1.
DEFINITIONS AND CERTAIN BASIC PROVISIONS . . . . . . . . . . . . . . . 1
ARTICLE 2.
GRANTING CLAUSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
ARTICLE 3.
DELIVERY OF DEMISED PREMISES . . . . . . . . . . . . . . . . . . . . . 2
ARTICLE 4.
RENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
ARTICLE 5.
FINANCIAL REPORTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ARTICLE 6.
TENANT'S RESPONSIBILITY FOR TAXES, OTHER
REAL ESTATE CHARGES AND INSURANCE EXPENSES . . . . . . . . . . . . . . 4
ARTICLE 7.
COMMON AREA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
ARTICLE 8.
[INTENTIONALLY OMITTED] . . . . . . . . . . . . . . . . . . . . . . . . 7
ARTICLE 9.
USE AND CARE OF DEMISED PREMISES . . . . . . . . . . . . . . . . . . . 7
ARTICLE 10.
MAINTENANCE AND REPAIR OF DEMISED PREMISES . . . . . . . . . . . . . . 7
ARTICLE 11.
ALTERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
ARTICLE 12.
LANDLORD'S RIGHT OF ACCESS . . . . . . . . . . . . . . . . . . . . . . 9
ARTICLE 13.
SIGNS; STORE FRONTS . . . . . . . . . . . . . . . . . . . . . . . . . . 9
ARTICLE 14.
UTILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
ARTICLE 15.
INSURANCE COVERAGES . . . . . . . . . . . . . . . . . . . . . . . . . .10
ARTICLE 16.
WAIVER OF LIABILITY; MUTUAL WAIVER OF SUBROGATION . . . . . . . . . . .11
<PAGE>
ARTICLE 17.
DAMAGES BY CASUALTY . . . . . . . . . . . . . . . . . . . . . . . . . .12
ARTICLE 18.
EMINENT DOMAIN . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
ARTICLE 19.
ASSIGNMENT AND SUBLETTING . . . . . . . . . . . . . . . . . . . . . . .13
ARTICLE 20.
SUBORDINATION; ATTORNMENT; ESTOPPELS . . . . . . . . . . . . . . . . .15
ARTICLE 21.
TENANT'S INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . .15
ARTICLE 22.
DEFAULT BY TENANT AND REMEDIES . . . . . . . . . . . . . . . . . . . .16
ARTICLE 23
[INTENTIONALLY OMITTED] . . . . . . . . . . . . . . . . . . . . . . . .19
ARTICLE 24.
HOLDING OVER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
ARTICLE 25.
NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
ARTICLE 26.
COMMISSIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
ARTICLE 27.
REGULATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
ARTICLE 28.
HAZARDOUS MATERIALS . . . . . . . . . . . . . . . . . . . . . . . . . .21
ARTICLE 29.
MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
</TABLE>
EXHIBIT "A" DEMISED PREMISES
EXHIBIT "B" CONSTRUCTION: TENANT ACCEPTANCE OF SPACE "AS IS"
EXHIBIT "C" TENANT CONSTRUCTION RULES AND REGULATIONS
EXHIBIT "D" RIGHT OF FIRST OPPORTUNITY
2
<PAGE>
INDUSTRIAL COMPLEX LEASE
(California)
ARTICLE 1.
DEFINITIONS AND CERTAIN BASIC PROVISIONS
1.1 The following list sets out certain defined terms and certain
financial and other information pertaining to this lease:
(a) "Landlord": MP Caribbean, Inc., a Delaware corporation,
whose taxpayer identification number is 94-3226570.
(b) Landlord's address: c/o GE Capital Investment Advisors,
Inc., 444 Market Street, Suite 2100, San Francisco, California 94111, Attention:
Asset Management and Legal Department
(c) "Tenant": Ariba Technologies, Inc., a Delaware
corporation, whose taxpayer identification number is 77-0439730.
(d) Tenant's address:
Prior to Commencement Date: 1870 Plymouth Street,
Suite 103
Mountain View, CA 94043
Upon Commencement Date: 1314 Chesapeake Terrace
Sunnyvale, CA 94089
(See also section 25.1)
(e) Tenant's trade name: Ariba Technologies
(f) Tenant's Guarantor: N/A
(g) "Agent": South Bay Development Company, whose address is
511 Division Street, Campbell, California 95008, Attention: James D. Mair.
(h) "Industrial Complex": Landlord's property in the City of
Sunnyvale, Santa Clara County, California, which property is commonly known as:
1310-1327 Chesapeake Terrace, Caribbean Corporate Center, Sunnyvale, California.
(i) "Demised Premises": that certain area in the Industrial
Complex located at 1314 Chesapeake Terrace, Sunnyvale, California and being
described or shown cross-hatched on the floor plan(s) attached hereto as EXHIBIT
"A" which Landlord and Tenant acknowledge and agree to contain 32,576 square
feet of rentable area.
(j) "Commencement Date": the later of September 14, 1997, or
that date upon which Landlord has completed all of the Landlord's Improvements
as provided in Article IV of EXHIBIT "B" attached hereto.
(k) "Lease Term": commencing on the Commencement Date and
continuing for seven (7) years and no months after the Commencement Date;
provided that if the Commencement Date is a date other than the first day of a
calendar month, the lease term shall be extended by the number of days remaining
in the calendar month in which the Commencement Date occurs. See EXHIBIT "D".
(l) Minimum guaranteed rental: $57,008.00, subject to Section
4.1 below.
(m) Prepaid rental: $57,008.00, being an estimate of the
initial minimum guaranteed rental, for the first month of the lease term, such
prepaid rental being due and payable upon execution of this lease.
(n) Security deposit: $76,396.00, such security deposit being
due and payable upon execution of this lease.
(o) Permitted use: General office and software development,
and for no other purpose whatsoever.
(p) Tenant's maximum insurance deductible: $5,000.00.
(q) "Tenant's Broker": Cushman & Wakefield of California,
Inc.
1
<PAGE>
(r) (i) "Tenant's Proportionate Share of Building Basic
Costs": 44.89%
(ii) "Tenant's Proportionate Share of Industrial
Complex Basic Costs": 12.85%
(iii) "Tenant's Proportionate Share of Parcel Basic
Costs": 22.09%.
ARTICLE 2.
GRANTING CLAUSE
2.1 Landlord leases the Demised Premises to Tenant, and Tenant leases
the Demised Premises from Landlord, upon the terms and conditions set forth in
this lease.
ARTICLE 3.
DELIVERY OF DEMISED PREMISES
3.1 Except to the extent modified by Landlord's express assumption of
construction obligations, if any, in EXHIBIT "B" attached to this lease, the
Demised Premises is being leased "AS IS," with Tenant accepting all defects, if
any; and Landlord makes no warranty of any kind, express or implied, with
respect to the Demised Premises (without limitation, Landlord makes no warranty
as the habitability, fitness or suitability of the Demised Premises for a
particular purpose nor as to the absence of any toxic or otherwise hazardous
substances). This Section 3.1 is subject to any contrary requirements under
applicable law; however, in this regard Tenant acknowledges that it has been
given the opportunity to inspect the Demised Premises and to have qualified
experts inspect the Demised Premises prior to the execution of this lease.
3.2 Notwithstanding the foregoing, Landlord warrants for a period of
ninety (90) days following the Commencement Date that the roof, mechanical,
electrical and plumbing systems serving the Demised Premises shall be in proper
working order. Landlord shall repair any defective or malfunctioning component
of the foregoing building systems about which Landlord has received written
notice from Tenant describing the failure or malfunction within ninety (90) days
of the Commencement Date.
3.3 Notwithstanding anything to the contrary in this Lease, Tenant
may, prior to the Commencement Date, enter the Demised Premises for the purpose
of installing telephones, electronic communication or related equipment,
fixtures, furniture and equipment, provided that Tenant shall be solely
responsible for any of such equipment, fixtures, furniture or material and for
any loss or damage thereto from any cause whatsoever, excluding only the gross
negligence or willful misconduct of Landlord. Such early access to the Demised
Premises and such installation shall be permitted only to the extent that
Landlord determines that such early access and installation activities will not
delay Landlord's completion of the Landlord Improvements. Landlord and Tenant
shall cooperate in the scheduling of Tenant's early access to the Demised
Premises and of Tenant's installation activities. The provisions of Articles 15,
16 and 21 below shall expressly apply in full during the period of any such
early entry, and Tenant shall (i) provide certificates of insurance evidencing
the existence and amounts of liability insurance carried by Tenant and its
agents and contractors, reasonably satisfactory to Landlord, prior to such early
entry, and (ii) comply with all applicable laws, regulations, permits and other
approvals applicable to such early entry work in the Demised Premises. No rent
shall be due for such early access period.
ARTICLE 4.
RENT
4.1 The minimum guaranteed rental shall be subject to periodic
increases based upon the following schedule and which increases shall become
effective automatically and without further notice as of the first day of the
specified lease month:
<TABLE>
<CAPTION>
Lease Months Monthly Rental
------------ --------------
<S> <C>
Months 1 -12 $57,008.00
Months 13-24 $59,858.00
Months 25 -36 $62,851.00
Months 37 -48 $65,994.00
Months 49 -60 $69,294.00
Months 61 -72 $72,758.00
Months 73 -84 $76,396.00
</TABLE>
2
<PAGE>
Notwithstanding anything to the contrary contained herein, Tenant shall be
credited for the amount of minimum guaranteed rental for months one (1) and two
(2) of the lease term in the total amount of $114,016.00. Tenant acknowledges
that in no way shall this minimum guaranteed rental credit apply to any other
period of the lease term or in any way relieve Tenant of its responsibility to
pay all other charges due under this lease, including without limitation,
Tenant's obligation to pay Tenant's pro rata share of real estate charges,
insurance expenses and common area expenses. In the event Tenant is in default
of any of its obligations set forth in this lease beyond any applicable notice
and cure period at any time during the term of this lease, and Landlord elects
to pursue its remedies under Section 22.2(c) below ("Landlord's Recovery
Action"), in addition to any other fights or remedies Landlord may have as a
result of such default in such Landlord's Recovery Action, the entire
$114,016.00 amount of the minimum guaranteed rental credit hereinabove
referenced shall be due and payable by Tenant to Landlord.
4.2 Rental shall accrue from the Commencement Date, and shall be
payable to Landlord at Agent's address specified in Section 1.1(g) above or at
such other address as Landlord shall so notify Tenant from time to time.
4.3 Tenant shall pay to Landlord minimum guaranteed rental in monthly
installments in the amounts specified in Section 1.1(l) and Section 4.1 of this
lease. The first such monthly installment shall be due and payable on or before
the Commencement Date, and subsequent installments shall be due and payable on
or before the first day of each succeeding calendar month during the lease term;
provided that if the Commencement Date is a date other than the first day of a
calendar month, there shall be due and payable on or before such date as minimum
guaranteed rental for the balance of such calendar month a sum equal to that
proportion of the rent specified for the first full calendar month as herein
provided, which the number of days from the Commencement Date to the end of the
calendar month during which the Commencement Date shall fall bears to the total
number of days in such month. Tenant agrees to pay to Landlord, if assessed by
the jurisdiction in which the Industrial Complex is located, any sales, excise
or other tax imposed, assessed or levied in connection with Tenant's payment of
rents.
4.4 It is understood that the minimum guaranteed rental is payable on
or before the first day of each calendar month (in accordance with Section 4.2
above), without offset or deduction of any nature. In the event any rental is
not received within five (5) days after its due date for any reason whatsoever,
or if any rental payment is by check which is returned for insufficient funds,
then in addition to the past due amount Tenant shall pay to Landlord one of the
following (the choice to be at the sole option of Landlord unless one of the
choices is improper under applicable law, in which event the other alternative
will automatically be deemed to have been selected): (a) a late charge in an
amount equal to six percent (6%) of the rental then due, in order to compensate
Landlord for its administrative and other overhead expenses; or (b) interest on
the rental then due at the maximum contractual rate which could legally be
charged in the event of a loan of such rental to Tenant (but in no event to
exceed 1-1/2% per month), such interest to accrue continuously on any unpaid
balance due to Landlord by Tenant during the period commencing with the rental
due date and terminating with the date on which Tenant makes full payment of all
amounts owing to Landlord at the time of said payment. Any such late charge or
interest payment shall be payable as additional rental under this lease, shall
not be considered a waiver by Landlord of any default by Tenant hereunder, and
shall be payable immediately on demand.
4.5 If Tenant fails in two (2) consecutive months to make rental
payments within five (5) days after it is due, Landlord, in order to reduce its
administrative costs, may require, by giving written notice to Tenant (and in
addition to any late charge or interest accruing pursuant to Section 4.4 above,
as well as any other rights and remedies accruing pursuant to Article 22 or
Article 23 below, or any other provision of this lease or at law), that minimum
guaranteed rentals are to be paid quarterly in advance instead of monthly, and
that all future rental payments are to be made on or before the due date by
cash, cashier's check, or money order and that the delivery of Tenant's
personal or corporate check will no longer constitute a payment of rental as
provided in this lease. Any acceptance of a monthly rental payment or of a
personal or corporate check thereafter by Landlord shall not be construed as a
subsequent waiver of said rights.
4.6 Tenant shall pay when due any and all sales taxes levied, imposed
or assessed by the United States of America, the State of California, or any
political subdivision thereof or other taxing authority upon the minimum
guaranteed rental, additional rent and all other sums payable hereunder.
ARTICLE 5.
FINANCIAL REPORTS
5.1 From time to time during the lease term, Tenant shall, within
fifteen (15) days of Landlord's request therefor, furnish a true and accurate
statement of its financial condition prepared in conformity with recognized
accounting principles and in a form reasonably satisfactory to Landlord.
3
<PAGE>
Landlord shall use reasonable efforts to maintain the confidentiality of such
financial reports; provided, however, that Landlord may disclose such financial
reports to individuals within its legal, real estate and accounting departments
who have a reasonable need to know the information contained in such financial
reports. Landlord and Tenant agree that Landlord may disclose Tenant's financial
statements to potential purchasers of, or lenders on, the Industrial Complex
only with Tenant's prior written consent, which consent shall not be
unreasonably withheld or delayed.
ARTICLE 6.
TENANT'S RESPONSIBILITY FOR TAXES, OTHER
REAL ESTATE CHARGES AND INSURANCE EXPENSES
6.1 Tenant shall be liable for all taxes levied against personal
property and trade fixtures placed by Tenant in the Demised Premises which taxes
shall be paid when due and before any delinquency. If any such taxes are levied
against Landlord or Landlord's property and if Landlord elects to pay the same
or if the assessed value of Landlord's property is increased by inclusion of
personal property and trade fixtures placed by Tenant in the Demised Premises
and Landlord elects to pay the taxes based on such increase, Tenant shall pay to
Landlord upon demand that part of such taxes for which Tenant is primarily
liable hereunder.
6.2 Tenant shall also be liable for Tenant's Proportionate Share (as
specified in Section 1.1(r) above and determined in accordance with Section 7.5
below) of all "real estate charges" (as defined below) and "insurance expenses"
(as defined below) related to the Industrial Complex or Landlord's ownership of
the Industrial Complex. Tenant's obligations under this Section 6.2 shall be
prorated during any partial year (i.e., the first year and the last year of the
lease term). Tenant's Proportionate Share shall be adjusted as reasonably
determined by Landlord in the event that the total rentable area of the
buildings in the Industrial Complex shall change after the date hereof. "Real
estate charges" shall include ad valorem taxes, general and special assessments,
parking surcharges, any tax or charge for governmental services (such as street
maintenance or fire protection) which are attributable to the transfer or
transaction directly or indirectly represented by this Lease, by any sublease or
assignment hereunder or by other Leases in the Industrial Complex or by any
document to which Tenant is a party creating or transferring (or reflecting the
creation or transfer) or any interest or an estate in the Demised Premises and
any tax or charge which replaces or is in addition to any of such
above-described "real estate charges"; real estate charges shall also include
any fees, expenses or costs (including attorney's fees, expert fees and the
like) incurred by Landlord in protesting or contesting any assessments levied or
the tax rate. "Real estate charges" shall not be deemed to include sales tax
payable by Tenant pursuant to Section 4.6 above and any franchise, estate,
inheritance or general income tax. "Insurance expenses" shall include all
premiums and other expenses incurred by Landlord for liability insurance and
fire and extended coverage property insurance (plus whatever endorsements or
special coverages which Landlord, in Landlord's sole discretion, may consider
appropriate) business interruption, and rent loss, earthquake and any other
insurance policy which may be carried by Landlord insuring the Demised Premises,
the Common Area, the Industrial Complex, or any improvements.
6.3 At Landlord's sole option, Landlord and Tenant shall attempt to
obtain separate assessments for Tenant's obligations pursuant to Section 6.1
and, with respect to Section 6.2, for such of the "real estate charges" as are
readily susceptible of separate assessment. To the extent of a separate
assessment, Tenant agrees to pay such assessment before it becomes delinquent
and to keep the Demised Premises free from any lien or attachment; moreover, as
to all periods of time during the lease term, this covenant of Tenant shall
survive the termination of the lease. With regard to the calendar year during
which the lease term expires, Landlord at its option either may bill Tenant when
the charges become payable or may charge the Tenant an estimate of Tenant's pro
rata share of whichever charges have been being paid directly by Tenant (based
upon information available for the current year plus, if current year
information is not adequate in itself, information relating to the immediately
preceding year).
6.4 At such time as Landlord has reason to believe that at some time
within the immediately succeeding twelve (12) month period Tenant will owe
Landlord any amounts pursuant to one or more of the preceding sections of this
Article 6, Landlord may direct that Tenant prepay monthly a pro rata portion of
the prospective future payment (i.e., the prospective future payment divided by
the number of months before the prospective future payment will be due). Tenant
agrees that any such prepayment directed by Landlord shall be due and payable
monthly on the same day that minimum guaranteed rental is due. Any amounts paid
by Tenant under this Section 6.4 shall be subject to reconciliation at the end
of the tax year or calendar year, at Landlord's option, on the basis of the
actual costs for such period, with Tenant to be credited with any overpayments
made.
6.5 In the event that any payment due from Tenant to Landlord is
not received within ten (10) days after its due date for any reason
whatsoever, or if any such payment is by check which is returned for
insufficient funds, then in addition to the amount then due, Tenant shall pay
to Landlord interest on
4
<PAGE>
the amount then due at the maximum contractual rate which could legally be
charged in the event of a loan of such amount to Tenant (but in no event to
exceed 1-1/2% per month), such interest to accrue continuously on any unpaid
balance until paid.
ARTICLE 7.
COMMON AREA
7.1 The term "Common Area" is defined for all purposes of this lease
as that part of the Industrial Complex intended for the common use of all
tenants, including among other facilities (as such may be applicable to the
Industrial Complex), parking areas, private streets and alleys, landscaping,
curbs, loading areas, sidewalks, recreation/picnic areas, malls and promenades
(enclosed or otherwise), lighting facilities, drinking fountains, meeting rooms,
public toilets, and the like, but excluding (i) space in buildings (now or
hereafter existing) designated for rental for commercial purposes, as the same
may exist from time to time; (ii) streets and alleys maintained by a public
authority; (iii) areas within the Industrial Complex which may from time to time
not be owned by Landlord (unless subject to a cross-access agreement benefiting
the area which includes the Demised Premises); and (iv) areas leased to a
single-purpose user where access is restricted. In addition, although the
roof(s) of the building(s) in the Industrial Complex are not literally part of
the Common Area, they will be deemed to be so included for purposes of (i)
Landlord's ability to prescribe rules and regulations regarding same, and (ii)
their inclusion for purposes of common area maintenance reimbursements. Landlord
reserves the right to change from time to time the dimensions and location of
the Common Area, as well as the dimensions, identities, locations and types of
any buildings, signs or other improvements in the Industrial Complex; provided,
however, that Landlord's actions pursuant to this sentence shall not
unreasonably interfere with Tenant's access to or use of the Demised Premises.
For example, and without limiting the generality of the immediately preceding
sentence, Landlord may from time to time substitute for any parking area other
areas reasonably accessible to the tenants of the Industrial Complex, which
areas may be elevated, surface or underground.
7.2 Tenant, and its employees and customers, and when duly authorized
pursuant to the provisions of this lease, its subtenants, licensees and
concessionaires, shall have the nonexclusive right to use the Common Area
(excluding roofs of buildings in the Industrial Complex) as constituted from
time to time, such use to be in common with Landlord, other tenants in the
Industrial Complex and other persons permitted by Landlord to use the same,
including the nonexclusive right to use not more than 130 of the parking spaces
in the Common Area as designated by Landlord from time to time, and subject to
rights of governmental authorities, easements, other restrictions of record, and
such reasonable rules and regulations governing use as Landlord may from time to
time prescribe. For example, and without limiting the generality of Landlord's
ability to establish rules and regulations governing all aspects of the Common
Area, Tenant agrees as follows:
(a) Landlord may from time to time designate specific areas
within the Industrial Complex or in reasonable proximity thereto in which
automobiles owned by Tenant, its employees, subtenants, licensees, and
concessionaires shall be parked; and in this regard, Tenant shall furnish to
Landlord upon request a complete list of license numbers of all automobiles
operated by Tenant, its employees, its subtenants, its licensees or its
concessionaires, or their employees; and Tenant agrees that if any automobile or
other vehicle owned by Tenant or any of its employees, its subtenants, its
licensees or its concessionaires, or their employees, shall at any time be
parked in any part of the Industrial Complex other than the specified areas
designated for employee parking, Tenant shall pay to Landlord as additional rent
upon demand an amount equal to the daily rate or charge for such parking as
established by Landlord from time to time for each day, or part thereof, that
such automobile or other vehicle is so parked.
(b) Tenant shall not solicit business within the Common Area
nor take any action which would interfere with the rights of other persons to
use the Common Area.
(c) Landlord may temporarily close any part of the Common
Area for such periods of time as may be necessary to make repairs or alterations
or to prevent the public from obtaining prescriptive rights.
(d) With regard to the roof(s) of the building(s) in the
Industrial Complex, use of the roof(s) is reserved to Landlord, or with regard
to any tenant demonstrating to Landlord's satisfaction a need to use same, to
such tenant after receiving prior written consent from Landlord.
7.3 Landlord shall be responsible for the operation, management and
maintenance of the Common Area, the manner of maintenance and the expenditures
therefor to be in the sole discretion of Landlord, but to be generally in
keeping with similar industrial centers within the same geographical area as the
Industrial Complex. Landlord shall be the sole determinant of the type and
amount of security services to be provided, if any. Landlord shall not be liable
to Tenant, and Tenant hereby waives any
5
<PAGE>
claim against Landlord for (i) any unauthorized or criminal entry of third
parties into the Demised Premises or Industrial Complex, (ii) any damage to
persons or property, except to the extent caused by the gross negligence or
willful misconduct of Landlord, or (iii) any loss of property in and about the
Demised Premises or Industrial Complex from any unauthorized or criminal acts of
third parties, regardless of any action, inaction, failure, breakdown or
insufficiency of security.
7.4 In addition to the rentals and other charges prescribed in this
lease, Tenant shall pay to Landlord Tenant's Proportionate Share (as determined
in Section 7.5 below) of the cost of operation and maintenance of the Common
Area which may be incurred by Landlord in its discretion, including, among other
costs, those for lighting, painting, cleaning, policing, inspecting, repairing,
replacing, and, if there is an enclosed mall or promenade in the Industrial
Complex, heating and cooling; Tenant's Proportionate Share of capital
expenditures and expenses incurred by Landlord to increase the operating
efficiency of the Industrial Complex or to cause the Common Area to comply with
applicable Regulations (as such term is defined in Section 27.1), it being
agreed that the cost of such capital expenditures and installation shall be
amortized over the reasonable life of the capital expenditure, with the
reasonable life and amortization schedule being determined in accordance with
generally accepted accounting principles consistently applied; a reasonable
portion of whatever management fee Landlord pays to the property manager for the
Industrial Complex; a reasonable allowance for Landlord's overhead costs and the
cost of any insurance for which Landlord is not reimbursed pursuant to Section
6.2 but specifically excluding all expenses paid or reimbursed pursuant to
Article 6. In addition, although the roof(s) of the buildings(s) in the
Industrial Complex are not literally part of the Common Area, Landlord and
Tenant agree that roof maintenance, repair and replacement shall be included as
a common area maintenance item to the extent not specifically allocated to
Tenant under this lease nor to another tenant pursuant to its lease. With regard
to capital expenditures other than the capital expenditures contemplated by the
first sentence of this Section, (i) the original investment in capital
improvements, i.e., upon the initial construction of the Industrial Complex,
shall not be included, and (ii) improvements and replacements, to the extent
capitalized on Landlord's records, shall be included only to the extent of a
reasonable depreciation or amortization (including interest accruals
commensurate with Landlord's interest costs). If this lease should commence on a
date other than the first day of a calendar year or terminate on a date other
than the last day of a calendar year, Tenant's reimbursement obligations under
this Section 7.4 shall be prorated based upon Landlord's expenses for the entire
calendar year. Tenant shall make such payment to Landlord on demand, at
intervals not more frequent than monthly. Landlord may, at its option, make
monthly or other periodic charges based upon the estimated annual cost of
operation and maintenance of the Common Area, payable in advance but subject to
adjustment after the end of the year on the basis of the actual cost for such
year. Landlord has the right to establish as a reserve, such amounts as Landlord
deems reasonable for the maintenance, repair and restoration of the roof and
parking of the Industrial Complex. In the event that any payment due from Tenant
to Landlord is not received within ten (10) days after its due date for any
reason whatsoever, or if any such payment is by check which is returned for
insufficient funds, then, in addition to the amount then due, Tenant shall pay
to Landlord interest on the amount then due at the maximum contractual rate
which could legally be charged in the event of a loan of such amount to Tenant
(but in no event to exceed 1-1/2% per month), such interest to accrue
continuously on any unpaid balance until paid. Any delay or failure of Landlord
in delivering any estimate or statement described in this Section 7.4 or in
computing or billing Tenant's Proportionate Share of the foregoing costs shall
not constitute a waiver of Landlord's right to require an increase in rent as
provided herein or in any way impair the continuing obligations of Tenant under
this Section.
7.5 "Basic Costs" shall mean the cost of (i) operation and
maintenance of the common area for which Tenant is responsible to pay Tenant's
Proportionate Share pursuant to Section 7.4; and (ii) real estate charges and
insurance expenses for which Tenant is responsible to pay Tenant's Proportionate
Share pursuant to Section 6.2. Basic Costs shall be comprised of "Building Basic
Costs", "Industrial Complex Basic Costs", and "Parcel Basic Costs". "Building
Basic Costs" shall consist of those Basic Costs which Landlord determines
pertains exclusively to the building in which the Demised Premises are located
(the "Building"). "Industrial Complex Basic Costs" shall consist of those Basic
Costs which Landlord determines shall be shared among all buildings at the
Industrial Complex. "Parcel Basic Costs" shall consist of those Basic Costs
which Landlord determines shall be shared among the Building and the other free
standing building contained on the same legal parcel as the Building (the
"Parcel"). For purposes of determining Tenant's Proportionate Share of Basic
Costs in accordance with this Article 7, (i) Tenant's Proportionate Share of
Building Basic Costs shall equal a fraction, the numerator of which shall be the
rentable area of the Demised Premises and the denominator of which shall be the
rentable area of the Building; (ii) Tenant's Proportionate Share of Industrial
Complex Basic Costs shall equal a fraction, the numerator or which shall be the
rentable area of the Demised Premises and the denominator of which shall be the
rentable area of all buildings (including the Building) at the Industrial
Complex; and (iii) Tenant's Proportionate Share of Parcel Basic Costs shall
equal a fraction the numerator of which shall be the rentable area of the
Demised Premises and the denominator of which shall be the rentable area of the
two buildings (including the Building) located on the Parcel.
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ARTICLE 8.
[INTENTIONALLY OMITTED]
ARTICLE 9.
USE AND CARE OF DEMISED PREMISES
9.1 The Demised Premises shall be used and occupied by Tenant solely
for the permitted use specified in Section 1.1.(o) above and for no other
purpose. Tenant, at its sole cost and expense, shall obtain and keep in effect
during the term, all permits, licenses and other authorizations necessary to
permit Tenant to use and occupy the Demised Premises for the permitted use.
Without limiting the generality of the foregoing, Tenant shall not use or store
any gasoline, flammable or so called "Red Label" materials in or about the
Demised Premises. All equipment used within the Demised Premises shall be
subject to approval by Landlord's insurance carriers and shall be Underwriters
Laboratory or Factory Mutual approved for the uses intended, evidence of which
shall be furnished to Landlord upon request. Tenant shall not operate any
machinery or equipment in the Demised Premises which, in Landlord's sole
discretion, shall cause any excessive noise, vibration or damage or disturbance
to the other tenants in the Industrial Complex.
9.2 Tenant shall take good care of the Demised Premises and keep the
same free from waste at all times. Tenant shall not overload the floors in the
Demised Premises, nor deface or injure the Demised Premises. Tenant shall keep
the Demised Premises and sidewalks, service-ways and loading areas adjacent to
the Demised Premises neat, clean and free from dirt, rubbish, ice or snow at all
times. Tenant shall store all trash and garbage within the Demised Premises or
in a trash dumpster or similar container approved by Landlord as to type,
location and screening; and Tenant shall arrange for the regular pick-up of such
trash and garbage at Tenant's expense (unless Landlord finds its necessary to
furnish such a service, in which event Tenant shall be charged an equitable
portion of the total of the charges to all tenants using the service). Receiving
and delivery of goods and merchandise and removal of garbage and trash shall be
made only in the manner and areas prescribed by Landlord. Tenant shall not
operate an incinerator or burn trash or garbage within the Industrial Complex.
ARTICLE 10.
MAINTENANCE AND REPAIR OF DEMISED PREMISES
10.1 Landlord shall keep the foundation, the exterior walls (except
plate glass; windows, doors and other exterior openings; window and door frames,
molding, closure devices, locks and hardware; special store fronts; lighting,
heating, air conditioning, plumbing and other electrical, mechanical and
electromotive installation, equipment and fixtures; signs, placards, decorations
or other advertising media of any type; and interior painting or other treatment
of exterior walls) and roof (subject to the second sentence in Section 7.4
above) of the Demised Premises in good repair. Landlord, however, shall not be
required to make any repairs occasioned by the act or negligence of Tenant, its
agents, contractors, employees, subtenants, invitees, customers, licensees and
concessionaires (including, but not limited to, roof leaks resulting from
Tenant's installation of air conditioning equipment or any other roof
penetration or placement); and the provisions of the previous sentence are
expressly recognized to be subject to the provisions of Article 17 and Article
18 of this lease. In the event that the Demised Premises should become in need
of repairs required to be made by Landlord hereunder, Tenant shall give
immediate written notice thereof to Landlord and Landlord shall have a
reasonable time after receipt by Landlord of such written notice in which to
make such repairs. Landlord shall not be liable to Tenant for any interruption
of Tenant's business or inconvenience caused due to any work performed in the
Demised Premises or in the Industrial Complex pursuant to Landlord's rights and
obligations under the Lease, so long as the work is performed without gross
negligence or willful misconduct.
10.2 Tenant shall keep the Demised Premises in good, clean and
habitable condition and shall at its sole cost and expense keep the Demised
Premises free of insects, rodents, vermin and other pests and make all needed
repairs and replacements, including replacement of cracked or broken glass,
except for repairs and replacements required to be made by Landlord under the
provisions of Section 10.1, Article 17 and Article 18 and except to the extent
any such repairs are necessitated by the gross negligence or willful misconduct
of Landlord. Without limiting the coverage of the previous sentence, it is
understood that Tenant's responsibilities therein include the repair and
replacement in accordance with all applicable Regulations of all lighting,
heating, air conditioning, plumbing and other electrical, mechanical and
electromotive installation, equipment and fixtures and also include all utility
repairs in ducts, conduits, pipes and wiring, and any sewer stoppage located in,
under and above the Demised Premises, regardless of when or how the defect or
other cause for repair or replacement occurred or became apparent; provided,
however, that as to the maintenance and repair of the HVAC equipment in the
Demised Premises, Landlord shall have the option of contracting directly with an
HVAC servicing company for all such work and charging Tenant for all costs
thereof. If any repairs required to be made by Tenant hereunder are not made
within ten (10) days after written notice delivered to Tenant by
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Landlord, Landlord may at its option make such repairs without liability to
Tenant for any loss or damage which may result to its stock or business by
reason of such repairs and Tenant shall pay to Landlord upon demand, as
additional rental hereunder, the cost of such repairs plus interest at the
maximum contractual rate which could legally be charged in the event of a loan
of such payment to Tenant (but in no event to exceed 1-1/2% per month), such
interest to accrue continuously from the date of payment by Landlord until
repayment by Tenant. At the expiration of this lease, Tenant shall surrender the
Demised Premises in good condition, excepting reasonable wear and tear and
losses required to be restored by Landlord in Section 10.1, Article 17 and
Article 18 of this lease.
10.3 Tenant waives the right to make repairs at Landlord's expense
under Section 1941 and 1942 of the California Civil Code and all other laws now
or hereafter in effect.
ARTICLE 11.
ALTERATIONS
11.1 Tenant shall not make any alterations, additions or improvements
to the Demised Premises (collectively, the "Alterations") without the prior
written consent of Landlord, except for the installation of unattached, movable
trade fixtures which may be installed without drilling, cuffing or otherwise
defacing the Demised Premises. Tenant shall furnish complete plans and
specifications to Landlord at the time it requests Landlord's consent to any
Alterations if the desired Alterations (i) will affect the Industrial Complex's
mechanical, electrical, plumbing, or life safety systems or services, or (ii)
will affect any structural component of the Demised Premises or the Industrial
Complex, or (iii) will require the filing of plans and specifications with any
governmental or quasi-governmental agency or authority, or (iv) will cost in
excess of Twenty-Five Thousand Dollars ($25,000.00). Subsequent to obtaining
Landlord's consent and prior to commencement of the Alterations, Tenant shall
deliver to Landlord any building permit required by applicable law and a copy of
the executed construction contract(s). Tenant shall reimburse Landlord within
ten (10) days after the rendition of a bill for all of Landlord's actual
out-of-pocket costs incurred in connection with any Alterations, including,
without limitation, all management, engineering, outside consulting, and
construction fees incurred by or on behalf of Landlord for the review and
approval of Tenant's plans and specifications and for the monitoring of
construction of the Alterations. If Landlord consents to the making of any
Alteration, such Alteration shall be made by Tenant at Tenant's sole cost and
expense by a contractor approved in writing by Landlord. Tenant shall give
Landlord not less than ten (10) days advance written notice of the commencement
of Tenant's Alterations to enable Landlord to post and record notices of
nonresponsibility. Tenant shall require its contractor to maintain insurance in
such amounts and in such form as Landlord may require. Any construction,
alteration, maintenance, repair, replacement, installation, removal or
decoration undertaken by Tenant in connection with the Demised Premises shall be
completed in accordance with plans and specifications which must be approved by
Landlord, shall be carried out in a good, workmanlike and prompt manner and in
accordance with the provisions of EXHIBIT "C" annexed hereto, shall comply with
all applicable Regulations of the authorities having jurisdiction thereof, and
shall be subject to supervision by Landlord or its employees, agents or
contractors. Without limiting the generality of the immediately preceding
sentence, any installation or replacement of Tenant's heating or air
conditioning equipment must be effected strictly in accordance with Landlord's
instructions, the Clean Air Act and all other applicable Regulations. Without
Landlord's prior written consent, Tenant shall not use any portion of the Common
Areas either within or without the Industrial Complex in connection with the
making of any Alterations. If the Alterations which Tenant causes to be
constructed result in Landlord being required to make any alterations and/or
improvements to other portions of the Industrial Complex in order to comply with
any applicable Regulations, then Tenant shall reimburse Landlord upon demand for
all costs and expenses incurred by Landlord in making such alterations and/or
improvements. Any Alterations made by Tenant shall become the property of
Landlord upon installation and shall remain on and be surrendered with the
Demised Premises upon the expiration or sooner termination of this lease, except
Tenant shall upon demand by Landlord, at Tenant's sole cost and expense,
forthwith and with all due diligence remove all or any portion of any
Alterations made by Tenant which are designated by Landlord to be removed and
repair and restore the Demised Premises in a good and workmanlike manner to
their original condition, reasonable wear and tear excepted. Notwithstanding the
foregoing, prior to commencing any Alterations, Tenant may request Landlord's
waiver of the restoration obligation with respect to specified Alterations,
which waiver may be granted or withheld by Landlord in its sole discretion.
11.2 All construction work done by Tenant within the Demised Premises
shall be performed in a good and workmanlike manner with new materials of
first-class quality, lien-free and in compliance with all governmental
requirements and Regulations, and in such manner as to cause a minimum of
interference with other construction in progress and with the transaction of
business in the Industrial Complex. Tenant agrees to indemnify Landlord and hold
Landlord harmless against any loss, liability or damage resulting from such
work, and Tenant shall, if requested by Landlord, furnish a bond or other
security satisfactory to Landlord against any such loss, liability or damage.
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11.3 In the event Tenant uses a general contractor to perform
construction work within the Demised Premises, Tenant shall, prior to the
commencement of such work, require said general contractor to execute and
deliver to Landlord a waiver and release of any and all claims against Landlord
and liens against the Industrial Complex to which such contractor might at any
time be entitled. The delivery of the waiver and release of lien within the time
period set forth above shall be a condition precedent to Tenant's ability to
enter on and begin its construction work at the Demised Premises and, if
applicable, to any reimbursement from Landlord for its construction work.
11.4 Nothing contained in this lease shall be construed as
constituting the consent or request of Landlord, express or implied, to or for
the performance by any contractor, laborer, materialman or vendor of any labor
or services or for the furnishing of any materials for any construction,
alteration, addition, repair or demolition of or to the Demised Premises or any
part thereof. All materialmen, contractors, artisans, mechanics, laborers and
any other persons now or hereafter furnishing any labor, services, materials,
supplies or equipment to Tenant with respect to any portion of the Demised
Premises are hereby charged with notice that they must look exclusively to
Tenant to obtain payment for same. Tenant and any subtenants shall have no power
to do any act or make any contract which may create or be the foundation of any
lien, mortgage or other encumbrance upon the reversionary or other estate of
Landlord, or any interest of Landlord in the Demised Premises. NOTICE IS HEREBY
GIVEN THAT LANDLORD IS NOT AND SHALL NOT BE LIABLE FOR ANY LABOR, SERVICES OR
MATERIALS FURNISHED OR TO BE FURNISHED TO TENANT OR TO ANYONE HOLDING THE
DEMISED PREMISES OR ANY PART THEREOF, AND THAT NO MECHANICS' OR OTHER LIENS FOR
ANY SUCH LABOR, SERVICES OR MATERIALS SHALL ATTACH TO OR AFFECT THE INTEREST OF
LANDLORD IN AND TO THE DEMISED PREMISES.
11.5 In the event that Landlord elects to remodel all or any portion
of the Industrial Complex, Tenant will cooperate with such remodeling, including
Tenant's tolerating temporary inconveniences (and even the temporary removal of
Tenant's signs in order to facilitate such remodeling, as it may relate to the
exterior of the Demised Premises).
ARTICLE 12.
LANDLORD'S RIGHT OF ACCESS
12.1 Landlord and Landlord's agents and representatives shall have the
right to enter the Demised Premises at any time in case of an emergency, and
otherwise at all reasonable times upon reasonable advance oral or written notice
for any purpose permitted pursuant to the terms of this lease, including, but
not limited to, examining the Demised Premises; making such repairs or
alterations therein as may be necessary or appropriate in Landlord's sole
judgment for the safety and preservation thereof; erecting, installing,
maintaining, repairing or replacing wires, cables, conduits, vents, ducts,
risers, pipes, HVAC equipment or plumbing equipment running in, to, or through
the Demised Premises; showing the Demised Premises to prospective purchasers or
mortgagees and during the last year of this lease, prospective tenants; and
posting notices of nonresponsibility. Except in the event of an emergency,
Landlord's agents and representatives shall be accompanied by a representative
of Tenant whenever they enter the Demised Premises. Tenant shall use reasonable
efforts to accommodate Landlord's requests for accompanied entry of the Demised
Premises.
12.2 If requested in writing by Landlord, Tenant shall give Landlord a
key for all of the doors for the Demised Premises, excluding Tenant's vaults,
safes and files. Landlord shall have the right to use any and all means to open
the doors to the Demised Premises in an emergency in order to obtain entry
thereto without liability to Tenant therefor. Any entry to the Demised Premises
by Landlord by any of the foregoing means, or otherwise, shall not be construed
or deemed to be a forcible or unlawful entry into or a detainer of the Demised
Premises, or an eviction, partial eviction or constructive eviction of Tenant
from the Demised Premises or any portion thereof, and shall not relieve Tenant
of its obligations hereunder.
ARTICLE 13.
SIGNS; STORE FRONTS
13.1 Tenant shall not place or permit to be placed any signs upon (i)
the roof of the Demised Premises, or (ii) the Common Areas or any exterior area
of the Industrial Complex without Landlord's prior written approval which
approval shall not be unreasonably withheld or delayed provided any proposed
sign is placed only in those locations as may be designated by Landlord, and
complies with the sign criteria promulgated by Landlord from time to time. Upon
request of Landlord, Tenant shall immediately remove any sign, advertising
material or lettering which Tenant has placed or permitted to be placed upon the
exterior or interior surface of any door or window or at any point inside the
Demised Premises, on the exterior of the Industrial Complex if required in
connection with any cleaning, maintenance or repairs to the Industrial Complex
or which, in Landlord's reasonable opinion, is of such
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a nature as to not be in keeping with the standards of the Industrial Complex
and if Tenant fails to do so, Landlord may without liability remove the same at
Tenant's expense. Tenant shall comply with such regulations as may from time to
time be promulgated by Landlord governing signs, advertising material or
lettering of all tenants in the Industrial Complex.
ARTICLE 14.
UTILITIES
14.1 Tenant shall obtain all water, electricity, sewerage, gas,
telephone and other utilities directly from the public utility company
furnishing same. Any meters required in connection therewith shall be installed
at Tenant's sole cost. Tenant shall pay all utility deposits and fees, and all
monthly service charges for water, electricity, sewage, gas, telephone and any
other utility services furnished to the Demised Premises during the term of this
lease. In the event any such utilities are not separately metered on the
Commencement Date, then until such time as such services are separately metered,
Tenant shall pay Landlord Tenant's equitable share of the cost of such services,
as determined by Landlord. If for any reason the use of any utility is measured
on a meter(s) indicating the usage of Tenant and other tenants of the Industrial
Complex, Tenant and such other tenants shall allocate the cost of such utility
amongst themselves and shall each be responsible for the payment of its
allocable share. Landlord shall furnish and install all piping, feeders, risers
and other connections necessary to bring utilities to the perimeter walls of the
Demised Premises. Anything to the contrary notwithstanding, Tenant shall remain
obligated for the payment of Tenant's pro rata share of any heating costs and/or
other utilities or services furnished to the Common Areas pursuant to Section
7.4.
14.2 Tenant shall have the right to use the existing heating, air
conditioning and ventilation equipment in the Demised Premises, if any. All such
equipment shall be maintained, repaired and replaced, as necessary, by Tenant in
its sole expense and shall be surrendered by Tenant to Landlord at the end of
the term of this lease together with the Demised Premises. Subject to Section
3.2, Landlord makes no representation or warranty as to the condition or
capacity of such equipment. Landlord shall have no obligation whatsoever to
provide the Demised Premises with any additional heat, air conditioning,
ventilation or hot water.
14.3 Landlord shall not be liable for any interruption whatsoever, nor
shall Tenant be entitled to an abatement or reduction of rent on account
thereof, in utility services not furnished by Landlord, nor for interruptions in
utility services furnished by Landlord which are due to fire, accident, strike,
acts of God or other causes beyond the control of Landlord or which are
necessary or useful in connection with making any alterations, repairs or
improvements. Notwithstanding the foregoing, if such interruption or failure in
utility services (i) is caused by Landlord or Landlord's authorized agent; (ii)
can be repaired at the Industrial Complex; and (iii) continues for more than
sixty (60) consecutive days, then Tenant shall be entitled to a proportionate
abatement of all rental charges due hereunder, effective on the sixtieth day of
such utility service failure.
14.4 Tenant shall not install any equipment which exceeds or overloads
the capacity of the utility facilities serving the Demised Premises.
ARTICLE 15.
INSURANCE COVERAGES
15.1 Landlord shall procure and maintain throughout the term of this
lease a policy or policies of insurance, at its sole cost and expense (but
subject to Article 6 above), causing the Industrial Complex to be insured under
standard fire and extended coverage insurance (excluding hurricane and storm
insurance unless readily obtainable at commercially reasonable rates) and
liability insurance (plus whatever endorsements or special coverages Landlord,
in its sole discretion, may consider appropriate), to the extent necessary to
comply with Landlord's obligations pursuant to other provisions of this lease.
15.2 Tenant shall procure and maintain throughout the term of this
lease, at its sole cost and expense, the following insurance:
(i) Comprehensive General Liability Insurance
providing coverage for bodily injury (including death), property
damage and products liability insurance (where such exposure
exists). This policy shall contain a broad form contractual
liability endorsement under which the insurer agrees to insure
Tenant's obligations under Article 21 hereof. Such insurance
shall have a combined single limit of not less than Two Million
Dollars ($2,000,000) per occurrence, or such greater amount as
Landlord may from time to time require;
(ii) Fire and extended coverage insurance covering
Tenant's personal property, fixtures, improvements, wall
coverings, floor coverings, window coverings, alterations,
furniture,
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equipment, lighting, ceilings, heating, ventilation and air
conditioning equipment, interior plumbing and plate glass against
loss or damage by fire, flood, windstorms, hail, earthquakes,
explosion, riot, damage from aircraft and vehicles, smoke damage,
vandalism and malicious mischief and such other risks as are from
time to time covered under "extended coverage" endorsements and
special extended coverage endorsements commonly known as "all
risks" endorsements, containing the waiver of subrogation
required in Section 16.3 of this lease and in an amount equal to
the greater of the full replacement value or the amount required
by the holder of any mortgage from time to time placed upon the
Industrial Complex or a portion of the Industrial Complex
containing the Demised Premises;
(iii) State Worker's Compensation Insurance in the
statutorily mandated limits and Employers Liability Insurance
with limits of not less than Five Hundred Thousand Dollars
($500,000), or such greater amount as Landlord may from time to
time require; and
(iv) Such other insurance as Landlord may reasonably
require from time to time.
It is expressly understood and agreed that the foregoing minimum limits
of insurance coverage shall not limit the liability of Tenant for its acts or
omissions as provided in this lease. All of the foregoing insurance policies
(with the exception of Worker's Compensation Insurance to the extent not
available under statutory law) shall name Landlord, any mortgagee, any managing
agent for the Industrial Complex and such other parties as Landlord shall from
time to time designate as an additional insured as their respective interests
may appear, and shall provide that any loss shall be payable to Landlord and any
other additional insured parties as their respective interests may appear. All
insurance required hereunder shall be placed with companies which are rated
A:VII or better by Best's Insurance Guide and licensed to do business in the
State of California. All such policies shall be written as primary policies with
deductibles not to exceed the amount specified in Section 1.1(p) above. Any
other policies, including Landlord's policy, will serve as excess coverage.
Tenant shall deliver duplicate original copies of all such policies and all
endorsements thereto, prior to the Commencement Date, or, in the case of
renewals thereto, fifteen (15) days prior to the expiration of the prior
insurance policy, together with evidence that such policies are fully paid for,
and that no cancellation, material change or non-renewal thereof shall be
effective except upon thirty (30) days' prior written notice from the insurer to
Landlord, as well as to Landlord's agent (at the address for the payment of rent
set forth in Section 4.2 above). If Tenant should fail to comply with the
foregoing requirement relating to insurance, Landlord may obtain such insurance
and Tenant shall pay to Landlord on demand as additional rental hereunder the
premium cost thereof plus interest at the maximum contractual rate (but in no
event to exceed 1-1/2% per month) from the date of payment by Landlord until
repaid by Tenant.
ARTICLE 16.
WAIVER OF LIABILITY; MUTUAL WAIVER OF SUBROGATION
16.1 Landlord and Landlord's agents and employees shall not be liable
to Tenant, nor to Tenant's employees, agents or visitors, nor to any other
person whomsoever, for any injury to person or damage to property caused by the
Demised Premises or other portions of the Industrial Complex becoming out of
repair or by defect or failure of any structural element of the Demised Premises
or of any equipment, pipes or wiring, or broken glass, or by the backing up of
drains, or by gas, water, steam, electricity, or oil leaking, escaping or
flowing into the Demised Premises (except where due to Landlord's willful
failure to make repairs required to be made by Landlord hereunder, after the
expiration of a reasonable time after written notice to Landlord of the need for
such repairs), nor shall Landlord be liable to Tenant, nor to Tenant's
employees, agents or visitors, nor to any other person whomsoever, for any loss
or damage that may be occasioned by or through the acts or omissions of other
tenants of the Industrial Complex or of any other persons whomsoever, excepting
only duly authorized employees and agents of Landlord. Landlord shall not be
held responsible in any way on account of any construction, repair or
reconstruction (including widening) of any private or public roadways, walkways
or utility lines.
16.2 Landlord shall not be liable to Tenant or to Tenant's employees,
agents, contractors, or to any other person whomsoever, for any injury to person
or damage to property on or about the Demised Premises or the Common Area caused
by the negligence or misconduct of Tenant, its employees, agents, subtenants,
invitees, customers, licensees or concessionaires, or of any other person
entering the Industrial Complex under express or implied invitation of Tenant
(with the exception of customers in the Common Area), or arising out of the use
of the Demised Premises by Tenant and the conduct of its business therein, or
arising out of any breach or default by Tenant in the performance of its
obligations under this lease; and Tenant hereby agrees to indemnify Landlord and
hold Landlord harmless from any loss, expense or claims arising out of such
damage or injury. Furthermore, Tenant agrees to indemnify Landlord and hold
Landlord harmless from and against any and all liability, claims, demands,
causes of action of any kind and nature arising or growing out of or in any way
connected with Tenant's use, occupancy, management or control of the Demised
Premises and Tenant's operations or activities in the Industrial Complex.
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16.3 Landlord and Tenant each hereby release the other from any and
all liability or responsibility to the other, or to any other party claiming
through or under them by way of subrogation or otherwise, for any loss or damage
to property caused by a casualty which is insurable under standard fire and
extended coverage insurance; provided, however, that this mutual waiver shall be
applicable only with respect to a loss or damage occurring during the time when
property insurance policies, which are readily available in the marketplace,
contain a clause or permit an endorsement to the effect that any such release
shall not adversely affect or impair the policy or the right of the insured
party to receive proceeds under the policy; provided, further, that this release
shall not be applicable to the portion of any damage which is not reimbursed by
the damaged party's insurer because of the "deductible" in the damaged party's
insurance coverage. The release specified in this Section 16.3 is cumulative
with any releases or exculpations which may be contained in other provisions of
this lease. Landlord and Tenant agree that all policies of insurance obtained by
them pursuant to the terms of this lease shall contain provisions or
endorsements thereto waiving the insurer's rights of subrogation with respect to
claims against the other, and, unless the policies permit waiver of subrogation
without notice to the insurer, each shall notify its insurance companies of the
existence of the waiver and indemnity provisions set forth in this lease.
ARTICLE 17.
DAMAGES BY CASUALTY
17.1 Tenant shall give immediate written notice to Landlord of any
damage caused to the Demised Premises by fire or other casualty.
17.2 In the event that the Demised Premises shall be damaged or
destroyed by fire or other casualty insurable under standard fire and extended
coverage insurance and Landlord does not elect to terminate this lease as
hereinafter provided, Landlord shall proceed with reasonable diligence and at
its sole cost and expense to rebuild and repair the Demised Premises. In the
event (a) the building in which the Demised Premises are located is destroyed or
substantially damaged by a casualty not covered by Landlord's insurance, or (b)
such building is destroyed or rendered untenantable to an extent in excess of
fifty percent (50%) of the first floor area by a casualty covered by Landlord's
insurance, or (c) the holder of a mortgage, deed of trust or other lien on such
building at the time of the casualty elects, pursuant to such mortgage, deed of
trust or other lien, to require the use of all or part of Landlord's insurance
proceeds in satisfaction of all or part of the indebtedness secured by the
mortgage, deed of trust or other lien, or (d) the Demised Premises shall be
damaged to the extent of fifty percent (50%) or more of the cost of replacement,
then Landlord may elect either to terminate this lease or to proceed to rebuild
and repair the Demised Premises. Landlord shall give written notice to Tenant of
such election within sixty (60) days after the occurrence of such casualty and,
if it elects to rebuild and repair, shall proceed to do so with reasonable
diligence and at its sole cost and expense.
17.3 Landlord's obligation to rebuild and repair under this Article 17
shall in any event be limited to restoring one of the following (as may be
applicable): (a) if this lease does not include an attached exhibit describing
Landlord's initial construction responsibility ("Landlord's Work"), restoring
the Demised Premises to substantially the condition in which the same existed
prior to such casualty, exclusive of any alterations, additions, improvements,
fixtures and equipment installed by Tenant; or (b) restoring Landlord's Work, as
described in the applicable exhibit attached to this lease (if such an exhibit
is attached), to substantially the same condition in which the same existed
prior to the casualty. Tenant agrees that promptly after completion of such work
by Landlord, Tenant will proceed with reasonable diligence and at Tenant's sole
cost and expense to restore, repair and replace all alterations, additions,
improvements, fixtures, signs and equipment installed by Tenant, and, if an
exhibit describing Tenant's Work is attached hereto, all items of Tenant's Work
as described in such exhibit.
17.4 Notwithstanding anything to the contrary in this Article 17, if
the casualty should occur during the last six (6) months of the term, and at
least fifty percent (50%) of the Demised Premises has been damaged thereby,
either party may, upon ten (10) days notice to the other party given within
fifteen (15) days of the date of the casualty, terminate this lease.
17.5 Tenant agrees that during any period of reconstruction or repair
of the Demised Premises, it will continue the operation of its business within
the Demised Premises to the extent practicable. During the period from the
occurrence of the casualty until Landlord's repairs are completed, the minimum
guaranteed rental and additional rental charges shall be proportionately reduced
hereunder.
17.6 Tenant hereby waives the provisions of California Civil Code
Sections 1932(2) and 1933(4) and the provisions of any successor or other law of
like import.
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ARTICLE 18.
EMINENT DOMAIN
18.1 If more than thirty percent (30%) of the floor area of the
Demised Premises should be taken for any public or quasi-public use under any
governmental law, ordinance or regulation or by right of eminent domain or by
private purchase in lieu thereof, this lease shall terminate and the rent shall
be abated during the unexpired portion of this lease, effective on the date
physical possession is taken by the condemning authority.
18.2 If less than thirty percent (30%) of the floor area of the
Demised Premises should be taken as aforesaid, this lease shall not terminate;
however, the minimum guaranteed rental payable hereunder during the unexpired
portion of this lease shall be reduced in proportion to the area taken,
effective on the date physical possession is taken by the condemning authority.
Following such partial taking, Landlord shall make all necessary repairs or
alterations to the remaining premises or, if an exhibit describing Landlord's
Work is attached to this lease, all necessary repairs within the scope of
Landlord's Work as described in such exhibit, as the case may be, required to
make the remaining portions of the Demised Premises an architectural whole, but
in no event shall Landlord be required to expend an amount greater than the
award actually received by Landlord in connection with such taking.
18.3 If any part of the Common Area should be taken as aforesaid, this
lease shall not terminate, nor shall the rent payable hereunder be reduced,
except that either Landlord or Tenant may terminate this lease if the area of
the Common Area remaining following such taking plus any additional parking area
provided by Landlord in reasonable proximity to the Industrial Complex shall be
less than seventy percent (70%) of the area of the Common Area immediately prior
to the taking. Any election to terminate this lease in accordance with this
provision shall be evidenced by written notice of termination delivered to the
other party within thirty (30) days after the date physical possession is taken
by the condemning authority.
18.4 All compensation awarded for any taking (or the proceeds of
private sale in lieu thereof) of the Demised Premises or Common Area shall be
the property of Landlord, and Tenant hereby assigns its interest in any such
award to Landlord; provided, however, Landlord shall have no interest in any
award made to Tenant for Tenant's moving and relocation expenses or for the loss
of Tenant's fixtures and other tangible personal property if a separate award
for such items is made to Tenant as long as such separate award does not reduce
the amount of the award that would otherwise be awarded to Landlord.
18.5 The rights contained in this Article 18 shall be Tenant's sole
and exclusive remedy in the event of a taking or condemnation. Each party waives
the provisions of Sections 1265.130 and 1265.150 of the California Code of Civil
Procedure and the provisions of any successor or other law of like import.
18.6 Notwithstanding anything to the contrary, Landlord may terminate
this lease with no further liability to Tenant if (i) fifty percent (50%) or
more of the gross leasable area of the Industrial Complex is taken or (ii) if
following any taking, Landlord's mortgagee elects to require Landlord to apply
all or a portion of such award to the outstanding indebtedness.
ARTICLE 19.
ASSIGNMENT AND SUBLETTING
19.1 Tenant shall not assign or in any manner transfer this lease or
any estate or interest therein, or sublet the Demised Premises or any part
thereof, or grant any license, concession or other right of occupancy of any
portion of the Demised Premises without the prior written consent of Landlord.
Landlord agrees that it will not withhold consent in a wholly unreasonable and
arbitrary manner (as further explained in Section 29.4 of this lease); however,
in determining whether or not to grant its consent, Landlord shall be entitled
to take into consideration factors such as Landlord's desired tenant mix, the
reputation and net worth of the proposed transferee, and the then current market
conditions (including market rentals). In addition, Landlord shall also be
entitled to charge Tenant a reasonable fee for processing Tenant's request.
Consent by Landlord to one or more assignments or sublettings shall not operate
as a waiver of Landlord's rights as to any subsequent assignments and
sublettings. In all events, Landlord can refuse to consent to an assignment or
sublease if there shall exist any uncured default of Tenant or a matter which
will become a default with the passage of time.
19.2 If Tenant is a corporation, partnership or other entity and if at
any time during the term of this lease the person or persons who own a majority
of either the outstanding voting rights or the outstanding ownership interests
of Tenant at the time of the execution of this lease cease to own a majority of
such voting rights or ownership interests (except as a result of transfers by
devise or descent), the loss of a majority of such voting rights or ownership
interests shall be deemed an assignment of this lease by Tenant and, therefore,
subject in all respects to the provisions of Section
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19.1 above. The previous sentence shall not apply, however, if at the time of
the execution of this lease, (i) Tenant is a corporation and the outstanding
voting shares of capital stock of Tenant are listed on a recognized security
exchange or over-the-counter market or (ii) Tenant is a privately held,
corporation which subsequently elects to offer shares of stock in the
corporation to the public through a "public offering". Further, any sale or
transfer of all or substantially all of the stock or assets of Tenant shall not
be deemed an assignment hereunder, provided that the successor entity expressly
assumes the obligations of Tenant hereunder in an agreement whose form and
content is satisfactory to Landlord in its sole discretion.
19.3 Notwithstanding anything to the contrary contained herein, and
without prejudice to Landlord's right to require a written assumption from each
assignee, any person or entity to whom this lease is assigned including, without
limitation, assignees pursuant to the provisions of the Bankruptcy Code, 11
U.S.C. paragraph 101, ET SEQ. (the 'Bankruptcy Code"), shall automatically be
deemed, by acceptance of such assignment or sublease or by taking actual or
constructive possession of the Demised Premises, to have assumed all obligations
of Tenant arising under this lease effective as of the earlier of the date of
such assignment or sublease or the date on which the assignee or sublessee
obtains possession of the Demised Premises. In the event this lease is assigned
to any person or entity pursuant to the provisions of the Bankruptcy Code, any
and all monies or other consideration payable or otherwise to be delivered in
connection with such assignment shall be paid or delivered to Landlord and shall
remain the exclusive property of Landlord and not Constitute the property of
Tenant or Tenant's estate within the meaning of the Bankruptcy Code. All such
money or other consideration not paid or delivered to Landlord shall be held in
trust for the benefit of Landlord and shall be promptly paid or delivered to
Landlord.
19.4 Notwithstanding any assignment or subletting, Tenant and any
guarantor of Tenant's obligations under this lease shall at all times remain
fully responsible and liable for the payment of the rent herein specified and
for compliance with all of its other obligations under this lease (even if
future assignments and sublettings occur subsequent to the assignment or
subletting by Tenant, and regardless of whether or not Tenant's approval has
been obtained for such future assignments and sublettings). Moreover, in the
event that the rental due and payable by a sublessee (or a combination of the
rental payable under such sublease plus any bonus or other consideration
therefor or incident thereto) exceeds the rental payable under this lease, or if
with respect to a permitted assignment, permitted license or other transfer by
Tenant permitted by Landlord, the consideration payable to Tenant by the
assignee, licensee or other transferee exceeds the rental payable under this
lease, then Tenant shall be bound and obligated to pay Landlord fifty percent
(50%) of all such excess rental and other excess consideration within ten (10)
days following receipt thereof by Tenant from such sublessee, assignee, licensee
or other transferee, as the case may be. Finally, in the event of an assignment
or subletting, it is understood and agreed that all rentals paid to Tenant by an
assignee or sublessee (other than the fifty percent (50%) of excess rental or
other consideration resulting from such assignment or sublease) shall be
received by Tenant in trust for Landlord, to be forwarded immediately to
Landlord without offset or reduction of any kind; and upon election by Landlord
such rentals shall be paid directly to Landlord as specified in Section 4.2 of
this lease (to be applied as a credit and offset to Tenant's rental obligation).
19.5 Tenant shall not mortgage, pledge or otherwise encumber its
interest in this lease or in the Demised Premises;
19.6 In the event of the transfer and assignment by Landlord of its
Interest in this lease and in the building containing the Demised Premises to a
person expressly assuming Landlord's obligations under this lease, Landlord
shall thereby be released from any further obligations hereunder, and Tenant
agrees to look solely to such successor in interest of the Landlord for
performance of such obligations. Any security given by Tenant to secure
performance of Tenant's obligations hereunder may be assigned and transferred by
Landlord to such successor in interest and Landlord shall thereby be discharged
of any further obligation relating thereto.
19.7 Notwithstanding anything to the contrary contained herein,
Landlord shall have the option, in its sole discretion, in the event of any
proposed subletting or assignment, to terminate this Lease, or in the case of a
proposed subletting of less than the entire Demised Premises for substantially
all of the remaining term of this lease, to recapture the portion of the Demised
Premises to be sublet, as of the date the subletting or assignment is to be
effective. The option shall be exercised by Landlord giving Tenant written
notice ("Landlord's Recapture Notice") within twenty (20) days following
Landlord's receipt of Tenant's written notice as required above. If this Lease
shall be terminated with respect to the entire Demised Premises, the Term shall
end on the date stated in Tenant's notice as the effective date of the sublease
or assignment as if that date had been originally fixed in this Lease for the
expiration of the Term. If Landlord recaptures only a portion of the Demised
Premises, the minimum guaranteed rental during the unexpired Term shall abate,
proportionately, based on the minimum guaranteed rental due as of the date
immediately prior to such recapture. Notwithstanding the foregoing, Tenant shall
have the right to withdraw its request to assign or sublet within three (3)
business days of delivery of Landlord's
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Recapture Notice, in which event, this Lease shall continue unaffected and
Landlord's Recapture Notice shall be null and void.
19.8 Tenant hereby waives any suretyship defenses it may now or
hereafter have to an action brought by Landlord including those contained in
Sections 2787 through 2856, Inclusive, 2899 and 3433 of the California Civil
Code, as now or hereafter amended, or similar laws of like import.
ARTICLE 20.
SUBORDINATION; ATTORNMENT; ESTOPPELS
20.1 Tenant accepts this lease subject and subordinate to any
mortgage, deed of trust or other lien presently existing upon the Industrial
Complex or any portion of the Industrial Complex which includes the Demised
Premises, and to any renewals, modifications and extensions thereof and this
subordination shall be self operative and no further instrument of
subordination is needed. Tenant agrees that any mortgagee shall have the
right at any time to subordinate its mortgage, deed of trust or other lien to
this lease; provided, however, notwithstanding that this lease may be (or is
made to be) superior to a mortgage, deed of trust or other lien, the
mortgagee shall not be liable for prepaid rentals, security deposits and
claims accruing during or with respect to Landlord's ownership, any amendment
or modification made to this lease without its prior written consent or any
offsets or claims against Landlord; further provided that the provisions of a
mortgage, deed of trust or other lien relative to the right of the mortgagee
with respect to proceeds arising from an eminent domain taking (including a
voluntary conveyance by Landlord) and provisions relative to proceeds arising
from insurance payable by reason of damage to or destruction of the Demised
Premises shall be prior and superior to any contrary provisions contained in
this instrument with respect to the payment or usage thereof. Landlord shall
have the right to require Tenant to subordinate this lease to any mortgage,
deed of trust or other lien hereafter placed upon the Demised Premises or the
Industrial Complex as a whole, and Tenant agrees upon demand to execute an
instrument subordinating this lease as Landlord may request; provided,
however, that Tenant's obligation to execute such a subordination (and
attornment) instrument shall be conditioned on Tenant's receipt from the
lender of a nondisturbance agreement in the form typically utilized by such
lender. If the holder of any mortgage, indenture or deed of trust or similar
instrument (each a "Mortgagee") succeeds to Landlord's interest in the
Demised Premises, Tenant shall, upon request of any such Mortgagee,
automatically become the tenant of and attorn to and recognize such Mortgagee
as the landlord under this lease and will pay to it all rents and other
amounts payable by Tenant under this lease, in accordance with the applicable
terms of this lease.
20.2 Tenant may not exercise any remedies for default by Landlord
hereunder unless and until Landlord and the holder(s) of any indebtedness
secured by mortgage, deed of trust or other lien on the Demised Premises shall
have received written notice of such default and a reasonable time (not less
than 45 days) shall thereafter have elapsed without the default having been
cured.
20.3 Tenant agrees that it will from time to time upon request by
Landlord execute and deliver to Landlord a written statement addressed to
Landlord (and to a party[ies] designated by Landlord), which statement shall
identify Tenant and this lease, shall certify that this lease is unmodified and
in full force and effect (or if there have been modifications, that the same is
in full force and effect as so modified), shall confirm that Landlord is not in
default as to any obligations of Landlord under this lease (or if Landlord is in
default, specifying any default), shall confirm Tenant's agreements contained
above in this Article 20, and shall contain such other information or
confirmations as Landlord may reasonably require. Landlord is hereby irrevocably
appointed and authorized as the agent and attorney-in-fact of Tenant to execute
and deliver any such written statement on Tenant's behalf if Tenant fails to do
so within seven (7) days after the delivery of a written request from Landlord
to Tenant.
ARTICLE 21.
TENANT'S INDEMNIFICATION
21.1 Tenant shall indemnify, defend and hold harmless Landlord,
Landlord's asset manager, Landlord's subasset manager, Landlord's partners, any
subsidiary or affiliate of Landlord and the officers, directors, shareholders,
partners, employees, managers, independent contractors, attorneys and agents of
any of the foregoing (collectively, the "lndemnitees") from and against any and
all claims, demands, causes of action, judgments, costs and expenses, and all
losses and damages (including consequential and punitive damages) arising from
Tenant's use of the Demised Premises or from the conduct of its business or from
any activity, work, or other acts or things done, permitted or suffered by
Tenant in or about the Demised Premises, and shall further indemnify, defend and
hold harmless the Indemnitees from and against any and all claims arising from
any breach or default in the performance of any obligation on Tenant's part to
be performed under the terms of this lease, or arising from any act, omission or
negligence or willful or criminal misconduct of Tenant, or any officer, agent,
employee, independent contractor, guest, or invitee thereof, and from all costs,
attorneys' fees and disbursements,
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and liabilities incurred in the defense of any such claim or any action or
proceeding which may be brought against, out of or in any way related to this
lease, except, in each Instance, to the extent caused by the gross negligence or
willful misconduct of Landlord. Upon notice from Landlord, Tenant shall defend
any such claim, demand, cause of action or suit at Tenant's expertise by counsel
satisfactory to Landlord in its sole discretion. As a material part of the
consideration to Landlord for this lease, Tenant hereby assumes all risk of
damage to property or injury to persons in, upon or about the Demised Premises
from any cause, except to the extent caused by the gross negligence or willful
misconduct of Landlord, and Tenant hereby waives all claims with respect thereto
against Landlord. Tenant shall give immediate notice to Landlord in case of
casualty or accidents in the Demised Premises. The provisions of this Article 21
shall survive the expiration or sooner termination of this lease.
21.2 All personal property of Tenant, including goods, wares,
merchandise, inventory, trade fixtures and other personal property of Tenant,
shall be stored at the sole risk of Tenant. Landlord or its agents shall not
be liable for any loss or damage to persons or property resulting from fire,
explosion, falling plaster, steam, gas, electricity, water or rain which may
leak from any part of the Industrial Complex or from the pipes, appliances or
plumbing works therein or from the roof, street or subsurface or from any
other places resulting from dampness or any other cause whatsoever, or from
the act or negligence of any other tenant or any officer, agent, employee,
contractor or guest of any such tenant, except personal injury caused by or
due to the gross negligence or willful misconduct of Landlord. Landlord or
its agents shall not be liable for interference with the electrical service,
ventilation, or for any latent defect in the Demised Premises.
21.3 The parties hereto acknowledge that all or a part of the Demised
Premises may be used for the storage and shipment of goods not owned by Tenant,
and Landlord is not willing to enter into this lease unless Tenant indemnifies
the Indemnitees to Landlord's satisfaction from any liability on the part of the
Indemnitees to the owner(s) of such goods for damage to the same arising out of
any acts or omissions of the Indemnitees. As a material inducement to Landlord
to enter into this lease, Tenant agrees to defend, indemnify and hold the
Indemnitees harmless from and against any and all losses, claims, liabilities,
obligations and damages imposed upon or incurred or asserted against the
Indemnitees by reason of damage to goods of persons storing such goods with
Tenant, notwithstanding the fact that such losses, claims, liabilities,
obligations or damages may have been caused by the acts or omissions of
Landlord, except to the extent caused by the gross negligence or willful
misconduct of Landlord. Tenant agrees that at all times during which it shall
store goods not owned by it in the Demised Premises, it shall insure the
indemnity described under this Section 21.3 in a manner reasonably satisfactory
to Landlord. Landlord shall not be deemed a bailee, consignee, or warehouseman
(or responsible for the standard of care incidental thereto) with respect to any
goods stored or shipped to or from the Demised Premises for consignment or
bailment and Tenant shall insert a clause to that effect in all warehouse
receipts or consignment agreements for the storage or shipment of goods to or
from the Demised Premises.
ARTICLE 22.
DEFAULT BY TENANT AND REMEDIES
22.1 The following events shall be deemed to be events of default by
Tenant under this lease:
(a) Tenant shall fail to pay any installment of rental or any
other obligation under this lease involving the payment of money and such
failure shall continue for a period of ten (10) days after such payment shall
become due and payable after written notice thereof to Tenant; provided,
however, that for each calendar year during which Landlord has already given
Tenant one (1) written notice of the failure to pay an installment of rental, no
further notice shall be required (i.e., the event of default will automatically
occur on the tenth (10th) day after the day upon which the rental was due; and
provided further that any such notice shall be in lieu of, and not in addition
to, any notice required under Section 1161, ET SEQ., of the California Code of
Civil Procedure).
(b) Tenant shall fail to comply with any provision of this
lease, other than as described in subsection (a) above, and either shall not
cure such failure within fifteen (15) days after written notice thereof to
Tenant, or shall cure that particular failure but shall again fail to comply
with the same provision of this lease within three (3) months after Landlord's
written notice; provided, however, that any such notice shall be in lieu of, and
not in addition to, any notice required under Section 1161 ET SEQ. of the
California Code of Civil Procedure; provided further, however, that if the
noticed failure cannot reasonably be cured within fifteen (15) days, Tenant
shall not be deemed in default hereunder if Tenant commences to cure the default
within such fifteen (15) day period, and thereafter diligently prosecutes such
cure to completion.
(c) Tenant or any guarantor of Tenant's obligations under
this lease shall become insolvent, or shall make a transfer in fraud of
creditors, or shall make an assignment for the benefit of creditors.
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(d) Tenant or any guarantor of Tenant's obligations under
this lease shall file a petition under any section or chapter of the federal
Bankruptcy Code, as amended, or under any similar law or statue of the United
States or any state thereof; or Tenant or any guarantor of Tenant's obligations
under this lease shall be adjudged bankrupt or insolvent in proceedings filed
against Tenant or any guarantor of Tenant's obligations under this lease
thereunder.
(e) A receiver or Trustee shall be appointed for the Demised
Premises or for all or substantially all of the assets of Tenant or any
guarantor of Tenant's obligations under this lease.
(f) Tenant shall desert or vacate or shall commence to desert
or vacate the Demised Premises or any substantial portion of the Demised
Premises or at any time prior to the last month of the lease term shall remove
or attempt to remove, without the prior written consent of Landlord, all or a
substantial amount of Tenant's goods, wares, equipment, fixtures, furniture, or
other personal property.
(g) Tenant shall do or permit to be done anything which
creates a lien upon the Demised Premises or upon all or any part of the
Industrial Complex.
(h) Any transfer of a substantial portion of the assets of
Tenant, or any incurrence of a material obligation by Tenant, unless such
transfer or obligation is undertaken or incurred in the ordinary course of
Tenant's business or in good faith for equivalent consideration, or with
Landlord's consent.
(i) The default of any guarantors of Tenant's obligations
hereunder under any guaranty of this Lease, or the attempted repudiation or
revocation of any such guaranty.
22.2 Upon the occurrence of any such event of default, Landlord shall
have the option to pursue any one or more of the following remedies to the
extent permitted by law:
(a) Without any further notice or demand whatsoever, Tenant
shall be obligated to reimburse Landlord for the damages suffered by Landlord as
a result of the event of default, plus interest on such amount at the maximum
contractual rate which could legally be charged in the event of a loan of such
amount to Tenant (but in no event to exceed 1-1/2% per month); and Landlord may
pursue a monetary recovery from Tenant.
(b) Without any further notice or demand whatsoever,
Landlord may take any one or more of the actions permissible at law to insure
performance by Tenant of Tenant's covenants and obligations under this lease.
In this regard, and without limiting the generality of the immediately
preceding sentence, it is agreed that if Tenant fails to open for business as
required in this lease or, having opened for business, deserts or vacates the
Demised Premises, Landlord may enter upon and take possession of such
premises in order to protect them from deterioration and continue to demand
from Tenant the monthly rentals and other charges provided in this lease,
without any obligation to relet; however, if Landlord does, at its sole
discretion, elect to relet the Demised Premises, such action by Landlord
shall not be deemed as an acceptance of Tenant's surrender of the Demised
Premises unless Landlord expressly notifies Tenant of such acceptance in
writing pursuant to this subsection (b), Tenant hereby acknowledging that
Landlord shall otherwise be reletting as Tenant's agent and Tenant
furthermore hereby agreeing to pay to Landlord on demand any deficiency that
may arise between the monthly rentals and other charges provided in this
lease and that actually collected by Landlord. In the event that Landlord
shall elect to relet, then rentals received by Landlord from such reletting
shall be applied: first, to the payment of any indebtedness (other than rent)
due hereunder from Tenant to Landlord; second, to the payment of any cost of
such reletting (including brokerage commissions); third, to the payment of
the cost of any alterations and repairs to the Demised Premises; fourth, to
the payment of rent due and unpaid hereunder; and the residue, if any, shall
be held by Landlord and applied in payment of future rent as the same may
become due and payable hereunder. Should reletting, during any month to which
such rent is applied, result in the actual payment of rentals at less than
the rent payable during that month by Tenant hereunder, then Tenant shall pay
such deficiency to Landlord immediately upon demand therefor by Landlord.
Such deficiency shall be calculated and paid monthly. Tenant shall also pay
to Landlord as soon as ascertained, any costs and expenses incurred by
Landlord in such reletting or in making such alterations and repairs not
covered by the rentals received from such reletting. Finally, it is agreed
that in the event of any default described in subsection (g) of Section 22.1
of this lease, Landlord may pay or bond around such lien, whether or not
contested by Tenant; and in such event Tenant agrees to reimburse Landlord on
demand for all costs and expenses incurred in connection with any such
action, with Tenant further agreeing that Landlord shall in no event be
liable for any damages or claims resulting from such action. No action or
inaction by Landlord including, without limitation, the re-entry or taking of
possession of the Demised Premises by Landlord pursuant to this Section
22.2(b) shall be construed as an election to terminate this lease or as
interference with Tenant's rights of possession, assignment or subletting
unless a written notice of such election shall be given to Tenant or unless
the termination thereof be decreed by a court of competent jurisdiction.
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Notwithstanding any reletting without termination by Landlord, Landlord may, at
any time after such reletting, elect to terminate this lease for any such
default.
(c) Landlord may terminate this lease by written notice to
Tenant, in which event Tenant shall immediately surrender the Demised Premises
to Landlord. In the event that Landlord shall elect to so terminate this lease,
then Landlord may recover from Tenant:
(i) The worth at the time of award of any unpaid rent
which had been earned at the time of such termination; plus
(ii) The worth at the time of award of the amount by
which the unpaid rent which would have been earned after
termination until the time of award exceeds the amount of such
rental loss Tenant proves reasonably could have been avoided;
plus
(iii) The worth at the time of award of the amount by
which the unpaid rent for the balance of the Term after the time
of award exceeds the amount of such rental loss that Tenant
proves reasonably could be avoided; plus
(iv) Any other amount necessary to compensate Landlord
for all detriment proximately caused by Tenant's failure to
perform its obligations under this lease or which in the ordinary
course would be likely to result therefrom, plus
(v) At Landlord's election, such other amounts in
addition to or in lieu of the foregoing as may be permitted from
time to time by applicable California law.
As used in subparagraphs (i) and (ii) above, the "worth at the
time of award" is computed by allowing interest at the maximum
rate permitted by law. As used in subparagraph (iii) above, the
"worth at the time of award" is computed by discounting such
amount at the discount rate of the Federal Reserve Bank of San
Francisco at the time of award plus one percent (1%).
Forbearance by Landlord to enforce one or more of the remedies herein provided
upon an event of default shall not be deemed or construed to constitute a waiver
of such default. Tenant hereby waives for Tenant and for all those claiming
under Tenant all right now or hereafter existing to redeem by order or judgment
of any court or by any legal process or writ, Tenant's right of occupancy of the
Demised Premises after any termination of this lease.
(d) In addition to all other rights and remedies provided
Landlord in this lease and by law, Landlord shall have the remedy described in
California Civil Code Section 1951.4 (Landlord may continue the lease in effect
after Tenant's breach and abandonment and recover rent as it becomes due if
Tenant has the right to sublet or assign the lease, subject to reasonable
limitations).
22.3 It is expressly agreed that in determining "the unpaid rent" as
that term is used throughout subsections 22.2(c)(i) and 22.2(c)(ii) above, there
shall be added to the minimum guaranteed rental (as specified in Sections 1.1(l)
and 4.1 of this lease) a sum equal to the charges for maintenance of the Common
Area (as specified in Section 7.4 of this lease), and the payments for taxes,
charges and insurance (as specified in Article 6 of this lease).
22.4 It is further agreed that, in addition to payments required
pursuant to subsections 22.2(b) and 22.2(c) above, Tenant shall compensate
Landlord for all expenses incurred by Landlord in repossession (including, among
other expenses, any increase in insurance premiums caused by the vacancy of the
Demised Premises), all expenses incurred by Landlord in reletting (including,
among other expenses, repairs, remodeling, replacements, advertisements and
brokerage fees), all concessions granted to a new tenant upon reletting
(including, among other concessions, renewal options), all losses incurred by
Landlord as a direct or indirect result of Tenant's default (including, among
other losses, any adverse reaction by Landlord's mortgagee or by other tenants
or potential tenants of the Industrial Complex) and a reasonable allowance for
Landlord's administrative efforts, salaries and overhead attributable directly
or indirectly to Tenant's default and Landlord's pursuing the rights and
remedies provided herein and under applicable law.
22.5 Landlord may restrain or enjoin any breach or threatened breach
of any covenant, duty or obligation of Tenant herein contained without the
necessity of proving the inadequacy of any legal remedy or irreparable harm. The
remedies of Landlord hereunder shall be deemed cumulative and not exclusive of
each other.
22.6 If on account of any breach or default by Tenant in its
obligations hereunder, Landlord shall employ an attorney to present, enforce or
defend any of Landlord's rights or remedies hereunder, Tenant agrees to pay any
reasonable attorneys' fees incurred by Landlord in such connection.
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22.7 Tenant acknowledges its obligation to deposit with Landlord the
sum stated in Section 1.1(n) above, to be held by Landlord without interest as
security for the performance by Tenant of Tenant's covenants and obligations
under this lease. Tenant agrees that such deposit may be commingled with
Landlord's other funds and that such security deposit is not an advance payment
of rental or a measure of Landlord's damages in case of default by Tenant. Upon
the occurrence of any event of default by Tenant, Landlord may, from time to
time, without prejudice to any other remedy provided herein or provided by law,
use such funds to the extent necessary to make good any arrears of rentals and
any other damage, injury, expense or liability caused to Landlord by such event
of default, and Tenant shall pay to Landlord on demand the amount so applied in
order to restore the security deposit to its original amount. If Tenant is not
then in default hereunder, any remaining balance of such security deposit shall
be returned by Landlord to Tenant within thirty (30) days of termination of this
lease and Tenant's vacating of the Demised Premises (subject to the provisions
of Section 19.6 above).
22.8 (a) In the event of any default described in subsection (d)
of Section 22.1 of this lease, any assumption and assignment must conform with
the requirements of the Bankruptcy Code and, in order to provide Landlord with
the assurances contemplated by the Bankruptcy Code, Tenant must fulfill the
following obligations, in addition to any other reasonable obligations that
Landlord may require, before any assumption of this lease is effective: (i) all
defaults under subsection (a) of Section 22.1 of this lease must be cured within
ten (10) days after the date of assumption; (ii) all other defaults under
Section 22.1 of this lease other than under subsection (d) of Section 22.1 must
be cured within fifteen (15) days after the date of assumption; (iii) all actual
monetary losses incurred by Landlord (including, but not limited to, reasonable
attorneys' fees) must be paid to Landlord within ten (10) days after the date of
assumption; and (iv) Landlord must receive within ten (10) days after the date
of assumption a security deposit in the amount of six (6) months minimum
guaranteed rent (using the minimum guaranteed rent in effect for the first full
month immediately following the assumption) and an advance prepayment of minimum
guaranteed rent in the amount of three (3) months minimum guaranteed rent (using
the minimum guaranteed rent in effect for the first full month immediately
following the assumption), both sums to be held by Landlord in accordance with
Section 22.7 above and deemed to be rent under this lease for the purposes of
the Bankruptcy Code as amended and from time to time in effect.
(b) In the event this lease is assumed in accordance with the
requirements of the Bankruptcy Code and this lease, and is subsequently
assigned, then, in addition to any other reasonable obligations that Landlord
may require and in order to provide Landlord with the assurances contemplated by
the Bankruptcy Code, Landlord shall be provided with (i) a financial statement
of the proposed assignee prepared in accordance with generally accepted
accounting principles consistently applied, though on a cash basis, which
reveals a net worth in an amount sufficient, in Landlord's reasonable judgment,
to assure the future performance by the proposed assignee of Tenant's
obligations under this lease; or (ii) a written guaranty by one or more
guarantors with financial ability sufficient to assure the future performance of
Tenant's obligations under this lease, such guaranty to be in form and content
satisfactory to Landlord and to cover the performance of all of Tenant's
obligations under this lease.
ARTICLE 23.
[INTENTIONALLY OMITTED]
ARTICLE 24.
HOLDING OVER
24.1 In the event Tenant remains in possession of the Demised Premises
after the expiration of this lease and without the execution of a new lease or
an amendment hereto, it shall be deemed to be occupying said premises as a
tenant from month to month at a rental equal to the rental herein provided plus
(i) fifty percent (50%) of such amount for the first ninety (90) days of the
holdover period and (ii) one hundred percent (100%) of such amount thereafter,
and otherwise subject to all the conditions, provisions and obligations of this
lease insofar as the same are applicable to a month-to-month tenancy. Neither
any provision hereof nor acceptance by Landlord of rent after such expiration or
earlier termination shall be deemed a consent to a holdover hereunder or result
in a renewal of this lease or an extension of the Term. Notwithstanding any
provision to the contrary contained herein, (i) Landlord expressly reserves the
right to require Tenant to surrender possession of the Demised Premises upon the
expiration of the Term of this lease or upon the earlier termination hereof, the
right to reenter the Demised Premises, and the right to assert any remedy at law
or in equity to evict Tenant and collect damages in connection with any such
holding over, and (ii) Tenant shall indemnify, defend and hold Landlord harmless
from and against any and all claims, demands, actions, losses, damages,
obligations, costs and expenses, including, without limitation, attorneys' fees
incurred or suffered by Landlord by reason of Tenant's failure to surrender the
Demised Premises on the expiration or earlier termination of this Lease in
accordance with the provisions of this lease.
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ARTICLE 25.
NOTICES
25.1 Wherever any notice is required or permitted hereunder, such
notice shall be in writing. Any notice or document required or permitted to be
delivered hereunder shall be deemed to be delivered when actually received by
the designated addressee or, if earlier and regardless of whether actually
received or not, when deposited in the United States mail, postage prepaid,
certified mail, return receipt requested, addressed to the parties hereto at the
respective addresses set out in Section 1.1 above (or at Landlord's option, to
Tenant at the Demised Premises), or at such other addresses as they have
theretofore specified by written notice. Copies of all notices to Tenant shall
concurrently be delivered to Thomas B. Jacob, Thoits, Love, Hershberger &
McLean, 245 Lytton Avenue, Palo Alto, California 94301.
25.2 If and when included within the term "Landlord" as used in this
instrument there are more than one person, firm or corporation, all shall
jointly arrange among themselves for their joint execution of such notice
specifying some individual at some specific address for the receipt of notices
and payments to the Landlord; if and when included within the term "Tenant" as
used in this instrument there are more than one person, firm or corporation, all
shall jointly arrange among themselves for their joint execution of such a
notice specifying some individual at some specific address for the receipt of
notices and payment to Tenant. All parties included within the terms "Landlord"
and "Tenant," respectively, shall be bound by notice and payments given in
accordance with the provisions of this Article to the same effect as if each had
received such notice or payment. In addition, Tenant agrees that actions by
Landlord and notices to Tenant hereunder may be taken or given by Agent,
Landlord's attorney, or any other property manager or agent.
25.3 A copy of any notice or document required or permitted to be
delivered hereunder to Landlord shall simultaneously be delivered to Agent.
ARTICLE 26.
COMMISSIONS
26.1 Tenant and Landlord warrant that they have had no dealings with
any broker or agent in connection with this lease, other than Agent and Tenant's
Broker. Landlord shall be responsible for the payment of a commission to Agent
pursuant to a separate agreement between Landlord and Agent. Landlord and Tenant
covenant to pay, hold harmless and indemnify each other from and against any and
all cost, expense or liability for any compensation, commissions or charges
claimed by any other broker or agent utilized by the indemnitor with respect to
this lease or the negotiation hereof.
ARTICLE 27.
REGULATIONS
27.1 Landlord and Tenant acknowledge that there are now in effect and
may hereafter be enacted or go into effect federal, state, county and municipal
laws, orders, rules, directives and regulations relating to or affecting the
Demised Premises or the Industrial Complex, concerning the impact on the
environment of construction, land use, maintenance and operation of structures,
toxic or otherwise hazardous substances, and the conduct of business, including,
without limitation, the Americans With Disabilities Act of 1990 and the Clean
Air Act and regulations issued thereunder (all of the foregoing, as amended from
time to time, being herein called the "Regulations"). Tenant will not cause or
permit to be caused, any act or practice, by negligence, omission or otherwise,
that would adversely affect the environment or do anything or permit anything to
be done that would violate any of said Regulations. Moreover, Tenant shall have
no claim against Landlord by reason of any changes Landlord may make in the
Industrial Complex or the Demised Premises pursuant to said Regulations or any
charges imposed upon Tenant, Tenant's customers or other invitees pursuant to
same.
27.2 If, by reason of any Regulations, the payment to, or collection
by, Landlord of any rental or other charge (collectively referred to hereinafter
as "Lease Payments") payable by Tenant to Landlord pursuant to the provisions of
this lease is in excess of the amount (the "Maximum Charge") permitted thereof
by the Regulations, then Tenant, during the period (the "Freeze Period") when
the Regulations shall be in force and effect shall not be required to pay, nor
shall Landlord be permitted to collect, any sum in excess of the Maximum Charge.
Upon the earlier of (i) the expiration of the Freeze Period, or (ii) the
issuance of a final order or judgment of a court of competent jurisdiction
declaring the Regulations to be invalid or not applicable to the provisions of
this lease, Tenant, to the extent not then proscribed by law, and commencing
with the first day of the month immediately following, shall pay to Landlord as
additional rental, in equal monthly installments during the balance of the term
of this lease, a sum equal to the cumulative difference between the Maximum
Charges and the Lease Payments during the Freeze
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Period. If any provisions of this Section, or the application thereof, shall to
any extent be declared to be invalid and unenforceable, the same shall not be
deemed to affect any of the other provisions of this section or of this lease,
all of which shall be deemed valid and enforceable to the fullest extent
permitted by law.
27.3 Tenant acknowledges that it will be wholly responsible for any
accommodations or alterations which need to be made to the Demised Premises to
accommodate disabled employees and customers of Tenant, including without
limitation, the requirements under the Americans with Disabilities Act and any
equivalent California law. Any alterations made to the Demised Premises in order
to comply with either statute must be made solely at Tenant's expense and in
compliance with all terms and requirements of this lease. Landlord agrees to
make reasonable efforts to ensure that the Common Area is in compliance with the
applicable disability access laws as of the date hereof. If a complaint is
received by Landlord from either a private or government source regarding
disability access to the Common Area of the Industrial Complex, Landlord
reserves the right to mediate, contest, comply with or otherwise respond to such
complaint as Landlord deems to be reasonably prudent under the circumstances. If
Landlord decides to make alterations to the Common Area of the Industrial
Complex in response to any such complaints or in response to legal requirements
Landlord considers to be applicable to the Common Area of the Industrial
Complex, the cost of such alterations shall be included in the Common Area
maintenance charge under this lease. Landlord and Tenant agree that so long as
the governmental entity or entities charged with enforcing such statutes have
not expressly required Landlord to take specific action to effectuate compliance
with such statutes, Landlord shall be conclusively deemed to be in compliance
with such statutes. Tenant agrees to provide Landlord with written notice should
Tenant become aware of a violation of such statutes with respect to the Common
Area. In the event either Landlord or Tenant is required to take action to
effectuate compliance with such statutes, Landlord or Tenant, as applicable,
shall have a reasonable period of time to make the improvements and alterations
necessary to effectuate such compliance, hich period of time shall be extended
by any time necessary to cause, any necessary improvements and alterations to be
made.
ARTICLE 28.
HAZARDOUS MATERIALS
28.1 During the term of this lease, Tenant shall comply with all
Environmental Laws and Environmental Permits (each as defined in Section 28.7
hereof) applicable to the operation or use of the Demised Premises, will cause
all other persons occupying or using the Demised Premises to comply with all
such Environmental Laws and Environmental Permits, will immediately pay or cause
to be paid all costs and expenses incurred by reason of such compliance, and
will obtain and renew all Environmental Permits required for operation or use of
the Demised Premises.
28.2 Tenant shall not generate, use, treat, store, handle, release or
dispose of, or permit the generation, use, treatment, storage, handling, release
or disposal of Hazardous Materials (as defined in Section 28.7 hereof) on the
Demised Premises, or the Industrial Complex, or transport or permit the
transportation of Hazardous Materials to or from the Demised Premises or the
Industrial Complex except for limited quantities used or stored at the Demised
Premises and required in connection with the routine operation and maintenance
of the Demised Premises, and then only upon the written consent of Landlord and
in compliance with all applicable Environmental Laws and Environmental Permits.
28.3 At any time and from time to time during the term of this lease,
Landlord may perform, at Tenant's sole cost and expense, an environmental site
assessment report concerning the Demised Premises, prepared by an environmental
consulting firm chosen by Landlord, indicating the presence or absence of
Hazardous Materials caused or permitted by Tenant and the potential cost of any
compliance, removal or remedial action in connection with any such Hazardous
Materials on the Demised Premises. Tenant shall grant and hereby grants to
Landlord and its agents access to the Demised Premises and specifically grants
Landlord an irrevocable non-exclusive license to undertake such an assessment;
and the cost of such assessment shall be immediately due and payable on demand.
28.4 Tenant will immediately advise Landlord in writing of any of the
following: (1) any pending or threatened Environmental Claim (as defined in
section 28.7 hereof) against Tenant relating to the Demised Premises or the
Industrial Complex; (2) any condition or occurrence on the Demised Premises or
the Industrial Complex that (a) results in noncompliance by Tenant with any
applicable Environmental Law, or (b) could reasonably be anticipated to form the
basis of an Environmental Claim against Tenant or Landlord or the Demised
Premises; (3) any condition or occurrence on the Demised Premises or any
property adjoining the Demised Premises that could reasonably be anticipated to
cause the Demised Premises to be subject to any restrictions on the ownership,
occupancy, use or transferability of the Demised Premises under any
Environmental Law; and (4) the actual or anticipated taking of any removal or
remedial action by Tenant in response to the actual or alleged presence of any
Hazardous Material on the Demised Premises or the Industrial Complex. All such
notices shall describe in reasonable detail the nature of the claim,
investigation, condition, occurrence or removal or remedial action and Tenant's
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response thereto. In addition, Tenant will provide Landlord with copies of all
communications regarding the Demised Premises with any government or
governmental agency relating to Environmental Laws, all such communications with
any person relating to Environmental Claims, and such detailed reports of any
such. Environmental Claim as may reasonably be requested by Landlord.
28.5 Tenant will not change or permit to be changed the present use of
the Demised Premises unless Tenant shall have notified Landlord thereof in
writing and Landlord shall have determined, in its sole and absolute discretion,
that such change will not result in the presence of Hazardous Materials on the
Demised Premises except for those described in Section 28.2 above.
28.6 (a) Tenant agrees to defend, indemnify and hold harmless the
Indemnitees (as defined in Section 21.1) from and against all obligations
(including removal and remedial actions), losses, claims, suits, judgments,
liabilities, penalties, damages (including consequential and punitive damages),
costs and expenses (including attorneys' and consultants' fees and expenses) of
any kind or nature whatsoever that may at any time be incurred by, imposed on or
asserted against such Indemnitees directly or indirectly based on, or arising or
resulting from (a) the actual or alleged presence of Hazardous Materials on the
Industrial Complex which is caused or permitted by Tenant and (b) any
Environmental Claim relating in any way to Tenant's operation or use of the
Demised Premises (the "Hazardous Materials Indemnified Matters"). The provisions
of this Article 28 shall survive the expiration or sooner termination of this
lease.
(b) To the extent that the undertaking in the preceding
paragraph may be unenforceable because it is violative of any law or public
policy, Tenant will contribute the maximum portion that it is permitted to pay
and satisfy under applicable law to the payment and satisfaction of all
Hazardous Materials Indemnified Matters incurred by the Indemnitees.
(c) All sums paid and costs incurred by Landlord with respect
to any Hazardous Materials Indemnified Matter shall bear interest at the lesser
of (i) eighteen (18%) percent per annum, or (ii) the maximum legal rate of
interest allowed in the State of California, from the date so paid or incurred
until reimbursed by Tenant, and all such sums and costs shall be immediately due
and payable on demand.
28.7 (a) "Hazardous Materials" means (i) petroleum or petroleum
products, natural or synthetic gas, asbestos in any form that is or could become
friable, urea formaldehyde foam insulation, and radon gas; (ii) any substances
defined as or included in the definition of "hazardous substances," "hazardous
wastes," "hazardous materials," "extremely hazardous wastes," "restricted
hazardous wastes," "toxic substances," "toxic pollutants," "contaminants" or
"pollutants," or words of similar import, under any applicable Environmental
Law; and (iii) any other substance exposure which is regulated by any
governmental authority; (b) "Environmental Law" means any federal, state or
local statute, law, rule, regulation, ordinance, code, policy or rule of common
law now or hereafter in effect and in each case as amended, and any judicial or
administrative interpretation thereof, including any judicial or administrative
order, consent decree or judgment, relating to the environment, health, safety
or Hazardous Materials, including without limitation, the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, 42 U.S.C.
Sections 9601 ET SEQ.; the Resource Conservation and Recovery Act, 42 U.S.C.
Sections 6901 ET SEQ.; the Hazardous Materials Transportation Act, 49 U.S.C.
Sections 1801 ET SEQ.; the Clean Water Act, 33 U.S.C. Sections 1251 ET SEQ.; the
Toxic Substances Control Act, 15 U.S.C. Sections 2601 ET SEQ.; the Clean Air
Act, 42 U.S.C. Sections 7401 ET SEQ.; the Safe Drinking Water Act, 42 U.S.C.
Sections 300f ET SEQ.; the Atomic Energy Act, 42 U.S.C. Sections 2011 ET SEQ.;
the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. Sections 136 ET
SEQ.; the Occupational Safety and Health Act, 29 U.S.C. Sections 651 ET SEQ.;
(c) "Environmental Claims" means any and all administrative, regulatory or
judicial actions, suits, demands, demand letters, claims, liens, notices of
non-compliance or violation, investigations, proceedings, consent orders or
consent agreements relating in any way to any Environmental Law or any
Environmental Permit, including without limitation (i) any and all Environmental
Claims by governmental or regulatory authorities for enforcement, cleanup,
removal, response, remedial or other actions or damages pursuant to any
applicable Environmental Law and (ii) any and all Environmental Claims by any
third party seeking damages, contribution, indemnification, cost recovery,
compensation or injunctive relief resulting from Hazardous Materials or arising
from alleged injury or threat of injury to health, safety or the environment;
(d) "Environmental Permits" means all permits, approvals, identification
numbers, licenses and other authorizations required under any applicable
Environmental Law.
28.8 Landlord hereby represents to its actual knowledge without
investigation that there are no Hazardous Materials in the Demised Premises in
violation of any applicable Environmental Law.
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ARTICLE 29.
MISCELLANEOUS
29.1 Nothing in this lease shall be deemed or construed by the parties
hereto, nor by any third party, as creating the relationship of principal and
agent or of partnership or of joint venture between the parties hereto, it being
understood and agreed that neither the method of computation of rent, nor any
other provision contained herein, nor any acts of the parties hereto, shall be
deemed to create any relationship between the parties hereto other than the
relationship of landlord and tenant.
29.2 Tenant shall not for any mason withhold or reduce Tenant's
required payments of rentals and other charges provided in this lease, it being
agreed that the obligations of Landlord under this lease are independent of
Tenant's obligations except as may be otherwise expressly provided. The
immediately preceding sentence shall not be deemed to deny Tenant the ability of
pursuing all rights granted it under this lease or at law; however, at the
direction of Landlord, Tenant's claims in this regard shall be litigated in
proceedings different from any litigation involving rental claims or other
claims by Landlord against Tenant (i.e., each party may proceed to a separate
judgment without consideration, counterclaim or offset as to the claims asserted
by the other party).
29.3 The liability of Landlord, any agent of Landlord, or any of their
respective officers, directors, shareholders, or employees to Tenant for or in
respect of any default by Landlord under the terms of this lease or in respect
of any other claim or cause of action shall be limited to the interest of
Landlord in the Industrial Complex, and Tenant agrees to look solely to
Landlord's interest in the Industrial Complex for the recovery and satisfaction
of any judgment against Landlord, any agent of Landlord, or any of their
respective officers, directors, shareholders, and employees.
29.4 In all circumstances under this lease where the prior consent of
one party (the "consenting party"), whether it be Landlord or Tenant, is
required before the other party (the "requesting party") is authorized to take
any particular type of action, such consent shall not be withheld in a wholly
unreasonable and arbitrary manner; however, the requesting party agrees that its
exclusive remedy if it believes that consent has been withheld improperly
(including, but not limited to, consent required from Landlord pursuant to
Section 19.1) shall be to Institute litigation either for a declaratory judgment
or for a mandatory injunction requiring that such consent be given (with the
requesting party hereby waiving any claim for damages, attorneys' fees or any
other remedy unless the consenting party refuses to comply with a court order or
judgment requiring it to grant its consent).
29.5 Whenever a period of time is herein prescribed for action to be
taken by either Landlord or Tenant, such party shall not be liable or
responsible for, and there shall be excluded from the computation of any such
period of time, any delays due to strikes, riots, acts of God, shortages of
labor or materials, war, governmental laws, regulations or restrictions or any
other causes of any kind whatsoever which are beyond the reasonable control of
such party; provided, however, that this provision shall NOT apply to Tenant's
obligation to pay rent or any other sums due hereunder.
29.6 If any provision of this lease should be held to be Invalid or
unenforceable, the validity and enforceability of the remaining provisions of
this lease shall not be affected thereby.
29.7 [INTENTIONALLY OMITTED]
29.8 The laws of the State of California shall govern the
interpretation, validity, performance and enforcement of this lease. Venue for
any action under this lease shall be the county in which rentals are due
pursuant to Section 4.2 and Section 1.1 of this lease.
29.9 The captions used herein are for convenience only and do not
limit or amplify the provisions hereof.
29.10 Whenever herein the singular number is used, the same shall
include the plural, and words of any gender shall include each other gender.
29.11 All covenants and obligations contained within this lease shall
bind and inure to the benefit of Landlord, its successors and assigns, and shall
be binding upon Tenant, its permitted successors and assigns.
29.12 This lease contains the entire agreement between the parties, and
no rights are created in favor of either party other than as specified or
expressly contemplated in this lease. No brochure, rendering, information or
correspondence shall be deemed to be a part of this agreement unless
specifically incorporated herein by reference. In addition, no agreement shall
be effective to change, modify or terminate this lease in whole or in part
unless such is in writing and duly signed by the party against whom enforcement
of such change, modification or termination is sought.
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29.13 LANDLORD AND TENANT HEREBY ACKNOWLEDGE THAT THEY ARE NOT RELYING
UPON ANY BROCHURE, RENDERING, INFORMATION, REPRESENTATION OR PROMISE OF THE
OTHER, OR OF THE AGENT, EXCEPT AS MAY BE EXPRESSLY SET FORTH IN THIS LEASE.
29.14 No waiver of any of the terms, covenants, provisions, conditions,
rules and regulations imposed by this lease, and no waiver of any legal or
equitable relief or remedy, shall be implied by the failure of Landlord to
assert any rights, declare any forfeiture, or for any other reason. No waiver of
any of the terms, provisions, covenants, conditions, rules and regulations shall
be valid unless it shall be in writing signed by Landlord. No waiver by Landlord
or forgiveness of performance by Landlord for one or more tenants shall
constitute a Waiver or forgiveness of performance in respect to Tenant.
Landlord's consent to or approval of any act by Tenant requiring Landlord's
consent or approval under this Lease shall not be deemed to render unnecessary
the obtaining of Landlord's consent to or approval of any subsequent act of
Tenant. No act or thing done by Landlord or Landlord's agents during the Term
of this lease shall be deemed an acceptance of a surrender of the Demised
Premises, unless in writing signed by Landlord. The delivery of the keys to any
employee or agent of Landlord shall not operate as a termination of this lease
or a surrender of the Demised Premises. The acceptance of any rent by Landlord
following a breach of this lease by Tenant shall not constitute a waiver by
Landlord of such breach or any other breach unless such waiver is expressly
stated in a writing signed by Landlord.
29.15 Tenant shall deliver and surrender to Landlord possession of the
Demised Premises (including all of Tenant's permanent work upon and to the
Demised Premises, all replacements and all fixtures permanently attached to the
Demised Premises) immediately upon the expiration of the Term or the termination
of this lease in as good condition and repair as the same were on the delivery
date (loss by any insured casualty and ordinary wear and tear only excepted),
and deliver the keys at the office of Landlord or Landlord's agent; provided,
however, that upon Landlord's request made at least thirty (30) days prior to
the end of the Term, or the date Tenant is otherwise required to vacate the
Demised Premises, Tenant shall remove all fixtures and equipment affixed to the
Demised Premises by Tenant, and repair and restore the Demised Premises to their
condition on the delivery date (loss by any insured casualty and ordinary wear
and tear only excepted), at Tenant's sole expense. The removal shall be
performed prior to the earlier of the end of the Term or the date Tenant is
required to vacate the Demised Premises.
29.16 Tenant shall not record this lease. Without the prior written
consent of Landlord, Tenant shall not record any memorandum of this lease, short
form or other reference to this lease.
29.17 The submission of this lease for examination does not constitute
a reservation of or option for the Demised Premises or any other space in the
Industrial Complex, and shall not vest any right in Tenant. This lease shall
become effective as a lease only upon its execution and delivery by the parties.
29.18 LANDLORD AND TENANT HEREBY KNOWINGLY, VOLUNTARILY AND
INTENTIONALLY WAIVE THE RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION
BASED HEREON, ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS LEASE OR ANY
DOCUMENTS CONTEMPLATED TO BE EXECUTED IN CONNECTION HEREWITH OR ANY COURSE OF
CONDUCT, COURSE OF DEALINGS, STATEMENTS (WHETHER ORAL OR WRITTEN) OR ACTIONS OF
EITHER PARTY ARISING OUT OF OR RELATED IN ANY MANNER WITH THE DEMISED PREMISES
(INCLUDING WITHOUT LIMITATION, ANY ACTION TO RESCIND OR CANCEL THIS LEASE OR ANY
CLAIMS OR DEFENSES ASSERTING THAT THIS LEASE WAS FRAUDULENTLY INDUCED OR IS
OTHERWISE VOID OR VOIDABLE). THIS WAIVER IS A MATERIAL INDUCEMENT FOR LANDLORD
TO ENTER AND ACCEPT THIS LEASE.
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29.19 This lease consists of twenty-nine Articles and Exhibits "A"
through "D". With the exception of Article 7, in the event any provision of an
exhibit shall be inconsistent with a provision in the body of the lease, the
provision as set forth in the exhibit shall be deemed to control.
EXECUTED as of the latest date accompanying a signature by Landlord or
Tenant below.
LANDLORD: MP CARIBBEAN, INC.,
a Delaware corporation
By: GE CAPITAL INVESTMENT ADVISORS, INC.,
its agent
By: /s/ [ILLEGIBLE]
-------------------------------------
Name: [ILLEGIBLE]
------------------------------
Title: [ILLEGIBLE]
-----------------------------
Date of Signature: 8-22-97
---------------------
TENANT: ARIBA TECHNOLOGIES, INC.,
a Delaware corporation
By: /s/ Edward P. Kinsey
-------------------------------------
Name: Edward P. Kinsey
------------------------------
Title: Vice President - Finance
Chief Financial Officer
-----------------------------
Date of Signature: 8-22-97
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EXHIBIT "A"
DEMISED PREMISES
[FLOOR PLAN]
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EXHIBIT "B"
CONSTRUCTION: TENANT ACCEPTANCE OF SPACE "AS IS"
ARTICLE I. GENERAL
Tenant hereby accepts the Demised Premises "as is" and "ready for occupancy."
Except as provided herein, Landlord shall have no obligation to make or pay for
any improvements, renovations or alterations in or to the Demised Premises to
prepare or make ready the Demised Premises for Tenant's occupancy as of the
Commencement Date. Prior to any modification of the existing premises, Tenant
shall adhere to the following as well as the provisions contained in Article 11
and EXHIBIT "C" of the lease.
ARTICLE II. PRE-CONSTRUCTION OBLIGATIONS
A. Plans, diagrams, schedules and other data relating to work to
be performed by Tenant must be furnished by Tenant to Landlord
complete, sufficient to obtain a building permit, and ready
for Landlord's consideration and final approval within fifteen
(15) days after execution of this lease (or at such other time
as may be specified by this exhibit). Without limiting the
generality of the immediately preceding sentence, Tenant's
submissions must include a floor plan, a reflected ceiling
plan, a plumbing plan, elevations of walls and a fixture plan.
All drawings shall be at scale of either 1/8" or 1/4" Tenant
shall reimburse Landlord for any loss or extra cost which may
result to Landlord by reason of failure on the part of Tenant
to submit any such plans, diagrams, schedules, specifications
and/or other data within said period of time.
B. Tenant shall secure Landlord's written approval of all
designs, plans, specifications, materials, contractors and
contracts for work to be performed by Tenant before beginning
the work (including following whatever "work letter"
instructions, if any, which Landlord may deliver to Tenant in
connection with the work), and shall secure all necessary
licenses and permits to be used in performing the work.
Tenant's finished work shall be subject to Landlord's approval
and acceptance.
C. The insurance requirements under Article 15 of this lease and
the indemnity requirements under Article 16 of this lease
shall apply during the construction contemplated in this
exhibit, and Tenant shall provide evidence of appropriate
insurance coverage prior to beginning any of Tenant's work.
Tenant shall provide Landlord with evidence of insurance
covering both Tenant and Tenant's contractor against damage to
their personal property, as well as against third-party
liability and workers' compensation claims arising out of all
construction and associated activities. All policies of
insurance shall be subject to Landlord's prior approval and
shall be endorsed showing Landlord as an additional named
insured (or if permitted by Landlord, may provide a waiver of
subrogation against Landlord).
ARTICLE III. DESCRIPTION OF TENANT'S WORK
A. Signs: Tenant shall pay for all signs and the installation
thereof, including the electrical hook-up, subject to the
provisions of Section 13.1 of this lease.
B. Utilities: All meters or other measuring devices in connection
with utility services shall be provided by Tenant. All service
deposits shall be made by Tenant at Tenant's expense.
C. All work undertaken by Tenant shall be at Tenant's expense and
shall not damage the building or any part thereof. Any roof
penetration shall be performed by Landlord's roofer or, at
Landlord's option, by a bonded roofer approved in advance by
Landlord. The work shall be begun only after Landlord has
given consent, which consent shall in part be conditioned upon
Tenant's plans, to include materials acceptable to Landlord,
in order to prevent injury to the roof and to spread the
weight of the equipment being installed. Tenant shall also be
responsible for obtaining and paying for professional
inspections of any structural work (including, without
limitation, any roof work or concrete work).
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D. All work undertaken by Tenant shall be awarded to Landlord's
contractor unless, before any construction begins, Tenant
chooses and receives Landlord's written approval for another
contractor to complete Tenant's work.
E. All work performed by or at the behest of Tenant shall be in
compliance with all applicable Regulations.
ARTICLE IV. DESCRIPTION OF LANDLORD'S WORK
Landlord shall cause the roof, mechanical, electrical and plumbing systems
serving the Demised Premises to be in proper working order as of the
Commencement Date ("Landlord's Improvements").
INITIALED:
LANDLORD:
--------------------
TENANT:
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EXHIBIT "C"
TENANT CONSTRUCTION RULES AND REGULATIONS
1. All demolition, removals and other categories of work that may
inconvenience other tenants or disturb building operations must be
scheduled and performed before or after normal working hours, and the
property manager for the Industrial Complex (the "Property Manager")
shall be provided with at least twenty-four (24) hours notice prior to
proceeding with such work.
2. All structural and floor loading requirements shall be subject to the
prior approval of the Industrial Complex's structural engineer. Approval
shall be obtained by Tenant and any fees shall be at Tenant's sole
expense.
3. All mechanical (HVAC, plumbing and sprinkler) and electrical
requirements shall be subject to the prior approval of Landlord's
mechanical and electrical engineers. When necessary, Property Manager
will require engineering and shop drawings, which drawings must be
approved by Property Manager before the work is started. Drawings shall
be prepared by Tenant and all approvals shall be obtained by Tenant.
4. If the shutdown of risers and mains for electrical, HVAC, sprinkler
and/or plumbing work is required, such work shall be supervised by a
representative of Landlord at Tenant's sole expense at a time approved
in advance by Property Manager.
5. Tenant's general contractor is responsible to do all of the following:
(a) Properly supervise construction at the Demised Premises at all
times.
(b) Police the work at all times, continually keeping the affected
space(s) safe and orderly.
(c) Maintain the cleanliness and protection of all affected areas.
(d) Avoid and prevent the disturbance of other tenants.
6. If Tenant's general contractor is negligent in any of its
responsibilities, Tenant shall be charged for the corrective work done
by Landlord's personnel.
7. No electrical cords are to be stretched across any walkways or public
areas in any manner that would cause any safety hazard.
8. Radios may not be played if the sound can be heard in the Common Area or
in other tenant suites.
9. Electrical rooms may not be used to store any materials, fixtures, etc.
10. All sprinkler shut downs, draining or filling shall be scheduled and
coordinated with the Landlord's chief engineer or his delegate.
11. Bracing, soldering or welding shall be scheduled in advance with
Property Manager.
12. Dust shall be kept at a minimum to avoid smoke detector activation.
13. If requested by Tenant, Property Manager shall provide space in the
parking lot at a location to be determined by Landlord for a trash and
debris bin during construction of the tenant improvements.
14. Damage to ANY pre-installed fixtures (E.G., water fountains, sinks,
lights, commodes, signage, etc.) shall be repaired at Tenant's sole
expense.
15. Tenant's general contractor shall coordinate the keying, schedule,
Tenant's key requirements and cylinder installation with Landlord's
designated locksmith.
16. Where appropriate, Tenant shall submit to Property Manager a final
"as-built" set of drawings showing all items of work in full detail.
"As-builts" shall be sepias or vellums.
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17. Throughout the construction period and upon conclusion of the work,
Tenant's general contractor shall cause the work areas and all other
affected areas to be clear and free of debris.
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EXHIBIT "D"
RIGHT OF FIRST OPPORTUNITY
Tenant shall have a one-time right of first opportunity ("Right of First
Opportunity") to lease all, but not less than all, of the adjacent space in the
Industrial Complex known as 1310 Chesapeake Terrace, Sunnyvale, California,
containing approximately 40,000 square feet (the "First Opportunity Space"), at
such time as the First Opportunity Space becomes "available for lease" (as
defined below) during the lease term provided that Tenant is not then in default
hereunder beyond any applicable notice and cure period. If the existing lease of
the First Opportunity Space should expire or be terminated, the First
Opportunity Space shall be deemed "available for lease" and, at such time,
Landlord shall give written notice thereof to Tenant ("Landlord's Notice"). Upon
receipt of Landlord's Notice, Tenant shall have the opportunity to inspect the
First Opportunity Space and conduct reasonable non-invasive investigations
therein for the purpose of determining whether Tenant wishes to lease the First
Opportunity Space (the "Tenant Inspection"). If Tenant in response to Landlord's
Notice elects to lease the First Opportunity Space, Tenant shall so notify
Landlord in writing (the "Election Notice"). If Tenant does not deliver to
Landlord the Election Notice within the later of (i) ten (10) days after
Landlord's delivery of the Landlord's Notice or (ii) three (3) days after
Landlord has provided Tenant with the opportunity to conduct the Tenant
Inspection, Landlord shall be relieved of its obligation to make available for
lease to Tenant the First Opportunity Space and the provisions of this paragraph
shall be of no further force or effect. Without limiting the foregoing, upon the
non-delivery of the Election Notice by Tenant, Landlord shall be entitled to
grant options and rights free and clear of Tenant's Right of First Opportunity
under this paragraph to other tenants or prospective tenants of the Industrial
Complex. Upon Tenant's TIMELY delivery of the Election Notice with respect to
the First Opportunity Space ("Tenant's Timely Notice Delivery Date"), Landlord
and Tenant shall promptly enter into an amendment of this lease adding the First
Opportunity Space to the Demised Premises on all the terms and conditions set
forth in this lease as to the Demised Premises, except that (i) the term of the
lease to Tenant of the First Opportunity Space shall commence (the "ROFO
Commencement Date") upon the later of (a) the actual availability date of the
First Opportunity Space or (b) Tenant's Timely Notice Delivery Date, and shall
be coterminous with the remainder of the Demised Premises, (ii) Tenant shall
take the First Opportunity Space in its then "AS-IS" condition (except that the
First Opportunity Space shall be delivered to Tenant broom-clean and subject to
the same warranty by Landlord as is set forth in Section 3.2 of this lease, with
the ninety (90) day period to commence as of the ROFO Commencement Date;
provided that in no event shall Landlord be required to expend in excess of
$25,000.00 to repair any defective or malfunctioning component(s) of any of the
building systems enumerated in said Section 3.2) and Landlord shall neither
provide nor pay for any interior improvement work or services related to the
First Opportunity Space, (iii) the minimum guaranteed rental per rentable square
foot payable by Tenant for the First Opportunity Space shall be equal to the
minimum guaranteed rental per rentable square foot then payable by Tenant under
the lease for the original Demised Premises (with scheduled increases), which
minimum guaranteed rental shall commence as of the ROFO Commencement Date, and
(iv) Tenant's Proportionate Share shall be increased to reflect the addition of
the First Opportunity Space to the Demised Premises.
Notwithstanding anything to the contrary contained in this EXHIBIT
"D", in the event that Landlord does not deliver a Landlord's Notice to Tenant
on or before August 31, 2002, then Tenant shall have the right to terminate this
lease upon thirty (30) days notice to Landlord ("Tenant's Termination Notice")
provided that (i) the Right of First Opportunity has not previously been
relinquished due to Tenant's default under this lease beyond any applicable
notice and cure period, and (ii) Tenant's Termination Notice is delivered no
later than September 30, 2002. In the event Tenant is entitled to and timely
elects to exercise this early termination right, the lease shall terminate
thirty (30) days following Landlord's receipt of Tenant's Termination Notice,
subject to Tenant's obligations under Section 29.15 of the lease. If Tenant is
entitled to exercise this early termination right, but does not timely do so,
the lease shall continue in full force and effect through the scheduled
expiration of the lease term, and Tenant's Right of First Opportunity under this
EXHIBIT "D" shall be null and void and of no further force or effect.
<PAGE>
EXHIBIT 21.1
INTERNATIONAL SUBSIDIARIES
<TABLE>
<CAPTION>
COUNTRY OFFICIAL NAME
- ------- -------------
<S> <C>
Australia Ariba Australia Pty Ltd
Canada Ariba Canada, Inc.
Germany Ariba Deutschland GmbH
Netherlands Ariba Netherlands B.V.
Sweden Ariba Sweden AB
Switzerland Ariba Switzerland GmbH/Sarl/Ltd liab Co.
United Kingdom Ariba U.K. Limited
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Ariba, Inc.:
We consent to the incorporation by reference in the registration statements
on Form S-8 (Nos. 333-81773 and 333-89119) of Ariba, Inc. of our report dated
October 18, 1999, except as to Note 8, which is as of December 16, 1999,
relating to the consolidated balance sheets of Ariba, Inc. and subsidiaries 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,
and the related financial statement schedule which report appears in the
September 30, 1999, annual report on Form 10-K of Ariba, Inc.
/s/ KPMG LLP
Mountain View, California
December 23, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ARIBA INC'S
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED SEPTEMBER 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001084755
<NAME> ARIBA, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 51,084
<SECURITIES> 102,156
<RECEIVABLES> 5,177
<ALLOWANCES> (20)
<INVENTORY> 0
<CURRENT-ASSETS> 106,045
<PP&E> 11,575
<DEPRECIATION> 2,173
<TOTAL-ASSETS> 170,021
<CURRENT-LIABILITIES> 47,057
<BONDS> 0
0
0
<COMMON> 182
<OTHER-SE> 122,001
<TOTAL-LIABILITY-AND-EQUITY> 170,021
<SALES> 26,768
<TOTAL-REVENUES> 45,372
<CGS> 724
<TOTAL-COSTS> 8,813
<OTHER-EXPENSES> 67,980
<LOSS-PROVISION> 20
<INTEREST-EXPENSE> 126
<INCOME-PRETAX> (29,202)
<INCOME-TAX> 98
<INCOME-CONTINUING> (29,300)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (29,300)
<EPS-BASIC> (0.84)<F1>
<EPS-DILUTED> (0.84)<F1>
<FN>
<F1>EPS 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. PRIOR FINANCIAL DATA SCHEDULES HAVE NOT BEEN RESTATED FOR THE
RECAPITALIZATION.
</FN>
</TABLE>
