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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF
THE SECURITIES ACT OF 1934
For the Quarter Ended June 30, 1999
Commission File Number 000-26299
ARIBA, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0439730
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1585 Charleston Road
Mountain View, California 94043
(Address of principal executive offices)
(408) 543-3800
(Registrant's telephone number, including area code)
1314 Chesapeake Terrace
Sunnyvale, California 94089
(Former address, as reported on Form S-1)
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 ___ No _X_
Although the registrant has filed all reports required to be filed
by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
period that the registrant was required to file such reports, the registrant
did not become subject to such filing requirements until the registration of
certain shares of its common stock pursuant to a registration statement on
Form S-1 (the "Registration Statement") was declared effective by the
Securities and Exchange Commission on June 22, 1999.
On July 30, 1999, 45,434,566 shares of the registrant's common stock were
issued and outstanding.
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<PAGE>
Ariba, Inc.
Index
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at June 30, 1999 and September 30, 1998 3
Condensed Consolidated Statements of Operations for the three and nine-month
periods ended June 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows for the nine-month periods
ended June 30, 1999 and 1998 5
Notes to the Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
PART II. OTHER INFORMATION 25
Item 2. Changes in Securities and Use of Proceeds 25
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 6. Exhibits and Reports on Form 8-K 26
SIGNATURES 26
</TABLE>
2
<PAGE>
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
ARIBA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
---------------- -------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $143,869 $8,305
Short-term investments 6,799 5,627
Restricted cash 800 -
Accounts receivable, net 5,956 2,129
Prepaid expenses and other current assets 657 255
----------------- ------------------
Total current assets 158,081 16,316
Property and equipment, net 5,120 2,217
Other assets 285 238
----------------- ------------------
Total assets $163,486 $18,771
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,188 $962
Accrued compensation and related liabilities 4,492 1,704
Accrued liabilities 4,114 1,264
Deferred revenue 25,230 3,938
Current portion of long-term debt 755 297
----------------- ------------------
Total current liabilities 35,779 8,165
Long-term debt, net of current portion 692 647
----------------- ------------------
Total liabilities 36,471 8,812
----------------- ------------------
Stockholders' equity:
Convertible preferred stock - 9
Common stock 91 38
Additional paid-in capital 191,314 28,218
Deferred stock-based compensation (29,324) (2,735)
Accumulated other comprehensive income (loss) (13) 61
Accumulated deficit (35,053) (15,632)
----------------- ------------------
Total stockholders' equity 127,015 9,959
----------------- ------------------
Total liabilities and stockholders' equity $163,486 $18,771
================= ==================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
ARIBA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Nine Months Ended June 30,
1999 1998 1999 1998
-------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues:
License $6,439 $1,693 $16,939 $2,500
Maintenance and service 5,454 770 11,292 1,178
-------------- --------------- -------------- --------------
Total revenues 11,893 2,463 28,231 3,678
-------------- --------------- -------------- --------------
Cost of revenues:
License 331 87 581 104
Maintenance and service 2,113 362 4,622 872
-------------- --------------- -------------- --------------
Total cost of revenues 2,444 449 5,203 976
-------------- --------------- -------------- --------------
Gross profit 9,449 2,014 23,028 2,702
-------------- --------------- -------------- --------------
Operating expenses:
Sales and marketing 9,796 3,040 21,098 6,373
Research and development 3,462 1,197 7,311 3,160
General and administrative 2,396 551 5,094 1,431
Amortization of stock-based compensation 5,285 404 9,330 483
-------------- --------------- -------------- --------------
Total operating expenses 20,939 5,192 42,833 11,447
-------------- --------------- -------------- --------------
Loss from operations (11,490) (3,178) (19,805) (8,745)
Other income, net 197 151 384 419
-------------- --------------- -------------- --------------
Net loss $(11,293) $(3,027) $(19,421) $(8,326)
============== =============== ============== ==============
Basic and diluted net loss per share $(0.86) $(0.48) $(1.79) $(1.64)
============== =============== ============== ==============
Shares used in computing basic and diluted net loss per share 13,156,401 6,315,639 10,848,463 5,075,721
============== =============== ============== ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
ARIBA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended June 30,
1999 1998
------------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(19,421) $(8,326)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 927 448
Amortization of stock-based compensation 9,330 483
Non-cash warrant expense 20 516
Changes in operating assets and liabilities:
Accounts receivable (3,827) (2,621)
Prepaid expenses and other assets (469) (178)
Accounts payable 226 (269)
Accrued compensation and related liabilities 2,787 533
Accrued liabilities 2,850 107
Deferred revenue 21,292 3,932
------------------- --------------
Net cash provided by (used) in operating activities 13,715 (5,375)
------------------- --------------
INVESTING ACTIVITIES:
Purchases of property and equipment (2,985) (619)
Purchases of short-term investments (1,246) (4,985)
Allocation to restricted cash (800) -
------------------- --------------
Net cash used in investing activities (5,031) (5,604)
------------------- --------------
FINANCING ACTIVITIES:
Repayments under long-term debt (341) (274)
Proceeds from sale of convertible preferred stock, net - 4,292
Proceeds from sale of common stock 127,233 278
Repurchase of common stock (12) (12)
------------------- --------------
Net cash provided by financing activities 126,880 4,284
------------------- --------------
Net increase (decrease) in cash and cash equivalents 135,564 (6,695)
Cash and cash equivalents at beginning of period 8,305 15,471
------------------- --------------
Cash and cash equivalents at end of period $143,869 $8,776
=================== ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
ARIBA, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1. Basis of Presentation
The unaudited condensed consolidated financial statements have been
prepared by the Company and reflect all adjustments (all of which are normal
and recurring in nature) that, in the opinion of management, are necessary
for fair presentation of the interim periods presented. Certain amounts in
the prior year financial statements have been reclassified to conform to the
current year presentation. The results of operations for the interim periods
presented are not necessarily indicative of the results to be expected for
any subsequent quarter or for the entire year ending September 30, 1999.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted under the Securities and Exchange
Commission's rules and regulations. These unaudited condensed consolidated
financial statements and notes included herein should be read in conjunction
with the Company's audited consolidated financial statements and notes for
the year ended September 30, 1998, included in the Company's Registration
Statement on Form S-1 declared effective by the Securities and Exchange
Commission on June 22, 1999.
On March 16, 1999, the Board of Directors approved a two-for-one
stock split of the Company's common stock. On April 20, 1999, the Board of
Directors approved another two-for-one stock split of the Company's common
stock thus effecting an overall four-for-one stock split as of April 20,
1999. The accompanying condensed consolidated financial statements have been
restated to give effect to the stock splits.
Accounts receivable includes amounts due from customers for which
revenue has been recognized. Deferred revenue includes amounts received from
customers for which revenue has not been recognized.
Note 2. Net Loss Per Share
The following table presents the calculation of basic and diluted
net loss per common share (in thousands, except share and per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss $(11,293) $(3,027) $(19,421) $(8,326)
=====================================================
Basic and diluted:
Weighted-average shares of common stock outstanding 21,851,304 18,979,127 19,582,777 18,573,308
Less: Weighted-average common shares subject to repurchase (8,694,903) (12,663,488) (8,734,314) (13,497,587)
-----------------------------------------------------
Weighted-average shares used in computing basic and diluted net
loss per common share 13,156,401 6,315,639 10,848,463 5,075,721
=====================================================
Basic and diluted net loss per common share $(0.86) $(0.48) $(1.79) $(1.64)
=====================================================
</TABLE>
We have excluded all convertible preferred stock, warrants,
outstanding stock options and shares subject to repurchase by the Company
from the calculation of diluted net loss per common share because all such
securities are anti-dilutive for the periods presented. The total numbers of
shares excluded from the calculation of diluted loss per share are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Shares issuable under stock options 7,060,349 1,074,036 3,864,763 656,849
Shares of unvested stock subject to repurchase 8,694,903 12,663,488 8,734,315 13,497,588
Shares issuable pursuant to warrants to purchase common and
convertible preferred stock 449,365 - 149,788 -
Shares of convertible preferred stock on an "as if converted" basis 17,256,873 17,711,976 17,649,075 17,168,537
</TABLE>
The weighted-average exercise price of stock options outstanding was
$5.33 and $0.62 as of June 30, 1999 and 1998,
6
<PAGE>
respectively. The weighted average purchase price of unvested stock was $0.70
and $0.04 as of June 30, 1999 and 1998, respectively. The weighted average
exercise price of warrants was $3.18 and $3.29 as of June 30, 1999 and 1998,
respectively.
Note 3. Comprehensive Income
In fiscal 1998 the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130 ("SFAS 130"), Reporting Comprehensive Income. SFAS
No. 130 establishes new rules for the reporting and display of comprehensive
income and its components. SFAS No. 130 requires unrealized gains or losses
on the Company's available-for-sale securities and foreign currency
translation adjustments, which prior to adoption were reported separately in
stockholders' equity, to be included in other comprehensive income. The
components of comprehensive income (loss) for the three and nine months ended
June 30, 1999 and 1998 were as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss $(11,293) $(3,027) $(19,421) $(8,326)
Unrealized gain (loss) on securities 5 6 (75) 6
Foreign currency translation adjustments 17 - 1 -
===================================================
Comprehensive loss $(11,271) $(3,021) $(19,495) $(8,320)
===================================================
</TABLE>
Tax effects of comprehensive income (loss) are not considered material.
The components of accumulated other comprehensive income (loss) at June 30,
1999 and September 30, 1998 were as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1999 1998
---- ----
<S> <C> <C>
Unrealized gain (loss) on securities $(14) $61
Foreign currency translation adjustments 1 -
===================
Accumulated other comprehensive income (loss) $(13) $61
===================
</TABLE>
Note 4. Initial Public Offering
On June 28, 1999 the Company completed an initial public offering in
which it sold 5,750,000 shares of Common Stock, including 750,000 shares in
connection with the exercise of the underwriters' over-allotment option, at
$23 per share. The Company received $121.1 million in cash, net of
underwriting discounts, commissions and other offering costs. The net
proceeds were predominately held in a money market fund at June 30, 1999.
Upon the closing of the offering, all of the Company's preferred stock, par
value $0.002 per share, automatically converted into an aggregate of
17,845,176 shares of Common Stock. Concurrent with the offering the Company
also sold 7,200 shares of common stock to its Canadian employees at $23 per
share.
Note 5. Deferred Stock-Based Compensation
The Company uses the intrinsic value method of accounting for its
employee stock-based compensation plans. Accordingly, no compensation cost is
recognized for any of its 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 June 30, 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 Financial
Accounting Standards Board (FASB) Interpretation No. 28 over the vesting
period of the individual options, generally 4 years.
7
<PAGE>
Note 6. Line of Credit
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. At
June 30, 1999 there were no amounts outstanding under the revolving line of
credit.
Note 7. Recent Pronouncements
In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 requires
disclosure of certain information regarding operating segments, products and
services, geographic areas of operation, and major customers. Management is
in the process of evaluating the financial reporting impact of this
pronouncement. The Company will provide the appropriate disclosures under
SFAS No. 131 as of September 30, 1999.
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 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 will
adopt SOP 98-9 in fiscal 2000. We are evaluating the requirements of SOP 98-9
and the effects, if any, on our current revenue recognition policies.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information in this discussion contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933,
as amended and Section 21E of the Securities Exchange Act of 1934, as
amended. Such statements are based upon current expectations that involve
risks and uncertainties. Any statements contained herein that are not
statements of historical facts may be deemed to be forward- looking
statements. For example, words such as "may", "will", "should", "estimates",
"predicts", "potential", "continue", "strategy", "believes", "anticipates",
"plans", "expects", "intends", and similar expressions are intended to
identify forward-looking statements. Our actual results and the timing of
certain events may differ significantly from the results discussed in the
forward-looking statement. Factors that might cause or contribute to such a
discrepancy include, but are not limited to, those discussed under the
heading "Risk Factors" and the risks discussed in our other Securities
Exchange Commission ("SEC") filings, including our Registration Statement on
Form S-1 declared effective on June 22, 1999 by the SEC (File No. 333-76953).
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 Ariba ORMS products and related services and
currently market them primarily in the United States, Europe, Canada and Asia
through our direct sales force.
Through June 30, 1999, our revenues have been principally derived
from licenses of our Ariba ORMS products, maintenance and support contracts
and from the delivery of implementation consulting and training services.
Customers who license our 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.
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 June 30, 1999, had an
accumulated deficit of $35.1 million. We believe our success is contingent on
increasing our customer base, developing our Ariba ORMS products and
developing the Ariba Network. 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 348 full-time employees as of June 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 June 30, 1999. This amount represents the difference between
the exercise price and the deemed fair value of our common stock 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 1998, we recorded
$830,000 of related stock-based compensation amortization expense and, during
the nine months ended June 30, 1999, we recorded $8.7 million of related
stock-based compensation amortization expense. As of June 30, 1999, we had an
aggregate of $28.9 million of related deferred compensation to be amortized.
The amortization of stock-based compensation is classified as a separate
component of operating expenses in our condensed 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 quarterly 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 state 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.
9
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain statements of operations data
as a percentage of revenues for the periods indicated. The data has been
derived from the unaudited condensed consolidated financial statements
contained in this Form 10-Q which, in the opinion of management include all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the financial position and results of operations for the
interim periods. The operating results for any period should not be
considered indicative of results for any future period. This information
should be read in conjunction with the Financial Statements and Notes thereto
included in the Company's Registration Statement.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended June 30, Ended June 30,
---------------------------------- ------------------------------
1999 1998 1999 1998
------------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
Revenues:
License 54.1% 68.7% 60.0% 68.0%
Maintenance and service 45.9 31.3 40.0 32.0
------------- ------------ ------------- -----------
Total revenues 100.0 100.0 100.0 100.0
------------- ------------ ------------- -----------
Cost of revenues:
License 2.8 3.5 2.1 2.8
Maintenance and service 17.8 14.7 16.4 23.7
------------- ------------ ------------- -----------
Total cost of revenues 20.6 18.2 18.5 26.5
------------- ------------ ------------- -----------
Gross profit 79.4 81.8 81.5 73.5
Operating expenses:
Sales and marketing 82.4 123.4 74.7 173.3
Research and development 29.1 48.6 25.9 85.9
General and administrative 20.1 22.4 18.0 38.9
Amortization of stock-based compensation 44.4 16.4 33.0 13.1
------------- ------------ ------------- -----------
Total operating expenses 176.0 210.8 151.6 311.2
------------- ------------ ------------- -----------
Loss from operations (96.6) (129.0) (70.1) (237.7)
Other income, net 1.7 6.1 1.4 11.4
============= ============ ============= ===========
Net loss (94.9)% (122.9)% (68.7)% (226.3)%
============= ============ ============= ===========
</TABLE>
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUE
LICENSE. License revenues for the quarter ended June 30, 1999 were
$6.4 million, a 280% increase over license revenues of $1.7 million for the
quarter ended June 30, 1998. This increase was primarily attributable to
increased market acceptance of our product, an increase in sales to new
customers resulting from increased headcount in our sales force and the
commencement of international operations.
MAINTENANCE AND SERVICE. Maintenance and service revenues for the
quarter ended June 30, 1999 were $5.5 million, a 608% increase over
maintenance and service revenues of $770,000 for the quarter ended June 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.
During the quarters ended June 30, 1999 and June 30, 1998, two and
four customers accounted for more than 10% of total revenues, respectively.
Revenues from international sales were $2.5 million in the quarter ended June
30, 1999 and were insignificant for the quarter ended June 30, 1998. Our
international revenues were derived from sales in Canada and Europe.
COST OF REVENUES
LICENSE. Cost of license revenues were $331,000 in the quarter ended
June 30, 1999, an increase of 280% over cost of license revenues of $87,000
for the quarter ended June 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 $2.1 million in the quarter ended June 30, 1999, an
10
<PAGE>
increase of 484% over cost of maintenance and service revenues of $362,000
for the quarter ended June 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 quarter ended June 30, 1999, sales
and marketing expenses were $9.8 million, an increase of 222% over sales and
marketing expenses of $3.0 million for the quarter ended June 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.
RESEARCH AND DEVELOPMENT. During the quarter ended June 30, 1999,
research and development expenses were $3.5 million, an increase of 189% over
research and development expenses of $1.2 million for the quarter ended June
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.
GENERAL AND ADMINISTRATIVE. During the quarter ended June 30, 1999,
general and administrative expenses were $2.4 million, an increase of 335%
over general and administrative expenses of $551,000 for the quarter ended
June 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 and increased facility costs. 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.
AMORTIZATION OF STOCK-BASED COMPENSATION. During the quarter ended
June 30, 1999, amortization of stock-based compensation increased to $5.3
million from $404,000 for the quarter ended June 30, 1998. Deferred
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 June 30, 1999, we had an
aggregate of $29.3 million of deferred compensation to be amortized.
OTHER INCOME, NET
Other income, net consists of interest income, interest expense and
other non-operating expenses. During the quarter ended June 30, 1999, other
income, net was $197,000, an increase of 30% over other income, net of
$151,000 for the quarter ended June 30, 1998. This increase is primarily
attributable to interest income resulting from higher average cash balances
during the more recent period.
COMPARISON OF THE NINE MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUE
LICENSE. License revenues increased 578% to $16.9 million for the
nine months ended June 30, 1999, from $2.5 million for the nine months ended
June 30, 1998. This license revenue growth was primarily attributable to
increased market acceptance of our product, an increase in sales to new
customers resulting from increased headcount in our sales force and the
commencement of international operations.
MAINTENANCE AND SERVICE. Maintenance and service revenues increased
859% to $11.3 million for the nine months ended June 30, 1999, from $1.2
million for the nine months ended June 30, 1998. The increase was primarily
attributable to increased customer implementations and maintenance contracts
resulting from our increased licensing activity, and to a lesser extent, to
accelerated customer implementations and renewals of recurring maintenance.
During the nine months ended June 30, 1999, one customer accounted
for more than 10% of total revenues, and, in the nine months ended June 30,
1998, four customers accounted for more than 10% of total revenues. Revenues
from international sales were $3.6 million for the nine months ended June 30,
1999, and were insignificant for the nine months ended June 30, 1998. Our
international
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revenues were derived from sales in Canada and Europe.
COST OF REVENUES
LICENSE. Cost of license revenues increased 459% to $581,000 for the
nine months ended June 30, 1999, from $104,000 for the nine months ended June
30, 1998. This 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
increased 430% to $4.6 million for the nine months ended June 30, 1999, from
$872,000 for the nine months ended June 30, 1998. 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. Sales and marketing expenses increased 231% to
$21.1 million for the nine months ended June 30, 1999, from $6.4 million for
the nine months ended June 30, 1998. The increase was primarily attributable
to increased sales commissions resulting from 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.
RESEARCH AND DEVELOPMENT. Research and development expenses
increased 131% to $7.3 million for the nine months ended June 30, 1999, from
$3.2 million for the nine months ended June 30, 1998. The increase was
primarily attributable to increases in the number of research and development
personnel.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased 256% to $5.1 million for the nine months ended June 30, 1999, from
$1.4 million for the nine months ended June 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 and increased facility
costs.
AMORTIZATION OF STOCK-BASED COMPENSATION. Amortization of
stock-based compensation increased to $9.3 million for the nine months ended
June 30, 1999, from $483,000 for the nine months ended June 30, 1998.
Deferred 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.
OTHER INCOME, NET
Other income, net decreased to $384,000 for the nine months ended
June 30, 1999, from $419,000 for the nine months ended June 30, 1998. This
decrease results from higher interest expense during the recent period from
capital equipment loans used to purchase computer equipment and office
furniture and equipment. This decrease is partially offset by interest income
resulting from higher average cash balances during the more recent period.
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, bank loans and
equipment leases. As of June 30, 1999 we had outstanding lease liabilities of
$1.4 million and we have a line of credit of $7.0 million that can be used
for working capital purposes. At June 30, 1999 no amounts were outstanding
under the line of credit. As of June 30, 1999, we had $150.7 million in cash,
cash equivalents and short-term investments, and $122.3 million in working
capital.
Net cash provided by operating activities was $13.7 million for the
nine months ended June 30, 1999. Net cash used in operating activities was
$5.4 million for the nine months ended June 30, 1998. 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 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 $5.0 million in the nine
months ended June 30, 1999 and $5.6 in the nine months ended June 30, 1998.
Cash used in investing activities reflects purchases of property and
equipment and purchases of short-term investments in both periods, and
proceeds from the sale of short-term investments in the nine months ended
June 30, 1999.
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Net cash provided by financing activities was $126.9 million in the
nine months ended June 30, 1999, primarily from the net proceeds of our
initial public offering of $121.1 million, as well as exercises of employee
stock options, offset by payments on capital lease obligations. Net cash
provided by financing activities was $4.3 million in the nine months ended
June 30, 1998, 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 $3.8 million in
the nine months ended June 30, 1999 and $1.7 million in the nine months ended
June 30, 1998. 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 have spent approximately $750,000 and
expect to additionally spend from $11.0 to $13.0 million for computer and
office equipment, furniture and fixtures and leasehold improvements because
of the relocation. We will also need to purchase additional operating
resources. We intend to use our revolving line of credit facility we
established recently to finance these commitments.
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.
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:
- No value for current date 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.
We have initiated an 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 initiated 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 complete testing of our information technology
systems in 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,
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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 manage the project, outside
contractor assistance, technical support for our products, product
engineering and customer satisfaction. In addition, we may experience
material problems and costs 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.
RISK FACTORS
In addition to the other information in this Form 10-Q, the
following risk factors should be considered carefully in evaluating our
business and us:
RISKS RELATED TO OUR BUSINESS
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 ORMS and
linking with suppliers over the Internet through the Ariba Network. The
implementation of Ariba ORMS 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 ORMS products will depend on
using our existing customers as reference accounts. As of June 30, 1999, only
39 customers had licensed our Ariba ORMS solution. Accordingly, our operating
resource solutions may not achieve significant market acceptance. 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.
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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 and $11.0
million in fiscal 1998. As of June 30, 1999, we had an accumulated deficit of
approximately $35.1 million. 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 the
Ariba Network, 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 June 30, 1999, we
had an aggregate of $29.3 million of deferred compensation to be amortized.
As a result, we expect to incur significant losses for the foreseeable future.
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 both Ariba ORMS and the Ariba Network;
- 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 ORMS 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 many 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'
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ability to complete the implementation of Ariba ORMS 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 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. 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.
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.
WE EXPECT THAT OUR ARIBA ORMS SOLUTIONS WILL CONTINUE TO PROVIDE
SUBSTANTIALLY ALL OF OUR REVENUES FOR THE FORESEEABLE FUTURE.
Our Ariba ORMS products and related services accounted for all of
our revenues in fiscal 1998 and for the nine months ended June 30, 1999. We
anticipate that revenues from our Ariba ORMS products and related services
will continue to constitute substantially all of our revenues for the
foreseeable future. Consequently, a decline in the price of, or demand for,
our Ariba ORMS solution, or its failure to achieve broad market acceptance,
would seriously harm our business.
IMPLEMENTATION OF OUR ARIBA ORMS SOLUTION 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
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established our pricing and revenue model for the services associated with
the Ariba Network. If we are unable to establish a pricing and revenue model
acceptable to our customers, the Ariba Network may not be commercially
successful. This would seriously harm our business, 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
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.
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. We expect the intensity of competition
to increase in the future. 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 primarily encounter
competition with respect to different aspects of our solution from Captura
Software, Clarus, Commerce One, Concur Technologies, Extensity, GE
Information Services, Intellysis, Netscape Communications and TRADE'ex
Electronic Commerce Systems. 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. 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 1998, five customers accounted for more than 10% of our
total revenues and, in the nine months ended June 30, 1999, one customer
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.
WE RELY ON THIRD PARTIES TO IMPLEMENT ARIBA ORMS.
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 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
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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 BY 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 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.
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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.
We plan to have the Ariba Network provide 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 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
application. 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
19
<PAGE>
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.
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 are currently implementing new systems to
manage our financial and human resources infrastructure. We may encounter
difficulties in transitioning to the new enterprise resource planning
software system. Even after we implement this system, our personnel, systems,
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 ORMS product delay the purchase and implementation of Ariba ORMS
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
ORMS 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.
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:
20
<PAGE>
- 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 MAY NEED TO MAKE ACQUISITIONS IN ORDER TO REMAIN COMPETITIVE IN OUR
MARKET. OUR BUSINESS COULD BE ADVERSELY AFFECTED AS A RESULT OF ANY OF
THESE FUTURE ACQUISITIONS.
In order to remain competitive, we may find it necessary 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. Further, completing a potential acquisition and integrating an
acquired business will cause significant diversions of management time and
resources. If we consummate one or more significant 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
acquisitions in which the consideration included cash, we could be required
to use a substantial portion of our available cash, to consummate any
acquisition. Acquisition financing may not be available on favorable terms,
or at all. In addition, we may be required to amortize significant amounts of
goodwill and other intangible assets in connection with future acquisitions,
which would seriously harm 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 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;
21
<PAGE>
- The termination on October 21, 1999 or earlier of the "lock
up" period during which Ariba's principal stockholders,
directors, officers and other employees are not permitted to
sell Ariba common stock they acquired before the public
offering;
- 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
EXPECTED 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.
OUR EXISTING EXECUTIVE OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS
CONTROL ARIBA AND COULD LIMIT THE ABILITY OF OUR OTHER STOCKHOLDERS TO
INFLUENCE THE OUTCOME OF DIRECTOR ELECTIONS AND OTHER TRANSACTIONS
SUBMITTED FOR A VOTE OF OUR STOCKHOLDERS.
Our executive officers, directors and principal stockholders
beneficially own, in the aggregate, approximately 56% of our outstanding
common stock. As a result, these stockholders will be able to exercise
control over all matters requiring stockholder approval, including the
election of directors and approval of significant corporate transactions
which could have the effect of delaying or preventing a third party from
acquiring control over us.
RISKS RELATED TO THE INTERNET INDUSTRY
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:
22
<PAGE>
- 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 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.
The Ariba Network is currently operating on a limited basis. 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.
23
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We develop products in the United States and market our products in
North America, Europe 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. Our interest income is
sensitive to changes in the general level of U.S. interest rates,
particularly since the majority of our investments are in cash equivalents
and short-term instruments. Due to the short-term nature of our cash
equivalents and investments, we believe that there is no material risk
exposure. Therefore, no quantitative tabular disclosures are required.
24
<PAGE>
PART II
OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds
(c) Changes in Securities.
During the quarter ended June 30, 1999 and prior to the closing of
our initial public offering we granted options to purchase 3,575,083 shares
of common stock to employees, consultants and other service providers of the
Company under our 1999 Equity Incentive Plan and our 1996 Stock Plan.
During the quarter ended June 30, 1999 and prior to the closing of
our initial public offering employees, consultants and other service
providers of the Company exercised options for 1,975,648 shares of common
stock.
On June 25, 1999 the Company issued 502,847 shares of common stock
for no proceeds pursuant to the net exercise of a warrant previously issued
and sold to Chevron Corporation.
The sale of the above securities was deemed to be exempt from
registration under the Securities Act of 1933 ("the Act") in reliance upon
Section 4(2) of the Act or Rule 701 promulgated under Section 3(b) of the Act.
(d) Use of Proceeds.
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 Rausher Incorporated),
Deutsche Blanc 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.
The offering commenced on June 23, 1999 and terminated on June 28,
1999 after we had sold all of the 5,750,000 shares of common stock registered
under the Registration Statement (including 750,000 shares sold in connection
with the exercise of the underwriters' over-allotment option). The initial
public offering price was $23 per share for an aggregate initial public
offering of $132,250,000.
We paid a total of $9,258,000 in underwriting discounts and
commissions. In addition, the following table sets forth the estimated costs
and expenses, other than underwriting discounts and commissions, incurred in
connection with the offering. None of the amounts shown was 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.
<TABLE>
<S> <C>
SEC registration fee $35,200
NASD fee 13,150
Nasdaq National Market initial listing fee 95,000
Printing and engraving 470,000
Legal fees and expenses 475,000
Accounting fees and expenses 450,000
Blue sky fees and expenses 10,000
Transfer agent fees 12,650
Miscellaneous 340,000
-----------
Total $1,901,000
===========
</TABLE>
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 proceeds were predominately held in a
money market fund at June 30, 1999.
Concurrent with the offering we also sold 7,200 shares of common
stock to our Canadian employees at $23 per share. The offering costs
associated with the offering of shares to our Canadian employees were not
material.
25
<PAGE>
ITEM 4. Submission of Matters to a Vote of Securities Holders
During the quarter ended June 30, 1999, the Company submitted four
matters to its stockholders by written consent in lieu of a stockholders
meeting:
On April 7, 1999, prior to the Company's initial public offering,
the Company's stockholders approved an amendment and restatement of the
Company's Certificate of Incorporation, which, among other things, eliminated
provisions contained therein allowing the holders of the Company's Preferred
Stock to redeem their stock in certain situations. Stockholders holding
12,515,588 shares (on an as if converted into Common Stock basis) or 61% of
the shares outstanding at that time, consented to the foregoing.
On April 20, 1999, prior to the Company's initial public offering,
the Company's stockholders approved an amendment to the Company's 1996 Stock
Plan, which amendment increased the number of shares reserved for issuance
under the plan by 1,300,000 shares. Stockholders holding 11,983,210 shares
(on an as if converted into Common Stock basis) or 57% of the shares
outstanding at that time, consented to the foregoing.
On April 28, 1999, prior to the Company's initial public offering,
the Company's stockholders approved an amendment and restatement of the
Company's Certificate of Incorporation, which, among other things, effected a
two-for-one stock split of the Company's outstanding Common Stock.
Stockholders holding 16,026,408 shares (on an as if converted into Common
Stock basis) or 74% of the shares outstanding at that time, consented to the
foregoing.
On June 11, 1999, prior to the Company's initial public offering,
the Company's stockholders approved (i) an amendment and restatement of the
Company's Certificate of Incorporation filed following the closing of the
initial public offering, which, among other things, increased the number of
authorized shares of capital stock of the Company, eliminated the right of
stockholders to take action by written consent, require the affirmative vote
of 66-2/3% of the Company's voting stock to amend the Company's Certificate
of Incorporation or for the stockholders to amend the Company's Bylaws, and
divided the members of the Company's Board of Directors into three separate
classes with the member or members of such classes serving staggered
three-year terms; (ii) an amendment and restatement of the Company's bylaws,
which, among other things, eliminated the stockholders' right to call a
special meeting of the stockholders and provided for indemnification of
officers and directors of the Company to the full extent authorized or
permitted by under Delaware law; (iv) the adoption of the Company's 1999
Equity Incentive Plan; (v) the adoption of the Company's Employee Stock
Purchase Plan; (vi) the adoption of the Company's 1999 Directors' Stock
Option Plan; and (vii) a form of indemnification agreement to be entered into
with each of the officers and directors of the Company. Stockholders holding
38,218,565 shares (on an as if converted into Common Stock basis) or 85% of
the shares outstanding at that time, consented to the foregoing.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule.
(b) No reports on Form 8-K have been filed with the Securities and Exchange
Commission during the three months ended June 30, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ARIBA, INC.
Date: August 16, 1999 By: /s/ Edward P. Kinsey
--------------------------------------
Edward P. Kinsey
Chief Financial Officer, Vice-President-
Finance and Administration and Secretary
(Principal Financial and and Accounting
Officer)
26
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT TITLE
- ----------- -------------
<S> <C>
27.1 Financial Data Schedule.
</TABLE>
27
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
ARIBA INC'S QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 144,669
<SECURITIES> 6,799
<RECEIVABLES> 5,976
<ALLOWANCES> (20)
<INVENTORY> 0
<CURRENT-ASSETS> 158,081
<PP&E> 6,801
<DEPRECIATION> 1,681
<TOTAL-ASSETS> 163,486
<CURRENT-LIABILITIES> 35,779
<BONDS> 0
0
0
<COMMON> 91
<OTHER-SE> 126,924
<TOTAL-LIABILITY-AND-EQUITY> 163,486
<SALES> 16,939
<TOTAL-REVENUES> 28,231
<CGS> 581
<TOTAL-COSTS> 5,203
<OTHER-EXPENSES> 42,833
<LOSS-PROVISION> 20
<INTEREST-EXPENSE> 95
<INCOME-PRETAX> (19,421)
<INCOME-TAX> 0
<INCOME-CONTINUING> (19,421)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,421)
<EPS-BASIC> (1.79)
<EPS-DILUTED> (1.79)
</TABLE>
