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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 December 31, 1999
Commission File Number 000-26299
ARIBA, INC.
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(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)
1565 Charleston Road
Mountain View, California 94043
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(Address of principal executive offices)
(650) 930-6200
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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On January 31, 2000, 96,110,541 shares of the registrant's common stock were
issued and outstanding.
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Ariba, Inc.
Index
<TABLE>
<CAPTION>
PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at December 31, 1999 and September 30, 1999 3
Condensed Consolidated Statements of Operations for the three-month periods ended December 31, 1999
and 1998 4
Condensed Consolidated Statements of Cash Flows for the three-month periods ended December 31, 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 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 2. Changes in Securities and Use of Proceeds 26
Item 3. Defaults Upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Securities Holders 26
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26
SIGNATURES 28
</TABLE>
2
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PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
ARIBA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
December 31, September 30,
1999 1999
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 42,168 $ 50,284
Short-term investments 64,269 47,868
Restricted cash 400 800
Accounts receivable, net 8,820 5,157
Prepaid expenses and other current assets 6,216 1,936
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Total current assets 121,873 106,045
Property and equipment, net 14,106 9,402
Long-term investments 54,563 54,288
Other assets 278 286
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Total assets $ 190,820 $ 170,021
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,945 $ 3,846
Accrued compensation and related liabilities 10,923 6,959
Accrued liabilities 8,019 4,834
Deferred revenue 46,709 30,733
Current portion of long-term debt 732 685
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Total current liabilities 73,328 47,057
Long-term debt, net of current portion 656 781
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Total liabilities 73,984 47,838
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Stockholders' equity:
Common stock 184 182
Additional paid-in capital 192,196 191,332
Deferred stock-based compensation (19,674) (24,178)
Accumulated other comprehensive loss (604) (221)
Accumulated deficit (55,266) (44,932)
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Total stockholders' equity 116,836 122,183
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Total liabilities and stockholders' equity $ 190,820 $ 170,021
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</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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ARIBA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended December 31,
1999 1998
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<S> <C> <C>
Revenues:
License $ 15,784 $ 4,827
Maintenance and service 7,695 2,025
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Total revenues 23,479 6,852
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Cost of revenues:
License 321 53
Maintenance and service (exclusive of stock-based
compensation expense of $344 in 1999 and $96 in 1998) 3,121 902
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Total cost of revenues 3,442 955
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Gross profit 20,037 5,897
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Operating expenses:
Sales and marketing (exclusive of stock-based compensation
expense of $2,163 in 1999 and $571 in 1998) 19,774 4,399
Research and development (exclusive of stock-based compensation
expense of $894 in 1999 and $250 in 1998) 4,443 1,649
General and administrative (exclusive of stock-based compensation
expense of $1,318 in 1999 and $196 in 1998) 3,421 1,201
Amortization of stock-based compensation 4,719 1,113
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Total operating expenses 32,357 8,362
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Loss from operations (12,320) (2,465)
Other income, net 2,059 106
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Net loss before income taxes (10,261) (2,359)
Provision for income taxes 73 --
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Net loss $ (10,334) $ (2,359)
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Basic and diluted net loss per share $ (0.13) $ (0.13)
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Shares used in computing basic and diluted net loss per share 77,990 18,124
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</TABLE>
See accompanying notes to condensed consolidated financial statements.
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ARIBA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended December 31,
1999 1998
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<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(10,334) $(2,359)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 950 225
Amortization of stock-based compensation 4,719 1,113
Non-cash warrant expense 7 7
Changes in operating assets and liabilities:
Accounts receivable (3,663) 172
Prepaid expenses and other assets (4,280) (100)
Accounts payable 3,099 40
Accrued compensation and related liabilities 3,964 247
Accrued liabilities 3,185 (103)
Deferred revenue 15,976 1,242
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Net cash provided by operating activities 13,623 484
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INVESTING ACTIVITIES:
Purchases of property and equipment (5,448) (283)
Purchases of investments (16,259) (1,229)
Allocation to restricted cash (400) --
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Net cash used in investing activities (22,107) (1,512)
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FINANCING ACTIVITIES:
Repayments under long-term debt (283) (109)
Proceeds from sale of common stock 651 57
Repurchase of common stock -- (5)
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Net cash provided by (used in) financing activities 368 (57)
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Net decrease in cash and cash equivalents (8,116) (1,085)
Cash and cash equivalents at beginning of period 50,284 8,305
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Cash and cash equivalents at end of period $42,168 $7,220
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</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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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 a fair presentation of the interim periods presented. Certain amounts in
the prior year financial statements have been reclassified to conform to the
current year presentation. The results of operations for the interim periods
presented are not necessarily indicative of the results to be expected for
any subsequent quarter or for the entire year ending September 30, 2000.
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, 1999, included in the Company's Form 10-K filed
December 23, 1999 with the Securities and Exchange Commission.
On November 16, 1999 the Board of Directors authorized a two-for-one
stock split of the Company's common stock, in the form of a stock dividend.
The stock split was effected by distribution to each stockholder of record as
of December 3, 1999 of one share of the Company's common stock for each share
of common stock held. The financial information included in the accompanying
financial statements has been restated to give effect to the stock split.
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 per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
1999 1998
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<S> <C> <C>
Net loss $ (10,334) $ (2,359)
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Basic and diluted:
Weighted-average number of shares of common stock outstanding 91,586 36,874
Less: Weighted-average number of common shares subject to repurchase (13,596) (18,750)
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Weighted-average number of shares used in computing basic and diluted net loss per common share 77,990 18,124
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Basic and diluted net loss per common share $ (0.13) $ (0.13)
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</TABLE>
Diluted net loss per share does not include the effect of the following
potential common shares:
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
1999 1998
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<S> <C> <C>
Shares issuable under stock options 20,853 10,373
Shares of unvested stock subject to repurchase 12,312 16,786
Shares issuable pursuant to warrants to purchase common and convertible preferred stock 29 1,142
Shares of convertible preferred stock on an "as if converted" basis -- 35,690
</TABLE>
The weighted-average exercise price of stock options outstanding was
$12.23 and $0.57 as of December 31, 1999 and 1998, respectively. The weighted
average repurchase price of unvested stock was $0.42 and $0.04 as of December
31, 1999 and 1998, respectively. The weighted average exercise price of warrants
was $1.65 as of December 31, 1999 and 1998.
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Note 3. Comprehensive Income
SFAS No. 130 REPORTING COMPREHENSIVE INCOME, establishes standards of
reporting and display of comprehensive income and its components of net income
and "Other Comprehensive Income." "Other Comprehensive Income" refers to
revenues, expenses, gains and losses that are not included in net income but
rather are recorded directly in stockholders' equity. The components of
comprehensive loss for the three months ended December 31, 1999 and 1998 were as
follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
1999 1998
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<S> <C> <C>
Net loss $ (10,334) $ (2,359)
Unrealized loss on securities (371) (25)
Foreign currency translation adjustments (12) (7)
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Comprehensive loss $ (10,717) $ (2,391)
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</TABLE>
Tax effects of comprehensive loss are not considered material.
The components of accumulated other comprehensive loss at December 31, 1999 and
September 30, 1999 were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 1999
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<S> <C> <C>
Unrealized loss on securities $ (593) $ (222)
Foreign currency translation adjustments (11) 1
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Accumulated other comprehensive loss $ (604) $ (221)
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</TABLE>
Note 4. Acquisitions
On December 16, 1999, the Company signed a definitive agreement to
acquire Tradex Technologies, Inc. ("Tradex"), a leading provider of solutions
for net markets. The Company will purchase all of the outstanding capital
stock of Tradex and will assume all of the outstanding stock options and
warrants in exchange for approximately 19,000,000 shares of the Company's
common stock (and options and warrants therefor). The Company will account
for the purchase of Tradex under the purchase method of accounting and
anticipates a significant portion of the purchase price will be allocated to
goodwill and other intangible assets. The Company also anticipates taking a
charge related to in-process research and development costs related to the
acquisition in the quarter ending March 31, 2000. The Company expects that
the transaction will close in the quarter ending March 31, 2000.
On January 20, 2000, the Company acquired TradingDynamics, Inc.
("TradingDynamics"), a provider of business-to-business Internet trading
applications, including business-to-business auction, request for quote
(RFQ), reverse auction, and bid/ask-style exchange mechanisms. The Company
issued approximately 4,148,000 shares of its common stock (including options
and warrants therefor) for all of the outstanding shares, options and
warrants of TradingDynamics. The Company will account for the purchase of
TradingDynamics under the purchase method of accounting and anticipates a
significant portion of the purchase price will be allocated to goodwill and
other intangible assets. The Company also anticipates taking a charge related
to in-process research and development costs related to the acquisition in
the quarter ending March 31, 2000.
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 December 31, 1999, the Company recorded
deferred stock-based compensation of $38.4 million 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.
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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
December 31, 1999 there were no amounts outstanding under the revolving line
of credit.
Note 7. Recent Pronouncements
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 establishes
accounting and reporting standards for derivative financial instruments and
hedging activities related to those instruments, as well as other hedging
activities. Because the Company does not currently hold any derivative
instruments and does not engage in hedging activities, the Company expects
the adoption of SFAS No. 133 will not have a material impact on its financial
position, results of operations or cash flows. The Company will be required
to adopt SFAS No. 133 in fiscal 2001 in accordance with SFAS No. 137, which
delays the required implementation of SFAS No. 133 for one year.
In March 1998, the Accounting Standards Executive Committee (AcSEC)
issued Statement of Position (SOP) 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER
SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE. SOP 98-1 establishes the
accounting for costs of software products developed or purchased for internal
use, including when such costs should be capitalized. The Company does not
expect SOP 98-1 to have a material effect on its financial position, results
of operations or cash flows. The Company adopted SOP 98-1 as of October 1,
1999.
In April 1998, the AcSEC issued SOP 98-5, REPORTING ON THE COSTS OF
START-UP ACTIVITIES. Under SOP 98-5, the cost of start-up activities should
be expensed as incurred. The Company does not expect SOP 98-5 to have a
material effect on its financial position, results of operations or cash
flows. The Company adopted SOP 98-5 as of October 1, 1999.
In December 1998, the American Institute of Certified Public
Accountants (AICPA) issued SOP 98-9, MODIFICATION OF SOP 97-2, SOFTWARE
REVENUE RECOGNITION, WITH RESPECT TO CERTAIN TRANSACTIONS, which amends SOP
97-2, Software Revenue Recognition, and supercedes SOP 98-4. The Company does
not expect SOP 98-9 to have a material effect on its financial position,
results of operations or cash flows. The Company adopted SOP 98-9 as of
October 1, 1999.
8
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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)
and in our Annual Report on Form 10-K filed December 23, 1999 with the SEC.
OVERVIEW
Ariba is a leading provider of Internet-based business-to-business
electronic commerce solutions. We were founded in September 1996 and from
that date through March 1997 were in the development stage, conducting
research and developing our initial products. In March 1997, we began selling
our products and related services and currently market them in the United
States, Latin America, Europe, Canada, Australia and Asia primarily through
our direct sales force and to a lesser extent through indirect sales channels.
Through December 31, 1999, our revenues have been principally
derived from licenses of our products, from maintenance and support contracts
and from the delivery of implementation consulting and training services.
Customers who license our Ariba Operating Resource Management System ("Ariba
ORMS") or our other products also generally purchase maintenance contracts
which provide software upgrades, technical support and connectivity to the
Ariba Network over a stated term, which is usually a twelve-month period.
Customers may purchase implementation services from us, but we expect to
increasingly rely on third-party consulting organizations to deliver these
services directly to our customers. We also offer fee-based training services
to our customers.
On October 1, 1997, we adopted Statement of Position, or SOP, 97-2,
SOFTWARE REVENUE Recognition, which supersedes SOP 91-1, SOFTWARE REVENUE
RECOGNITION. On October 1, 1999 we adopted Statement of Position, or 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 adoption of SOP 97-2 and SOP 98-9 has not had a
material effect on our operating results. SOP 97-2 generally requires
revenues earned on software arrangements involving multiple elements to be
allocated to each element based on the relative fair values of the elements.
Revenue allocated to software licenses is generally recognized upon delivery
of the products or ratably over a contractual period if unspecified software
products are to be delivered during that period. Starting in fiscal 1999, our
standard license agreement provided customers the right to future unspecified
software licenses. Accordingly, payments received from our customers upon the
signing of these license agreements are deferred, and the revenue is
recognized ratably over the contract period. Revenue allocated to maintenance
is recognized ratably over the maintenance term and revenue allocated to
training and other service elements is recognized as the services are
performed.
When we manage the implementation process for our customers, the
services are considered essential to the functionality of the software
products. Accordingly, both the software license revenue and service revenue
is recognized using the percentage of completion method in accordance with
the provisions of SOP 81-1, ACCOUNTING FOR PERFORMANCE OF CONSTRUCTION TYPE
AND CERTAIN PRODUCTION TYPE CONTRACTS. The implementation of our products can
take several months or more depending on the objectives of the customers, the
complexity of the customers' information technology environments and the
resources directed by the customers to the implementation projects.
Customers who license our software products generally receive a
server capacity license, one or more of the Ariba ORMS modules and adapters
to interface with financial, human resource and other existing enterprise
systems. The fee for the server capacity license is based on the customers'
estimated annual volume of line items of purchasing transactions. The license
fees for the software modules and adapters consist of individual prices for
each module or adapter.
The volume licensing of the server capacity allows customers to
scale the total cost of their purchase of our products to their needs. The
server capacity license entitles customers to execute the licensed volume of
line items of purchasing transactions during any annual period following
their purchase of the server license. Our customers generally purchase
estimated server capacity at the time of the purchase of the server license.
Following the initial implementation of our products, and based on the
reporting and analysis tools available
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through our products, our customers are able to understand their annual
transaction volume more fully. Customers who exceed their estimated volume
can purchase additional server capacity. However, there are no recurring
annual license fees
Our cost of license revenues includes royalties due to third parties
for integrated technology, the cost of manuals and product documentation, the
cost of production media used to deliver our products and shipping costs,
including the costs associated with the electronic transmission of software
to new customers. Our cost of maintenance and service revenues includes
salaries and related expenses for our customer support, implementation and
training services organizations, costs of third parties contracted to provide
consulting services to customers and an allocation of our facilities,
communications and depreciation expenses.
Our operating expenses are classified into three general categories:
sales and marketing, research and development and general and administrative.
We classify all charges to these operating expense categories based on the
nature of the expenditures. Although each category includes expenses that are
unique to the category type, there are commonly recurring expenditures that
are typically included in these categories in our operating expenses, such as
salaries, employee benefits, incentive compensation, bonuses, sales
commissions, travel and entertainment costs, telephone, communication, rent
and facilities costs, and third-party professional services fees. The sales
and marketing category of operating expenses includes expenditures specific
to the marketing group, such as public relations and advertising, trade
shows, marketing collateral materials and customer advisory council meetings.
We allocate the total costs for overhead and facilities to each of
the functional areas that use the overhead and facilities services based on
their headcount. These allocated charges include facility rent for the
corporate office, communication charges and depreciation expense for office
furniture and equipment.
Although revenues consistently increased from quarter to quarter, we
incurred significant costs to develop our technology and products and to
recruit and train personnel for our engineering, sales, marketing,
professional services and administration departments. As a result, we have
incurred significant losses since inception, and, as of December 31, 1999,
had an accumulated deficit of $55.3 million. We believe our success is
contingent on increasing our customer base and developing our products and
services. We intend to continue to invest heavily in sales, marketing,
research and development and, to a lesser extent, support infrastructure. We
therefore expect to continue to incur substantial operating losses for the
foreseeable future.
We had 465 full-time employees as of December 31, 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 December 31, 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 1999 and 1998, we
recorded $13.5 million and $830,000, respectively, of related stock-based
compensation amortization expense and during the three months ended December
31, 1999, we recorded $4.5 million of related stock-based compensation
amortization expense. As of December 31, 1999, we had an aggregate of $19.6
million of related deferred compensation to be amortized. The amortization of
the remaining deferred stock-based compensation will result in additional
charges to operations through fiscal 2003. The amortization of stock-based
compensation is presented as a separate component of operating expenses in
our consolidated statement of operations.
Our limited operating history makes the prediction of future
operating results very difficult. We believe that period-to-period
comparisons of operating results should not be relied upon as predictive of
future performance. Our operating results are expected to vary significantly
from quarter to quarter and are difficult or impossible to predict. Our
prospects must be considered in light of the risks, expenses and difficulties
encountered by companies at an early stage of development, particularly
companies in new and rapidly evolving markets. We may not be successful in
addressing such risks and difficulties. Although we have experienced
significant percentage growth in revenues in recent periods, we do not
believe that prior growth rates are sustainable or indicative of future
operating results. Please refer to the "Risk Factors" section for additional
information.
RECENT EVENTS
On December 16, 1999, we signed a definitive agreement to acquire
Tradex Technologies, Inc. ("Tradex"), a leading provider of solutions for net
markets. We will purchase all of the outstanding capital stock of Tradex and
will assume all of the outstanding stock options and warrants in exchange for
approximately 19,000,000 shares of our common stock (and options and warrants
therefor). We will account for the purchase of Tradex under the purchase
method of accounting and anticipate a significant portion of the purchase
price
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will be allocated to goodwill and other intangible assets and charged to our
earnings over the life of the goodwill and the other intangible assets. We
also anticipate taking a charge related to in-process research and
development costs related to the acquisition in the quarter ending March 31,
2000. We expect that the transaction will close in the quarter ending March
31, 2000
On December 31, 1999, we entered into a definitive agreement with
EDS CoNext to create a group of business-to-business net markets that will
use our business-to-business ecommerce platform. EDS CoNext and Ariba each
received warrants to purchase shares of the other's common stock. EDS CoNext
will receive warrants to purchase shares of our common stock that currently
constitute up to approximately 8.8% of our outstanding equity, based on
current market values of our common stock and its current fully diluted
equity after giving effect to the TradingDynamics acquisition as well as the
proposed acquisition of Tradex. The warrants to purchase shares of our common
stock will become exercisable upon EDS CoNext meeting significant
predetermined performance targets. Warrants to purchase additional shares of
our common stock will become exercisable when such performance targets are
significantly exceeded. Subject to predetermined limits, the shares issuable
upon exercise of the warrants to purchase our common stock adjust based on
changes in the value of our common stock. In the event these performance
targets are met, we may be required to record a significant non-cash
accounting expense based upon the value of the warrants. In addition, from
time to time we may enter into similar arrangements with, and issue
additional warrants to, other third parties that could require us to record
significant non-cash accounting expenses based upon the value of such
warrants.
On January 20, 2000, we acquired TradingDynamics, Inc.
("TradingDynamics"), a provider of business-to-business Internet trading
applications including business-to-business auction, request for quote (RFQ),
reverse auction, and bid/ask-style exchange mechanisms. We issued
approximately 4,148,000 shares of our common stock for all of the outstanding
shares, options and warrants of TradingDynamics. We will account for the
purchase of TradingDynamics under the purchase method of accounting and
anticipate a significant portion of the purchase price will be allocated to
goodwill and other intangible assets and charged to our earnings over the
life of the goodwill and the other intangible assets. We also anticipate
taking a charge related to in-process research and development costs related
to the acquisition in the quarter ending March 31, 2000.
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RESULTS OF OPERATIONS
The following table sets forth certain statements of operations data
in absolute dollars for the periods indicated. The data has been derived from
the 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
Form 10-K.
<TABLE>
<CAPTION>
Three Months Ended December 31,
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1999 1998
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(in thousands, except per share data)
<S> <C> <C>
Revenues:
License $ 15,784 $ 4,827
Maintenance and service 7,695 2,025
---------------- -----------
Total revenues 23,479 6,852
---------------- -----------
Cost of revenues:
License 321 53
Maintenance and service (exclusive of stock-based compensation
expense of $344 in 1999 and $96 in 1998) 3,121 902
---------------- -----------
Total cost of revenues 3,442 955
---------------- -----------
Gross profit 20,037 5,897
---------------- -----------
Operating expenses:
Sales and marketing (exclusive of stock-based compensation
expense of $2,163 in 1999 and $571 in 1998) 19,774 4,399
Research and development (exclusive of stock-based compensation
expense of $894 in 1999 and $250 in 1998) 4,443 1,649
General and administrative (exclusive of stock-based compensation
expense of $1,318 in 1999 and $196 in 1998) 3,421 1,201
Amortization of stock-based compensation 4,719 1,113
---------------- -----------
Total operating expenses 32,357 8,362
---------------- -----------
Loss from operations (12,320) (2,465)
Other income, net 2,059 106
---------------- -----------
Net loss before income taxes (10,261) (2,359)
Provision for income taxes 73 --
---------------- -----------
Net loss $ (10,334) $ (2,359)
---------------- -----------
---------------- -----------
Basic and diluted net loss per share $ (0.13) $ (0.13)
---------------- -----------
---------------- -----------
Shares used in computing basic and diluted net loss per share 77,990 18,124
---------------- -----------
---------------- -----------
</TABLE>
COMPARISON OF THE THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998
REVENUES
LICENSE. License revenues for the quarter ended December 31, 1999
were $15.8 million, a 227% increase over license revenues of $4.8 million for
the quarter ended December 31, 1998. This increase was primarily attributable
to continued market acceptance of our products, an increase in sales to new
customers resulting from increased headcount in our sales force along with an
increasing demand for business-to-business electronic commerce solutions and
the increased acceptance of our products internationally.
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MAINTENANCE AND SERVICE. Maintenance and service revenues for the
quarter ended December 31, 1999 were $7.7 million, a 280% increase over
maintenance and service revenues of $2.0 million for the quarter ended
December 31, 1998. This increase is attributable to increased licensing
activity over the last year, 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
have also contributed to the increase.
During the quarter ended December 31, 1999 two individual customers
each accounted for more than 10% of total revenues, and, in the quarter ended
December 31, 1998, four individual customers each accounted for more than 10%
of total revenues. Revenues from international sales were $8.0 million in the
quarter ended December 31, 1999 and were $127,000 for the quarter ended
December 31, 1998.
Going forward, we plan to continue to add services and other
functionality to the Ariba Network. As such, we expect to charge fees for
these services. The revenues associated may be a combination of transaction
and/or annual subscription fees. Examples of such services might include
electronic payment, bid/quote and sourcing, among others. We expect these
network related revenues to be a significant contributor to total revenues
over time. However, we cannot predict whether these services and other
functionality will be commercially successful or whether they will adversely
impact revenues from our Ariba ORMS products and services. We would be
seriously harmed if the Ariba Network is not commercially successful,
particularly if we experience a decline in the growth or growth rate of
revenues from our ORMS solution. In general, we expect that total revenue
will fluctuate in future periods depending on the timing and acceptance of
new product and service introductions, customer buying patterns, pricing
actions taken by us, competition and other factors.
COST OF REVENUES
LICENSE. Cost of license revenues were $321,000 in the quarter ended
December 31, 1999, an increase of 506% over cost of license revenues of
$53,000 for the quarter ended December 31, 1998. The increase in the cost of
license revenues was attributable to royalties due to third parties for
integrated technology.
MAINTENANCE AND SERVICE. Cost of maintenance and service revenues
were $3.1 million in the quarter ended December 31, 1999, an increase of 246%
over cost of maintenance and service revenues of $902,000 for the quarter
ended December 31, 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 because of
increased licensing activity over the last year resulting in increased
implementation, customer support and training costs.
During the quarter ended December 31, 1999, cost of maintenance and
service revenues including related stock-based amortization increased to $3.5
million from $1.0 million for the quarter ended December 31, 1998. In
addition to the increases mentioned in the above paragraph the increase was
also due to a greater number of stock options being subject to amortization
during the more recent quarter where the original exercise price of the
option was below the deemed fair value of our common stock for accounting
purposes. The amortization of stock-based compensation primarily represents
the difference between the exercise price and the deemed fair value of our
common stock for accounting purposes on the date certain stock options were
granted. This amount is included as a component of stockholders' equity and
is being amortized on an accelerated basis by charges to operations over the
vesting period of the options, consistent with the method described in
Financial Accounting Standards Board Interpretation No. 28. As of December
31, 1999, we had an aggregate of $1.5 million of deferred compensation
relating to cost of maintenance and service revenues still to be amortized.
OPERATING EXPENSES
SALES AND MARKETING. During the quarter ended December 31, 1999,
sales and marketing expenses were $19.8 million, an increase of 350% over
sales and marketing expenses of $4.4 million for the quarter ended December
31, 1998. The increase was primarily attributable to increased sales
commissions as a result of increased sales, an increase in salaries and
related expenses because of an increase in the number of sales and marketing
employees, an increase in fees paid to outside professional service
providers, expanded marketing programs for trade shows and customer advisory
council meetings and increased facility costs related to the expansion of our
corporate headquarters and international sales offices. We believe these
expenses will continue to increase in absolute dollar amounts in future
periods as we expect to continue to expand our sales and marketing efforts.
During the quarter ended December 31, 1999, sales and marketing
expenses including related stock-based amortization increased to $21.9
million from $5.0 million for the quarter ended December 31, 1998. In
addition to the increases mentioned in the above paragraph the increase was
also due to a greater number of stock options being subject to amortization
during the more recent quarter where the original exercise price of the
option was below the deemed fair value of our common stock for accounting
purposes. As of December 31, 1999, we had an aggregate of $9.5 million of
deferred compensation relating to sales and marketing expense still to be
amortized.
RESEARCH AND DEVELOPMENT. During the quarter ended December 31,
1999, research and development expenses were $4.4 million, an increase of
169% over research and development expenses of $1.6 million for the quarter
ended December 31, 1998. The increase was primarily attributable to an
increase in salaries and related expenses because of an increase in the
number of research and development employees and increased facility costs
related to the expansion of our corporate headquarters and international
sales offices.
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<PAGE>
To date, all software development costs have been expensed in the period
incurred. We believe that continued investment in research and development is
critical to attaining our strategic objectives, and, as a result, we expect
research and development expenses to increase in absolute dollar amounts in
future periods.
During the quarter ended December 31, 1999, research and development
expenses including related stock-based amortization increased to $5.3 million
from $1.9 million for the quarter ended December 31, 1998. In addition to the
increases mentioned in the above paragraph the increase was also due to a
greater number of stock options being subject to amortization during the more
recent quarter where the original exercise price of the option was below the
deemed fair value of our common stock for accounting purposes. As of December
31, 1999, we had an aggregate of $3.8 million of deferred compensation
relating to research and development expense still to be amortized.
GENERAL AND ADMINISTRATIVE. During the quarter ended December 31,
1999, general and administrative expenses were $3.4 million, an increase of
185% over general and administrative expenses of $1.2 million for the quarter
ended December 31, 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, increased facility costs related to the
expansion of our corporate headquarters and international sales offices and
to increased communication costs, particularly to remote offices. We believe
general and administrative expenses will increase in absolute dollars, as we
expect to add personnel to support our expanding operations, and to incur
additional costs related to the growth of our business and our
responsibilities as a public company.
During the quarter ended December 31, 1999, general and
administrative expenses including related stock-based amortization increased
to $4.7 million from $1.4 million for the quarter ended December 31, 1998. In
addition to the increases mentioned in the above paragraph the increase was
also due to a greater number of stock options being subject to amortization
during the more recent quarter where the original exercise price of the
option was below the deemed fair value of our common stock for accounting
purposes. As of December 31, 1999, we had an aggregate of $4.9 million of
deferred compensation relating to general and administrative expense still to
be amortized.
OTHER INCOME, NET
Other income, net consists of interest income, interest expense and
other non-operating expenses. During the quarter ended December 31, 1999,
other income, net was $2.1 million, an increase of 1,842% over other income,
net of $106,000 for the quarter ended December 31, 1998. This increase is
primarily attributable to interest income resulting from higher average cash
balances during the more recent period.
PROVISION FOR INCOME TAXES
We incurred operating losses for all periods from inception through
December 31, 1999. We have recorded a valuation allowance for the full amount
of our net deferred tax assets, as the future realization of the tax benefit
is not currently likely. We recorded income tax expense of $73,000 relating
to our international subsidiaries during the quarter ended December 31, 1999.
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 $121.2
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 December 31, 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 December 31, 1999, no amounts
were outstanding under the line of credit. The line of credit contains
covenants that require the Company to maintain certain financial ratios and
levels of net worth. The line of credit also does not permit the payment of
dividends to stockholders. As of December 31, 1999, we had $161.0 million in
cash, cash equivalents and investments, and $48.5 million in working capital.
Net cash provided by operating activities was $13.6 million in the
quarter ended December 31, 1999 and $484,000 in the quarter ended December
31, 1998. Net cash flows provided by operating activities in each period was
primarily attributed to deferred revenue from customer payments that were not
recognized as revenue, and, to a lesser extent, by amortization of
stock-based compensation and by increases in accounts payable, accrued
compensation and related liabilities and accrued liabilities. These cash
flows provided by operating activities were partially offset by the net loss
for each quarter and, to a lesser extent, an increase in prepaid expenses and
other assets and an increase in accounts receivable for the quarter ended
December 31, 1999.
Net cash used in investing activities was $22.1 million in the
quarter ended December 31, 1999 and $1.5 million in the quarter ended
December 31, 1998. Cash used in investing activities primarily reflects
purchases of property and equipment and purchases of investments in both
periods.
14
<PAGE>
Net cash provided by financing activities was $368,000 in the
quarter ended December 31, 1999, primarily from the proceeds of exercises of
employee stock options, which was partially offset by payments on capital
lease obligations. Net cash used in financing activities was $57,000 in the
quarter ended December 31, 1998, primarily because of payments on capital
lease obligations, partially offset from exercises of employee stock options.
Capital expenditures, including capital leases, were $5.7 million in
the quarter ended December 31, 1999 and $604,000 in the quarter ended
December 31, 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 expect to additionally spend approximately
$6.0 to $8.0 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 expect to fund these
commitments from our existing cash and cash equivalents.
We expect to experience significant growth in our operating
expenses, particularly research and development and sales and marketing
expenses, for the foreseeable future in order to execute our business plan.
As a result, we anticipate that such operating expenses, as well as planned
capital expenditures, will constitute a material use of our cash resources.
In addition, we may utilize cash resources to fund acquisitions or
investments in complementary businesses, technologies or product lines. We
believe that the net proceeds from the sale of the common stock in our
initial public offering and our cash flow from operations 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 COMPLIANCE
We have tested our products and believe that they are year 2000
compliant. We have also inquired of significant vendors of our internal
systems as to their year 2000 readiness, and we have also tested our material
internal systems. We believe that, based on these tests and assurances of our
vendors, we will not incur material costs to resolve year 2000 issues for our
products and internal systems. Furthermore, to date we have not experienced
any year 2000 problems and our customers or vendors have not informed us of
any material year 2000 problems. If it comes to our attention that there are
any year 2000 problems with our products or that some of our third-party
hardware and software used in our internal systems are not year 2000
compliant, then we will endeavor to make modifications to our products and
internal systems, or purchase new internal systems, to quickly respond to the
problem. The costs already incurred by us to date related to year 2000
compliance are not material, and we do not anticipate incurring additional
material costs related to year 2000 compliance.
RISK FACTORS
In addition to other information in this Form 10-Q, the following
risk factors should be carefully considered in evaluating Ariba and its
business because such factors currently may have a significant impact on
Ariba's business, operating results and financial condition. As a result of
the risk factors set forth below and elsewhere in this Form 10-Q, and the
risks discussed in Ariba's other Securities and Exchange Commission filings,
actual results could differ materially from those projected in any
forward-looking statements.
ARIBA IS AN EARLY-STAGE COMPANY. OUR LIMITED OPERATING HISTORY MAKES IT
DIFFICULT TO EVALUATE OUR FUTURE PROSPECTS.
Ariba was founded in September 1996 and has a limited operating
history. Our limited operating history makes an evaluation of our future
prospects very difficult. We began shipping our first product, the Ariba
Operating Resource Management System, or Ariba ORMS, in June 1997 and began
to operate the Ariba Network in April 1999. We will encounter risks and
difficulties frequently encountered by early-stage companies in new and
rapidly evolving markets. Many of these risks are described in more detail in
this "Risk Factors" section. We may not successfully address any of these
risks. If we do not successfully address these risks, our business would be
seriously harmed.
THE MARKET FOR OUR SOLUTIONS IS AT AN EARLY STAGE. WE NEED A CRITICAL
MASS OF LARGE BUYING ORGANIZATIONS AND THEIR SUPPLIERS TO IMPLEMENT OUR
SOLUTIONS
The market for Internet-based operating resource
applications and services is at an early stage of development. Our success
depends on a significant number of large buying organizations implementing
Ariba products and services. The implementation of Ariba products by large
buying organizations is complex, time consuming and expensive. In many cases,
these organizations must change established business practices and conduct
business in new ways. Our ability to attract additional customers for our
Ariba products and services will depend on using our existing customers as
reference accounts. Unless a critical mass of large buying organizations and
their
15
<PAGE>
suppliers join the Ariba Network, our solutions may not achieve widespread
market acceptance and our business would be seriously harmed.
WE HAVE A HISTORY OF LOSSES AND EXPECT TO INCUR LOSSES IN THE FUTURE.
We incurred net losses of $4.7 million in fiscal 1997, $11.0 million
in fiscal 1998, $29.3 million in fiscal 1999 and $10.3 million for the
quarter ended December 31, 1999. We expect to derive substantially all of our
revenues for the foreseeable future from licensing our products and from
transaction based revenue. 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 more of our revenues from revenues related to
network access and network services, which is based on an unproven business
model. Moreover, we expect to incur significant sales and marketing, research
and development, and general and administrative expenses. In the future, we
expect to incur substantial non-cash costs relating to the amortization of
deferred compensation which will contribute to our net losses. As of December
31, 1999 we had an aggregate of $19.7 million of deferred compensation to be
amortized. As a result, we expect to incur significant losses for the
foreseeable future. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
OUR QUARTERLY OPERATING RESULTS ARE VOLATILE AND DIFFICULT TO PREDICT.
IF WE FAIL TO MEET THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS OR
INVESTORS, THE MARKET PRICE OF OUR COMMON STOCK MAY DECREASE
SIGNIFICANTLY.
Our quarterly operating results have varied significantly in the
past and will likely vary significantly in the future. We believe that
period-to-period comparisons of our results of operations are not meaningful
and should not be relied upon as indicators of future performance. Our
operating results will likely fall below the expectations of securities
analysts or investors in some future quarter or quarters. Our failure to meet
these expectations would likely adversely affect the market price of our
common stock.
Our quarterly operating results may vary depending on a number of
factors, including:
- Demand for Ariba products and services;
- Actions taken by our competitors, including new product
introductions and enhancements;
- Ability to scale our network and operations to support large
numbers of buyers, suppliers and transactions;
- Ability to develop, introduce and market new products and
enhancements to our existing products on a timely basis;
- Changes in our pricing policies or those of our competitors;
- Ability to expand our sales and marketing operations,
including hiring additional sales personnel;
- Size and timing of sales of our products and services;
- Success in maintaining and enhancing existing relationships
and developing new relationships with strategic partners,
including systems integrators and other implementation
partners;
- Compensation policies that compensate sales personnel based on
achieving annual quotas;
- Ability to control costs;
- Technological changes in our markets;
- Deferrals of customer orders in anticipation of product
enhancements or new products;
- Customer budget cycles and changes in these budget cycles; and
- General economic factors.
Our quarterly revenues are especially subject to fluctuation because
they depend on the sale of a small number of relatively large orders for our
Ariba products and related services. As a result, our quarterly operating
results may fluctuate significantly if we are unable to complete one or more
substantial sales in any given quarter. In some cases, we recognize revenues
from product sales on a percentage of completion basis. Accordingly, our ability
to
16
<PAGE>
recognize these revenues is subject to delays associated with our customers'
ability to complete the implementation of Ariba products in a timely manner.
In some cases, we recognize revenues on a subscription basis over the life of
the subscriptions specified in the contract, which is typically 12 to 24
months. Therefore, if we do not book a sufficient number of large orders in a
particular quarter, our revenues in future periods could be lower than
expected. We also continue to develop our business model for the Ariba
Network and related services. As this business model evolves, the potential
for fluctuations in our quarterly results could increase. Furthermore, other
revenue recognition policies and procedures may affect our quarterly revenues
significantly. These policies and procedures may evolve or change over time
based on applicable accounting standards and how these standards are
interpreted. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
We plan to increase our operating expenses to expand our sales and
marketing operations, fund greater levels of research and development,
develop new partnerships, make tenant improvements to our new facilities,
increase our professional services and support capabilities and improve our
operational and financial systems. If our revenues do not increase along with
these expenses, our business, operating results and financial condition could
be seriously harmed and net losses in a given quarter could be even larger
than expected.
In addition, because our expense levels are relatively fixed in the
near term and are based in part on expectations of our future revenues, any
decline in our revenues to a level that is below our expectations would have
a disproportionately adverse impact on our operating results.
IMPLEMENTATION OF OUR ARIBA PRODUCTS BY LARGE CUSTOMERS IS COMPLEX,
TIME CONSUMING AND EXPENSIVE. WE FREQUENTLY EXPERIENCE LONG SALES AND
IMPLEMENTATION CYCLES.
Ariba ORMS is an enterprise-wide solution that must be deployed with
many users within a buying organization. Its implementation by large buying
organizations is complex, time consuming and expensive. In many cases, our
customers must change established business practices and conduct business in
new ways. In addition, they must generally consider a wide range of other
issues before committing to purchase our product, including product benefits,
ease of installation, ability to work with existing computer systems, ability
to support a larger user base, functionality and reliability. Furthermore,
because we are one of the first companies to offer an Internet-based
operating resource management system, many customers will be addressing these
issues for the first time in the context of managing and procuring operating
resources. As a result, we must educate potential customers on the use and
benefits of our products and services. In addition, we believe that the
purchase of our products is often discretionary and generally involves a
significant commitment of capital and other resources by a customer. It
frequently takes several months to finalize a sale and requires approval at a
number of management levels within the customer organization. The
implementation and deployment of our products requires a significant
commitment of resources by our customers and third-party and/or our
professional services organizations. Because we target large customers, our
sales cycles range from four to 24 months and average approximately nine
months.
BUSINESS-TO-BUSINESS ELECTRONIC COMMERCE PURCHASING NETWORKS, INCLUDING
THE ARIBA NETWORK, ARE AT AN EARLY STAGE OF DEVELOPMENT AND MARKET
ACCEPTANCE
We began operating the Ariba Network in April 1999. Broad and timely
acceptance of the Ariba Network, which is critical to our future success, is
subject to a number of significant risks. These risks include:
- Operating resource management and procurement on the Internet
is a new market;
- Our network's ability to support large numbers of buyers and
suppliers is unproven;
- Our need to enhance the interface between our Ariba ORMS
product and the Ariba Network;
- Our need to significantly enhance the features and services of
the Ariba Network to achieve widespread commercial acceptance
of our network; and
- Our need to significantly expand our internal resources to
support planned growth of the Ariba Network.
Although we expect to derive a significant portion of our long-term
future revenue from the Ariba Network, we have not yet fully evolved our
revenue model for services associated with the Ariba Network. The revenues
associated may be a combination of transaction and/or annual subscription
fees. Examples of such services might include electronic payment, bid/quote
and sourcing, among others. However, we cannot predict whether these services
and other functionality will be commercially successful or whether they will
adversely impact revenues from our Ariba ORMS products and services. We would
be seriously harmed if the Ariba Network is not commercially successful,
particularly if we experience a decline in the growth or growth rate of
revenues from our Ariba ORMS solution.
17
<PAGE>
WE DEPEND ON SUPPLIERS FOR THE SUCCESS OF THE ARIBA NETWORK.
We 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 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 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. We may not successfully obtain 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. The intensity of competition has
increased and is expected to further increase in the future. This increased
competition is likely to result in price reductions, reduced gross margins
and loss of market share, any one of which could seriously harm our business.
Competitors vary in size and in the scope and breadth of the products and
services offered. We also increasingly encountered competition with respect
to different aspects of our solution from Captura Software, Clarus, Commerce
One, Concur Technologies, Extensity, GE Information Services, Intelisys,
Netscape Communications, a subsidiary of America Online and VerticalNet. We
also encounter competition from several major enterprise software developers,
such as Oracle, PeopleSoft and SAP. In addition, because there are relatively
low barriers to entry in the operating resource management software market,
we expect additional competition from other established and emerging
companies, as the operational resource management software market continues
to develop and expand. For example, third parties that currently help
implement Ariba ORMS could begin to market products and services that compete
with our own. We could also face competition from new companies who introduce
an Internet-based operating resource management solution.
Many of our current and potential competitors have longer operating
histories, significantly greater financial, technical, marketing and other
resources than us, significantly greater name recognition and a larger
installed base of customers. In addition, many of our competitors have
well-established relationships with our current and potential customers and
have extensive knowledge of our industry. In the past, we have lost potential
customers to competitors for various reasons, including lower prices and
incentives not matched by us. In addition, current and potential competitors
have established or may establish cooperative relationships among themselves
or with third parties to increase the ability of their products to address
customer needs. Accordingly, it is possible that new competitors or alliances
among competitors may emerge and rapidly acquire significant market share. We
also expect that competition will increase as a result of industry
consolidations.
We may not be able to compete successfully against our current and
future competitors.
REVENUES COULD BE CONCENTRATED IN A RELATIVELY SMALL NUMBER OF
CUSTOMERS.
In the quarter ended December 31, 1999, two individual customers
each accounted for more than 10% of our total revenues; in fiscal 1999, one
customer accounted for more than 10% of our total revenues and, in fiscal
1998, five individual customers each accounted for more than 10% of our total
revenues. We may continue to derive a significant portion of our revenues
from a relatively small number of customers in the future. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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WE MAY INCUR INCREASED NET LOSSES IF WE ARE REQUIRED TO RECORD A
SIGNIFICANT ACCOUNTING EXPENSE UPON THE VESTING OF WARRANTS.
On December 31, 1999, we entered into a definitive agreement with
EDS CoNext to create a group of business-to-business net markets that will
use our business-to-business ecommerce platform. EDS CoNext and Ariba each
received warrants to purchase shares of the other's common stock. EDS CoNext
will receive warrants to purchase shares of our common stock that currently
constitute up to approximately 8.8% of our outstanding equity, based on
current market values of our common stock and its current fully diluted
equity after giving effect to the TradingDynamics acquisition as well as the
proposed acquisition of Tradex. The warrants to purchase shares of our common
stock will become exercisable upon EDS CoNext meeting significant
predetermined performance targets. Warrants to purchase additional shares of
our common stock will become exercisable when such performance targets are
significantly exceeded. Subject to predetermined limits, the shares issuable
upon exercise of the warrants to purchase our common stock adjust based on
changes in the value of our common stock. In the event these performance
targets are met, we may be required to record a significant non-cash
accounting expense based upon the value of the warrants. In addition, from
time to time we may enter into similar arrangements with, and issue
additional warrants to, other third parties that could require us to record
significant non-cash accounting expenses based upon the value of such
warrants.
WE ARE PROVIDING OUR ECOMMERCE PLATFORM TO BE USED IN CORPORATE
INDEPENDENT INTERNET MARKETPLACES
We have entered into agreements to create corporate independent
internet marketplaces that will be powered by our business-to-business
ecommerce platform. These marketplaces are recently formed and at an early
stage of development. There is no guarantee regarding the level of activity
of different companies in these marketplaces, the effectiveness of the
interaction between our business-to-business ecommerce platform and the
marketplace, the attractiveness and the offerings of other competitors in the
market, and the marketplace could be affected by general domestic and
international economic and political conditions.
WE RELY ON THIRD PARTIES TO IMPLEMENT ARIBA PRODUCTS.
We rely, and expect to rely increasingly, on a number of third
parties to implement Ariba ORMS at customer sites. If we are unable to
establish and maintain effective, long-term relationships with our
implementation providers, or if these providers do not meet the needs or
expectations of our customers, our business would be seriously harmed. This
strategy will also require that we develop new relationships with additional
third-party implementation providers to provide these services if the number
of Ariba ORMS implementations continues to increase. Our current
implementation partners are not contractually required to continue to help
implement Ariba ORMS. As a result of the limited resources and capacities of
many third-party implementation providers, we may be unable to establish or
maintain relationships with third parties having sufficient resources to
provide the necessary implementation services to support our needs. If these
resources are unavailable, we will be required to provide these services
internally, which would significantly limit our ability to meet our
customers' implementation needs. A number of our competitors, including
Oracle, SAP and PeopleSoft, have significantly more well-established
relationships with these third parties and, as a result, these third parties
may be more likely to recommend competitors' products and services rather
than our own. In addition, we cannot control the level and quality of service
provided by our current and future implementation partners.
WE DEPEND ON THE INTRODUCTION OF NEW VERSIONS OF ARIBA ORMS AND OUR
OTHER PRODUCTS AND ON ENHANCING THE FUNCTIONALITY AND SERVICES OFFERED
THROUGH THE ARIBA NETWORK.
If we are unable to develop new software products or enhancements to
our existing products on a timely and cost-effective basis, or if new
products or enhancements do not achieve market acceptance, our business would
be seriously harmed. The life cycles of our products are difficult to predict
because the market for our products is new and emerging, and is characterized
by rapid technological change, changing customer needs and evolving industry
standards. The introduction of products employing new technologies and
emerging industry standards could render our existing products or services
obsolete and unmarketable.
To be successful, our products and services must keep pace with
technological developments and emerging industry standards, address the
ever-changing and increasingly sophisticated needs of our customers and
achieve market acceptance.
In developing new products and services, we may:
- Fail to develop and market products that respond to
technological changes or evolving industry standards in a
timely or cost-effective manner;
- Encounter products, capabilities or technologies developed by
others that render our products and services obsolete or
noncompetitive or that shorten the life cycles of our existing
products and services;
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- 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 or other products in anticipation
of future releases. If customers defer material orders of Ariba ORMS or other
products 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 and additional
scalability limitations, in new releases or new products after the
commencement of commercial shipments. In addition, a delay in the commercial
release of the next version of Ariba ORMS could also slow the growth of the
Ariba Network.
WE COULD BE SUBJECT TO POTENTIAL PRODUCT LIABILITY CLAIMS AND THIRD
PARTY LIABILITY CLAIMS RELATED TO PRODUCTS AND SERVICES PURCHASED
THROUGH THE ARIBA NETWORK.
Our customers use our products and services to manage their
operating resources. Any errors, defects or other performance problems could
result in financial or other damages to our customers. A product liability
claim brought against us, even if not successful, would likely be time
consuming and costly and could seriously harm our business. Although our
customer license agreements typically contain provisions designed to limit
our exposure to product liability claims, existing or future laws or
unfavorable judicial decisions could negate these limitation of liability
provisions.
The Ariba Network provides our customers with indices of products
that can be purchased from suppliers participating in the Ariba Network. The
law relating to the liability of providers of listings of products and
services sold over the Internet for errors, defects or other performance
problems with respect to those products and services is currently unsettled.
We will not pre-screen the types of products and services that may be
purchased through the Ariba Network. Some of these products and services
could contain performance or other problems. We may not successfully avoid
civil or criminal liability for problems related to the products and services
sold through the Ariba Network. Any claims or litigation could still require
expenditures in terms of management time and other resources to defend
ourselves. Liability of this sort could require us to implement measures to
reduce our exposure to this liability, which may require us, among other
things, to expend substantial resources or to discontinue certain product or
service offerings or to take precautions to ensure that certain products and
services are not available through the Ariba Network.
OUR SUCCESS DEPENDS ON RETAINING OUR CURRENT KEY PERSONNEL AND
ATTRACTING ADDITIONAL KEY PERSONNEL, PARTICULARLY IN THE AREAS OF
DIRECT SALES AND RESEARCH AND DEVELOPMENT.
Our future performance depends on the continued service of our
senior management, product development and sales personnel, in particular
Keith Krach, our Chief Executive Officer and Chairman of the Board of
Directors. 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.
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IF THE PROTECTION OF OUR INTELLECTUAL PROPERTY IS INADEQUATE, OUR
COMPETITORS MAY GAIN ACCESS TO OUR TECHNOLOGY, AND WE MAY LOSE
CUSTOMERS.
We depend on our ability to develop and maintain the proprietary
aspects of our technology. To protect our proprietary technology, we rely
primarily on a combination of contractual provisions, confidentiality
procedures, trade secrets, and patent, copyright and trademark laws.
We license rather than sell Ariba ORMS and require our customers to
enter into license agreements, which impose restrictions on their ability to
utilize the software. In addition, we seek to avoid disclosure of our trade
secrets through a number of means, including but not limited to, requiring
those persons with access to our proprietary information to execute
confidentiality agreements with us and restricting access to our source code.
We seek to protect our software, documentation and other written materials
under trade secret and copyright laws, which afford only limited protection.
We cannot assure you that any of our proprietary rights with respect to the
Ariba Network will be viable or of value in the future because the validity,
enforceability and type of protection of proprietary rights in
Internet-related industries are uncertain and still evolving.
We have no patents, and none may be issued from our existing patent
applications. Our future patents, if any, may be successfully challenged or
may not provide us with any competitive advantages. We may not develop
proprietary products or technologies that are patentable.
Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy aspects of our products or to obtain and use
information that we regard as proprietary. Policing unauthorized use of our
products is difficult, and while we are unable to determine the extent to
which piracy of our software products exists, software piracy can be expected
to be a persistent problem. In addition, the laws of some foreign countries
do not protect our proprietary rights to as great an extent as do the laws of
the United States. Our means of protecting our proprietary rights may not be
adequate and our competitors may independently develop similar technology,
duplicate our products or design around patents issued to us or our other
intellectual property.
There has been a substantial amount of litigation in the software
industry and the Internet industry regarding intellectual property rights. It
is possible that in the future, third parties may claim that we or our
current or potential future products infringe their intellectual property. We
expect that software product developers and providers of electronic commerce
solutions will increasingly be subject to infringement claims as the number
of products and competitors in our industry segment grows and the
functionality of products in different industry segments overlaps. Any
claims, with or without merit, could be time-consuming, result in costly
litigation, cause product shipment delays or require us to enter into royalty
or licensing agreements. Royalty or licensing agreements, if required, may
not be available on terms acceptable to us or at all, which could seriously
harm our business.
We must now, and may in the future have to, license or otherwise
obtain access to intellectual property of third parties. For example, we are
currently dependent on developers' licenses from enterprise resource
planning, database, human resource and other system software vendors in order
to ensure compliance of our Ariba ORMS products with their management
systems. We may not be able to obtain any required third party intellectual
property in the future.
IN ORDER TO MANAGE OUR GROWTH AND EXPANSION, WE WILL NEED TO IMPROVE
AND IMPLEMENT NEW SYSTEMS, PROCEDURES AND CONTROLS.
We have recently experienced a period of significant expansion of
our operations that has placed a significant strain upon our management
systems and resources. If we are unable to manage our growth and expansion,
our business will be seriously harmed. In addition, we have recently hired a
significant number of employees and plan to further increase our total
headcount. We also plan to expand the geographic scope of our customer base
and operations. This expansion has resulted and will continue to result in
substantial demands on our management resources. Our ability to compete
effectively and to manage future expansion of our operations, if any, will
require us to continue to improve our financial and management controls,
reporting systems and procedures on a timely basis, and expand, train and
manage our employee work force. We have implemented new systems to manage our
financial and human resources infrastructure. We may find that this system,
our personnel, procedures and controls may be inadequate to support our
future operations.
OUR BUSINESS COULD BE ADVERSELY AFFECTED IF THE SYSTEMS WE USE ARE
NOT YEAR 2000 COMPLIANT
We have tested our products and believe that they are year 2000
compliant. We have also inquired of significant vendors of our internal
systems as to their year 2000 readiness, and we have also tested our material
internal systems. We believe that, based on these tests and assurances of our
vendors, we will not incur material costs to resolve year 2000 issues for our
products and internal systems. Furthermore, to date we have not experienced
any year 2000 problems and our customers or vendors have not informed us of
any material year 2000 problems. If it comes to our attention that there are
any year 2000 problems with our products or that some of
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our third-party hardware and software used in our internal systems are not
year 2000 compliant, then we will endeavor to make modifications to our
products and internal systems, or purchase new internal systems, to quickly
respond to the problem. The costs already incurred by us to date related to
year 2000 compliance are not material, and we do not anticipate incurring
additional material costs related to year 2000 compliance.
AS 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 continue to expand our
international operations and hire additional international personnel.
Therefore, we expect to commit significant resources to expand our
international sales and marketing activities. If successful, we will be
subject to a number of risks associated with international business
activities. These risks generally include:
- Currency exchange rate fluctuations;
- Seasonal fluctuations in purchasing patterns;
- Unexpected changes in regulatory requirements;
- Tariffs, export controls and other trade barriers;
- Longer accounts receivable payment cycles and difficulties in
collecting accounts receivable;
- Difficulties in managing and staffing international
operations;
- Potentially adverse tax consequences, including restrictions
on the repatriation of earnings;
- The burdens of complying with a wide variety of foreign laws;
- The risks related to the recent global economic turbulence and
adverse economic circumstances in Asia; and
- Political instability.
WE MUST INTEGRATE RECENT ACQUISITIONS, AND WE MAY NEED TO MAKE
ADDITIONAL FUTURE ACQUISITIONS TO REMAIN COMPETITIVE. OUR BUSINESS
COULD BE ADVERSELY AFFECTED AS A RESULT OF THESE ACQUISITIONS.
On January 20, 2000 we completed our acquisition of TradingDynamics,
a leading provider of business-to-business Internet trading applications. On
December 16, 1999, we entered into a definitive agreement to acquire Tradex a
leading provider of solutions for net markets. The Tradex acquisition is
expected to be completed in the quarter ending March 31, 2000, subject to the
satisfaction of standard closing conditions. We may find it necessary or
desirable to acquire additional businesses, products, or technologies. If we
identify an appropriate acquisition candidate, we may not be able to
negotiate the terms of the acquisition successfully, finance the acquisition,
or integrate the acquired business, products or technologies into our
existing business and operations. If our efforts are not successful, it could
seriously harm our business.
Completing the acquisition of Tradex, or a potential future
acquisition, and integrating TradingDynamics, Tradex or other acquisitions
will cause significant diversions of management time and resources. In
particular, the acquisition of Tradex will require the integration of two
large, geographically distant organizations. We have issued approximately
4,000,000 and will issue approximately 19,000,000 shares of our common stock
(and options and warrants therefor), respectively, as consideration to
TradingDynamics shareholders and TRADEX Technologies stockholders, which will
result in immediate and substantial dilution to our existing stockholders.
Similarly, if we consummate one or more significant future acquisitions in
which the consideration consists of stock or other securities, our equity
could be significantly diluted. If we were to proceed with one or more
significant future acquisitions in which the consideration included cash, we
could be required to use a substantial portion of our available cash, to
consummate any acquisition. Financing for future acquisitions may not be
available on favorable terms, or at all. In addition, in connection with our
pending and future acquisitions we may be required to amortize significant
amounts of goodwill and other intangible assets, which will negatively effect
the operating income of our business.
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IN THE FUTURE WE MAY NEED TO RAISE ADDITIONAL CAPITAL IN ORDER TO
REMAIN COMPETITIVE IN THE BUSINESS-TO-BUSINESS ELECTRONIC COMMERCE
INDUSTRY. THIS CAPITAL MAY NOT BE AVAILABLE ON ACCEPTABLE TERMS,
IF AT ALL.
We expect that the net proceeds from our initial public stock
offering and our cash flow from operations will be sufficient to meet our
currently anticipated 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 versus market
expectations;
- Announcements that our revenue or income are below analysts'
expectations;
- Changes in securities analysts' estimates of our performance
or industry performance;
- Changes in market valuations of similar companies;
- Sales of large blocks of our common stock;
- Announcements by us or our competitors of significant
contracts, acquisitions, strategic partnerships, joint
ventures or capital commitments;
- Loss of a major customer or failure to complete significant
license transactions;
- Additions or departures of key personnel; and
- Fluctuations in stock market price and volume, which are
particularly common among highly volatile securities of
software and Internet-based companies.
WE ARE AT RISK OF SECURITIES CLASS ACTION LITIGATION DUE TO OUR STOCK
PRICE VOLATILITY.
In the past, securities class action litigation has often been
brought against a company following periods of volatility in the market price
of its securities. We may in the future be the target of similar litigation.
Securities litigation could result in substantial costs and divert
management's attention and resources, which could seriously harm our business.
WE HAVE IMPLEMENTED CERTAIN ANTI-TAKEOVER PROVISIONS THAT COULD MAKE IT
MORE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US.
Provisions of our amended and restated certificate of incorporation
and bylaws, as well as provisions of Delaware law, could make it more
difficult for a third party to acquire us, even if doing so would be
beneficial to our stockholders.
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:
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- Use of the Internet and other online services does not
continue to increase or increases more slowly than expected;
- The technology underlying the Internet and other online
services does not effectively support any expansion that may
occur; or
- The Internet and other online services do not create a viable
commercial marketplace, inhibiting the development of
electronic commerce and reducing the need for our products and
services.
WE DEPEND ON THE ACCEPTANCE OF THE INTERNET AS A COMMERCIAL MARKETPLACE
AND THIS ACCEPTANCE MAY NOT OCCUR ON A TIMELY BASIS.
The Internet may not be accepted as a viable long-term commercial
marketplace for a number of reasons. These include:
- Potentially inadequate development of the necessary
communication and computer network technology, particularly if
rapid growth of the Internet continues;
- Delayed development of enabling technologies and performance
improvements;
- Delays in the development or adoption of new standards and
protocols; and
- Increased governmental regulation.
SECURITY RISKS AND CONCERNS MAY DETER THE USE OF THE INTERNET FOR
CONDUCTING ELECTRONIC COMMERCE.
A significant barrier to electronic commerce and communications is
the secure transmission of confidential information over public networks.
Advances in computer capabilities, new discoveries in the field of
cryptography or other events or developments could result in compromises or
breaches of our security systems or those of other web sites to protect
proprietary information. If any well-publicized compromises of security were
to occur, it could have the effect of substantially reducing the use of the
web for commerce and communications. Anyone who circumvents our security
measures could misappropriate proprietary information or cause interruptions
in our services or operations. The Internet is a public network, and data is
sent over this network from many sources. In the past, computer viruses,
software programs that disable or impair computers, have been distributed and
have rapidly spread over the Internet. Computer viruses could be introduced
into our systems or those of our customers or suppliers, which could disrupt
the Ariba Network or make it inaccessible to customers or suppliers. We may
be required to expend significant capital and other resources to protect
against the threat of security breaches or to alleviate problems caused by
breaches. To the extent that our activities may involve the storage and
transmission of proprietary information, such as credit card numbers,
security breaches, could expose us to a risk of loss or litigation and
possible liability. Our security measures may be inadequate to prevent
security breaches, and our business would be harmed if we do not prevent them.
THE ARIBA NETWORK MAY EXPERIENCE PERFORMANCE PROBLEMS OR DELAYS AS A
RESULT OF HIGH VOLUMES OF TRAFFIC.
If the volume of traffic on the web site for the Ariba Network
increases, the Ariba Network may in the future experience slower response
times or other problems. In addition, users will depend on Internet service
providers, telecommunications companies and the efficient operation of their
computer networks and other computer equipment for access to the Ariba
Network. Each of these has experienced significant outages in the past and
could experience outages, delays and other difficulties due to system
failures unrelated to our systems. Any delays in response time or performance
problems could cause users of the Ariba Network to perceive this service as
not functioning properly and therefore cause them to use other methods to
procure their operating resources.
INCREASING GOVERNMENT REGULATION COULD LIMIT THE MARKET FOR, OR IMPOSE
SALES AND OTHER TAXES ON THE SALE OF, OUR PRODUCTS AND SERVICES OR ON
PRODUCTS AND SERVICES PURCHASED THROUGH THE ARIBA NETWORK.
As Internet commerce evolves, we expect that federal, state or
foreign agencies will adopt regulations covering issues such as user privacy,
pricing, content and quality of products and services. It is possible that
legislation could expose companies involved in electronic commerce to
liability, which could limit the growth of electronic commerce generally.
Legislation could dampen the growth in Internet usage and decrease its
acceptance as a communications and commercial medium. If enacted, these laws,
rules or regulations could limit the market for our products and services.
We do not collect sales or other similar taxes in respect of goods
and services purchased through the Ariba Network. However, one or more states
may seek to impose sales tax collection obligations on out-of-state companies
like us that engage in or facilitate electronic commerce. A number of
proposals have been made at the state and local level that would impose
additional taxes on the sale of
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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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY RISK
We develop products in the United States and market our products in
North America, Europe, Australia and the Asia-Pacific region. As a result,
our financial results could be affected by factors such as changes in foreign
currency exchange rates or weak economic conditions in foreign markets. As
all sales are currently made in U.S. dollars, a strengthening of the dollar
could make our products less competitive in foreign markets.
INTEREST RATE RISK
The Company's exposure to market risk for changes in interest rates
relate primarily to the Company's investment portfolio. The Company does not
use derivative financial instruments in its investment portfolio. The primary
objective of the Company's investment activities is to preserve principal
while maximizing yields without significantly increasing risk. This is
accomplished by investing in widely diversified investments, consisting
primarily of investment grade securities. Due to the nature of our
investments, we believe that there is no material risk exposure. All
investments are carried at market value, which approximates cost.
The table below represents principal (or notional) amounts and
related weighted-average interest rates by year of maturity of the Company's
investment portfolio.
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT
INTEREST RATES) 2000 2001 2002 2003 2004 THEREAFTER TOTAL
- --------------------------------- --------- --------- --------- -------- ------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash equivalents $ 41,838 $ 41,838
Average interest rate 4.92%
Investments $ 64,269 $28,910 $ 23,403 $116,582
Average interest rate 6.03% 6.41% 6.74%
Total investment securities $ 106,107 $28,910 $ 23,403 $158,420
</TABLE>
We also have made two equity investments during the quarter ended
December 31, 1999 of $1.5 million and $750,000 in two privately held
Companies. These investments are not included in the table above. We account
for these investments on the cost basis. Our ownership percentage is less
than 5% in both of these Companies.
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PART II
OTHER INFORMATION
ITEM 1. Legal Proceedings
Not applicable.
ITEM 2. Changes in Securities and Use of Proceeds
(c) Changes in Securities
On December 31, 1999, we issued warrants to purchase shares of our
common stock in connection with the establishment of a joint venture with EDS
CoNext and our receipt of warrants to purchase shares of EDS CoNext common
stock constituting five percent of the fully-diluted equity of EDS CoNext.
The warrants to purchase our common stock become exercisable upon EDS CoNext
meeting significant predetermined performance targets. We also issued EDS
CoNext an additional warrant that becomes exercisable in the event that these
performance targets are significantly exceeded. These warrants expire five
years after they become exercisable and have exercise prices ranging from a
fixed exercise price of $177.375 to exercise prices that adjust based on the
price of our common stock at the time they become exercisable. In addition,
they may be exercised only on a net issuance basis such that, if exercised in
full, the warrants would result in the issuance of approximately 12,000,000
shares of common stock, assuming the exercise of all shares subject to the
warrants at current market values of our common stock. The offer and sale of
the warrants to purchase Common Stock was exempt from the registration
requirements of the Securities Act of 1933, as amended, pursuant to Section
4(2) thereof. The Company relied on the following criteria to make such
exemption available: the number of offerees, the size and manner of the
offering, the sophistication of the offerees and the availability of material
information.
(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 Rauscher
Incorporated), Deutsche Banc Alex. Brown and Merrill Lynch & Company. The
shares of the common stock sold in the offering were registered under the
Securities Act of 1933, as amended, on a Registration Statement on Form S-1
(No. 333-76953). The Securities and Exchange Commission declared the
Registration Statement effective on June 22, 1999.
The offering commenced on June 23, 1999 and terminated on June 28,
1999 after we had sold all of the 11,500,000 shares of common stock
registered under the Registration Statement (including 1,500,000 shares sold
in connection with the exercise of the underwriters' over-allotment option).
The initial public offering price was $11.50 per share for an aggregate
initial public offering of $132.3 million.
We paid a total of $9.3 million in underwriting discounts and
commissions and approximately $1.8 million has been paid for costs and
expenses related to the offering. None of the costs and expenses related to
the offering were paid directly or indirectly to any director, officer,
general partner of Ariba or their associates, persons owning 10 percent or
more of any class of equity securities of Ariba or an affiliate of Ariba.
After deducting the underwriting discounts and commissions and the
offering expenses the estimated net proceeds to Ariba from the offering were
approximately $121.2 million. The net offering proceeds have been used for
general corporate purposes, to provide working capital to develop products
and to expand the Company's operations. Funds that have not been used have
been invested in money market funds, certificate of deposits and other
investment grade securities. We also may use a portion of the net proceeds to
acquire or invest in businesses, technologies, products or services.
Concurrent with the offering we also sold 14,400 shares of common
stock to our Canadian employees at $11.50 per share. The offering costs
associated with the offering of shares to our Canadian employees were not
material.
ITEM 3. Defaults Upon Senior Securities
Not applicable.
ITEM 4. Submission of Matters to a Vote of Securities Holders
Not applicable.
ITEM 5. Other information
Not applicable.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
A current report on Form 8-K was filed with the Securities and
Exchange Commission by Ariba on November 24, 1999 to report the
announcement of the signing of a definitive agreement to merge with
TradingDynamics, Inc. and to report a two-for-one stock split, to be
effected in the form of a stock dividend.
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A current report on Form 8-K was filed with the Securities and
Exchange Commission by Ariba on December 23, 1999 to report the
announcement of the signing of a definitive agreement to acquire Tradex
Technologies, Inc.
A current report on Form 8-K was filed with the Securities and
Exchange Commission by Ariba on January 25, 2000 to report the
consummation of our merger with TradingDynamics, Inc.
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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: February 14, 2000 By: /s/ Edward P. Kinsey
-----------------------------------
Edward P. Kinsey
Chief Financial Officer,
Executive Vice-President-Finance and
Administration and
Secretary (Principal Financial and
and Accounting Officer)
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EXHIBIT INDEX
EXHIBIT NO. EXHIBIT TITLE
27.1 Financial Data Schedule.
29
<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 DECEMBER 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 42,568
<SECURITIES> 118,832
<RECEIVABLES> 8,840
<ALLOWANCES> (20)
<INVENTORY> 0
<CURRENT-ASSETS> 121,873
<PP&E> 16,766
<DEPRECIATION> 2,660
<TOTAL-ASSETS> 190,820
<CURRENT-LIABILITIES> 73,328
<BONDS> 0
0
0
<COMMON> 184
<OTHER-SE> 116,652
<TOTAL-LIABILITY-AND-EQUITY> 190,820
<SALES> 15,784
<TOTAL-REVENUES> 23,479
<CGS> 321
<TOTAL-COSTS> 3,442
<OTHER-EXPENSES> 32,357
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 44
<INCOME-PRETAX> (10,261)
<INCOME-TAX> 73
<INCOME-CONTINUING> (10,334)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,334)
<EPS-BASIC> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
