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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 000-26299
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ARIBA, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0439730
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
1565 CHARLESTON ROAD, MOUNTAIN VIEW, 94043
CALIFORNIA (Zip Code)
(Address of principal executive
offices)
(650) 930-6200
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $0.002 par value
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of November 30, 1999, there were 91,905,632 shares of the Registrant's
Common Stock outstanding. The aggregate market value of the Common Stock held by
non-affiliates of the Registrant (based on the closing price for the Common
Stock on the Nasdaq National Market on November 30, 1999) was approximately
$6,675,558,578
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III is incorporated by reference to
specified portions of the Registrant's definitive Proxy Statement to be issued
in conjunction with the Registrant's 2000 Annual Meeting of Stockholders, which
is expected to be filed not later than 120 days after the Registrant's fiscal
year ended September 30, 1999.
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ARIBA, INC.
FORM 10-K
SEPTEMBER 30, 1999
TABLE OF CONTENTS
ITEM PAGE NO.
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PART I
1. Business.................................................... 3
2. Properties.................................................. 29
3. Legal Proceedings........................................... 29
4. Submission of Matters to a Vote of Security Holders......... 29
4A. Executive Officers of the Registrant........................ 29
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 31
6. Selected Consolidated Financial Data........................ 33
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 34
7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 45
8. Financial Statements and Supplementary Data................. 45
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 68
PART III
10. Directors and Executive Officers of the Registrant.......... 68
11. Executive Compensation...................................... 68
12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 68
13. Certain Relationships and Related Transactions.............. 68
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 69
SIGNATURES.......................................................................... 71
2
PART I
ITEM 1. BUSINESS
The information in this report contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Such statements
are based upon current expectations that involve risks and uncertainties. Any
statements contained herein that are not statements of historical facts may be
deemed to be forward-looking statements. For example, words such as "may,"
"will," "should," "estimates," "predicts," "potential," "continue," "strategy,"
"believes," "anticipates," "plans," "expects," "intends," and similar
expressions are intended to identify forward-looking statements. Our actual
results and the timing of certain events may differ significantly from the
results discussed in the forward-looking statement. Factors that might cause or
contribute to such a discrepancy include, but are not limited to, those
discussed elsewhere in this report in the section entitled "Risk Factors" and
the risks discussed in our other Securities and Exchange Commission ("SEC")
filings including our Registration Statement on Form S-1 declared effective on
June 22, 1999 by the SEC (File No. 333-76953) and in our Form 10-Q filed
August 16, 1999.
OVERVIEW
Ariba is a leading provider of Internet-based business-to-business
electronic commerce solutions for operating resources. The Ariba Network is a
single global business-to-business electronic commerce network that enables
buyers and suppliers to automate business transactions on the Internet. Our
Operating Resource Management System, the Ariba ORMS application, enables
organizations to automate the procurement cycle within their "intranets,"
internal computer networks which are based on the Internet protocol, lowering
the costs associated with operating resources and other materials. Since we
began marketing the Ariba platform, it has been licensed by large, multinational
industry leaders and public sector organizations including Andersen Consulting,
Cisco Systems, Federal Express Corporation, Hewlett-Packard, Philips, U S WEST
and Visa, among others.
Our objective is to create the leading Internet-based business-to-business
electronic commerce network platform. Our strategy to achieve this objective is
to take advantage of the buying power of a large multinational customer base to
attract leading operating resource suppliers to the Ariba Network. We believe a
growing number of suppliers in the Ariba Network will in turn draw more buyers
to our network. We also believe this growth cycle will help create a network
effect, where the value to each participant in the network increases with the
addition of each new participant, increasing the overall value of our Ariba
solution.
Ariba was incorporated in Delaware in September 1996. Our principal
executive offices are located at 1565 Charleston Road, Mountain View, California
94043.
RECENT EVENTS
On November 15, 1999, we signed a definitive agreement to acquire
TradingDynamics, Inc., a leading provider of business-to-business Internet
trading applications. The agreement is structured as a tax-free stock for stock
merger and will be accounted for as a purchase transaction. We will issue stock
worth approximately $500 million, based on current trading ranges, to
TradingDynamics shareholders. We expect that the transaction will close in the
quarter ending March 31, 2000. We have also entered into a loan agreement with
TradingDynamics to loan TradingDynamics up to $2,000,000.
On November 16, 1999, the Board of Directors authorized a two-for-one stock
split of our common stock, to be effected in the form of a stock dividend. The
stock split will be effected by distribution to each stockholder of record as of
December 3, 1999 of one share of our common stock
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for each share of common stock held. The financial information included in this
report has been restated to give effect to the stock split.
On December 16, 1999, we signed a definitive agreement to acquire TRADEX
Technologies, Inc., a leading provider of solutions for Net Markets. The
agreement is structured as a stock-for-stock merger and will be accounted for as
a purchase transaction. We will issue stock worth approximately $2 billion,
based on current trading ranges, to TRADEX stockholders. We expect that the
transaction will close in the quarter ending June 30, 2000.
INDUSTRY BACKGROUND
GROWTH OF THE INTERNET AND BUSINESS-TO-BUSINESS ELECTRONIC COMMERCE
The Internet has emerged as the fastest growing communication medium in
history. With over 97 million users at the end of 1998, growing to 320 million
users by 2002, as estimated by International Data Corporation, the Internet is
dramatically changing how businesses and individuals communicate and share
information. The Internet has created new opportunities for conducting commerce,
such as business-to-consumer and person-to-person electronic commerce. Recently,
the widespread adoption of intranets and the acceptance of the Internet as a
business communications platform has created a foundation for
business-to-business electronic commerce that will enable organizations to
streamline complex processes, lower costs and improve productivity.
With this foundation, Internet-based business-to-business electronic
commerce is poised for rapid growth and is expected to represent a significantly
larger opportunity than business-to-consumer or person-to-person electronic
commerce. According to Forrester Research, business-to-business electronic
commerce is expected to grow from $43 billion in 1998 to $1.3 trillion in 2003,
accounting for more than 90% of the dollar value of electronic commerce in the
United States. This market is expected to create a substantial demand for
Internet-based electronic commerce applications. According to International Data
Corporation, the worldwide market for Internet-based electronic commerce
procurement and order management applications alone is expected to experience
tremendous growth, increasing from $187 million in 1998 to $8.5 billion in 2003.
TRADITIONAL APPROACHES TO BUYING OPERATING RESOURCES
Operating resources are the goods and services required to operate a
company, ranging from significant items, such as information technology,
telecommunications equipment and professional services, to recurring items, such
as MRO (Maintenance, Repair and Operations) supplies, travel and entertainment
expenses, and office equipment. Operating resource expenditures are distinct
from manufacturing resource expenditures, such as raw materials and other costs
of goods sold, and from human resource expenditures, such as wages, salaries and
benefits. According to Killen & Associates, operating resource expenditures are
often the largest segment of corporate expenditures, representing approximately
33% of an average company's total revenues.
Today, most organizations buy operating resources through paper-based or
semi-automated processes. These processes are costly, time consuming and complex
and often include the re-keying of information, lengthy approval cycles and
significant involvement of financial and administrative personnel. AMR estimates
that the cost per procurement transaction ranges from $75 to $175, often
exceeding the cost of the items being purchased. In addition, these time
consuming processes often result in fulfillment delays to end-users, leading to
productivity losses.
Beyond the time and expense associated with manual processing costs,
organizations suffer even greater costs when they cannot fully exploit
procurement economies of scale. Most organizations lack the systems that enable
them to monitor purchases and compile data necessary to negotiate better volume
discounts with preferred suppliers. In addition, most organizations suffer from
a problem
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known as "maverick buying," which occurs when personnel do not follow internal
guidelines as to which suppliers to use for operating resource purchases. When
preferred suppliers are not used, organizations pay a premium. AMR estimates
that maverick buying accounts for one-third of operating resource expenditures,
costing organizations a 15% to 27% premium on those purchases.
Traditional procurement processes also result in missed revenue
opportunities and additional costs to suppliers. When buyers are unable to
channel purchases to preferred suppliers, these suppliers lose revenue.
Suppliers also suffer from inefficient, error prone and manually-intensive order
fulfillment processes. Many suppliers dedicate significant resources to the
manual entry of information from faxed or phoned-in purchase orders and the
manual processing of paper checks, invoices and ship notices. Suppliers also
spend significant resources on customer acquisition and sales costs, including
the production and distribution of paper catalogs. Without fully automated and
integrated electronic commerce technologies, both buyers and suppliers incur
substantial extraneous costs in conducting commerce.
OPPORTUNITY FOR BUSINESS-TO-BUSINESS ELECTRONIC COMMERCE SOLUTIONS
Over the past 30 years, information technologies have brought automation to
departmental operations such as manufacturing resource planning, financial
management, sales force automation and human resource management. However, the
information technology platforms that made departmental automation possible did
not provide enterprise-wide connectivity within organizations or connectivity
between organizations. Thus, the processes linking end-users to approvers and
organizations to suppliers for operating resources are today largely
paper-based. With the widespread implementation of intranets and the adoption of
the Internet as a business communication platform, organizations can now
automate enterprise-wide and inter-organizational commerce activities. The
availability of this technology creates a significant market opportunity for
Internet-based business-to-business electronic commerce solutions for operating
resources.
For buyers, a solution must include a user-friendly, intranet-based system
that links end-users, approvers and administrative personnel with an integrated
global network that connects buying organizations with suppliers. This system
must be flexible enough to meet the unique business process requirements of
large, multinational organizations and must be highly scalable, reliable and
rapidly deployable. It must take advantage of an organization's existing
investments in information technologies by working with and connecting to
multiple financial, human resource and enterprise resource planning systems. The
system must provide data reporting and analytical tools that enable analysis of
end-user spending patterns and provide insight into savings opportunities. For
suppliers, the solution must be easy to implement, based on open standards and
build upon existing investments in on-line catalogs and order processing
technologies. Additionally, the solution should offer suppliers the opportunity
to expand their customer base by providing access to a critical mass of buyers.
Addressing these requirements for both buyers and suppliers is critical to
enabling full scale business-to-business electronic commerce for operating
resources.
THE ARIBA NETWORK PLATFORM
Ariba is a leading provider of Internet-based business-to-business
electronic commerce solutions for operating resources. Our solution consists of
two components, our intranet-based Ariba ORMS (Operating Resource Management
System) network application and our Internet-based Ariba Network. Ariba ORMS is
a robust, scalable and reliable network application that operates primarily
within a buying organization's intranet. Ariba ORMS enables an organization to
reduce processing costs and improve productivity by automating the procurement
cycle and linking end-users throughout an organization with internal approvers
and financial systems. Ariba ORMS also enables organizations to reduce the cost
of operating resources by channeling purchases to preferred suppliers. The Ariba
Network is a single global business-to-business electronic commerce network,
enabling buyers and
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suppliers to automate transactions on the Internet. Together, Ariba ORMS and the
Ariba Network combine intranet-based network applications with an Internet-based
network to create a business-to-business electronic commerce platform benefiting
both buyers and suppliers.
We believe our solution provides the following benefits:
BENEFITS TO BUYERS:
SIGNIFICANTLY REDUCED PROCESSING COSTS AND INCREASED PRODUCTIVITY. By
automating the operating resource procurement process, our Ariba ORMS solution
allows organizations to achieve significant cost savings and productivity
enhancements. Ariba ORMS enables an organization to streamline and automate
complex and unusual business processes. Ariba ORMS also takes advantage of
existing investments in financial, human resource and enterprise resource
planning systems, which reduces or eliminates the need to manually enter data
into these systems. As a result, our Ariba solution allows organizations to
focus on value-added activities such as negotiating better discounts with
preferred suppliers. Through our solution, end-users can order and receive
requested items more quickly and with less effort, improving overall
productivity.
SUBSTANTIALLY REDUCED COSTS OF OPERATING RESOURCES. Our Ariba solution
enables organizations to maximize procurement economies of scale, lowering the
overall costs of operating resources. Ariba ORMS provides corporate-wide data
analysis and reporting tools on buying patterns, enabling organizations to
negotiate more favorable contracts with preferred suppliers. Our Ariba solution
in turn routes transactions to these preferred suppliers automatically.
Moreover, Ariba ORMS is accessible on every desktop, is easy-to-use and
streamlines the procurement process. These benefits minimize the frustration to
end-users that often results in maverick buying, further enabling organizations
to take advantage of negotiated discounts with preferred suppliers.
BENEFITS TO SUPPLIERS:
INCREASED VOLUME AND REVENUE OPPORTUNITIES. Ariba ORMS and the Ariba
Network enable buyers to channel spending to preferred suppliers, providing
these suppliers the opportunity to increase revenues. The Ariba Network provides
suppliers with greater access to new and existing customers through a global
presence and availability 24 hours a day, seven days a week. In addition, by
taking advantage of suppliers' web-based catalog capabilities, our solution
enables suppliers to differentiate and market their goods and services in their
preferred format.
REDUCED SALES COSTS. The Ariba Network platform enables suppliers to reduce
sales costs in several ways. By automating transactions, suppliers can reduce
the costs associated with, and reduce the potential for error inherent in,
paper-based ordering and payment processes. Product information can be
distributed electronically, reducing the cost of printed product catalog
distribution. In addition, suppliers can utilize their existing investments in
electronic commerce systems, including catalogs and product web pages.
We believe that the benefits of the Ariba Network platform will create a
growth cycle that increases the value of the Ariba Network to both buyers and
suppliers over time. As buyers benefit from the efficiencies of the Ariba
solution, we believe suppliers will be drawn to the Ariba Network by the
aggregated purchasing power of buyers using our network. As more suppliers offer
products and services through the network, more buyers are encouraged to join
our network.
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THE ARIBA GROWTH STRATEGY
Our objective is to create the leading Internet-based business-to-business
electronic commerce network platform. Key elements of our strategy to achieve
this objective include:
TARGET LARGE MULTINATIONAL BUYERS IN A BROAD RANGE OF INDUSTRIES. We intend
to continue to target large, multinational corporations and public sector
institutions, benefiting from our first-mover advantage with many of these
organizations. We believe these organizations will be the most likely early
beneficiaries of an automated, reliable, robust and scalable procurement
solution and can provide strong customer references. Furthermore, we believe the
large spending power these organizations can channel through the Ariba Network
will attract suppliers to the network. Finally, these organizations have
demanding requirements and rigorously test our products, assisting us in
designing a robust, reliable and scalable solution.
CREATE A NETWORK EFFECT BY ATTRACTING THE LARGEST BUYERS AND SUPPLIERS TO
THE ARIBA NETWORK. As Ariba ORMS is deployed to a critical mass of large buyers
in numerous industries, we intend to build upon the buying power of these large
organizations to attract suppliers to the Ariba Network. We believe a growing
number of suppliers in the Ariba Network will in turn draw more buyers to our
network. We also believe this growth cycle will help create a network effect,
where the value to each participant in the network increases with the addition
of each new participant, increasing the overall value of our Ariba solution.
EXTEND AND BUILD UPON THE ARIBA COMMUNITY OF PARTNERS. We intend to build
upon our strategic relationships with industry leaders in the areas of
electronic commerce systems, information technology consulting, distribution and
content aggregation. We are working with these partners to accelerate the Ariba
Network rollout, provide additional customer implementation capabilities, expand
our customer base and increase the content available on the Ariba Network. These
relationships allow us to focus on our core area of expertise, while taking
advantage of the strengths of complementary technologies and the influence of
these industry leaders. We believe that these relationships, as well as others
that we intend to pursue, will enable the rapid and widespread deployment of our
electronic commerce network platform.
PROVIDE SUPERIOR CUSTOMER SATISFACTION. We believe a loyal base of
reference customers affords us a significant competitive advantage. Therefore,
we intend to continue to focus significant resources on customer satisfaction
programs. In order to foster a culture of customer satisfaction as our highest
priority, all of our employees with variable compensation are paid in part based
on customer satisfaction as measured by an independent third party organization.
We continue to make use of a number of other programs to promote superior
customer satisfaction including our customer-driven development process and our
frequent customer advisory councils.
EXPAND GLOBAL OPERATIONS. We intend to aggressively grow our global
presence by expanding our worldwide field sales, marketing and services
organizations. To complement this strategy, we intend to continue to globalize
our operations and expand our corporate and administrative organizations and
systems. We also intend to enter into a strategic relationship with a third
party to expand the computer and communications equipment and software required
to support the day-to-day operations of the Ariba Network on a global basis.
ARIBA PRODUCTS AND SERVICES
Ariba provides a comprehensive intranet- and Internet-based
business-to-business electronic commerce solution for operating resources. This
solution consists of two components, Ariba ORMS and the Ariba Network. Ariba
ORMS is a network application that operates primarily within a buying
organization's internal network. Ariba ORMS enables organizations to reduce
processing costs and improve productivity by automating the procurement cycle,
linking end-users throughout the
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organization with approvers and financial systems. Ariba ORMS also enables
organizations to reduce the cost of operating resources by channeling purchases
to preferred suppliers. As orders are generated and approved, Ariba ORMS
automates commerce transactions securely with suppliers on the Internet through
the Ariba Network. The Ariba Network is a global business-to-business electronic
commerce network that enables buying organizations, suppliers and distributors
to automate transactions on the Internet. Together, Ariba ORMS and the Ariba
Network combine intranet-based network applications with an Internet-based
network to create a business-to-business electronic commerce platform benefiting
both buyers and suppliers.
ARIBA ORMS
Ariba ORMS is a robust, scalable and reliable network application that
operates primarily within a buying organization's intranet. Ariba ORMS enables
organizations to reduce processing costs and improve productivity by automating
the procurement cycle, linking end-users throughout the organization with
approvers and financial systems. Ariba ORMS also enables organizations to reduce
the cost of operating resources by channeling purchases to preferred suppliers.
Ariba ORMS is designed to connect large numbers of end-users, approvers and
administrative personnel through web-based applications that automate
procurement and finance processes. Ariba ORMS works with multiple enterprise
systems simultaneously, in addition to providing real-time electronic access to
important procurement information, such as supplier product specifications,
price lists, web sites and order status.
The primary characteristics of Ariba ORMS are:
USER FRIENDLY, WEB-BASED INTERFACES. The browser-based user interface
enables users throughout an organization to take full advantage of Ariba ORMS
from their desktop and with minimal training. Wizards, software that provides
automated assistance, guide less experienced users through the acquisition
process, while an advanced user interface makes the system more productive for
experienced users.
ELECTRONIC BUSINESS PROCESS AUTOMATION. Ariba ORMS provides flexible
workflow capable of streamlining and automating even the most complex or unusual
business processes of large, multinational organizations. This flexible workflow
can be customized for the unique processes of an organization and can be
tailored to respond to end-user input, system events or any extrinsic or
intrinsic data in the procurement cycle.
SIMULTANEOUS INTERACTION WITH MULTIPLE ENTERPRISE SYSTEMS. Ariba ORMS works
with and connects to leading finance, human resource management and enterprise
resource planning systems from vendors such as PeopleSoft, SAP and Oracle. In
addition, Ariba ORMS provides a comprehensive API (Application Programming
Interface) to connect and work with other legacy systems through adapters that
are sold as separate products. A single Ariba ORMS installation can connect with
multiple enterprise applications simultaneously through real-time or scheduled
interfaces. These interfaces also enable Ariba ORMS to utilize standard user
authentication and directory services such as LDAP (Lightweight Directory Access
Protocol) and Microsoft's Active Directory.
INFORMATION ACCESS. With powerful analytical and reporting tools, Ariba
ORMS enables organizations to evaluate data collected throughout the process of
acquiring, receiving and paying for operating resources. By employing these
analytical tools, an organization can analyze purchasing patterns to streamline
the procurement process, negotiate more favorable terms with preferred suppliers
and gain insight into additional savings opportunities.
INTERFACE WITH THE ARIBA NETWORK. Ariba ORMS allows organizations to
automate commerce transactions with suppliers over the Internet and through the
Ariba Network. By adhering to open standards, Ariba ORMS provides a variety of
methods for suppliers to communicate electronically with
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buying organizations through the Ariba Network. Ariba ORMS also allows suppliers
to take advantage of their existing web-based catalogs to provide product
information to buyers.
MULTI-PLATFORM ARCHITECTURE. The Ariba ORMS server currently supports
industry-standard approaches to high-performance databases and multi-processor
hardware. Ariba ORMS currently supports Microsoft Windows NT and Unix platforms
including Hewlett-Packard HP-UX and Sun Solaris.
ARIBA ORMS MODULES
Ariba ORMS modules are designed specifically for the procurement and
management of different operating resources. Each module contains powerful
reporting and data analysis tools that enable operations managers to monitor the
requisition process and identify areas for cost reductions.
The Ariba ORMS modules are:
ARIBA MRO. Ariba MRO allows organizations to manage purchases associated
with maintenance, repair and operations supplies. These items are primarily
ordered through electronic catalogs and may include office products, information
technologies and facilities items.
ARIBA SERVICES. Ariba Services are specifically designed to address the
unique data collection requirements for the procurement of professional
services, such as facility, legal, temporary and maintenance services.
Purchasing professional services, unlike commodities, involves a number of
different variables, such as scope of services needed, qualification of
personnel and duration of the services. Ariba Services can integrate this data
to process requisitions obtained from the end-user at various points in the
requisitioning, procurement and receiving cycle.
ARIBA CAPITAL EQUIPMENT. Ariba Capital Equipment addresses the specific
needs of capital equipment purchases such as manufacturing, facilities or
information technology equipment. The procurement of capital equipment often
requires unique data such as different accounting, asset identification and
tracking information. Ariba Capital Equipment can be easily configured to suit
an organization's specific accounting and tracking needs.
ARIBA EFORMS. Ariba eForms allow organizations to create custom forms,
which can be attached to existing Ariba applications or used to create new
applications for nearly any type of operating resource request. Ariba eForms are
created using XML (eXtensible Markup Language), a robust definition language
that allows organizations to design forms that capture information from
end-users and route the information for internal approval. Each Ariba eForm can
have its own approval rules and can incorporate standard data from Ariba ORMS
including financial accounting and human resources information.
ARIBA EXPENSE MANAGEMENT. Ariba Expense Management automates the expense
reporting process associated with expenditures such as travel and entertainment.
Ariba Expense Management provides a robust set of features to generate expense
reports automatically from electronic credit card, travel card or procurement
card data feeds and can route expense reports to functional, travel and expense
managers.
ARIBA P-CARD RECONCILIATION. Ariba P-Card Reconciliation provides support
for the use of P-Cards, which are credit cards designed specifically for
business procurement. P-Cards can be allocated to a given user or an accounting
entity. Electronic P-Card statements from financial institutions can be read
automatically by Ariba ORMS and reconciled against purchases made, flagging any
exceptions or inconsistencies.
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ARIBA ORMS ENTERPRISE ADAPTERS
Ariba ORMS enterprise adapters are designed specifically to connect to or
integrate with leading finance, human resource management and enterprise
resource and planning systems. Integration refers to the ability of Ariba ORMS
adapters to exchange information with an organization's enterprise systems,
eliminating the need for manual transfer of critical information from Ariba ORMS
to these systems. Ariba ORMS enterprise adapters can integrate with standard
implementations of these systems or can be configured to integrate with custom
installations of the enterprise system. These adapters enable a single Ariba
ORMS installation to integrate with multiple enterprise applications
simultaneously.
ARIBA SAP ADAPTER. Ariba SAP Adapter provides real-time and scheduled
integration with SAP applications through standard programming interfaces for
personnel, accounting, distribution, supplier and financial information.
ARIBA PEOPLESOFT ADAPTER. Ariba PeopleSoft Adapter allows real-time and
scheduled integration with PeopleSoft finance, distribution and human resources
management systems through PeopleSoft's message agent for administrative,
personnel, accounting, distribution, supplier and financial information.
ARIBA ORACLE ADAPTER. Ariba Oracle Adapter allows real-time and scheduled
integration with Oracle applications for personnel, accounting, distribution,
supplier and financial information.
ARIBA AUTHENTICATION ADAPTER. Ariba Authentication Adapter provides
integration with standard user authentication and directory services such as
LDAP and Microsoft's Active Directory.
ARIBA GENERAL API ADAPTER. Ariba General API Adapter provides integration
with existing and legacy enterprise systems to interface information with Ariba
ORMS on a real-time or scheduled basis.
Customers who purchase our software products receive a server capacity
license, one or more of the Ariba ORMS modules and adapters to interface with
enterprise financial and human resource systems. The license fee for the server
capacity license is based on the customer's annual volume of line items of
purchasing transactions. The license fees for the software modules and adapters
consist of individual prices for each module or adapter.
The volume licensing of the server capacity allows customers to scale the
total cost of their purchase of the Ariba ORMS system to their needs. The server
capacity license entitles customers to execute the licensed volume of line items
of purchasing transactions during any annual period following their purchase of
the server license. Ariba's customers generally purchase estimated server
capacity at the time of the purchase of the server license. Following the
initial implementation of Ariba ORMS, and based on the reporting and analysis
tools available through Ariba ORMS, our customers are able to understand their
annual transaction volume more fully. Customers who exceed their estimated
volume can purchase additional server capacity. However, there are no recurring
annual license fees.
THE ARIBA NETWORK
The Ariba Network is an Internet-based corporate resource commerce network
designed to provide access to large amounts of supplier product information and
to enable electronic commerce transactions over the Internet. The Ariba Network
bridges buyer and supplier networks on the Internet and offers electronic
payment, catalog and content management, order transaction routing and multi-
protocol support for numerous electronic commerce standards.
Our multi-protocol network allows buyers to send transactions from Ariba
ORMS in one standard format; it then converts the order into the supplier's
preferred transaction format, such as CXML (Commerce eXtensible Markup
Language), a format used on the Internet to describe commerce data
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and documents, or EDI (Electronic Data Interchange), a format used to exchange
data and documents electronically. This feature eliminates the need for a single
standard for electronic commerce and gives suppliers the freedom to transact in
their preferred protocols.
The Ariba Network also allows suppliers to utilize their existing electronic
commerce systems to provide information about their products and services.
Suppliers can send electronic catalogs through standard formats such as CIF
(Catalog Interchange Format), a format commonly used to transfer catalog
information electronically, and CXML. In addition, buyers can link to a
supplier's web site using a technology called CXML Punch-out. CXML Punch-out
allows a buyer to select a product utilizing a supplier's web site while keeping
the purchasing process within our Ariba ORMS system for internal approval,
accounting and administrative controls. This feature is particularly useful for
suppliers with robust web sites, electronic product configuration systems and
large product catalogs. In addition, suppliers can take advantage of their
existing web-based catalog capabilities to differentiate and market their goods
and services.
The key components of the Ariba Network are:
OPEN STANDARDS MULTI-PROTOCOL TRANSACTION NETWORK. The Ariba Network
automatically routes and translates transactions between buyers and suppliers
using most major electronic commerce standards, including: XML; CXML; Internet
EDI; VAN EDI (Value Added Networks for EDI); a subset of the OBI standard (Open
Buying on the Internet), a protocol for buying goods and services on the
Internet; HTML (Hyper-Text Markup Language), a format commonly used to define
content for web pages; e-mail; auto-fax and CIF. This enables buyers to conduct
business with suppliers independent of the type of electronic commerce systems
used by the supplier.
WEB-BASED CONTENT ACCESS AND INDEXING. The Ariba Network uses a scalable
approach for content management. This approach employs indexing, rather than
content aggregation, to connect buying organizations using Ariba ORMS to
suppliers' existing web-based catalogs. This indexing approach eliminates the
need to aggregate content in a central repository, yet provides robust and
comprehensive searching tools to buyers. In addition, the Ariba Network allows
suppliers to take advantage of existing electronic commerce web-based catalogs
through CIF, CXML and CXML Punch-out.
SUPPLIER SELF-MANAGEMENT AND REGISTRATION. To conduct commerce with all
buying organizations using Ariba ORMS, suppliers need only to register once and
continue to manage their relationships online, in their preferred transaction
standards and configurations without the need for additional software.
NEWS, INFORMATION AND SERVICES. The Ariba Network provides news,
information and services of interest to business buyers and suppliers such as
sourcing, supplier, financial and industry information.
The Ariba Network is designed for high-performance databases and
multi-processing hardware and utilizes a multi-server configuration to allow
workloads to be shared across multiple servers and the site to maintain
availability of online service. We have entered into a relationship with a third
party who has provided hardware to us for the Ariba Network. This network and
platform infrastructure consists of the computer and communications equipment
and software that allow buyers and suppliers to exchange information over the
Ariba Network.
Although we expect to derive a substantial portion of our revenue from the
Ariba Network in the future, we are still developing our pricing, expense and
revenue model for the services associated with our network. If we are unable to
successfully establish a pricing, expense and revenue model acceptable to our
customers, the Ariba Network may not be commercially successful.
11
STRATEGIC RELATIONSHIPS
To ensure that we deliver a comprehensive solution to our customers, we have
established strategic relationships with organizations in four general
categories: hardware platforms; software platforms; electronic commerce; and
systems integrators. Our hardware partners include Cisco Systems, Hewlett-
Packard and Sun Microsystems. These relationships help ensure the reliability,
scalability and performance of the Ariba solution on these platforms. We have
entered into a relationship with a third party who has provided hardware to us
for the Ariba Network. This network and platform infrastructure consists of the
computer and communications equipment and software that allow buyers and
suppliers to exchange information over the Ariba Network. Our electronic
commerce partners include American Express, Sterling Commerce and Visa
International.
We have system integrator relationships with Andersen Consulting, Chicago
Consulting Partners, Deloitte & Touche, EC Soft, Ernst & Young,
PricewaterhouseCoopers, Cambridge Technology Partners, Computer Sciences
Corporation, Core Technologies, SRA International, Tier Technologies and TSA
Associates. These system integrators implement our products and often assist us
with sales lead generation. We have certified and trained consultants in these
organizations for the implementation and operation of our products.
We rely, and expect to increasingly rely, on a number of third parties to
implement, support and recommend our products during the evaluation stage of a
customer's purchase process. If we are unable to maintain or increase the number
and quality of our relationships with providers that recommend, implement or
support operating resources management systems, our business will be seriously
harmed. A number of our competitors, including Oracle, SAP and PeopleSoft, have
significantly more established relationships with such providers and, as a
result, these firms may be more likely to recommend competitors' products and
services rather than our products and services. Furthermore, it is possible that
our current implementation partners, many of which have significantly greater
financial, technical, marketing and other resources than we have, could begin to
market software products and services that compete with our products and
services.
SALES AND IMPLEMENTATION
We sell our software primarily through our worldwide direct sales
organization. As of September 30, 1999, our direct sales force consisted of 111
sales professionals located in 17 domestic locations and offices in Canada,
Australia, Belgium, Germany, Japan, The Netherlands, Sweden, Switzerland and the
United Kingdom. Application specialists that provide pre-sales support to
potential customers on product information and deployment capabilities
complement our direct sales force. We plan to expand our direct sales force.
During our sales process, we typically approach senior executive management
teams including the chief financial officer, chief information officer and chief
executive officer of our potential customers. We utilize sales teams consisting
of both sales and technical professionals who work with our strategic partners
to create organization-specific proposals, presentations and demonstrations that
address the specific needs of each potential customer.
Ariba provides professional services to augment the implementation efforts
of customers and systems integrators. This organization provides professional
services on the strategy, methodology and technical implementation of Ariba
ORMS. As of September 30, 1999, our professional services organization consisted
of 68 employees.
We believe that strategic partnerships will assist us in gaining broad
market acceptance as well as enhance our marketing, sales and distribution
capabilities. We have therefore developed close relationships with a number of
strategic integrators and technology providers. These companies have
12
worked with us and participated in joint sales calls to several of our large
accounts. See "-Strategic Relationships."
MARKETING
We focus our marketing efforts toward educating our target market,
generating new sales opportunities, and creating awareness for our
business-to-business electronic commerce solutions. We conduct a variety of
marketing programs worldwide to educate our target market. We have engaged in
marketing activities such as business seminars, trade shows, press relations and
industry analyst programs and advisory councils.
Our marketing organization also serves an integral role in acquiring,
organizing and prioritizing customer and industry feedback in order to help
provide product direction to our development organizations. We formalized this
customer-driven approach by establishing advisory council meetings, made up of
numerous industry experts, to provide forums for discussing customer needs and
requirements. One of our most recent advisory council meetings was attended by
over 1400 people, including procurement, information technology and finance
executives. In addition to providing information to prospective customers,
advisory council meetings provide a useful forum in which to share information,
test product concepts and collect data on customer and industry needs. We have
also augmented advisory council meetings with a detailed product management
process that surveys customer and market needs to predict and prioritize future
customer requirements. We also have marketing relationships with Andersen
Consulting, Cisco Systems, Hewlett-Packard, Sun Microsystems and Visa
International. These relationships provide collaborative resources to help
extend the reach of our presence in the marketplace. We intend to continue to
pursue these programs in the future.
CUSTOMER SERVICE, TRAINING AND SUPPORT
We believe that customer satisfaction is essential for our long-term success
and offer comprehensive customer assistance programs. Our technical support
provides dependable and timely resolution of customer technical inquiries and is
available to clients by telephone, over the web or by electronic mail. We use a
customer service automation system to track each customer inquiry until it is
resolved. Our education services group delivers education and training to our
clients and partners. We offer a comprehensive series of classes to provide the
knowledge and skills to successfully deploy, use and maintain our products and
solutions. These courses focus on the technical aspects of our products as well
as real-world business issues and processes. All of our classes include lecture,
demonstration, discussion and hands-on use of our solutions. Classes are held
regularly in our training facilities at our headquarters in Mountain View,
California.
RESEARCH AND DEVELOPMENT
We originally introduced Ariba ORMS in May 1997 and have released a number
of product enhancements in five subsequent major releases. We began to operate
the Ariba Network in April 1999 and continue to provide enhancements to this
Internet platform on an ongoing basis. Research and development expenses were
$11.6 million, $4.5 million and $1.9 million for the fiscal years ended
September 30, 1999, 1998 and 1997, respectively.
Our research and development operations are divided into two organizations,
one focusing on Ariba ORMS and the other focusing on the Ariba Network. Our
Ariba ORMS organization has eight teams that include server and infrastructure
development, user interface and application design, tools development,
enterprise integration, quality assurance, documentation, release management and
advanced development. The Ariba Network organization has five teams that include
Internet applications and design, platform and infrastructure engineering,
operations, quality assurance and
13
documentation. Both the Ariba ORMS and the Ariba Network organizations regularly
share resources and collaborate on code development, quality assurance and
documentation.
We believe our software and Internet applications teams and core
technologies represent a significant competitive advantage. The software and
Internet applications development organizations include a number of key members
from past engineering organizations that have developed Internet applications
and services, and have extensive experience with Java programming. We believe a
technically skilled and highly productive development organization is a key
component for the success of new product offerings. We must attract and retain
highly qualified employees to further our research and development efforts. Our
business could be seriously harmed if we are not able to hire and retain a
sufficient number of these individuals.
We cannot be sure that existing and future development efforts will be
completed within our anticipated schedules or that, if completed, they will have
the features or quality necessary to make them successful in the marketplace.
Further, despite testing by us and by current and potential customers, errors
could be found in our products. We may not be able to successfully correct these
errors in a timely and cost effective manner. If we are not able to develop new
products or enhancements to existing products or corrections on a timely and
cost-effective basis, or if these new products or enhancements do not have the
features or quality necessary to make them successful in the marketplace, our
business will be seriously harmed.
We expect that most of our enhancements to existing and future products will
be developed internally. However, we currently license certain
externally-developed technologies and will continue to evaluate
externally-developed technologies to integrate with our solutions. These
externally developed technologies, if suffering from defects, quality issues or
the lack of product functionality required to make our solutions successful in
the marketplace, may seriously impact and harm our business.
INTERNATIONAL OPERATIONS
The Company has established seven wholly-owned subsidiaries, namely Ariba
Canada, Inc., Ariba U.K. Limited, Ariba Netherlands B.V., Ariba Sweden AB, Ariba
Australia Pty Ltd, Ariba Deutschland GmbH and Ariba Switzerland GmbH/Sarl/Ltd
liab Co., which are located in Canada, the United Kingdom, The Netherlands,
Sweden, Australia, Germany and Switzerland, respectively. Revenue related to our
international operations was $6.7 million, $1.8 million and $0 for the fiscal
years ended September 30, 1999, 1998 and 1997, respectively.
COMPETITION
The market for our solution is intensely competitive, evolving and subject
to rapid technological change. The intensity of competition has increased and is
expected to further increase in the future. This increased competition is likely
to result in price reductions, reduced gross margins and loss of market share,
any one of which could seriously harm our business. Competitors vary in size and
in the scope and breadth of the products and services offered. We have also
increasingly encountered competition with respect to different aspects of our
solution from a variety of vendors including Captura Software, Clarus, Commerce
One, Concur Technologies, Extensity, GE Information Services, Intelysis,
Netscape Communications, a subsidiary of America Online, and TRADEX
Technologies. We also encounter competition from several major enterprise
software developers, such as Oracle, PeopleSoft and SAP. In addition, because
there are relatively low barriers to entry in the operating resource management
software market, we expect additional competition from other established and
emerging companies, as the operational resource management software market
continues to develop and expand.
We believe that the principal competitive factors affecting our market
include a significant base of reference customers, breadth and depth of
solution, critical mass of buyers and suppliers, product
14
quality and performance, customer service, core technology, product features,
ability to implement solutions and value of solution. Although we believe that
our solutions currently compete favorably with respect to these factors, our
market is relatively new and is evolving rapidly. We may not be able to maintain
our competitive position against current and potential competitors, especially
those with significantly greater financial, marketing, service, support,
technical and other resources.
Many of our competitors have longer operating histories, significantly
greater financial, technical, marketing and other resources than us,
significantly greater name recognition and a larger installed base of customers.
In addition, many of our competitors have well-established relationships with
our current and potential customers and have extensive knowledge of our
industry. In the past, we have lost potential customers to competitors for
various reasons, including lower prices and other incentives not matched by us.
In addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to increase the
ability of their products to address customer needs. Accordingly, it is possible
that new competitors or alliances among competitors may emerge and rapidly
acquire significant market share. We also expect that competition will increase
as a result of industry consolidations.
We may not be able to compete successfully against our current and future
competitors.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
We depend on our ability to develop and maintain the proprietary aspects of
our technology. To protect our proprietary technology, we rely primarily on a
combination of contractual provisions, confidentiality procedures, trade
secrets, and patent, copyright and trademark laws.
We license rather than sell Ariba ORMS and require our customers to enter
into license agreements, which impose restrictions on their ability to utilize
the software. In addition, we seek to avoid disclosure of our trade secrets
through a number of means, including but not limited to, requiring those persons
with access to our proprietary information to execute confidentiality agreements
with us and restricting access to our source code. We seek to protect our
software, documentation and other written materials under trade secret and
copyright laws, which afford only limited protection. We cannot assure you that
any of our proprietary rights with respect to the Ariba Network will be viable
or of value in the future since the validity, enforceability and type of
protection of proprietary rights in Internet-related industries are uncertain
and still evolving.
We presently have two U.S. patent applications pending. We also have filed
patent applications in other countries. It is possible that the patents that we
have applied for, if issued, or our potential future patents may be successfully
challenged or that no patents will be issued from our patent applications. It is
also possible that we may not develop proprietary products or technologies that
are patentable, that any patent issued to us may not provide us with any
competitive advantages, or that the patents of others will seriously harm our
ability to do business.
We rely on technology that we license from third parties, including software
that is integrated with internally developed software and used in Ariba ORMS to
perform key functions. For example, we license reporting software from Actuate
and integration software from Tibco. If we are unable to continue to license any
of this software on commercially reasonable terms, we will face delays in
releases of our software until equivalent technology can be identified, licensed
or developed, and integrated into our current product. These delays if they
occur could seriously harm our business.
Ariba and the Ariba logo are registered as trademarks in the United States.
In addition, we have the following trademarks registered in one or more foreign
countries: Ariba, the Ariba logo, the Ariba "boomerang" design, Ariba Network,
ORM, ORMS and Walk-Up UI. We also have filed applications to register these
trademarks in several countries. The above mentioned trademark applications are
15
subject to review by the applicable governmental authority, may be opposed by
private parties, and may not issue.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Policing unauthorized use of our products is
difficult, and while we are unable to determine the extent to which piracy of
our software products exists, software piracy can be expected to be a persistent
problem. In addition, the laws of some foreign countries do not protect our
proprietary rights to as great an extent as do the laws of the United States.
Our means of protecting our proprietary rights may not be adequate and our
competitors may independently develop similar technology, duplicate our products
or design around patents issued to us or our other intellectual property.
There has been a substantial amount of litigation in the software and
Internet industries regarding intellectual property rights. It is possible that
in the future third parties may claim that we or our current or potential future
products infringe their intellectual property. We expect that software product
developers and providers of electronic commerce solutions will increasingly be
subject to infringement claims as the number of products and competitors in our
industry segment grows and the functionality of products in different industry
segments overlaps. Any claims, with or without merit, could be time-consuming,
result in costly litigation, cause product shipment delays or require us to
enter into royalty or licensing agreements. Royalty or licensing agreements, if
required, may not be available on terms acceptable to us or at all, which could
seriously harm our business.
EMPLOYEES
As of September 30, 1999, we had a total of 386 employees, including 98 in
research and development, 140 in sales and marketing, 98 in customer support,
professional services and training, and 50 in administration and finance. Of
these employees, 342 were located in the United States and 44 were located
outside the United States. None of our employees is represented by a collective
bargaining agreement, nor have we experienced any work stoppage. We consider our
relations with our employees to be good.
Our future operating results depend in significant part on the continued
service of our key technical, sales and senior management personnel, none of
whom is bound by an employment agreement. Our future success also depends on our
continuing ability to attract and retain highly qualified technical, sales and
senior management personnel. Competition for these personnel is intense, and we
may not be able to retain our key technical, sales and senior management
personnel or attract these personnel in the future. We have experienced
difficulty in recruiting qualified technical, sales and senior management
personnel, and we expect to experience these difficulties in the future. If we
are unable to hire and retain qualified personnel in the future, this inability
could seriously harm our business.
RISK FACTORS
In addition to other information in this Form 10-K, the following risk
factors should be carefully considered in evaluating Ariba and its business
because such factors currently may have a significant impact on Ariba's
business, operating results and financial condition. As a result of the risk
factors set forth below and elsewhere in this Form 10-K, and the risks discussed
in Ariba's other Securities and Exchange Commission filings, actual results
could differ materially from those projected in any forward-looking statements.
16
ARIBA IS AN EARLY-STAGE COMPANY. OUR LIMITED OPERATING HISTORY MAKES IT
DIFFICULT TO EVALUATE OUR FUTURE PROSPECTS.
Ariba was founded in September 1996 and has a limited operating history. Our
limited operating history makes an evaluation of our future prospects very
difficult. We began shipping our first product, the Ariba Operating Resource
Management System, or Ariba ORMS, in June 1997 and began to operate the Ariba
Network in April 1999. We will encounter risks and difficulties frequently
encountered by early-stage companies in new and rapidly evolving markets. Many
of these risks are described in more detail in this "Risk Factors" section. We
may not successfully address any of these risks. If we do not successfully
address these risks, our business would be seriously harmed.
THE MARKET FOR OUR SOLUTIONS IS AT AN EARLY STAGE. WE NEED A CRITICAL MASS
OF LARGE BUYING ORGANIZATIONS AND THEIR SUPPLIERS TO IMPLEMENT OUR
SOLUTIONS.
The market for Internet-based operating resource applications and services
is at an early stage of development. Our success depends on a significant number
of large buying organizations implementing Ariba products and services. The
implementation of Ariba products by large buying organizations is complex, time
consuming and expensive. In many cases, these organizations must change
established business practices and conduct business in new ways. Our ability to
attract additional customers for our Ariba products and services will depend on
using our existing customers as reference accounts. Unless a critical mass of
large buying organizations and their suppliers join the Ariba Network, our
solutions may not achieve widespread market acceptance and our business would be
seriously harmed.
WE HAVE A HISTORY OF LOSSES AND EXPECT TO INCUR LOSSES IN THE FUTURE.
We incurred net losses of $4.7 million in fiscal 1997, $11.0 million in
fiscal 1998 and $29.3 million in fiscal 1999. We expect to derive substantially
all of our revenues for the foreseeable future from licensing Ariba ORMS.
Although these revenues have grown in recent quarters, we may not be able to
sustain these growth rates. In fact, we may not have any revenue growth, and our
revenues could decline. Over the longer term, we expect to derive revenues from
revenues related to network access and network services, which is based on an
unproven business model. Moreover, we expect to incur significant sales and
marketing, research and development, and general and administrative expenses. In
the future, we expect to incur substantial non-cash costs relating to the
amortization of deferred compensation which will contribute to our net losses.
As of September 30, 1999, we had an aggregate of $24.2 million of deferred
compensation to be amortized. As a result, we expect to incur significant losses
for the foreseeable future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
OUR QUARTERLY OPERATING RESULTS ARE VOLATILE AND DIFFICULT TO PREDICT. IF WE
FAIL TO MEET THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS OR INVESTORS, THE
MARKET PRICE OF OUR COMMON STOCK MAY DECREASE SIGNIFICANTLY.
Our quarterly operating results have varied significantly in the past and
will likely vary significantly in the future. We believe that period-to-period
comparisons of our results of operations are not meaningful and should not be
relied upon as indicators of future performance. Our operating results will
likely fall below the expectations of securities analysts or investors in some
future quarter or quarters. Our failure to meet these expectations would likely
adversely affect the market price of our common stock.
Our quarterly operating results may vary depending on a number of factors,
including:
- Demand for Ariba products and services;
17
- Actions taken by our competitors, including new product introductions and
enhancements;
- Delays or reductions in spending for, or the implementation of,
application software by our potential customers as companies attempt to
stabilize their computer systems prior to January 1, 2000 in order to
reduce the risk of computer system problems associated with the Year 2000;
- Ability to scale our network and operations to support large numbers of
customers, suppliers and transactions;
- Ability to develop, introduce and market new products and enhancements to
our existing products on a timely basis;
- Changes in our pricing policies or those of our competitors;
- Ability to expand our sales and marketing operations, including hiring
additional sales personnel;
- Size and timing of sales of our products and services;
- Success in maintaining and enhancing existing relationships and developing
new relationships with strategic partners, including systems integrators
and other implementation partners;
- Compensation policies that compensate sales personnel based on achieving
annual quotas;
- Ability to control costs;
- Technological changes in our markets;
- Deferrals of customer orders in anticipation of product enhancements or
new products;
- Customer budget cycles and changes in these budget cycles; and
- General economic factors.
Our quarterly revenues are especially subject to fluctuation because they
depend on the sale of a small number of relatively large orders for our Ariba
products and related services. As a result, our quarterly operating results may
fluctuate significantly if we are unable to complete one or more substantial
sales in any given quarter. In some cases, we recognize revenues from product
sales on a percentage of completion basis. Accordingly, our ability to recognize
these revenues is subject to delays associated with our customers' ability to
complete the implementation of Ariba products in a timely manner. In some cases,
we recognize revenues on a subscription basis over the life of the subscriptions
specified in the contract, which is typically 12 to 24 months. Therefore, if we
do not book a sufficient number of large orders in a particular quarter, our
revenues in future periods could be lower than expected. We have not fully
developed our business model for the Ariba Network and related services. As this
business model evolves, the potential for fluctuations in our quarterly results
could increase. Furthermore, our quarterly revenues may be affected
significantly by other revenue recognition policies and procedures. These
policies and procedures may evolve or change over time based on applicable
accounting standards and how these standards are interpreted. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
We plan to increase our operating expenses to expand our sales and marketing
operations, fund greater levels of research and development, develop new
partnerships, make tenant improvements to our new facilities, increase our
professional services and support capabilities and improve our operational and
financial systems. If our revenues do not increase along with these expenses,
our business, operating results and financial condition could be seriously
harmed and net losses in a given quarter could be even larger than expected.
In addition, because our expense levels are relatively fixed in the near
term and are based in part on expectations of our future revenues, any decline
in our revenues to a level that is below our expectations would have a
disproportionately adverse impact on our operating results.
18
IMPLEMENTATION OF OUR ARIBA PRODUCTS BY LARGE CUSTOMERS IS COMPLEX, TIME
CONSUMING AND EXPENSIVE. WE FREQUENTLY EXPERIENCE LONG SALES AND
IMPLEMENTATION CYCLES.
Ariba ORMS is an enterprise-wide solution that must be deployed with many
users within a buying organization. Its implementation by large buying
organizations is complex, time consuming and expensive. In many cases, our
customers must change established business practices and conduct business in new
ways. In addition, they must generally consider a wide range of other issues
before committing to purchase our product, including product benefits, ease of
installation, ability to work with existing computer systems, ability to support
a larger user base, functionality and reliability. Furthermore, because we are
one of the first companies to offer an Internet-based operating resource
management system, many customers will be addressing these issues for the first
time in the context of managing and procuring operating resources. As a result,
we must educate potential customers on the use and benefits of our products and
services. In addition, we believe that the purchase of our products is often
discretionary and generally involves a significant commitment of capital and
other resources by a customer. It frequently takes several months to finalize a
sale and requires approval at a number of management levels within the customer
organization. The implementation and deployment of our products requires a
significant commitment of resources by our customers and third-party and/or our
professional services organizations. Because we target large customers, our
sales cycles range from four to 24 months and average approximately nine months.
BUSINESS-TO-BUSINESS ELECTRONIC COMMERCE PURCHASING NETWORKS, INCLUDING THE
ARIBA NETWORK, ARE AT AN EARLY STAGE OF DEVELOPMENT AND MARKET ACCEPTANCE
We began operating the Ariba Network in April 1999. Broad and timely
acceptance of the Ariba Network, which is critical to our future success, is
subject to a number of significant risks. These risks include:
- Operating resource management and procurement on the Internet is a new
market;
- Our network's ability to support large numbers of buyers and suppliers is
unproven;
- Our need to enhance the interface between our Ariba ORMS product and the
Ariba Network;
- Our need to significantly enhance the features and services of the Ariba
Network to achieve widespread commercial acceptance of our network; and
- Our need to significantly expand our internal resources to support planned
growth of the Ariba Network.
Although we expect to derive a significant portion of our long-term future
revenue from the Ariba Network, we have not yet fully evolved our revenue model
for services associated with the Ariba Network. The revenues associated may be a
combination of transaction and/or annual subscription fees. Examples of such
services might include electronic payment, bid/quote and sourcing, among others.
However, we cannot predict whether these services and other functionality will
be commercially successful or whether they will adversely impact revenues from
our Ariba ORMS products and services. We would be seriously harmed if the Ariba
Network is not commercially successful, particularly if we experience a decline
in the growth or growth rate of revenues from our Ariba ORMS solution.
WE WILL RELY ON THIRD PARTIES TO EXPAND, MANAGE AND MAINTAIN THE COMPUTER
AND COMMUNICATIONS EQUIPMENT AND SOFTWARE NEEDED FOR THE DAY-TO-DAY
OPERATIONS OF THE ARIBA NETWORK.
We will rely on several third parties to provide hardware, software and
services required to expand, manage and maintain the computer and communications
equipment and software needed for the day-to-day operations of the Ariba
Network. Services provided by these parties will include managing
19
the Ariba Network web server, maintaining communications lines and managing
network data centers, which are the locations on our network where data is
stored. If we are unable to contract successfully with third parties for these
services, we would have to perform them ourselves. We may not successfully
obtain or perform these services on a timely and cost effective basis. Since the
installation of the computer and communications equipment and software needed
for the day-to-day operations of the Ariba Network to a significant extent will
be managed by third parties, we will be dependent on those parties to the extent
that they manage, maintain and provide security for it.
20
THE BUSINESS-TO-BUSINESS ELECTRONIC COMMERCE INDUSTRY IS VERY COMPETITIVE,
AND WE FACE INTENSE COMPETITION FROM MANY PARTICIPANTS IN THIS INDUSTRY. IF
WE ARE UNABLE TO COMPETE SUCCESSFULLY, OUR BUSINESS WILL BE SERIOUSLY
HARMED.
The market for our solution is intensely competitive, evolving and subject
to rapid technological change. The intensity of competition has increased and is
expected to further increase in the future. This increased competition is likely
to result in price reductions, reduced gross margins and loss of market share,
any one of which could seriously harm our business. Competitors vary in size and
in the scope and breadth of the products and services offered. We also
increasingly encountered competition with respect to different aspects of our
solution from Captura Software, Clarus, Commerce One, Concur Technologies,
Extensity, GE Information Services, Intellysis, Netscape Communications, a
subsidiary of America Online, and TRADEX Technologies. We also encounter
competition from several major enterprise software developers, such as Oracle,
PeopleSoft and SAP. In addition, because there are relatively low barriers to
entry in the operating resource management software market, we expect additional
competition from other established and emerging companies, as the operational
resource management software market continues to develop and expand. For
example, third parties that currently help implement Ariba ORMS could begin to
market products and services that compete with our own. We could also face
competition from new companies who introduce an Internet-based operating
resource management solution.
Many of our current and potential competitors have longer operating
histories, significantly greater financial, technical, marketing and other
resources than us, significantly greater name recognition and a larger installed
base of customers. In addition, many of our competitors have well-established
relationships with our current and potential customers and have extensive
knowledge of our industry. In the past, we have lost potential customers to
competitors for various reasons, including lower prices and incentives not
matched by us. In addition, current and potential competitors have established
or may establish cooperative relationships among themselves or with third
parties to increase the ability of their products to address customer needs.
Accordingly, it is possible that new competitors or alliances among competitors
may emerge and rapidly acquire significant market share. We also expect that
competition will increase as a result of industry consolidations.
We may not be able to compete successfully against our current and future
competitors.
WE EXPECT REVENUES FROM ARIBA ORMS TO BE CONCENTRATED IN A RELATIVELY SMALL
NUMBER OF CUSTOMERS.
In fiscal 1999, one customer accounted for more than 10% of our total
revenues and, in fiscal 1998, five customers accounted for more than 10% of our
total revenues. We may continue to derive a significant portion of our revenues
from a relatively small number of customers in the future. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
WE RELY ON THIRD PARTIES TO IMPLEMENT ARIBA PRODUCTS.
We rely, and expect to rely increasingly, on a number of third parties to
implement Ariba ORMS at customer sites. If we are unable to establish and
maintain effective, long-term relationships with our implementation providers,
or if these providers do not meet the needs or expectations of our customers,
our business would be seriously harmed. This strategy will also require that we
develop new relationships with additional third-party implementation providers
to provide these services if the number of Ariba ORMS implementations continues
to increase. Our current implementation partners are not contractually required
to continue to help implement Ariba ORMS. As a result of the limited resources
and capacities of many third-party implementation providers, we may be unable to
establish or maintain relationships with third parties having sufficient
resources to provide the necessary implementation services to support our needs.
If these resources are unavailable, we will be required to
20
provide these services internally, which would significantly limit our ability
to meet our customers' implementation needs. A number of our competitors,
including Oracle, SAP and PeopleSoft, have significantly more well-established
relationships with these third parties and, as a result, these third parties may
be more likely to recommend competitors' products and services rather than our
own. In addition, we cannot control the level and quality of service provided by
our current and future implementation partners.
WE DEPEND ON SUPPLIERS FOR THE SUCCESS OF THE ARIBA NETWORK.
We expect to depend on suppliers joining the Ariba Network. Any failure of
suppliers to join the Ariba Network in sufficient and increasing numbers would
make our network less attractive to buyers and consequently other suppliers. In
order to provide buyers on the Ariba Network an organized method for accessing
operating resources, we rely on suppliers to maintain web-based catalogs,
indexing services and other content aggregation tools. Our inability to access
and index these catalogs and services would result in our customers having fewer
products and services available to them through our solution, which would
adversely affect the perceived usefulness of the Ariba Network.
WE DEPEND ON THE INTRODUCTION OF NEW VERSIONS OF ARIBA ORMS AND ON ENHANCING
THE FUNCTIONALITY AND SERVICES OFFERED THROUGH THE ARIBA NETWORK.
If we are unable to develop new software products or enhancements to our
existing products on a timely and cost-effective basis, or if new products or
enhancements do not achieve market acceptance, our business would be seriously
harmed. The life cycles of our products are difficult to predict because the
market for our products is new and emerging, and is characterized by rapid
technological change, changing customer needs and evolving industry standards.
The introduction of products employing new technologies and emerging industry
standards could render our existing products or services obsolete and
unmarketable.
To be successful, our products and services must keep pace with
technological developments and emerging industry standards, address the
ever-changing and increasingly sophisticated needs of our customers and achieve
market acceptance.
In developing new products and services, we may:
- Fail to develop and market products that respond to technological changes
or evolving industry standards in a timely or cost-effective manner;
- Encounter products, capabilities or technologies developed by others that
render our products and services obsolete or noncompetitive or that
shorten the life cycles of our existing products and services;
- Experience difficulties that could delay or prevent the successful
development, introduction and marketing of these new products and
services; or
- Fail to develop new products and services that adequately meet the
requirements of the marketplace or achieve market acceptance.
IF WE FAIL TO RELEASE OUR PRODUCTS IN A TIMELY MANNER, OR IF OUR PRODUCTS DO
NOT ACHIEVE MARKET ACCEPTANCE, OUR BUSINESS WOULD BE SERIOUSLY HARMED.
We may fail to introduce or deliver new potential offerings on a timely
basis or at all. In the past, we have experienced delays in the commencement of
commercial shipments of our new releases. If new releases or potential new
products are delayed or do not achieve market acceptance, we could experience a
delay or loss of revenues and customer dissatisfaction. Customers may delay
purchases of
21
Ariba ORMS in anticipation of future releases. If customers defer material
orders of Ariba ORMS in anticipation of new releases or new product
introductions, our business would be seriously harmed.
NEW VERSIONS AND RELEASES OF ARIBA ORMS MAY CONTAIN ERRORS OR DEFECTS.
Ariba ORMS is complex and, accordingly, may contain undetected errors or
failures when first introduced or as new versions are released. This may result
in loss of, or delay in, market acceptance of our products. We have in the past
discovered software errors in our new releases and new products after their
introduction. In the past, we discovered problems with respect to the ability of
software written in Java to scale to allow for large numbers of concurrent users
of Ariba ORMS. We have experienced delays in release, lost revenues and customer
frustration during the period required to correct these errors. We may in the
future discover errors, including Year 2000 errors and additional scalability
limitations, in new releases or new products after the commencement of
commercial shipments. In addition, a delay in the commercial release of the next
version of Ariba ORMS could also slow the growth of the Ariba Network.
WE COULD BE SUBJECT TO POTENTIAL PRODUCT LIABILITY CLAIMS AND THIRD PARTY
LIABILITY CLAIMS RELATED TO PRODUCTS AND SERVICES PURCHASED THROUGH THE
ARIBA NETWORK.
Our customers use our products and services to manage their operating
resources. Any errors, defects or other performance problems could result in
financial or other damages to our customers. A product liability claim brought
against us, even if not successful, would likely be time consuming and costly
and could seriously harm our business. Although our customer license agreements
typically contain provisions designed to limit our exposure to product liability
claims, existing or future laws or unfavorable judicial decisions could negate
these limitation of liability provisions.
The Ariba Network provides our customers with indices of products that can
be purchased from suppliers participating in the Ariba Network. The law relating
to the liability of providers of listings of products and services sold over the
Internet for errors, defects or other performance problems with respect to those
products and services is currently unsettled. We will not pre-screen the types
of products and services that may be purchased through the Ariba Network. Some
of these products and services could contain performance or other problems. We
may not successfully avoid civil or criminal liability for problems related to
the products and services sold through the Ariba Network. Any claims or
litigation could still require expenditures in terms of management time and
other resources to defend ourselves. Liability of this sort could require us to
implement measures to reduce our exposure to this liability, which may require
us, among other things, to expend substantial resources or to discontinue
certain product or service offerings or to take precautions to ensure that
certain products and services are not available through the Ariba Network.
OUR SUCCESS DEPENDS ON RETAINING OUR CURRENT KEY PERSONNEL AND ATTRACTING
ADDITIONAL KEY PERSONNEL, PARTICULARLY IN THE AREAS OF DIRECT SALES AND
RESEARCH AND DEVELOPMENT.
Our future performance depends on the continued service of our senior
management, product development and sales personnel, in particular Keith Krach,
our President and Chief Executive Officer. None of these persons, including
Mr. Krach, is bound by an employment agreement, and we do not carry key person
life insurance. The loss of the services of one or more of our key personnel
could seriously harm our business. Our future success also depends on our
continuing ability to attract, hire, train and retain a substantial number of
highly skilled managerial, technical, sales, marketing and customer support
personnel. We are particularly dependent on hiring additional personnel to
increase our direct sales and research and development organizations. In
addition, new hires frequently require extensive training before they achieve
desired levels of productivity. Competition for qualified personnel
22
is intense, and we may fail to retain our key employees or to attract or retain
other highly qualified personnel.
IF THE PROTECTION OF OUR INTELLECTUAL PROPERTY IS INADEQUATE, OUR
COMPETITORS MAY GAIN ACCESS TO OUR TECHNOLOGY, AND WE MAY LOSE CUSTOMERS.
We depend on our ability to develop and maintain the proprietary aspects of
our technology. To protect our proprietary technology, we rely primarily on a
combination of contractual provisions, confidentiality procedures, trade
secrets, and patent, copyright and trademark laws.
We license rather than sell Ariba ORMS and require our customers to enter
into license agreements, which impose restrictions on their ability to utilize
the software. In addition, we seek to avoid disclosure of our trade secrets
through a number of means, including but not limited to, requiring those persons
with access to our proprietary information to execute confidentiality agreements
with us and restricting access to our source code. We seek to protect our
software, documentation and other written materials under trade secret and
copyright laws, which afford only limited protection. We cannot assure you that
any of our proprietary rights with respect to the Ariba Network will be viable
or of value in the future because the validity, enforceability and type of
protection of proprietary rights in Internet-related industries are uncertain
and still evolving.
We have no patents, and none may be issued from our existing patent
applications. Our future patents, if any, may be successfully challenged or may
not provide us with any competitive advantages. We may not develop proprietary
products or technologies that are patentable.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Policing unauthorized use of our products is
difficult, and while we are unable to determine the extent to which piracy of
our software products exists, software piracy can be expected to be a persistent
problem. In addition, the laws of some foreign countries do not protect our
proprietary rights to as great an extent as do the laws of the United States.
Our means of protecting our proprietary rights may not be adequate and our
competitors may independently develop similar technology, duplicate our products
or design around patents issued to us or our other intellectual property.
There has been a substantial amount of litigation in the software industry
and the Internet industry regarding intellectual property rights. It is possible
that in the future, third parties may claim that we or our current or potential
future products infringe their intellectual property. We expect that software
product developers and providers of electronic commerce solutions will
increasingly be subject to infringement claims as the number of products and
competitors in our industry segment grows and the functionality of products in
different industry segments overlaps. Any claims, with or without merit, could
be time-consuming, result in costly litigation, cause product shipment delays or
require us to enter into royalty or licensing agreements. Royalty or licensing
agreements, if required, may not be available on terms acceptable to us or at
all, which could seriously harm our business.
We must now, and may in the future have to, license or otherwise obtain
access to intellectual property of third parties. For example, we are currently
dependent on developers' licenses from enterprise resource planning, database,
human resource and other system software vendors in order to ensure compliance
of our Ariba ORMS products with their management systems. We may not be able to
obtain any required third party intellectual property in the future.
23
IN ORDER TO MANAGE OUR GROWTH AND EXPANSION, WE WILL NEED TO IMPROVE AND
IMPLEMENT NEW SYSTEMS, PROCEDURES AND CONTROLS.
We have recently experienced a period of significant expansion of our
operations that has placed a significant strain upon our management systems and
resources. If we are unable to manage our growth and expansion, our business
will be seriously harmed. In addition, we have recently hired a significant
number of employees and plan to further increase our total headcount. We also
plan to expand the geographic scope of our customer base and operations. This
expansion has resulted and will continue to result in substantial demands on our
management resources. Our ability to compete effectively and to manage future
expansion of our operations, if any, will require us to continue to improve our
financial and management controls, reporting systems and procedures on a timely
basis, and expand, train and manage our employee work force. We have implemented
new systems to manage our financial and human resources infrastructure. We may
find that this system, our personnel, procedures and controls may be inadequate
to support our future operations.
OUR BUSINESS COULD BE ADVERSELY AFFECTED IF THE SYSTEMS WE USE ARE NOT YEAR
2000 COMPLIANT OR IF OUR CUSTOMERS OR POTENTIAL CUSTOMERS ALTER THEIR
PURCHASING PATTERNS AS A RESULT OF THE YEAR 2000 PROBLEM.
The risks posed by Year 2000 issues could adversely affect our business in a
number of significant ways. Although we believe that our internally developed
systems and technology are Year 2000 compliant, our information technology
systems nevertheless could be substantially impaired or cease to operate due to
Year 2000 problems. Additionally, we rely on information technology supplied by
third parties, and our participating sellers also are heavily dependent on
information technology systems and on their own third-party vendor systems. Year
2000 problems experienced by us or any of these third parties could materially
adversely affect our business. Additionally, the Internet could face serious
disruptions arising from the Year 2000 problem.
Many of our customers and potential customers have implemented policies that
prohibit or strongly discourage making changes or additions to their internal
computer systems until after January 1, 2000. We will experience fewer sales if
potential customers who might otherwise purchase our Ariba products delay the
purchase and implementation of Ariba products until after January 1, 2000 in an
effort to stabilize their internal computer systems in order to cope with the
Year 2000 problem or because their information technology budgets have been
diverted to address Year 2000 issues. If our potential customers delay
purchasing or implementing Ariba products in preparation for the Year 2000
problem, our business would be seriously harmed. In addition, because the
revenues from some of our customers are recognized on a percentage of completion
basis, any implementation delays by these customers caused by their needs to
address Year 2000 issues will defer our ability to recognize this revenue.
We cannot guarantee that any of our participating sellers or other Internet
vendors will be Year 2000 compliant in a timely manner, or that there will not
be significant interoperability problems among information technology systems.
We also cannot guarantee that buyers and suppliers will be able to utilize the
Ariba Network without serious disruptions arising from the Year 2000 problem.
Given the pervasive nature of the Year 2000 problem, we cannot guarantee that
disruptions in other industries and market segments will not adversely affect
our business. Moreover, the costs related to Year 2000 compliance, which thus
far have not been material, could ultimately be significant. In the event that
we experience disruptions as a result of the Year 2000 problem, our business
could be seriously harmed.
24
IF WE EXPAND OUR INTERNATIONAL SALES AND MARKETING ACTIVITIES, OUR BUSINESS
WILL BE SUSCEPTIBLE TO NUMEROUS RISKS ASSOCIATED WITH INTERNATIONAL
OPERATIONS.
To be successful, we believe we must expand our international operations and
hire additional international personnel. Therefore, we expect to commit
significant resources to expand our international sales and marketing
activities. If successful, we will be subject to a number of risks associated
with international business activities. These risks generally include:
- Currency exchange rate fluctuations;
- Seasonal fluctuations in purchasing patterns;
- Unexpected changes in regulatory requirements;
- Tariffs, export controls and other trade barriers;
- Longer accounts receivable payment cycles and difficulties in collecting
accounts receivable;
- Difficulties in managing and staffing international operations;
- Potentially adverse tax consequences, including restrictions on the
repatriation of earnings;
- The burdens of complying with a wide variety of foreign laws;
- The risks related to the recent global economic turbulence and adverse
economic circumstances in Asia; and
- Political instability.
WE MUST INTEGRATE RECENT ACQUISITIONS, AND WE MAY NEED TO MAKE ADDITIONAL
FUTURE ACQUISITIONS TO REMAIN COMPETITIVE. OUR BUSINESS COULD BE ADVERSELY
AFFECTED AS A RESULT OF THESE ACQUISITIONS.
On November 15, 1999, we entered into a definitive agreement to acquire
TradingDynamics, a leading provider of business-to-business Internet trading
applications. On December 16, 1999, we entered into a definitive agreement to
acquire TRADEX Technologies, a leading provider of solutions for Net Markets.
These acquisitions are expected to be completed in the quarter ending March 31,
2000 and the quarter ending June 30, 2000, respectively, subject to the
satisfaction of standard closing conditions. We may find it necessary or
desirable to acquire additional businesses, products, or technologies. If we
identify an appropriate acquisition candidate, we may not be able to negotiate
the terms of the acquisition successfully, finance the acquisition, or integrate
the acquired business, products or technologies into our existing business and
operations. If our efforts are not successful, it could seriously harm our
business.
Completing the acquisitions of TradingDynamics and TRADEX Technologies, or a
potential future acquisition and integrating such acquisitions will cause
significant diversions of management time and resources. In particular, the
acquisition of TRADEX Technologies will require the integration of two large,
geographically distant organizations. We will issue shares of our common stock
worth approximately $500 million and $2 billion, respectively, based on current
trading ranges, as consideration to TradingDynamics shareholders and TRADEX
Technologies stockholders, which will result in immediate and substantial
dilution to our existing stockholders. Similarly, if we consummate one or more
significant future acquisitions in which the consideration consists of stock or
other securities, our equity could be significantly diluted. If we were to
proceed with one or more significant future acquisitions in which the
consideration included cash, we could be required to use a substantial portion
of our available cash, to consummate any acquisition. Financing for future
acquisitions may not be available on favorable terms, or at all. In addition, in
connection with our pending and future
25
acquisitions we may be required to amortize significant amounts of goodwill and
other intangible assets, which will negatively effect the operating income of
our business.
IN THE FUTURE WE MAY NEED TO RAISE ADDITIONAL CAPITAL IN ORDER TO REMAIN
COMPETITIVE IN THE BUSINESS-TO-BUSINESS ELECTRONIC COMMERCE INDUSTRY. THIS
CAPITAL MAY NOT BE AVAILABLE ON ACCEPTABLE TERMS, IF AT ALL.
We expect that the net proceeds from our initial public stock offering will
be sufficient to meet our working capital and capital expenditure needs for at
least the next 12 months. After that, we may need to raise additional funds and
we cannot be certain that we will be able to obtain additional financing on
favorable terms, if at all. If we cannot raise funds on acceptable terms, if and
when needed, we may not be able to develop or enhance our products and services,
take advantage of future opportunities, grow our business or respond to
competitive pressures or unanticipated requirements, which could seriously harm
our business.
OUR STOCK PRICE IS VOLATILE.
The market price of the common stock may decrease significantly in response
to the following factors, some of which are beyond our control:
- Variations in our quarterly operating results;
- Changes in securities analysts' estimates of our financial performance;
- Announcements that our revenue or income are below analysts' expectations;
- Changes in analysts' estimates of our performance or industry performance;
- Changes in market valuations of similar companies;
- Sales of large blocks of our common stock;
- Announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
- Loss of a major customer or failure to complete significant license
transactions;
- Additions or departures of key personnel; and
- Fluctuations in stock market price and volume, which are particularly
common among highly volatile securities of software and Internet-based
companies.
WE ARE AT RISK OF SECURITIES CLASS ACTION LITIGATION DUE TO OUR STOCK PRICE
VOLATILITY.
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. We may in the future be the target of similar litigation. Securities
litigation could result in substantial costs and divert management's attention
and resources, which could seriously harm our business.
WE HAVE IMPLEMENTED CERTAIN ANTI-TAKEOVER PROVISIONS THAT COULD MAKE IT MORE
DIFFICULT FOR A THIRD PARTY TO ACQUIRE US.
Provisions of our amended and restated certificate of incorporation and
bylaws, as well as provisions of Delaware law, could make it more difficult for
a third party to acquire us, even if doing so would be beneficial to our
stockholders.
26
WE DEPEND ON INCREASING USE OF THE INTERNET AND ON THE GROWTH OF ELECTRONIC
COMMERCE. IF THE USE OF THE INTERNET AND ELECTRONIC COMMERCE DO NOT GROW AS
ANTICIPATED, OUR BUSINESS WILL BE SERIOUSLY HARMED.
The Ariba Network depends on the increased acceptance and use of the
Internet as a medium of commerce. Rapid growth in the use of the Internet is a
recent phenomenon. As a result, acceptance and use may not continue to develop
at historical rates and a sufficiently broad base of business customers may not
adopt or continue to use the Internet as a medium of commerce. Demand and market
acceptance for recently introduced services and products over the Internet are
subject to a high level of uncertainty, and there exist few proven services and
products.
Our business would be seriously harmed if:
- Use of the Internet and other online services does not continue to
increase or increases more slowly than expected;
- The technology underlying the Internet and other online services does not
effectively support any expansion that may occur; or
- The Internet and other online services do not create a viable commercial
marketplace, inhibiting the development of electronic commerce and
reducing the need for our products and services.
WE DEPEND ON THE ACCEPTANCE OF THE INTERNET AS A COMMERCIAL MARKETPLACE AND
THIS ACCEPTANCE MAY NOT OCCUR ON A TIMELY BASIS.
The Internet may not be accepted as a viable long-term commercial
marketplace for a number of reasons. These include:
- Potentially inadequate development of the necessary communication and
computer network technology, particularly if rapid growth of the Internet
continues;
- Delayed development of enabling technologies and performance improvements;
- Delays in the development or adoption of new standards and protocols; and
- Increased governmental regulation.
SECURITY RISKS AND CONCERNS MAY DETER THE USE OF THE INTERNET FOR CONDUCTING
ELECTRONIC COMMERCE.
A significant barrier to electronic commerce and communications is the
secure transmission of confidential information over public networks. Advances
in computer capabilities, new discoveries in the field of cryptography or other
events or developments could result in compromises or breaches of our security
systems or those of other web sites to protect proprietary information. If any
well-publicized compromises of security were to occur, it could have the effect
of substantially reducing the use of the web for commerce and communications.
Anyone who circumvents our security measures could misappropriate proprietary
information or cause interruptions in our services or operations. The Internet
is a public network, and data is sent over this network from many sources. In
the past, computer viruses, software programs that disable or impair computers,
have been distributed and have rapidly spread over the Internet. Computer
viruses could be introduced into our systems or those of our customers or
suppliers, which could disrupt the Ariba Network or make it inaccessible to
customers or suppliers. We may be required to expend significant capital and
other resources to protect against the threat of security breaches or to
alleviate problems caused by breaches. To the extent that our activities may
involve the storage and transmission of proprietary information, such as credit
card numbers, security breaches, could expose us to a risk of loss or litigation
and possible liability. Our
27
security measures may be inadequate to prevent security breaches, and our
business would be harmed if we do not prevent them.
THE ARIBA NETWORK MAY EXPERIENCE PERFORMANCE PROBLEMS OR DELAYS AS A RESULT
OF HIGH VOLUMES OF TRAFFIC.
If the volume of traffic on the web site for the Ariba Network increases,
the Ariba Network may in the future experience slower response times or other
problems. In addition, users will depend on Internet service providers,
telecommunications companies and the efficient operation of their computer
networks and other computer equipment for access to the Ariba Network. Each of
these has experienced significant outages in the past and could experience
outages, delays and other difficulties due to system failures unrelated to our
systems. Any delays in response time or performance problems could cause users
of the Ariba Network to perceive this service as not functioning properly and
therefore cause them to use other methods to procure their operating resources.
INCREASING GOVERNMENT REGULATION COULD LIMIT THE MARKET FOR, OR IMPOSE SALES
AND OTHER TAXES ON THE SALE OF, OUR PRODUCTS AND SERVICES OR ON PRODUCTS AND
SERVICES PURCHASED THROUGH THE ARIBA NETWORK.
As Internet commerce evolves, we expect that federal, state or foreign
agencies will adopt regulations covering issues such as user privacy, pricing,
content and quality of products and services. It is possible that legislation
could expose companies involved in electronic commerce to liability, which could
limit the growth of electronic commerce generally. Legislation could dampen the
growth in Internet usage and decrease its acceptance as a communications and
commercial medium. If enacted, these laws, rules or regulations could limit the
market for our products and services.
We do not collect sales or other similar taxes in respect of goods and
services purchased through the Ariba Network. However, one or more states may
seek to impose sales tax collection obligations on out-of-state companies like
us that engage in or facilitate electronic commerce. A number of proposals have
been made at the state and local level that would impose additional taxes on the
sale of goods and services over the Internet. These proposals, if adopted, could
substantially impair the growth of electronic commerce and could adversely
affect our opportunity to derive financial benefit from such activities.
Moreover, a successful assertion by one or more states or any foreign country
that we should collect sales or other taxes on the exchange of goods and
services through the Ariba Network could seriously harm our business.
Legislation limiting the ability of the states to impose taxes on
Internet-based transactions has been proposed in the U.S. Congress. This
legislation could ultimately be enacted into law or this legislation could
contain a limited time period in which this tax moratorium will apply. In the
event that the tax moratorium is imposed for a limited time period, legislation
could be renewed at the end of this period. Failure to enact or renew this
legislation could allow various states to impose taxes on electronic commerce,
and the imposition of these taxes could seriously harm our business.
28
ITEM 2. PROPERTIES
Our principal sales, marketing, research, development, and administrative
offices occupy approximately 130,000 square feet in Mountain View, California.
Our sublease for this facility expires in October 2006. We are sub-subleasing
approximately 19,000 square feet of the Mountain View facility through
December 1999. Previously our principal sales, marketing, research, development,
and administrative offices occupied approximately 33,000 square feet in
Sunnyvale, California under a lease that expires on August 31, 2004. We are
currently subleasing the Sunnyvale facility. In addition we also lease sales and
support offices in the North American metropolitan areas of Atlanta, Boston,
Chicago, Cleveland, Columbus, Dallas, Denver, Detroit, Los Angeles, Milwaukee,
Minneapolis, New York, Philadelphia, Seattle, St. Louis, Toronto and Washington
D.C. We also lease sales and support offices outside of North America including
locations in Australia, Belgium, Germany, Japan, The Netherlands, Sweden,
Switzerland and the United Kingdom. We believe that our existing facilities will
be adequate to meet our requirements for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of Ariba and their ages as of September 30, 1999 are
as follows:
NAME AGE POSITION(S)
- ---- -------- --------------------------------------------------------
Keith J. Krach 42 President, Chief Executive Officer and Chairman of the
Board of Directors
Edward P. Kinsey 43 Chief Financial Officer, Vice President-Finance &
Administration and Secretary
Shelley C. Brown 47 Vice President-Human Resources
Robert J. DeSantis 36 Vice President-Network Commerce
Rune C. Eliasen 44 Vice President-Customer Services
K. Charly Kleissner 42 Vice President-Engineering
Robert D. Lent 45 Vice President-Corporate Development
Paul L. Melchiorre 38 Vice President-North America Operations
David L. Rome 51 Vice President-Marketing
Paul C.M. Touw 34 Vice President-Corporate Strategy
KEITH J. KRACH, a co-founder of Ariba, has served as Chairman of the Board
of Directors, Chief Executive Officer and President since our inception in
September 1996. From March 1996 to September 1996, Mr. Krach served as an
Entrepreneur in Residence at Benchmark Capital. From October 1988 to
August 1995, Mr. Krach served as Chief Operating Officer of Rasna Corporation, a
mechanical computer-aided design automation software company. Prior to joining
Rasna, Mr. Krach held various positions with General Motors, including General
Manager and Vice President of GMF Robotics. Mr. Krach holds a Bachelor of
Science degree in Industrial Engineering from Purdue University and a Master of
Business Administration from Harvard Business School.
EDWARD P. KINSEY, a co-founder of Ariba, has served as Chief Financial
Officer, Secretary and Vice President of Finance and Administration since our
inception in September 1996. From October 1995 to August 1996, Mr. Kinsey served
as the Chief Financial Officer and Vice President of Finance of CenterView
Software, an Internet development tools company. From March 1994 to
October 1995,
29
Mr. Kinsey served as Corporate Controller of Rasna Corporation and, from
July 1988 to March 1994, Mr. Kinsey served in various capacities at
Zenger-Miller, Inc., a management and supervisory skills training and
development company, most recently as the Chief Financial Officer and Vice
President of Operations. Prior to 1988, Mr. Kinsey held management positions at
Peat Marwick Mitchell and at Price Waterhouse. Mr. Kinsey is a Certified Public
Accountant in California and Ohio and holds a Bachelor of Business
Administration degree in Accounting from the University of Toledo.
SHELLEY C. BROWN has served as Ariba's Vice President of Human Resources
since April 1999. From January 1990 to March of 1998 Ms. Brown served as Vice
President of Corporate Services at Aspect Telecommunications, a provider of
integrated software suites for telecommunication products. Prior to Aspect,
Ms. Brown worked for the Hewlett-Packard Company, a computer manufacturer, for
12 years in several Human Resource management positions. Ms. Brown holds a
Bachelor of Arts degree in Sociology from Stanford University and a Master of
Business Administration from the University of California at Los Angeles.
ROBERT J. DESANTIS, a co-founder of Ariba, has served as Vice President of
Network Commerce since September 1999, as Vice President of International
Operations from July 1998 to September 1999 and Vice President of Sales from our
inception in September 1996 to July 1998. From October 1995 to September 1996,
Mr. DeSantis worked as a consultant in the venture capital community. From
August 1990 to October 1995, Mr. DeSantis served as Vice President of Sales and
Vice President of European Operations at Rasna Corporation. Prior to joining
Rasna, Mr. DeSantis served as Director of Sales for Structural Research and
Analysis Corporation, a design analysis software company, and as a member of the
technical staff of Hughes Aircraft Company. Mr. DeSantis holds a Bachelor of
Science degree in Mechanical Engineering from the University of Rhode Island.
RUNE C. ELIASEN has served as Ariba's Vice President of Customer Services
since March 1997. From August 1995 to February 1997, Mr. Eliasen served as Vice
President of Operations at CBT Systems, Inc., a computer training development
company. From March 1989 to August 1995, Mr. Eliasen served as the Vice
President of Operations at Rasna Corporation. Prior to joining Rasna,
Mr. Eliasen held various senior engineering management positions at General
Motors and Ford Motor Company. Mr. Eliasen holds a Bachelor of Science degree in
Aeronautical and Astronautical Engineering from Purdue University.
K. CHARLY KLEISSNER has served as Ariba's Vice President of Engineering
since July 1997. From June 1996 to July 1997, Dr. Kleissner was Vice President
of Product Development at DataMind Corporation, a data mining software tools
development company. From April 1994 to June 1996, Dr. Kleissner held various
senior engineering management positions at NeXT Software Inc., a software
development company. Prior to joining NeXT, Dr. Kleissner held various senior
engineering management positions at Digital Equipment Corporation and
Hewlett-Packard Company. Dr. Kleissner holds a Ph.D. in Computer Science from
the University of Technology, Vienna and a Master of Science degree in Computer
Science from the Institute of Technology at the University of Vienna.
ROBERT D. LENT, a co-founder of Ariba, has served as Vice President of
Corporate Development since December 1997. From January 1993 to September 1996,
Mr. Lent was Vice President of U.S. Marketing for Inmac, a supplier of
networking and computing equipment. Prior to joining Inmac, he held various
senior product-marketing positions at Quantum, a mass storage company, and
Softbridge Microsystems. Mr. Lent began his career with Deloitte & Touche LLP.
Mr. Lent is a Certified Public Accountant and holds a Bachelor of Science degree
in Business Administration from the University of California at Berkeley and a
Master of Business Administration with distinction from Harvard Business School.
PAUL L. MELCHIORRE has served as Ariba's Vice President of North American
Operations since May 1998. From December 1992 to May 1998, Mr. Melchiorre served
as Senior Vice President of Global Accounts for SAP America, Inc., an enterprise
software company. Prior to joining SAP, he held
30
various sales and management positions with MAI Systems, an accounting software
company, and Automatic Data Processing, a developer of business software.
Mr. Melchiorre holds a Bachelor of Science degree in Marketing from Villanova
University and a Master of Business Administration from Drexel University.
DAVID L. ROME has served as Ariba's Vice President of Marketing since
July 1997. From March 1997 to July 1997, Mr. Rome served as Vice President of
Marketing at Calico Technology, an Internet company focused on enabling
electronic commerce for companies selling complex products and services. From
July 1990 to September 1995, Mr. Rome held several general manager positions at
Lotus Development Corporation. Prior to joining Lotus, Mr. Rome held various
senior sales and marketing management positions with Alliant Computer Systems, a
specialized computer manufacturer, and Data General Corporation, a data storage
products company. Mr. Rome holds a Bachelor of Science degree in Mechanical
Engineering from Purdue University and a Master of Business Administration from
Harvard Business School.
PAUL C. M. TOUW, a co-founder of Ariba, has served as Vice President of
Corporate Strategy since March 1997 and managed marketing and business
development for Ariba from our inception in September 1996 to March 1997. From
September 1995 to July 1996, Mr. Touw managed western area sales and business
development for Open Market, Inc., an Internet commerce software company. From
1991 to September 1995, Mr. Touw held various senior technical and sales
management positions at Rasna Corporation. Prior to joining Rasna, Mr. Touw held
analyst and senior analyst positions at Westinghouse Electric Company, AEC Able
Engineering, and BP Advanced Materials serving primarily in aerospace
engineering and analysis roles. Mr. Touw holds a Bachelor of Science degree in
Mechanical and Physics Engineering from University of the Pacific, School of
Engineering.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq National Market under the symbol
"ARBA." Our initial public offering of stock was June 23, 1999 at $11.50 per
share. The price range per share reflected in the table below, is the highest
and lowest sale price for our stock as reported by the Nasdaq National Market
during each quarter the stock has been publicly traded. Our present policy is to
retain earnings, if any, to finance future growth. We have never paid cash
dividends and have no present intention to pay cash dividends. In addition, our
existing line of credit agreement currently prohibits the payment of dividends.
At November 30, 1999, there were approximately 294 stockholders of record and
the price per share of our common stock was $90.28.
THREE MONTHS ENDED
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DEC. 31, 1998 MAR. 31, 1999 JUNE 30, 1999 SEPT. 30, 1999
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Price range per share:
Low.......................