Back to GetFilings.com
1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________
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 MARCH 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
COMMISSION FILE NUMBER 0-26934
ARBOR SOFTWARE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0277772
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1344 CROSSMAN AVENUE,
SUNNYVALE, CALIFORNIA 94089
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (408) 744-9500
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK
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. [X]
The aggregate market value of the Common Stock held by non-affiliates
of the registrant as of May 31, 1997 was $332,529,376.
The number of shares outstanding of the registrant's common stock as of
May 31, 1997 was 11,177,458.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement to be issued in
connection with the registrant's Annual Meeting of Stockholders to be held
August 13, 1997.
================================================================================
2
ARBOR SOFTWARE CORPORATION
FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 31, 1997
INDEX
Page
----
PART I
Item 1. Business ........................................................................................ 1
Item 2. Properties ...................................................................................... 13
Item 3. Legal Proceedings ............................................................................... 13
Item 4. Submission of Matters to a Vote of Security Holders ............................................. 14
Item 4a. Executive Officers of the Registrant ............................................................ 15
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters ............................ 16
Item 6. Selected Consolidated Financial Data ............................................................ 16
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 17
Item 8. Financial Statements and Supplementary Data ..................................................... 22
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures............ 38
PART III
Item 10. Directors and Executive Officers of the Registrant .............................................. 39
Item 11. Executive Compensation........................................................................... 39
Item 12. Security Ownership of Certain Beneficial Owners and Management .................................. 39
Item 13. Certain Relationships and Related Transactions .................................................. 39
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ................................. 40
Signatures ...................................................................................... 42
3
PART I
The discussion in this Report on Form 10-K contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from those discussed herein. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in "Risk Factors" as well as those discussed in this section and elsewhere in
this Report.
ITEM 1. BUSINESS
GENERAL
Arbor Software Corporation ("Arbor" or the "Company") develops and
markets enterprise software for management reporting, analysis and planning. The
Company's Essbase software is a powerful on-line analytical processing ("OLAP")
solution that integrates data from throughout an enterprise, including data from
relational databases, data warehouses and other data repositories, and allows
users to perform multidimensional analysis on this data utilizing spreadsheets,
query tools, report writers and web browsers. Essbase users can easily access
and organize large volumes of historical and projected data, rapidly perform
interactive what-if scenario analyses and share this information with users
throughout the enterprise. The powerful Arbor Essbase OLAP solution enables
users to easily organize and view in multiple dimensions large volumes of
historical and projected data from heterogeneous sources, to rapidly perform
interactive scenario analyses and to share information with other users
throughout the enterprise without significant utilization of MIS (Management
Information Services) resources.
The Company believes that to succeed in today's increasingly
competitive markets, businesses must accelerate the rate at which they identify
and respond to changing business conditions. An organization's market agility
and ultimate success are dependent upon its ability to rapidly collect, organize
and analyze data to make effective business decisions. Many organizations have
begun to implement business process reengineering initiatives to improve
planning and analysis and decision making. Consequently, they have made
substantial investments in information systems to automate many activities,
resulting in the generation of large quantities of data. Spreadsheets,
databases, data warehouses and query and reporting tools are used to store,
manipulate and review this data. Each performs specific functions but does not
fully address an organization's need to transform data into useful information
upon which decisions can be based.
Essbase consists principally of the Essbase Server, Essbase Spreadsheet
Client and Essbase Application Manager, and may be augmented with optional tools
to extend and enhance the functionality of the Essbase solution. Essbase is easy
to use and rapidly deployable, possesses robust calculation capabilities,
provides rapid response to user requests and incorporates user-generated
scenario data. Essbase also has the flexibility to reorganize and present data
from a variety of perspectives without disturbing the integrity of the
underlying historical data or causing the degradation of network performance.
The Company believes that its future success will be largely dependent
upon its ability to establish Essbase as a standard platform for on-line
analytical processing. To accelerate the adoption of Essbase as a standard for
OLAP, the Company plans to maintain its technology leadership in performance,
analytical power, deployability, and open architecture and to foster strategic
relationships with providers of software applications, tools, services and
hardware platforms. In addition, to further the establishment of Essbase as a
standard platform for on-line analytical processing, the Company intends to
ensure that Essbase adheres to key industry standards, leverages existing
customer investments in information technology and focuses on solutions in a
broad range of markets.
1
4
ESSBASE SOFTWARE
Essbase is a comprehensive on-line analytical processing solution
comprised of the Essbase Server, Essbase Spreadsheet Client and Essbase
Application Manager. In addition, the Company offers optional modules and tools
that extend and enhance Essbase functionality.
The Essbase Server. Essbase is an OLAP server multidimensional database
engine that supports simultaneous, multi-user access, analysis and write-back of
data using multiple dimensions such as channel, geography, customer, fiscal
period or budget versus actual. The analytical model, all data and data security
controls reside at the Essbase Server, where data computation functions are
performed. This approach to analytical calculations maximizes data integrity,
reduces network traffic requirements and eliminates the need for
high-performance client PCs and workstations. Specifically implemented as a
client/server solution, Essbase can support simultaneous reading and writing by
multiple users without perceptible impact on network performance and presents
data to the user through a spreadsheet client or other common client interface.
A version of Essbase was ported by a third party for the AS/400 platform in
fiscal 1997. Additionally, the Company signed a joint development agreement with
International Business Machines Corporation ("IBM") in fiscal 1997 that will
integrate the Essbase OLAP server directly with IBM's DB2 and other relational
database software to create a new Essbase product configuration option as well
as a new IBM based product offering tentatively called the IBM DB2 OLAP server.
The Essbase Server operates on Windows NT, OS/2 and various Unix operating
systems.
The Essbase Spreadsheet Client. The Essbase Spreadsheet Client enables
users with Microsoft Excel (Windows and Macintosh) and Lotus 1-2-3 for Windows
to connect and seemlessly interact with Essbase. Users work within the
spreadsheet interface to activate special Essbase features through mouse clicks
and familiar "drag and drop" operations. For example, to retrieve data into a
spreadsheet from the Essbase Server, the user chooses the "Retrieve" command
from the pull-down Essbase menu, and clicks the mouse. The requested data is
immediately displayed and available to be analyzed, manipulated and charted
within the user's spreadsheet. Besides providing immediate data access, the
Essbase Spreadsheet Client provides multidimensional analysis capabilities such
as drill down and pivoting. Because of the tight integration of the Essbase
Spreadsheet Client with the most widely used spreadsheet applications, the
Essbase Spreadsheet Client can be easily deployed throughout the organization.
The Essbase Application Manager. The primary functions of the Essbase
Application Manager are:
o Model definition. The analytical model is defined using an intuitive
outline format and is stored separately from the actual database.
During the definition of the analytical model, the Essbase Application
Manager provides a visual representation of dimensions, hierarchical
structures within dimensions and embedded dimensional calculations.
o Data loading. The Essbase Application Manager provides powerful
functions for loading data into an Essbase database and building tight
links between data repositories and Essbase applications. Data can be
loaded from relational databases, data warehouses, legacy database
repositories, production systems, flat file extracts and spreadsheet
files or any combination of each. Users can select, manipulate or
substitute incoming data values as desired. Once defined, these rules
can be stored and used on all subsequent data loads.
o Dimension building. The Essbase Application Manager allows new
dimensions to be defined and new members of a dimension to be added to
an existing outline, off-line from the actual database. Essbase
dimension building capabilities are designed for quick and flexible
adaptation of data structures to changing business conditions. New
dimensions can be added automatically when new data is loaded. In
addition, users can automatically aggregate data to new dimensions
without having to reload the entire database.
o Calculations definition. The Essbase Application Manager allows users
to define analytical calculations which are executed by the powerful
Essbase calculation engine. In addition to allowing users to create
custom calculation formulas and scripts, the Essbase Application
Manager can utilize over 100 pre-defined
2
5
analytical functions, such as net present value and internal rate of
return which are commonly required for planning and analysis
applications.
o Security. The Essbase Application Manager has an intuitive graphical
interface that allows administrators to limit access to applications or
databases, specific dimensions, members, ranges of members or
modification capabilities. The ability to define security groups also
simplifies assigning access privileges. Access privileges, such as
read, read-write and no access, can be created for specified groups and
individuals and can be assigned to such groups without having to
recreate the individual security profile for each user.
Optional Tools to Extend and Enhance Essbase Functionality. The Company
markets additional separately sold modules that extend Essbase's functionality.
These modules include the following:
o Application Programming Interface ("API"). The Essbase API enables
developers to use standard tools for creating custom applications that
take advantage of the robust data storage, computational and retrieval
capabilities of Essbase. For example, the API can be used to design
customized data entry screens or screens for executive access to data.
The API supports Microsoft Visual Basic, C or C++ and works with
Windows, Macintosh, OS/2 and various Unix clients.
o Extended Spreadsheet Toolkit. The Extended Spreadsheet Toolkit includes
more than 20 macros and Visual Basic for Applications functions,
enabling users to build customized third-party spreadsheet applications
incorporating Essbase functions.
o SQL Interface. The Essbase SQL Interface provides access to more than
20 relational and PC data sources by making the Essbase Server operate
as an open database connectivity ("ODBC") client. The SQL Interface is
used to move data from diverse sources into the Essbase Server for user
access and analysis.
o SQL Drill-Through. The Essbase SQL Drill-Through module creates tight
links between summary data residing in Essbase and detail data residing
in relational stores for OLTP or data warehouse repositories. The SQL
Drill-Through module generates SQL queries that enable users without
any knowledge of SQL commands to retrieve detail data from the RDBMS
that corresponds to specific data cells in the Essbase Server thereby
providing powerful, fully-integrated analysis capabilities.
o Currency Conversion. The Essbase Currency Conversion module translates,
analyzes and reports foreign financial data. The Essbase Currency
Conversion Module allows users to model exchange rate scenarios and
perform ad hoc conversions directly from their spreadsheets.
o Essbase Web Gateway. The Essbase Web Gateway is a multi-threaded server
application which enables high-speed, interactive, read and write
access to Essbase for OLAP applications over the World Wide Web. The
Essbase Web Gateway provides customers a comprehensive, web-based
solution that delivers sophisticated management reporting, provides
ad-hoc multidimensional analysis, and enables development of
comprehensive OLAP applications including planning, budgeting, and
forecasting over intranets or the internet.
o Crystal Info for Essbase. Crystal Info for Essbase integrates Seagate
Software's Crystal Reports, the industry leading production report
writer, reporting server and scheduling system with the power of
Essbase to deliver a comprehensive enterprise reporting system for OLAP
applications. With Crystal Info for Essbase, customers are able to use
an OLAP aware, high-volume production reporting solution with powerful
distribution and flexible processing capabilities. This product was
released for general availability in May 1997.
o Arbor Essbase Adjustment Module. The Arbor Essbase Adjustment Module
accelerates the management reporting process by integrating secure,
auditable controls for corporate adjustments into a comprehensive
reporting, analysis and planning environment. It automates recurring
adjustments and reconciles
3
6
intercompany balances, reducing the adjustment period and increasing
the accuracy and timeliness of management information. This
functionality can be applied to a wide range of applications including
budgeting, sales forecasting, consolidations, intercompany elimination
management reporting. Additionally, the product provides user
independence for loading and calculating data. This product was
released for general availability in May 1997.
The Company licenses its Essbase software for one-time license fees
which are determined on a per server and per port basis. The minimum
installation consists of one Essbase Server with five ports. Ports are defined
by the number of concurrent users that can access a given server. The base fees
for each Essbase Server and each port are currently listed at $25,000 and
$2,500, respectively, with discounts based on quantity.
To provide customers with a strategic platform for rapidly deploying a
wide range of financial management applications, the Company announced in May
1997 the availability of the Arbor Essbase Financial Mart, an integrated
platform for rapidly deploying a wide range of financial management
applications. The Arbor Essbase Financial Data Mart is a packaging of the Arbor
Essbase OLAP Server, Arbor Essbase Adjustment Module, Arbor Essbase Application
Manager, Crystal Info for Essbase Module, Arbor Essbase Spreadsheet Client,
Arbor Essbase Currency Conversion Module, Best Practices Templates and Education
and Support Services.
The Arbor Essbase Financial Data Mart provides robust financial
management capabilities across disparate financial systems by unifying
processing, modeling and management reporting within a single platform. The
Arbor Essbase Financial Data Mart helps customers deliver high quality
management information and eliminate unnecessary or redundant processes.
Customers can utilize the Arbor Essbase Financial Data Mart to rapidly deploy
enterprise-scale financial applications, including consolidation and budgeting,
product profitability, activity-based costing, performance measurement and
Executive Information Systems ("EIS").
SALES AND MARKETING
The Company markets and sells Essbase in the United States, Canada, Europe and
the Pacific Rim through the Company's direct sales force and worldwide through
original equipment manufacturers ("OEMs"), value-added resellers ("VARs") and
distributors. The direct sales process involves the generation of sales leads
through direct mail, seminars and telemarketing or requests for proposal from
prospects. The Company's field sales force conducts multiple presentations and
demonstrations of the Company's products to management and users at the customer
site as part of the direct sales effort. Sales cycles generally last from three
to six months. The direct sales force is responsible for local partner support,
joint sales efforts and channel management. The direct sales force is
compensated for sales made through indirect channel partners as well as direct
sales to ensure appropriate cooperation with the Company's OEMs and VARs.
The Company's sales and marketing organization consisted of 130
employees as of March 31, 1997. The sales and marketing staff is based at the
Company's corporate headquarters in Sunnyvale, California. The Company also has
field sales offices in the metropolitan areas of Atlanta; Boston; Chicago;
Dallas; Houston; Los Angeles; Washington, D.C; Vancouver, BC, Canada; Frankfurt,
Hamburg and Munich, Germany; London, England; Paris, France; and Sydney,
Australia. To support its sales force, the Company conducts comprehensive
marketing programs, which include direct mail, public relations, advertising,
seminars, trade shows, education and user group conferences.
In January 1997, the Company promoted John Dillon, the Company's former
Senior Vice President of Sales and Services, to President and Chief Operating
Officer.
The Company has been able to leverage sales and marketing through its
partnering strategy with indirect channel partners that distribute or resell the
Company's products in their respective markets. Indirect channel partners
accounted for approximately 25%, 28% and 29% of the Company's total revenues in
fiscal 1997, 1996 and 1995, respectively. The Company's indirect channel
partners include Comshare, Inc. ("Comshare"), Fiserv CIR, Inc.; Fujitsu Limited;
International Business Machines Corporation ("IBM"); Lawson Software;
PeopleSoft, Inc.;
4
7
Shell Services Corporation; ShowCase Corporation; SQL Financials, International
Inc. and Walker Interactive Systems. See "Risk Factors -- Dependence Upon
Comshare and Other Indirect Channel Partners."
The Company's largest indirect channel partner is Comshare, a provider
of executive information systems that currently markets a family of products
that employ Essbase. Essbase distributed by Comshare is supported by Comshare
and their agents and channel partners around the world. Under the Company's
December 1993 license agreement with Comshare (the "Comshare License
Agreement"), Comshare has been granted a license to use, copy, distribute and
sublicense Essbase worldwide. The Company is paid a percentage of license fees
generated by Comshare with minimum commitments owed to the Company in order to
maintain the scope of Comshare's distribution rights. The agreement provides for
standard confidentiality and non-disclosure obligations and commits standard
warranty and indemnification rights to Comshare. Revenues from Comshare
accounted for 19%, 26% and 26% of the Company's total revenues for fiscal 1997,
1996 and 1995, respectively. The Comshare License Agreement provides that, in
the event that certain competitors of Comshare were to acquire at least a twenty
percent equity interest in the Company, in substantially all of the Company's
assets or in substantially all of the intellectual property rights to the
Company's Essbase software, the license revenues payable by Comshare to the
Company under the agreement would be reduced by fifty percent, and Comshare
could elect to terminate the Comshare License Agreement. Accordingly, the
possibility of termination of the Comshare License Agreement or a fifty percent
reduction in license revenues from Comshare could discourage potential
acquisition proposals and could delay or prevent a change in control of the
Company. In addition, the Comshare License Agreement contains a provision
prohibiting the Company from licensing its products to or through certain of
Comshare's competitors, and the elimination of any potential customers limits
the Company's potential market share to some degree. Comshare does not report to
the Company the revenues generated by its sales of the Company's Essbase
software for a particular quarter until 45 days after quarter-end; accordingly,
the Company records such revenues in that subsequent quarter. No assurance can
be given that revenues derived from Comshare and other indirect channel partners
will not fluctuate significantly in subsequent periods or will not terminate
entirely. The loss of, or a significant reduction in revenues from Comshare
could have a material adverse effect on the Company's business, operating
results and financial condition. The Company is currently in litigation with
Comshare with respect to the Comshare License Agreement and related matters. The
outcome of the litigation is uncertain at this time and no assurance can be
given as to the outcome of the litigation. However, management does not believe
that the outcome of the litigation will have a material adverse effect on the
Company although it does anticipate unpredictable variations in royalty
revenues and substantial legal costs during the course of the litigation. See
"Legal Proceedings" in Item 3 below. See also "Risk Factors - Dependence Upon
Comshare and Other Indirect Channel Partners;" "Risks Associated with Litigation
and Related Costs" and "Fluctuations in Quarterly Results; Future Operating
Results Uncertain."
International revenues from the Company's direct sales force accounted
for 11%, 9% and 5% of total revenues in fiscal 1997, 1996 and 1995,
respectively. In addition, although the Company records revenues from its United
States based indirect channel partners as domestic revenues, such partners may
sell Essbase to international customers. The Company's largest indirect channel
partner, Comshare, accounts for a significant portion of the Company's
international revenues. Based on reports received from Comshare, the Company
believes that approximately 60%, 50% and 37% of revenues generated by Comshare
were derived from sales to international customers in fiscal 1997, 1996 and
1995, respectively. The Company believes that in order to increase sales
opportunities and profitability it will be required to expand its international
operations. The Company recently opened offices in Vancouver, BC, Canada; Paris,
France; Frankfurt, Hamburg and Munich, Germany and Sydney, Australia. See
"Properties" in Item 2 below. See also "Principles of Consolidation" in Note 1
of Notes to Consolidated Financial Statements. The Company continues to expand
its direct and indirect sales and marketing activities worldwide, which will
require significant management attention and financial resources. The Company
has committed and continues to commit significant time and financial resources
to developing international sales and support channels. There can be no
assurance, however, that the Company will be able to maintain or increase
international market demand for Essbase. To the extent that the Company is
unable to do so in a timely manner, the Company's international sales will be
limited, and the Company's business, operating results and financial condition
would be materially adversely affected. See "Risk Factors -- Risks Associated
with International Operations."
5
8
CUSTOMER MAINTENANCE AND SUPPORT
The Company believes that a high level of customer support is important
to the successful marketing and sale of Essbase. Maintenance and support
contracts, which are typically for twelve months, are offered with the initial
license, and may be renewed annually and are set at a fixed percentage of the
total license fee. Substantially all of the Company's direct sales to customers
have maintenance and support contracts that entitle the customers to patches,
updates and upgrades, at no additional cost, if and when available, and
technical hotline support. In addition, the Company offers classes and training
programs available at the Company's headquarters, local training centers and
customer sites. Telephone hotline support is complemented by an offering of a
number of web-based support services, available 24 hours a day. These include
access to TechTips and FAQs (frequently asked questions), an interactive search
engine for finding known problems, a patch download area, and an interface to
the Company's technical support department's problem-tracking database, which
allows customers to submit cases, and view the status of any of their current
cases on-line. Users of Essbase can attend regional user group conferences
throughout the year, at which Essbase skills and solutions are exchanged.
RESEARCH AND DEVELOPMENT
The Company believes that its future success will depend in large part
on its ability to maintain and enhance its leadership in OLAP server technology
and develop new products that meet an expanding range of customer requirements.
The Company's research and development organization is divided into teams
consisting of development engineers, quality assurance engineers and technical
writers. As of March 31, 1997, the Company's research and development
organization consisted of 49 full-time employees including 30 development
engineers, 12 quality assurance engineers and 7 technical writers. The Company
is presently searching for a Vice President of Product Development. The research
and development organization uses a phase oriented development process which
includes constant monitoring of quality, schedule, functionality, costs and
customer satisfaction. The product definition is based upon a consolidation of
the requirements from existing customers, from technical support and from
engineering. These are prioritized by the Company's management to fit business
priorities and to meet the Company's vision.
The Company's core technology is based upon a proprietary technology
that exploits the sparse and dense characteristics of multidimensional data. The
majority of the Company's current research and development effort is spent
improving the performance, analytical power, deployability and open architecture
of the server implementation of this technology. The Company licenses an API
(Application Program Interface) to encourage partners to connect their client
tools to the core Essbase Server. The Company's server technology is platform
independent so that it can be easily ported to Windows NT, Windows 95, OS/2 and
various Unix operating systems.
The software industry, and specifically the market in which the Company
competes, is characterized by rapid technological change, frequent introductions
of new products, changes in customer demands and evolving industry standards.
The introduction of products embodying new technologies and the emergence of new
industry standards can render existing products obsolete and unmarketable. The
life cycle of each version of Essbase is difficult to estimate. The Company's
future success will depend upon its ability to address the increasingly
sophisticated needs of its customers by developing and introducing enhancements
to Essbase on a timely basis that keep pace with technological developments and
emerging industry standards and customer requirements. There can be no assurance
that the Company will be successful in developing and marketing enhancements to
Essbase that respond to technological change or evolving industry standards or
customer requirements, that the Company will not experience difficulties that
could delay or prevent the successful development, introduction and sale of such
enhancements or that such enhancements will adequately meet the requirements of
the marketplace and achieve any significant degree of market acceptance. The
Company has in the past experienced delays in the release dates of enhancements
to Essbase. If release dates of any future Essbase enhancements are delayed or
if when released they fail to achieve market acceptance, the Company's business,
operating results and financial condition could be materially and adversely
affected. There can be no assurance that the introduction or announcement of new
product offerings by the Company or the Company's competitors will not cause
customers to defer or forgo purchases of current versions of Essbase, which
could have a material adverse effect on the Company's business, operating
results and financial condition. See "Risk Factors - Risks Associated with New
Versions and New Products; Rapid Technological Change."
6
9
Software products as internally complex as Essbase frequently contain
errors or defects, especially when first introduced or when new versions or
enhancements are released. Despite extensive product testing by the Company, the
Company has in the past released versions of Essbase with defects and has
discovered software errors in Essbase and certain enhanced versions of Essbase
after their introduction. Although the Company has not experienced material
adverse effects resulting from any such defects and errors to date, there can be
no assurance that, despite testing by the Company and by current and potential
customers, defects and errors will not be found in new versions or enhancements
after commencement of commercial shipments, resulting in loss of revenues or
delay in market acceptance, which could have a material adverse effect upon the
Company's business, operating results and financial condition. The Company
anticipates that it will continue to commit substantial resources to research
and development in the future. See "Risk Factors - Risk of Software Defects."
The functioning of Arbor Essbase is not affected by dates containing
the year 2000 or subsequent years. This is due to the fact that Essbase does not
store any date information as a data type in its database and does not perform
any date calculations. In addition, the definition of dates in Essbase is in
the control of the user.
COMPETITION
The market in which the Company competes is intensely competitive,
highly fragmented and characterized by rapidly changing technology and evolving
standards. The Company's current and potential competitors offer a variety of
planning and analysis software solutions and generally fall within three
categories: (i) vendors of multidimensional database and analysis software such
as Oracle Corporation (Express), Pilot Software, Inc., a division of Cognizant
Corporation (Pilot Analysis Server); Gentia Software plc ("Gentia Software")
(formerly known as Planning Sciences International plc and Planning Sciences,
Inc.) (Gentia); Applix, Inc. (TM1); and Microsoft Corporation ("Microsoft"),
through its acquisition of OLAP technology from Panorama Software of Tel Aviv,
Israel ("Panorama"); (ii) vendors of dedicated software applications for
budgeting and financial consolidation such as Hyperion Software Corporation
(Hyperion and FYPlan); and (iii) vendors of OLAP/relational database software
(ROLAP) such as Information Advantage, Inc. (Decision Suite); Informix
Corporation (Metacube); Holistic Systems, a division of Seagate Technology, Inc.
(Holos) and Microstrategy, Inc. (DSS Agent). The Company does not believe that
the Panorama technology, as acquired by Microsoft, is currently competitive with
the Company's Essbase product. However, there can be no assurance that Microsoft
will not enhance such technology in order to market a competitive product in the
future. See "Risk Factors - Competition" and "Risks Associated with Litigation
and Related Costs."
PROPRIETARY RIGHTS
The Company relies primarily on a combination of patent, copyright and
trademark laws, trade secrets, confidentiality procedures and contractual
provisions to protect its proprietary rights. The Company also believes that
factors such as the technological and creative skills of its personnel, new
product developments, frequent product enhancements, name recognition and
reliable product maintenance are essential to establishing and maintaining a
technology leadership position. The Company seeks to protect its software,
documentation and other written materials under trade secret and copyright laws,
which afford only limited protection. The Company currently has one United
States patent and corresponding patent applications pending in Europe, Canada
and Australia. There can be no assurance that the Company's patent will not be
invalidated, circumvented or challenged, that the rights granted thereunder will
provide competitive advantages to the Company or that any of the Company's
pending or future patent applications, whether or not being currently challenged
by applicable governmental patent examiners, will be issued with the scope of
the claims sought by the Company, if at all. Furthermore, there can be no
assurance that others will not develop technologies that are similar or superior
to the Company's technology or design around the patents owned by the Company.
Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. Policing
unauthorized use of the Company's products is difficult, and while the Company
is unable to determine the extent to which piracy of its software products
exists, software piracy can be expected to be a persistent problem. In addition,
the laws of some foreign countries do not protect the Company's proprietary
rights as fully as do the laws of the United States. There can be no assurance
that the Company's means of protecting its proprietary rights in the
7
10
United States or abroad will be adequate or that competitors will not
independently develop similar technology. The Company has entered into source
code escrow agreements with a number of its customers and indirect channel
partners requiring release of source code under certain conditions. Such
agreements provide that such parties will have a limited, non-exclusive right to
use such code in the event that there is a bankruptcy proceeding by or against
the Company, if the Company ceases to do business or if the Company fails to
meet its contractual obligations. The provision of source code may increase the
likelihood of misappropriation by third parties.
The Company expects that software product developers will increasingly
be subject to infringement claims as the number of products and competitors in
the Company's industry segment grows and the functionality of products in
different industry segments overlaps. Any such claims, with or without merit,
could be time consuming to defend, result in costly litigation, divert
management's attention and resources, cause product shipment delays or require
the Company to enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, may not be available on terms acceptable to
the Company, if at all. In the event of a successful claim of product
infringement against the Company and failure or inability of the Company to
license the infringed or similar technology, the Company's business, operating
results and financial condition would be materially adversely affected.
The Company relies upon certain software that it licenses from third
parties, including software that is integrated with the Company's internally
developed software and used in Essbase to perform key functions. There can be no
assurance that these third-party software licenses will continue to be available
to the Company on commercially reasonable terms. The loss of, or inability to
maintain, any such software licenses could result in shipment delays or
reductions until equivalent software could be developed, identified, licensed
and integrated, which would materially adversely affect the Company's business,
operating results and financial condition.
Currently, the Company is engaged in litigation with Gentia Software
concerning the enforcement and validity of the Company's U.S. patent. See "Legal
Proceedings" in Part I, Item 3 below. See "Risk Factors -- Fluctuations in
Quarterly Results; Future Operating Results Uncertain;" and "Risks Associated
with Litigation and Related Costs."
EMPLOYEES
As of March 31, 1997, the Company had a total of 252 employees,
including 49 in research and development, 130 in sales and marketing, 38 in
services, which includes customer support services and 35 in administration. Of
these employees, 206 were located in the United States and 46 were located in
the United Kingdom, Germany, France, Australia and Canada. None of the Company's
employees are represented by a collective bargaining agreement, nor has the
Company experienced any work stoppage. The Company considers its relations with
its employees to be good.
The Company is presently searching for a Vice President of Product
Development. See "Risk Factors - Personnel."
The Company's future operating results depend in significant part upon
the continued service of its key technical and senior management personnel none
of whom is bound by an employment agreement. The Company's future success also
depends on its continuing ability to attract and retain highly qualified
technical and managerial personnel. Competition for such personnel is intense,
and there can be no assurance that the Company will retain its key managerial or
technical personnel or attract such personnel in the future. The Company has at
times experienced and continues to experience difficulty in recruiting qualified
personnel and there can be no assurance that the Company will not experience
such difficulties in the future. The Company, either directly or through
personnel search firms, actively recruits qualified research and development,
financial and sales personnel. If the Company is unable to hire and retain
qualified personnel in the future, such inability could have a material adverse
effect on the Company's business, operating results and financial condition. See
"Risk Factors - Personnel."
8
11
RISK FACTORS
In addition to the other information in this Report on Form 10-K, the
following risk factors should be considered carefully in evaluating the Company
and its business:
Fluctuations in Quarterly Results; Future Operating Results Uncertain.
The Company's quarterly operating results have in the past varied significantly
and will likely in the future vary significantly depending on factors such as:
demand for the Company's Essbase software; the Company's relationship with its
indirect channel partners, particularly Comshare, and the consistency of sales
made by such indirect channel partners; the level of price and product
competition; changes in pricing policies by the Company or its competitors;
changes in the mix of indirect channels through which Essbase is offered; the
number, timing and significance of product enhancements and new product
announcements by the Company and its competitors; the ability of the Company to
develop, introduce and market new and enhanced versions of Essbase on a timely
basis; the size, timing and structure of significant licenses; changes in the
Company's sales incentive strategy; the timing of revenue recognition under the
Company's agreements; customer order deferrals in anticipation of enhancements
to Essbase or enhancements of new products of its competitors; the impact of
acquisitions of competitors and indirect channel partners; the level of the
Company's international revenues; foreign currency exchange rates; the renewal
of maintenance and support agreements; product life cycles; software defects and
other product quality problems; personnel changes; changes in Company strategy;
changes in the level of operating expenses and general domestic and
international economic and political conditions, among others. The operating
results of many software companies reflect seasonal trends, and the Company's
business, operating results and financial condition may experience comparatively
slower growth in its first fiscal quarter and summer months, which overlap into
its second fiscal quarter. The Company sells substantially more product towards
the end of each quarter, due in part to established buying patterns within the
software industry. As a result, the magnitude of any quarterly fluctuations may
not become evident until late in the quarter. Essbase orders are typically
shipped shortly after receipt, and consequently in the past, order backlog at
the beginning of any quarter has represented only a small portion of that
quarter's expected revenues. As a result, license revenues in any quarter are
substantially dependent on orders booked and shipped in that quarter. In
addition, a significant portion of each year's revenues are derived from sales
of the Company's Essbase software by Comshare. The Company's pending litigation
could have a significant impact on Comshare's sales of Essbase. See "Legal
Proceedings" in Item 3 below. See also "Risk Factors -- Dependence Upon Comshare
and Other Indirect Channel Partners" and "Risks Associated with Litigation and
Related Costs."
Due to all of the foregoing, revenues for any future quarter are not
predictable with any significant degree of accuracy. Quarterly revenues are also
difficult to forecast because the Company's sales cycle, from initial evaluation
to license and maintenance and support purchases, varies substantially from
customer to customer. Accordingly, the Company believes that period-to-period
comparisons of its operating results are not necessarily meaningful and should
not be relied upon as indications of future performance. Although the Company
has experienced significant growth in total revenues in recent years, the
Company does not believe that historical growth rates are sustainable.
Accordingly, the rate at which the Company has grown in the past should not be
considered to be indicative of future revenue growth, if any, or future
operating results. There can be no assurance that the Company will remain
profitable on a quarterly or annual basis. The Company's limited operating
history makes the prediction of future operating results difficult, if not
impossible.
The Company's expense levels are based in significant part on the
Company's expectations of future revenues and therefore are higher than past
expense levels, and are relatively fixed in the short run. If revenue levels are
below expectations, net income is likely to be disproportionately affected.
There can be no assurance that the Company will be able to achieve or maintain
profitability on a quarterly or annual basis in the future. In addition, it is
possible that in some future quarter the Company's operating results will be
below the expectations of public market analysts and investors. In such event,
or in the event that adverse conditions prevail or are perceived to prevail
generally or with respect to the Company's business, the price of the Company's
Common Stock would likely be materially and adversely affected.
Dependence Upon Comshare and Other Indirect Channel Partners. In
addition to its direct sales force, the Company relies on indirect channel
partners such as OEMs, VARs and distributors for licensing and support of its
products in the United States and internationally. The Company's indirect
channel partners generally offer
9
12
products of several different companies, including, in some cases, products that
compete with Essbase. The Company's largest indirect channel partner is
Comshare, a leading provider of executive information systems that currently
markets a family of products that employ Essbase. Revenues from Comshare
accounted for 19%, 26% and 26% of the Company's total revenues for fiscal 1997,
1996 and 1995, respectively. There can be no assurance that the Company's
current indirect channel partners will elect, or be able, to market or support
Essbase effectively, that the Company will be able to effectively manage channel
conflicts, that economic conditions or industry demand will not adversely affect
these or other indirect channel partners or that these indirect channel partners
will not devote greater resources to marketing and supporting the products of
other companies. No assurance can be given that revenues derived from Comshare
and other indirect channel partners will not fluctuate significantly in
subsequent periods or will not terminate entirely. The loss of, or a significant
reduction in revenues from Comshare could have a material adverse effect on the
Company's business, operating results and financial condition.
The Company is currently in litigation with Comshare. The outcome of
the litigation is uncertain at this time and no assurance can be given as to the
outcome of the litigation. However, management does not believe that the outcome
of the litigation will have a material adverse effect on the Company although it
does anticipate unpredictable variations in royalty revenues and substantial
legal costs during the course of the litigation. See "Business - Sales and
Marketing." See also "Legal Proceedings" in Item 3 below. See also "Risk Factors
- - Fluctuations in Quarterly Results; Future Operating Results Uncertain,"
"Dependence Upon Comshare and Other Indirect Channel Partners" and "Risks
Associated with Litigation and Related Costs."
Product Concentration; Dependence upon the Emerging Market for OLAP
Server Software. All of the Company's revenues to date have been derived from
licenses for Essbase and related products and services. The Company currently
expects that Essbase-related revenues, including maintenance and support
contracts, will continue to account for all or substantially all of the
Company's revenues for the foreseeable future. As a result, the Company's future
operating results are dependent upon continued market acceptance of Essbase and
enhancements thereto. There can be no assurance that Essbase will achieve
continued market acceptance or that the Company will be successful in marketing
Essbase or enhancements thereto. A decline in demand for, or market acceptance
of, Essbase as a result of competition, technological change or other factors
would have a material adverse effect on the Company's business, operating
results and financial condition. The Company intends to continue its efforts to
improve and enhance Essbase by maintaining its commitment to an open
architecture, extending its partnerships, integrating third party technologies,
tightening its linkage with leading general-purpose database management systems,
continuing to evolve the Essbase OLAP server, and developing new application
development products and middleware tools. No assurance can be given that such
efforts will enhance the value of the Company's product offerings to customers.
Although sales of Essbase have increased in recent years, the market in
which the Company competes is undergoing rapid change and there can be no
assurance that sales of Essbase will continue to increase or potential customers
will purchase Essbase. The Company has spent, and intends to continue to spend,
considerable resources educating potential customers about Essbase and its
functions and on-line analytical processing generally. However, there can be no
assurance that such expenditures will enable Essbase to achieve any additional
degree of market acceptance, and if the market for Essbase fails to grow or
grows more slowly than the Company currently anticipates, the Company's
business, operating results and financial condition would be materially
adversely affected. Historically, the software industry has experienced
significant periodic downturns, often in connection with, or in anticipation of,
declines in general economic conditions during which MIS budgets often decrease.
As a result, the Company's business, operating results and financial condition
may in the future reflect substantial fluctuations from period to period as a
consequence of patterns and general economic conditions in the software
industry.
Potential Volatility of Stock Price. The market price of the Company's
Common Stock is highly volatile and may be significantly affected by factors
such as actual or anticipated fluctuations in the Company's operating results,
relationships with indirect channel partners, announcements relating to the
Company's pending litigation with Comshare and Gentia Software, announcements of
technological innovations, new products or new contracts by the Company or its
competitors, developments with respect to patents, copyrights or proprietary
rights, conditions and trends in the software and other technology industries,
adoption of new accounting standards affecting the software industry, general
market conditions and other factors. In addition, the stock market has from time
to time experienced significant price and volume fluctuations that have
particularly affected the market prices
10
13
for the common stocks of technology companies. These broad market fluctuations
may adversely affect the market price of the Company's Common Stock. In the
past, following periods of volatility in the market price of a particular
company's securities, securities class action litigation has often been brought
against that company. There can be no assurance that such litigation will not
occur in the future with respect to the Company. Such litigation could result in
substantial costs and a diversion of management's attention and resources, which
could have a material adverse effect upon the Company's business, operating
results and financial condition.
Risks Associated with International Operations. International sales are
subject to inherent risks, including the impact of possible recessionary
environments in economies outside the United States, costs of localizing
products for foreign countries, longer receivables collection periods and
greater difficulty in accounts receivable collection, unexpected changes in
regulatory requirements, difficulties and costs of staffing and managing foreign
operations, reduced protection for intellectual property rights in some
countries, potentially adverse tax consequences and political and economic
instability. There can be no assurance that the Company or its indirect channel
partners will be able to sustain or increase international revenues from
international licenses and maintenance, support and other contracts, or that the
foregoing factors will not have a material adverse effect on the Company's
future international revenues and, consequently, on the Company's business,
operating results and financial condition. The Company's direct international
sales are currently denominated in either United States dollars, British pounds
sterling, German deutsche marks or French francs and the Company does not
currently engage in hedging activities. Although exposure to currency
fluctuations to date has been insignificant, there can be no assurance that
fluctuations in the currency exchange rates in the future will not have a
material adverse impact on revenues from direct international sales and thus the
Company's business, operating results or financial condition. Sales generated by
the Company's indirect channel partners, including Comshare, currently are paid
to the Company in United States dollars. If, in the future, international
indirect sales are denominated in local currencies, foreign currency
translations may contribute to significant fluctuations in, and could have a
material adverse effect upon, the Company's business, operating results and
financial condition. See "Business - Sales and Marketing."
Competition. The Company has experienced and expects to continue to
experience increased competition from current and potential competitors, many of
whom have significantly greater financial, technical, marketing and other
resources than the Company. Such competitors may be able to respond more quickly
to new or emerging technologies and changes in customer requirements or devote
greater resources to the development, promotion and sale of their products than
the Company. Also, certain current and potential competitors have greater name
recognition or more extensive customer bases that could be leveraged, thereby
gaining market share to the Company's detriment. The Company expects additional
competition as other established and emerging companies enter into the OLAP
software market and new products and technologies are introduced. Increased
competition could result in price reductions, fewer customer orders, reduced
gross margins and loss of market share, any of which would materially adversely
affect the Company's business, operating results and financial condition.
Current and potential competitors may make strategic acquisitions or
establish cooperative relationships among themselves or with third parties,
thereby increasing the ability of their products to address the needs of the
Company's prospective customers. Further, competitive pressures, such as those
resulting from competitors discounting of their products, may require the
Company to reduce the price of Essbase, which would materially adversely affect
the Company's business, operating results and financial condition. There can be
no assurance that the Company will be able to compete successfully against
current and future competitors, and the failure to do so would have a material
adverse effect upon the Company's business, operating results and financial
condition. See "Business - Competition."
Personnel. The effective management of the Company's business will
depend, in large part, upon the Company's ability to retain its highly skilled
technical, managerial and marketing personnel as well as its ability to attract
and maintain additions to such personnel in the future. If the Company is unable
to retain its key managerial, sales and technical personnel, or attract,
assimilate and retain additional qualified personnel, particularly those in key
positions, the Company's business, operating results and financial condition
would be materially adversely affected. See "Business - Employees."
Risks Associated with Litigation and Related Costs. The Company's
ongoing litigation with Comshare and Gentia Software (formerly known as Planning
Sciences, Inc.) has and will lead to increased legal costs to the
11
14
Company. There is no guarantee as to when these litigation proceedings will be
resolved or that management will not be distracted from their normal duties as a
result of these litigation proceedings. The Company believes that it has
meritorious claims against Comshare and that it has meritorious defenses to each
of Comshare's counterclaims, and intends to vigorously pursue its claims and
defend itself against the counterclaims. The outcome of the litigation is
uncertain at this time and no assurance can be given as to the outcome of the
litigation. However, management does not believe that the outcome of the
litigation will have a material adverse effect on the Company although it does
anticipate unpredictable variations in royalty revenues and substantial legal
costs during the course of the litigation. See "Legal Proceedings" in Item 3
below.
Risk Associated with New Versions and New Products; Rapid Technological
Change. The software industry, and specifically the market in which the Company
competes, is characterized by rapid technological change, frequent introductions
of new products, changes in customer demands and evolving industry standards.
The introduction of products embodying new technologies and the emergence of new
industry standards can render existing products obsolete and unmarketable. The
life cycle of each version of Essbase is difficult to estimate. The Company's
future success will depend upon its ability to address the increasingly
sophisticated needs of its customers by developing and introducing enhancements
to Essbase on a timely basis that keep pace with technological developments and
emerging industry standards and customer requirements. There can be no assurance
that the Company will be successful in developing and marketing enhancements to
Essbase that respond to technological change, evolving industry standards or
customer requirements, that the Company will not experience difficulties that
could delay or prevent the successful development, introduction and sale of such
enhancements or that such enhancements will adequately meet the requirements of
the marketplace and achieve any significant degree of market acceptance. The
Company has in the past experienced delays in the release dates of enhancements
to Essbase. If release dates of any future Essbase enhancements are delayed or
if when released they fail to achieve market acceptance, the Company's business,
operating results and financial condition could be materially and adversely
affected. There can be no assurance that the introduction or announcement of new
product offerings by the Company or the Company's competitors will not cause
customers to defer or forgo purchases of current versions of Essbase, which
could have a material adverse effect on the Company's business, operating
results and financial condition.
Risk of Software Defects. Software products as internally complex as
Essbase frequently contain errors or defects, especially when first introduced
or when new versions or enhancements are released. Despite extensive product
testing by the Company, the Company has in the past released versions of Essbase
with defects and has discovered software errors in Essbase and certain enhanced
versions of Essbase after their introduction. Although the Company has not
experienced material adverse effects resulting from any such defects and errors
to date, there can be no assurance that, despite testing by the Company and by
current and potential customers, defects and errors will not be found in new
versions or enhancements after commencement of commercial shipments, resulting
in loss of revenues or delay in market acceptance, which could have a material
adverse effect upon the Company's business, operating results and financial
condition.
Need to Manage Changing Business. The Company has recently experienced
a period of significant expansion. In the future, the Company will be required
to improve its financial and management controls, reporting systems and
procedures on a timely basis and expand, train and manage its work force. There
can be no assurance that the Company will be able to do so effectively, and
failure to do so when necessary would have a material adverse effect upon the
Company's business, operating results and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Proprietary Rights and Risks of Infringement. The Company relies
primarily on a combination of patent, copyright and trademark laws, trade
secrets, confidentiality procedures and contractual provisions to protect its
proprietary rights. The Company seeks to protect its software, documentation and
other written materials under trade secret and copyright laws, which afford only
limited protection. The Company currently has one United States patent and
corresponding patent applications pending in Europe, Canada and Australia. There
can be no assurance that the Company's patent will not be invalidated,
circumvented or challenged, that the rights granted thereunder will provide
competitive advantages to the Company. Unauthorized parties may attempt to copy
aspects of the Company's products or to obtain and use information that the
Company regards as proprietary. Policing unauthorized use of the Company's
products is difficult. Software piracy can be expected to be a persistent
12
15
problem. In addition, the laws of some foreign countries do not protect the
Company's proprietary rights as fully as do the laws of the United States.
The Company is not aware that it is infringing any proprietary rights
of third parties. There can be no assurance, however, that third parties will
not claim infringement by the Company with respect to Essbase or enhancements
thereto.
The Company relies upon certain software that it licenses from third
parties, including software that is integrated with the Company's internally
developed software and used in Essbase to perform key functions. There can be no
assurance that these third-party software licenses will continue to be available
to the Company on commercially reasonable terms. See "Business - Proprietary
Rights."
Product Liability. The Company's license agreements with its customers
typically contain provisions designed to limit the Company's exposure to
potential product liability claims. It is possible, however, that the limitation
of liability provisions contained in the Company's license agreements may not be
effective as a result of federal, state or local laws or ordinances enacted in
the future or unfavorable judicial decisions. Although the Company has not
experienced any product liability claims to date, the sale and support of
Essbase by the Company may entail the risk of such claims. A successful product
liability claim brought against the Company could have a material adverse effect
upon the Company's business, operating results and financial condition.
ITEM 2. PROPERTIES
The Company's principal administrative, sales, marketing, and research
and development facility occupies approximately 100,000 square feet in
Sunnyvale, California pursuant to a lease which expires in December 2002. The
Company is currently subleasing approximately 20,000 square feet and expects to
expand into this space within the next two years. In addition, the Company also
leases sales offices in the metropolitan areas of Atlanta; Boston; Chicago;
Dallas; Houston; Los Angeles; Washington, D.C.; Vancouver, BC, Canada; London,
England; Frankfurt, Hamburg and Munich, Germany; Paris, France; and Sydney,
Australia. The Company believes that its existing facilities are adequate for
its current needs but anticipates that it will need to seek additional space in
the future. The Company believes that suitable additional or alternative space
will be available in the future on commercially reasonable terms as needed.
ITEM 3. LEGAL PROCEEDINGS
PENDING AND POTENTIAL LITIGATION
On September 27, 1996, the Company filed an action against Comshare in
the United States District Court for the Northern District of California. The
action alleges that Comshare has breached its obligations under its license
agreement with the Company by underpaying royalties and that Comshare
fraudulently induced the Company into entering into the agreement. The action
seeks monetary and injunctive relief with respect to future distribution of
Essbase. On October 21, 1996, Comshare filed its answer and counterclaim against
the Company alleging interference with prospective economic advantage, unfair
competition, defamation and disparagement, and breach of contract. In its
counterclaim, Comshare alleged that the Company disseminated false and
misleading information concerning Comshare's rights under the agreement and that
the Company violated certain provisions of the agreement. On January 21, 1997,
the Court entered an order denying Comshare's motion for a preliminary
injunction and denying Comshare's motion to dismiss the Company's fraud claim
and to strike the Company's request for exemplary damages. On January 31, 1997,
the Company filed its first amended complaint for fraud and breach of written
contract. On May 6, 1997, the Court entered an order denying Comshare's motion
to dismiss the Company's amended fraud claim and to strike the Company's request
for injunctive relief and attorney's fees, and granting Comshare's motion to
strike the Company's request for exemplary damages. On May 20, 1997, Comshare
filed its answer to the first amended complaint as well as its first amended
counterclaim against the Company alleging fraud, breach of contract,
interference with prospective economic advantage, unfair competition, and
defamation and disparagement. Comshare claims that the Company fraudulently
induced Comshare into entering into the agreement, has violated certain
provisions of the agreement, and has disseminated false and misleading
information concerning Comshare's rights under the agreement, and that Comshare
has overpaid royalties to
13
16
the Company by at least $711,828 as a result of alleged improper and
inaccurate information provided by the Company. Comshare seeks monetary
damages, injunctive relief, a declaratory judgment regarding the parties'
rights and obligations under the agreement, and attorney's fees. The parties
are presently engaged in discovery and a jury trial is set for May 4, 1998.
The Company believes that it has meritorious claims against Comshare
and that it has meritorious defenses to each of Comshare's counterclaims, and
intends to vigorously pursue its claims and defend itself against the
counterclaims. The outcome of the litigation is uncertain at this time and no
assurance can be given as to the outcome of the litigation. However, management
does not believe that the outcome of the litigation will have a material adverse
effect on the Company although it does anticipate unpredictable variations in
royalty revenues and substantial legal costs during the course of the
litigation.
On April 16, 1996, Gentia Software filed an action against the Company
in the United States District Court for the District of Massachusetts (the
"Massachusetts action") seeking a declaratory judgment that U.S. Patent No.
5,359,724 (the "'724 patent"), owned by the Company, is invalid and not
infringed by Gentia Software's products. On April 18, 1996, the Company filed an
action against Gentia Software in the United States District Court for the
Northern District of California (the "California action") alleging that Gentia
Software infringes the '724 patent, and seeking a permanent injunction and
monetary damages, including treble damages. On May 8, 1996, Gentia Software
filed its answer in the California action, including a counterclaim seeking to
declare the '724 patent invalid. Gentia Software also filed a motion to dismiss,
stay or transfer the action to Massachusetts, which the California court denied
on December 12, 1996. On May 13, 1996, the Company filed a motion to transfer
the Massachusetts action to California, which was granted on November 18, 1996.
The Company filed its answer and a counterclaim for patent infringement in the
transferred case on December 12, 1996. On April 7, 1997, the Court consolidated
both actions into a single case pending in the United States District Court for
the Northern District of California. The parties are presently engaged in
discovery and a jury trial is set for October 5, 1998.
The Company believes that it has meritorious claims against Gentia
Software and that it has meritorious defenses against Gentia Software's claims
that the '724 patent is invalid, and intends to vigorously pursue its claims and
defend itself against Gentia Software's claims. The outcome of the litigation is
uncertain at this time and no assurance can be given as to the outcome of the
litigation. However, management does not believe that the outcome of the
litigation will have a material adverse effect on the Company.
The preceding pending litigation and any future litigation against the
Company or its employees, regardless of the outcome, is expected to result in
substantial costs and expenses to the Company and significant diversion of
attention by the Company's management personnel. See "Risk Factors - Dependence
Upon Comshare and Other Indirect Channel Partners" and "Risks Associated with
Litigation and Related Costs."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 1997.
14
17
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are biographical summaries of the executive officers of
the Company, as of March 31, 1997:
NAME AGE POSITION
---- ------ --------
James A. Dorrian............................ 44 Chairman of the Board of Directors and
Chief Executive Officer
John M. Dillon.............................. 47 President, Chief Operating Officer and
Director
Stephen V. Imbler........................... 45 Senior Vice President and Chief Financial
Officer
Kirk A. Cruikshank.......................... 41 Senior Vice President of Marketing
Mr. Dorrian, the Company's co-founder, Chief Executive Officer and
Chairman of the Board, is responsible for strategic issues including overall
corporate vision, strategic initiatives, product direction and business
alliances. Prior to co-founding the Company in 1991, Mr. Dorrian was President
of Solutions Technology, Inc., a San Francisco-based software consulting firm
specializing in financial software systems development. Previously, he was
Western States Director at Thorn EMI Computer Software, a developer of Executive
Information Systems ("EIS") software. Mr. Dorrian holds a B.A. in Economics from
Indiana University.
Mr. Dillon joined the Company in December 1993 as Vice President of
Sales. Presently, Mr. Dillon is the Company's President and Chief Operating
Officer and is responsible for worldwide field operations (sales, support,
consulting and education), marketing, product development, finance and
administration. In addition, Mr. Dillon has been a director of the Company since
December 1996. Mr. Dillon previously served as Senior Vice President of the
Company's worldwide field operations organization - Customer Advocacy (Customer
Support and Education), North American Sales, EMEA (Europe, Middle East &
Africa) Sales, Channel Sales and Field Marketing. Mr. Dillon also served three
years as Vice President of Worldwide Sales. Before joining the Company, Mr.
Dillon was a field Vice President for Interleaf, a major document management
software company. He spent five years at Oracle Corporation in various sales
management positions for the company's RDBMS, financial applications and tools
products, and held sales management positions at GRiD Systems and Tymshare/
McDonnell Douglas. Mr. Dillon served in the U.S. Navy for five years and earned
a B.S. in Engineering from the United States Naval Academy. Mr. Dillon also
holds an M.B.A. from Golden Gate University, San Francisco.
Mr. Imbler joined the Company in July 1995 as Vice President and Chief
Financial Officer. Presently, Senior Vice President and Chief Financial Officer,
Mr. Imbler is responsible for the Company's overall financial and administrative
operations. Mr. Imbler joined the Company from Gupta (now known as Centura
Software Corporation), where he was Senior Vice President of Finance and
Operations and Chief Financial Officer, responsible for managing finance,
investor relations, human resources, MIS and manufacturing facilities. Prior to
Centura Software he was Vice President and Chief Financial Officer at Quick
Response Services, Inc. He also held several executive positions at Oracle
Corporation, including Vice President, U.S. Finance and Operations, and Vice
President of Finance (Oracle Corporate). He was also a Senior Tax Manager at
Peat Marwick, San Francisco. Mr. Imbler holds a master's degree in public
accounting from the University of Texas at Austin and holds a bachelor's degree
in Piano Performance from Wichita State University.
Mr. Cruikshank joined the Company in February 1993 as Vice President of
Marketing. Presently, Senior Vice President of Marketing, Mr. Cruikshank is
responsible for product marketing, marketing communications and channel
marketing. Prior to joining the Company, Mr. Cruikshank was Vice President of
Marketing for GRiD Systems Corporation, a leading developer and retailer of
mobile computer products for government and corporate organizations worldwide.
Previously, he was the Director of Grid's Federal Systems Division. Mr.
Cruikshank holds a B.S. in Economics from Ohio Wesleyan University and a M.B.A.
from the University of Michigan.
15
18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been traded on The Nasdaq National
Market under the symbol ARSW since the completion of the Company's initial
public offering on November 7, 1995. According to the records of the Company's
transfer agent, the Company had approximately 145 stockholders of record as of
June 20, 1997. The Company believes that a significant number of beneficial
owners of its Common Stock hold shares in street name. The following table sets
forth the high and low sale prices as of the close of market of the Company's
Common Stock in each of the Company's last two fiscal years commencing with the
completion of the Company's initial public offering during the third quarter of
fiscal 1996.
HIGH LOW
---- ---
Fiscal 1996:
- ------------
Third Quarter (from November 7, 1995)........ $48.00 $34.88
Fourth Quarter............................... 47.00 29.75
Fiscal 1997:
First Quarter................................ $79.25 $43.25
Second Quarter............................... 61.63 34.00
Third Quarter................................ 42.75 21.75
Fourth Quarter............................... 36.50 24.13
The Company has not declared or paid dividends and does not anticipate
declaring or paying dividends on its Common Stock in the foreseeable future.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
YEARS ENDED MARCH 31,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- --------- ---------- ---------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Total revenues......................... $ 47,383 $ 25,134 $ 11,520 $ 4,268 $ 1,106
Gross profit........................... 42,799 23,519 10,847 3,933 1,047
Income (loss) from operations.......... 7,522 3,126 527 (2,128) (2,375)
Net income (loss)...................... 5,826 2,878 374 (2,180) (2,402)
Net income per share (1)............... $ 0.50 $ 0.27 $ 0.04 -- --
CONSOLIDATED BALANCE SHEET DATA:
Total assets........................... $ 59,589 $ 45,883 $ 6,494 $ 4,289 $ 2,302
Lease obligations, long-term........... 279 1,093 833 406 307
Stockholders' equity................... 42,572 34,306 2,305 1,920 1,108
(1) For an explanation of the number of shares used to compute net income per
share, see Note 1 of Notes to Consolidated Financial Statements. Net income
per share prior to fiscal 1995 has not been presented since such amounts are
not deemed meaningful due to the significant change in the Company's capital
structure that occurred in connection with the Company's initial public
offering.
16
19
QUARTERLY FINANCIAL INFORMATION:
FIRST SECOND THIRD FOURTH
1997 QUARTER QUARTER QUARTER QUARTER
- --------- --------- ----------- --------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Total revenues.......................... $ 9,270 $ 10,795 $ 12,474 $ 14,844
Gross profit............................ 8,383 9,695 11,266 13,455
Income from operations.................. 1,461 1,836 1,898 2,327
Net income.............................. 1,194 1,417 1,503 1,712
Net income per share.................... $ 0.10 $ 0.12 $ 0.13 $ 0.15
FIRST SECOND THIRD FOURTH
1996 QUARTER QUARTER QUARTER QUARTER
- --------- --------- ----------- --------- -------
Total revenues.......................... $ 4,766 $ 5,382 $ 6,759 $ 8,227
Gross profit............................ 4,476 5,080 6,356 7,607
Income from operations.................. 409 506 862 1,349
Net income.............................. 310 353 813 1,402
Net income per share.................... $ 0.03 $ 0.04 $ 0.07 $ 0.12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion in this report on Form 10-K contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from the results discussed in the forward-looking
statements. Factors that could cause or contribute to such differences include,
but are not limited to, those discussed in Item 1 under the heading"Risk
Factors" as well as those discussed in this section and elsewhere in this
Report.
OVERVIEW
The Company was founded in April 1991 to develop, market and support
enterprise software for management reporting, analysis and planning. The Company
commenced commercial shipments of its Essbase software in April 1992. Since
inception, all of the Company's revenues have been derived from licenses for
Essbase and related maintenance and support, training and consulting. The
Company currently expects that Essbase-related revenues will continue to account
for all or substantially all of the Company's revenues for the foreseeable
future. As a result, the Company's future operating results are dependent upon
continued market acceptance of Essbase and enhancements thereto.
17
20
RESULTS OF OPERATIONS
The following table sets forth certain items in the Company's
consolidated statements of operations as a percentage of total revenues for the
periods indicated:
YEARS ENDED MARCH 31,
-----------------------------------------
1997 1996 1995
-----------------------------------------
Revenues:
License.......................... 82.5% 85.7% 89.1%
Maintenance, support and other... 17.5 14.3 10.9
---------- --------- ----------
Total revenues................ 100.0 100.0 100.0
---------- --------- ----------
Cost of revenues:
License.......................... 1.5 2.8 2.2
Maintenance, support and other... 8.2 3.6 3.6
---------- --------- ----------
Total cost of revenues........ 9.7 6.4 5.8
---------- --------- ----------
Gross profit....................... 90.3 93.6 94.2
---------- --------- ----------
Operating expenses:
Sales and marketing.............. 50.1 55.9 61.5
Research and development......... 14.6 14.7 17.3
General and administrative....... 9.7 10.6 10.8
---------- --------- ----------
Total operating expenses...... 74.4 81.2 89.6
---------- --------- ----------
Income from operations............. 15.9 12.4 4.6
Interest and other income.......... 3.6 3.1 .3
Interest expense................... (0.6) (1.2) (1.4)
----------- ---------- -----------
Income before income taxes......... 18.9 14.3 3.5
Provision for income taxes......... (6.6) (2.8) (0.2)
----------- ---------- -----------
Net income......................... 12.3% 11.5% (3.3)%
========== ========= ===========
REVENUES
The Company's total revenues are derived from license revenues for its
Essbase software as well as software maintenance and support, training and
consulting revenues from Essbase licensees. Revenues for maintenance and support
services, training and consulting are charged separately from the license of
Essbase. License revenues are recognized upon shipment of the product if no
significant vendor obligations remain and collection of the resulting receivable
is probable. In instances where a significant vendor obligation exists, revenue
recognition is delayed until such obligation has been satisfied. Allowances for
estimated future returns, which to date have been immaterial, are provided for
upon shipment. Maintenance and support revenues consist of ongoing support and
product updates and are recognized ratably over the term of the contract, which
is typically twelve months. Revenues from training and consulting are recognized
when the services are performed. The Company has recognized revenue, for all
periods presented, in accordance with Statement of Position 91-1 entitled
"Software Revenue Recognition."
Revenues are gross revenues less allowances for estimated future
returns which are estimated and provided for at the time of shipment of the
product. The Company's total revenues increased from $11.5 million in fiscal
1995 to $25.1 million in fiscal 1996 and to $47.4 million in fiscal 1997,
representing increases of 118% and 89%, respectively. License revenues increased
from $10.3 million in fiscal 1995 to $21.5 million in fiscal 1996 and to $39.1
million in fiscal 1997, representing increases of 110% and 82%, respectively.
The increases were primarily a due to an increase in the number of licenses sold
and the average transaction size, reflecting the expansion of the Company's
direct sales organization and increased customer acceptance of Essbase. During
fiscal 1997, the Company signed new reseller agreements with a significant
number of indirect channel partners and opened international offices in Paris,
France; Frankfurt, Hamburg and Munich, Germany; and Sydney, Australia.
International revenues from the Company's direct sales force accounted for 11%,
9% and 5% of total revenues in fiscal 1997, 1996 and 1995, respectively.
Maintenance, support and other revenues increased from $1.3 million in fiscal
1995 to $3.6 million in fiscal 1996 and to $8.3 million in fiscal 1997,
primarily as a result of a larger installed base in each successive year. The
percentage of the Company's total revenues attributable to software licenses
decreased from 89% in fiscal 1995 to 86% in fiscal 1996 and to 83% in fiscal
1997 due to an increase in the
18
21
Company's installed base, which resulted in incremental maintenance, support and
other revenues. Comshare accounted for 26%, 26% and 19% of the Company's total
revenues in fiscal 1995, 1996 and 1997. See "Risk Factors -- Dependence Upon
Comshare and Other Indirect Channel Partners" and "Risks Associated with
International Operations."
COST OF REVENUES
Cost of license revenues consists primarily of product packaging,
documentation, production costs and royalties paid for licensed technologies.
Cost of license revenues increased as a percentage of license revenues from 2.5%
in fiscal 1995 to 3.3% in fiscal 1996, and decreased to 2.0% in fiscal 1997. The
increase in the cost of license revenues as a percentage of license revenues
from fiscal 1995 to fiscal 1996 was primarily due to certain costs attributable
to licensed technologies. The decrease in the cost of license revenues as a
percentage of license revenues from fiscal 1996 to fiscal 1997 was primarily
attributable to increases in sales volume and the average transaction size.
Cost of maintenance, support and other revenues consists primarily of
customer support costs and direct costs associated with providing other
services. Customer support includes telephone question and answer services,
newsletters, on-site visits and other support. Cost of maintenance, support and
other revenues decreased as a percentage of maintenance, support and other
revenues from 34% in fiscal 1995 to 25% in fiscal 1996 and increased to 46% in
fiscal 1997. The decrease from fiscal 1995 to fiscal 1996 was primarily due to
increased maintenance revenues (which have a lower cost structure than support
and training) on a larger installed customer base in each successive year. The
increase from fiscal 1996 to fiscal 1997 was primarily due to increased costs
resulting from the establishment of the Customer Advocacy Group, which is
comprised of the Technical Support, Field Services, Services Marketing and
Courseware Development departments, during the first quarter of fiscal 1997. The
Customer Advocacy Group's mission is to coordinate services for the Company's
customers. The Company expects to continue to invest in its service organization
in anticipation of supporting the increasing number of users in the customer
installed base and therefore anticipates that cost of services will increase in
absolute dollars in future periods.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses consist primarily of
personnel costs, including sales commissions, of all personnel involved in the
sales process, as well as costs of advertising, public relations, seminars and
trade shows. Sales and marketing expenses increased from $7.1 million in fiscal
1995 to $14.1 million in fiscal 1996 and to $23.7 million in fiscal 1997. The
increase in dollar amount was primarily due to costs associated with the
expansion of the direct sales force in the U.S. and Europe, including new
offices in France and Germany. Other factors included personnel increases in the
marketing group, and increased costs associated with advertising, public
relations, seminars and trade shows. Sales and marketing expenses represented
62%, 56% and 50% of total revenues in fiscal 1995, 1996 and 1997, respectively.
The decrease as a percentage of total revenues was due to growth in the
Company's total revenues. Additionally, in fiscal 1996 the Company incurred
higher sales and marketing expenses to help establish the OLAP market and to
build infrastructure. The Company believes that its sales and marketing expenses
will increase in absolute dollar amounts in fiscal 1998 as the Company continues
to hire additional sales and marketing personnel, and continues to increase
promotion and advertising expenditures.
Research and Development. Research and development expenses consist
primarily of salaries and other personnel-related expenses, consultants,
depreciation of development equipment and supplies. Research and development
expenses increased from $2.0 million in fiscal 1995 to $3.7 million in fiscal
1996 and to $7.0 million in fiscal 1997. The increase from fiscal 1995 to fiscal
1996 was primarily attributable to an increase in personnel. The increase from
fiscal 1996 to fiscal 1997 was primarily due to an increase in personnel as well
as increased consulting fees relating to product development, joint development
projects and associated support required to develop Essbase enhancements.
Research and development expenses represented 17%, 15% and 15% of total revenues
in fiscal 1995, 1996 and 1997, respectively. The decrease as a percentage of
total revenues from fiscal 1995 to 1996 was due to growth in the Company's total
revenues. The Company believes that a significant level of investment for
product research and development is required to remain competitive and,
accordingly, the Company anticipates that it will continue to devote substantial
resources to product research and development and that
19
22
research and development expenses will increase in absolute dollars in fiscal
1998. To date, all research and development costs have been expensed as
incurred. See Note 1 of Notes to Consolidated Financial Statements.
General and Administrative. General and administrative expenses consist
primarily of personnel costs for finance, investor relations, legal and
contracts, MIS, human resources and general management, as well as bad debt,
insurance and professional expenses. General and administrative expenses
increased from $1.2 million in fiscal 1995 to $2.6 million in fiscal 1996 and to
$4.6 million in fiscal 1997. Expenses increased in each period primarily due to
increased staffing necessary to manage and support the Company's growth. General
and administrative expenses represented 11%, 11% and 10% of total revenues in
fiscal 1995, 1996 and 1997, respectively. The decrease as a percentage of total
revenues from fiscal 1996 to fiscal 1997 was due to growth in the Company's
total revenues. The Company believes that its general and administrative
expenses will increase in absolute dollar amounts in fiscal 1998 as the Company
expands its administrative staff, adds infrastructure and incurs additional
costs related to being a public company, such as expenses related to directors'
and officers' insurance, investor relations programs and increased professional
fees, which include legal fees resulting from the Comshare and Gentia Software
litigation. See "Legal Proceedings" in Item 3 above. See also "Risk Factors --
Risks Associated with Litigation and Related Costs."
INTEREST AND OTHER INCOME AND INTEREST EXPENSE
Interest and other income represents interest income earned on the
Company's cash, cash equivalents and short-term investments, and other income
including foreign exchange gains and losses. Interest and other income increased
from $39,000 in fiscal 1995 to $772,000 in fiscal 1996 and to $1.7 million in
fiscal 1997. Interest income increased in each period primarily due to the
investment of the proceeds from the Company's initial public offering completed
in November 1995. Foreign exchange gains and losses have been immaterial to
date. Interest expense represents interest expense on capital equipment leases.
PROVISION FOR INCOME TAXES
The Company provided $24,000 in alternative minimum income tax for
fiscal 1995. The provision for income tax was $716,000 in fiscal 1996 and $3.1
million in fiscal 1997. The Company's effective income tax rate was 20% for
fiscal 1996 and 35% for fiscal 1997. The Company expects that its effective tax
rate will increase to approximately 37% in fiscal 1998.
The Company had gross deferred tax assets of $4.2 million at March 31,
1997. No valuation allowance has been provided since such deferred tax assets
are expected to be realized through the Company's carryback capacity generated
during fiscal 1997 and expected future income in the next twelve months.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1997, the Company had $28.9 million in cash, cash
equivalents and short-term investments. Cash and cash equivalents are highly
liquid investments with original maturities of ninety days or less. Net cash
provided by operating activities was $1.1 million in fiscal 1995, $6.9 million
in fiscal 1996, and $1.4 million in fiscal 1997. For fiscal 1997, net cash
provided by operating activities of $1.4 million was primarily attributable to
net income of $5.8 million and increases in accrued expenses and other current
liabilities of $3.0 million, and deferred revenue of $2.2 million as well as
depreciation and amortization of $2.4 million, offset by an increases in
accounts receivable of $8.8 million and deferred income taxes of $3.3 million.
The Company used $10.8 million of cash in fiscal 1997 for the
acquisition of property and equipment primarily due to the relocation of the
Company's headquarters which was completed in December 1996. The capital
expenditures were primarily for tenant improvements for the Company's new
corporate facilities, and related furniture and equipment, as well as for
computer equipment used throughout the Company. The Company expects significant
capital expenditures in fiscal 1998 for branch office tenant improvements,
related furniture and
20
23
equipment and computer equipment. The Company also expects increases in
operating expenses going forward due to increased depreciation charges and
facility costs relating to the new and larger corporate headquarters.
The Company's current line of credit allows for borrowings of up to
$5.0 million at the bank's prime rate and expires in December 1997. As of March
31, 1997, the Company had no outstanding borrowings under its credit facility.
See Note 4 of Notes to Consolidated Financial Statements.
As of March 31, 1997, the Company's principal commitments consisted of
obligations under operating and capital leases. As of March 31, 1997, the
Company had approximately $1.0 million in outstanding borrowings under capital
leases which are payable through 1998.
The Company believes its current cash and short-term investment
balances, its credit facility and the cash flows generated from operations, if
any, will be sufficient to meet its anticipated cash needs for working capital
and capital expenditures for at least the next 12 months. Capital expenditures
are expected to increase significantly in fiscal 1998 in line with the expected
growth rate of the Company.
21
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Accountants................................................................... 23
Consolidated Balance Sheets as of March 31, 1997 and 1996........................................... 24
Consolidated Statements of Operations for the Years Ended March 31, 1997, 1996 and 1995............. 25
Consolidated Statements of Cash Flows for the Years Ended March 31, 1997, 1996 and 1995............. 26
Consolidated Statements of Stockholders' Equity for the Years Ended March 31, 1997, 1996
and 1995.......................................................................................... 27
Notes to Consolidated Financial Statements.......................................................... 28
The following financial statement schedule of the Registrant is filed
as part of this report:
Schedule II -- Valuation and Qualifying Accounts.................................................... 41
All other schedules are omitted because they are not applicable or the
required information is shown in the Consolidated Financial Statements or
notes thereto.
22
25
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Arbor Software Corporation
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Arbor Software Corporation and its subsidiaries at March 31, 1997
and 1996, and the results of their operations and their cash flows for each of
the three years in the period ended March 31, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
San Jose, California
April 18, 1997
23
26
ARBOR SOFTWARE CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
MARCH 31,
-------------------------------
1997 1996
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents............................................... $ 5,647 $ 10,698
Short-term investments.................................................. 23,204 25,965
Accounts receivable, net of allowances of $783 and $388................. 12,877 4,505
Deferred tax assets..................................................... 4,203 900
Prepaid expenses and other current assets............................... 1,051 485
------------- -------------
Total current assets................................................. 46,982 42,553
Property and equipment, net................................................. 11,424 2,923
Other assets................................................................ 1,183 407
------------- -------------
$ 59,589 $ 45,883
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................ $ 2,183 $ 1,109
Accrued expenses and other current liabilities.......................... 7,840 4,883
Deferred revenue........................................................ 5,954 3,781
Current portion of lease obligations.................................... 761 711
------------- -------------
Total current liabilities............................................ 16,738 10,484
------------- -------------
Lease obligations, long-term................................................ 279 1,093
------------- -------------
Commitments and contingencies (Note 8)
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized; none
issued and outstanding............................................... -- --
Common stock, $0.001 par value; 50,000,000 and 25,000,000 shares
authorized; 11,126,000 and 10,859,000 shares issued and
outstanding.......................................................... 11 11
Additional paid-in capital.............................................. 39,223 36,813
Retained earnings (deficit)............................................. 3,307 (2,519)
Cumulative translation adjustment....................................... 31 1
------------- -------------
Total stockholders' equity........................................... 42,572 34,306
------------- -------------
$ 59,589 $ 45,883
============= =============
See accompanying notes to consolidated financial statements.
24
27
ARBOR SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED MARCH 31,
================================================
1997 1996 1995
------------- ------------- -------------
Revenues:
License........................................... $ 39,087 $ 21,538 $ 10,268
Maintenance, support and other.................... 8,296 3,596 1,252
------------- ------------- -------------
Total revenues................................. 47,383 25,134 11,520
------------- ------------- -------------
Cost of revenues:
License........................................... 731 706 253
Maintenance, support and other.................... 3,853 909 420
------------- ------------- -------------
Total cost of revenues......................... 4,584 1,615 673
------------- ------------- -------------
Gross profit.......................................... 42,799 23,519 10,847
------------- ------------- -------------
Operating expenses:
Sales and marketing............................... 23,732 14,060 7,081
Research and development.......................... 6,954 3,685 1,999
General and administrative........................ 4,591 2,648 1,240
------------- ------------- -------------
Total operating expenses....................... 35,277 20,393 10,320
------------- ------------- -------------
Income from operations................................ 7,522 3,126 527
Interest and other income............................. 1,683 772 39
Interest expense...................................... (242) (304) (168)
------------- ------------- -------------
Income before income taxes............................ 8,963 3,594 398
Provision for income taxes............................ (3,137) (716) (24)
------------- ------------- -------------
Net income .......................................... $ 5,826 $ 2,878 $ 374
============= ============= =============
Net income per share.................................. $ 0.50 $ 0.27 $ 0.04
============= ============= =============
Shares used to compute net income per share........... 11,729 10,502 9,718
============= ============= =============
See accompanying notes to consolidated financial statements.
25
28
ARBOR SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED MARCH 31,
================================================
1997 1996 1995
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................ $ 5,826 $ 2,878 $ 374
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, amortization and other..................... 2,355 1,062 515
Loss on fixed asset disposition.......................... 26 -- --
Deferred income taxes.................................... (3,303) (900) --
Provision for doubtful accounts.......................... 397 269 106
Changes in assets and liabilities:
Accounts receivable................................. (8,769) (2,945) (876)
Prepaid expenses and other current assets........... (566) (264) (101)
Other assets........................................ (776) (183) (60)
Accounts payable.................................... 1,074 499 142
Accrued expenses and other current liabilities...... 2,957 3,925 423
Deferred revenue.................................... 2,173 2,535 573
------------- ------------- -------------
Net cash provided by operating activities....... 1,394 6,876 1,096
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of (proceeds from) short-term investments, net..... 2,761 (25,886) 1,001
Acquisition of property and equipment........................ (10,826) (1,333) (147)
------------- ------------- -------------
Net cash provided by (used in) investing activities (8,065) (27,219) 854
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock, including tax benefit related
to stock plans........................................... 2,354 28,956 20
Proceeds from issuance of preferred stock, net............... -- 100 --
Repayment of capital lease obligations....................... (764) (763) (416)
------------- ------------- -------------
Net cash provided by (used in) financing activities 1,590 28,293 (396)
------------- ------------- --------------
Effect of exchange rate changes on cash and cash equivalents...... 30 9 (9)
------------- ------------- -------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS.............. (5,051) 7,959 1,545
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.................... 10,698 2,739 1,194
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR.......................... $ 5,647 $ 10,698 $ 2,739
============= ============= =============
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest....................................... $ 242 $ 304 $ 169
Cash paid for income taxes................................... 4,478 625 7
NON-CASH TRANSACTIONS:
Acquisition of property and equipment through capital leases. -- 1,192 1,098
See accompanying notes to consolidated financial statements.
26
29
ARBOR SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
CONVERTIBLE ADDITIONAL RETAINED CUMULATIVE
PREFERRED STOCK COMMON STOCK PAID-IN EARNINGS TRANSLATION
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) ADJUSTMENT TOTAL
------ ------ ------ ------ ------- --------- ---------- -----
Balance at March 31, 1994 .............. 3,875 $4 2,152 $2 $ 7,684 $ (5,771) $ 1 $ 1,920
Issuance of common stock pursuant to
exercise of options ................. -- -- 220 -- 20 -- -- 20
Translation adjustment ................. -- -- -- -- -- -- (9) (9)
Net income ............................. -- -- -- -- -- 374 -- 374
------- --- ------- ---- ------- ------- ------ --------
Balance at March 31, 1995 .............. 3,875 4 2,372 2 7,704 (5,397) (8) 2,305
Issuance of common stock pursuant to
exercise of options and other ....... -- -- 734 1 262 -- -- 263
Issuance of Series C convertible
preferred stock ..................... 16 1 -- -- 99 -- -- 100
Issuance of common stock pursuant to
initial public offering, net ........ -- -- 1,880 2 28,715 -- -- 28,717
Conversion of preferred stock to
common stock upon completion of
initial public offering ............. (3,891) (5) 5,837 5 -- -- -- --
Exercise of preferred stock warrant and
conversion to common stock upon
completion of initial public offering -- -- 36 1 33 -- -- 34
Translation adjustment ................. -- -- - -- -- -- 9 9
Net income ............................. -- -- -- -- -- 2,878 -- 2,878
------- --- ------- ---- ------- ------- ------ --------
Balance at March 31, 1996 .............. -- -- 10,859 11 36,813 (2,519) 1 34,306
Issuance of common stock pursuant to
exercise of options and other ....... -- -- 210 -- 220 -- -- 220
Issuance of common stock pursuant to
employee stock purchase plan ........ -- -- 57 -- 999 -- -- 999
Tax benefit related to stock options ... -- -- -- -- 1,191 -- -- 1,191
Translation adjustment ................. -- -- -- -- -- -- 30 30
Net income ............................. -- -- -- -- -- 5,826 -- 5,826
------- --- ------- ---- ------- ------- ------ --------
Balance at March 31, 1997 .............. -- $-- 11,126 $ 11 $ 39,223 $ 3,307 $ 31 $ 42,572
======= === ======= ==== ======= ======= ====== ========
See accompanying notes to consolidated financial statements.
27
30
ARBOR SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY AND A SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Arbor Software Corporation (the "Company") develops and markets
enterprise software for management reporting, analysis and planning
applications. The Company was incorporated in Delaware in April 1991 and
commenced operations on that date.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries in the United Kingdom, France and
Germany. All significant intercompany accounts and transactions have been
eliminated.
REVENUE RECOGNITION
The Company's total revenues are derived from license revenues for its
Essbase software as well as software maintenance and support, training and
consulting revenues from Essbase licensees. Revenues for maintenance and support
services, training and consulting are charged separately from the license of
Essbase. License revenues are recognized upon shipment of the product if no
significant vendor obligations remain and collection of the resulting receivable
is probable. In instances where a significant vendor obligation exists, revenue
recognition is delayed until the obligation has been satisfied. Allowances for
estimated future returns, which to date have been immaterial, are provided upon
shipment. Maintenance and support revenues consist of ongoing support and
product updates and are recognized ratably over the term of the contract, which
is typically twelve months. Revenues from training and consulting are recognized
when the services are performed. The Company has recognized revenue, for all
periods presented, in accordance with Statement of Position 91-1 entitled
"Software Revenue Recognition."
Royalty revenues from indirect channel partners are generally recorded
in the month such royalties are reported to the Company, which typically occurs
in the month following the resale of Essbase by the indirect channel partner.
The Company entered into a license agreement in December 1993 with Comshare,
Inc. ("Comshare"), which provides Comshare the right to sublicense certain of
the Company's products. Under the agreement, Comshare provides the Company with
a summary of royalties earned 45 days after the end of each calendar quarter.
Royalty revenues generated under this agreement are recorded in that subsequent
quarter due to the 45 day delay before the Company receives the summary of
royalties earned and since currently such royalty revenues are not reasonably
estimable. Such royalty revenues for the quarters ended March 31, June 30,
September 30, and December 31, 1996 totaled approximately $2,440,000,
$2,540,000, $1,390,000 and $2,570,000 respectively, and were recorded by the
Company during the quarters ended June 30, September 30 and December 31, 1996
and March 31, 1997, respectively.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company invests certain of its excess cash in debt instruments of
financial institutions. All highly liquid investments with a maturity of three
months or less when purchased are considered to be cash equivalents and those
with maturities greater than three months are considered short-term investments.
The Company has classified all short-term investments as available-for-sale.
28
31
ARBOR SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist primarily of cash, cash
equivalents, short-term investments and accounts receivable. The Company invests
its excess cash in accordance with its investment policy which has been approved
by the Board of Directors and is reviewed periodically to minimize credit risk.
Accounts receivable are derived from revenues earned from customers primarily
located in the U.S. and Europe. The Company maintains reserves for potential
credit losses and historically such losses have been immaterial. One indirect
channel partner accounted for 19%, 26% and 26% of total revenues in fiscal 1997,
1996 and 1995, respectively. Revenues from international customers, primarily in
Europe, were 11%, 9% and 5% of total revenues in fiscal 1997, 1996 and 1995,
respectively.
At March 31, 1997, no single customer accounted for more than 10% of outstanding
accounts receivable. At March 31, 1996, outstanding accounts receivables from
one customer represented 16% of gross accounts receivable.
PROPERTY AND EQUIPMENT
Property and equipment, including leasehold improvements, are stated at
cost. Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, generally three years. Amortization of leasehold
improvements is computed using the straight-line method over the shorter of the
estimated useful lives of the assets or the remaining lease term.
SOFTWARE DEVELOPMENT COSTS
Software development costs are included in research and development and
are expensed as incurred. Statement of Financial Accounting Standards No. 86
("FAS 86") requires the capitalization of certain software development costs
once technological feasibility is established, which the Company defines as the
completion of a working model. The capitalized cost is then amortized on a
straight-line basis over the estimated product life, or on the ratio of current
revenues to total projected product revenues, whichever is greater. To date, the
period between achieving technological feasibility and the general availability
of such software has been short and software development costs qualifying for
capitalization have been insignificant. Accordingly, the Company has not
capitalized any software development costs.
INCOME TAXES
Income taxes are computed using the asset and liability method. Under
the asset and liability method, deferred income tax assets and liabilities are
determined based on the differences between the financial reporting and tax
basis of assets and liabilities and are measured using the currently enacted tax
rates and laws.
FOREIGN CURRENCY
The functional currency of the Company's subsidiaries in the United
Kingdom, Germany and France is the local currency. The balance sheet accounts
are translated into United States dollars at the exchange rates prevailing at
the balance sheet dates. Revenues, costs and expenses are translated into United
States dollars at average rates for the periods. Gains and losses resulting from
translation are accumulated as a component of stockholders' equity. Net gains
and losses resulting from foreign exchange transactions are included in the
consolidated statements of operations and were not significant during any of the
periods presented.
29
32
ARBOR SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NET INCOME PER SHARE
Net income per share is computed using the weighted average number of
common and common equivalent shares outstanding during the period. Common
equivalent shares consist of convertible preferred stock (using the if converted
method) and stock options and warrants (using the treasury stock method). Common
equivalent shares are excluded from the computation if their effect is
antidilutive, except that, pursuant to the Securities and Exchange Commission
Staff Accounting Bulletin, convertible preferred stock (using the if converted
method) and common equivalent shares (using the treasury stock method and the
initial public offering price) issued subsequent to March 31, 1994 through
November 6, 1995 have been included in the computation as if they were
outstanding for all periods through the effectiveness of the Company's initial
public offering.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations. The
Company provides additional pro forma disclosures as required under Statement of
Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation." See Note 6.
MANAGEMENT ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to the financial statements in
order to conform to the 1997 presentation.
RECENT ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share." This
statement is effective for the Company's fiscal year ending March 31, 1998. The
Statement redefines earnings per share under generally accepted accounting
principles. Under the new standard, primary earnings per share is replaced by
basic earnings per share and fully diluted earnings per share is replaced by
diluted earnings per share. Net income per share as reported and the unaudited
pro forma earnings per share based on the new standard are as follows for the
year ended March 31, 1997:
Net income per share as reported............... $0.50
Pro forma basic earnings per share............. $0.53
Pro forma diluted earnings per share........... $0.50
NOTE 2 -- SHORT-TERM INVESTMENTS
As of March 31, 1997 and 1996, the Company's short-term investments
consisted primarily of medium term notes, corporate notes and market auction
preferred stocks and their cost approximated fair value.
30
33
ARBOR SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- BALANCE SHEET COMPONENTS
MARCH 31,
===================================
1997 1996
----------- -------------
(IN THOUSANDS)
Property and equipment:
Computer equipment.................................... $ 7,392 $ 3,863
Furniture, fixtures and office equipment.............. 3,096 854
Leasehold improvements................................ 4,735 184
------------- -------------
15,223 4,901
Less: accumulated depreciation and amortization....... (3,799) (1,978)
-------------- --------------
$ 11,424 $ 2,923
============= =============
Accrued expenses and other current liabilities:
Income taxes payable.................................. $ 1,754 $ 991
Accrued commissions................................... 1,290 907
Accrued benefits...................................... 1,758 963
Other................................................. 3,038 2,022
------------- -------------
$ 7,840 $ 4,883
============= =============
NOTE 4 -- BANK LINE OF CREDIT
In September 1995, the Company entered into a line of credit agreement
with a bank. The credit agreement provides for working capital advances of up to
$5,000,000. Borrowings under the line of credit are limited to specified
percentages of eligible accounts receivable and are collateralized by
substantially all of the assets of the Company. Interest on borrowings is set at
the bank's prime rate. Among other provisions, the Company is required to
maintain certain financial covenants. In addition, payment of cash dividends is
prohibited without the bank's consent. The line of credit agreement was renewed
during fiscal 1997 and expires on December 16, 1997. As of March 31, 1997, there
were no borrowings outstanding under the line of credit.
NOTE 5 -- CONVERTIBLE PREFERRED STOCK AND PREFERRED STOCK WARRANT
PREFERRED STOCK
At March 31, 1997, the Company has authorized 5,000,000 shares of
undesignated preferred stock. Prior to completion of the Company's initial
public offering, the Company had authorized 4,000,000 shares of preferred stock,
of which 2,065,000 shares had been designated Series A Convertible Preferred
Stock ("Series A"), 960,000 shares had been designated Series B Convertible
Preferred Stock ("Series B") and 904,636 shares had been designated Series C
Convertible Preferred Stock ("Series C") (collectively "Preferred Shares").
Holders of Series A, B and C were entitled to receive noncumulative,
preferential dividends of $0.10, $0.275 and $0.34, respectively, per annum, when
and if declared by the Board of Directors. No such dividends were declared. Each
outstanding share of preferred stock was converted into one and one-half shares
of common stock upon the completion of the Company's initial public offering.
PREFERRED STOCK WARRANT
In August 1991 the Company issued a warrant to purchase 25,000 Series A
Convertible Preferred Shares to a company for providing equipment lease
financing (the "Warrant"). The Warrant enabled the holder to purchase 25,000
Series A Preferred Shares at $1.00 per share, subject to adjustment for
dilution, and each share of preferred stock was convertible into one and one
half shares of common stock. The Warrant was to expire on the earlier of August
2001 or five years following the Company's initial public offering. The Warrant
had nominal value on the date of issuance. The warrant was exercised in
conjunction with the Company's initial public offering. The Company issued
36,029 shares of common stock upon the net exercise and simultaneous conversion
of the warrant from preferred stock to common stock.
31
34
ARBOR SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- EMPLOYEE STOCK PLANS
STOCK OPTION PLAN
In August 1995, the Company's Board of Directors adopted, and the
stockholders subsequently approved, the 1995 Stock Option/Stock Issuance Plan
(the "1995 Plan"). The 1995 Plan serves as the successor equity incentive
program to the Company's 1992 Stock Option Plan (the "Predecessor Plan").
Outstanding options under the Predecessor Plan were incorporated into the 1995
Plan upon effectiveness of the initial public offering. No further option grants
were made under the Predecessor Plan. The incorporated options will continue to
be governed by their existing terms which are essentially the same as options
granted under the Discretionary Option Grant Program described below.
The 1995 Plan is divided into four separate components: (i) the
Discretionary Option Grant Program; (ii) the Stock Issuance Program; (iii) the
Salary Investment Option Grant Program; and (iv) the Automatic Option Grant
Program. The 1995 Plan will terminate on September 30, 2005, unless terminated
earlier by the Board.
Options granted under the Discretionary Option Grant Program are for
periods not to exceed ten years, and must be issued at prices not less than 100%
and 85%, for incentive and nonqualified stock options, respectively, of the fair
market value of the stock on the date of grant. Incentive stock options granted
to stockholders who own greater than 10% of the outstanding stock are for
periods not to exceed five years and must be issued at prices not less than 110%
of the fair market value of the stock on the date of grant. Options granted
under the Discretionary Option Grant Program are exercisable at the date of
grant and are subject to repurchase by the Company at the option exercise price
paid per share with such repurchase right lapsing with respect to 25% one year
after the date of grant and ratably each month over the remaining thirty-six
month period. The Discretionary Option Grant Program also provides for the grant
of stock appreciation rights. Stock appreciation rights provide the holders with
the election to surrender their outstanding options for an appreciation
distribution from the Company equal to the excess of the fair market value of
the vested shares of common stock subject to each surrendered option over the
aggregate exercise price payable for those shares. Such appreciation
distribution may be made in cash or in shares of common stock. No stock
appreciation rights had been granted under the 1995 Plan as of March 31, 1997.
Under the Stock Issuance Program individuals may be issued shares of
common stock directly through the purchase of shares at a price per share not
less than 85% of the fair market value at the time of issuance or as a fully
paid bonus for services rendered to the Company. No shares had been issued under
the Stock Issuance Program as of March 31, 1997.
Under the Salary Investment Option Grant Program, each executive
officer of the Company may elect, prior to the start of a calendar year, to
reduce his or her base salary for that calendar year by a designated multiple of
1%, subject to a maximum dollar amount. In return the officer will automatically
be granted, on the first trading day in the calendar year for which the salary
reduction is in effect, a non-statutory option to purchase that number of shares
of common stock determined by dividing the salary reduction amount by two-thirds
of the fair market value per share of common stock on the date of grant. The
option will be exercisable at a price per share equal to one-third of the fair
market value of the option shares on the date of grant. As a result, the total
spread on the option shares at the time of grant will be equal to the salary
reduction amount. The option will vest in a series of twelve equal monthly
installments over the calendar year for which the salary reduction is in effect.
No executive officer of the Company had elected to participate in the Salary
Investment Option Grant Program through March 31, 1997.
32
35
ARBOR SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Under the Automatic Option Grant Program, each individual who first
becomes a non-employee Board member will receive an option grant for 20,000
shares of common stock at the fair market value of the stock on the date he or
she joins the Board, provided such individual has not otherwise been in the
prior employ of the Company. In addition, at each Annual Stockholder Meeting,
beginning with the 1997 Annual Meeting, each individual who is to continue to
serve as a non-employee Board member after the meeting will receive on option
grant to purchase an additional 5,000 shares of common stock at the fair market
value of the stock on the date of grant, provided such individual has served on
the Board for at least six months. Each automatic option will have a term of ten
years, subject to earlier termination following the optionee's cessation of
Board service. Each automatic option will be immediately exercisable for all
option shares; however, any shares purchased upon exercise of the option will be
subject to repurchase by the Company, at the option exercise price paid per
share, should the optionee cease service on the Board prior to vesting in those
shares. The initial 20,000 share grant will vest in a series of four successive
equal annual installments over the optionee's period of Board service measured
from the grant date. Each additional 5,000 share grant will vest upon the
optionee's completion of one year of Board service measured from the grant date.
During fiscal 1997, 20,000 options were granted under the Automatic Option Grant
Program. As of March 31, 1997, a total of 20,000 shares had been granted under
the Automatic Option Grant Program.
During fiscal 1996, the Company granted certain options for the
purchase of common stock on which the Company will amortize approximately
$212,000 of compensation expense over the four-year vesting period of the
options. As of March 31, 1997, the Company has recognized an aggregate $80,000
of compensation expense related to these options, with $56,000 expensed during
fiscal 1997.
In recognition of the decline in the fair market value of the Company's
Common Stock in fiscal 1997, the Company repriced options to purchase
approximately 533,000 shares of Common Stock with exercise prices ranging from
$33.25 to $42.75 on December 4, 1996 to an exercise price of $26.88, which was
the fair market value of the Company's Common Stock on that date.
EMPLOYEE STOCK PURCHASE PLAN
In August 1995, the Company's Board of Directors adopted the 1995
Employee Stock Purchase Plan (the "Purchase Plan") and reserved 150,000 shares
of common stock for issuance to eligible employees. The Purchase Plan permits
eligible employees to purchase common stock through periodic payroll deductions
of up to 10% of their annual compensation. Each offering period will have a
maximum duration of 24 months and shares of common stock will be purchased for
each participant at semi-annual intervals during each offering period. The price
at which the common stock is purchased under the Purchase Plan is equal to 85%
of the lower of the fair market value of the Common Stock on the participant's
entry date into the offering period or the fair market value on the semi-annual
purchase date. No shares were issued under the Purchase Plan through March 31,
1996. During fiscal 1997, a total of 56,782 shares were issued under the
Purchase Plan. At March 31, 1997, a total of 93,218 shares were reserved for
future issuance under the Purchase Plan.
33
36
ARBOR SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of the activity under the stock option plans is as follows
(in thousands, except per share amounts):
OPTIONS OUTSTANDING
-------------------
SHARES WEIGHTED
AVAILABLE NUMBER AVERAGE
FOR GRANT OUTSTANDING EXERCISE PRICE
--------- ----------- --------------
Balance at March 31, 1994................................ 285 885 $ 0.14
Additional shares authorized........................... 600 --
Options granted at market price........................ (398) 398 $ 0.36
Options granted below market price..................... (276) 276 $ 0.50
Options exercised...................................... -- (220) $ 0.09
Options canceled....................................... 43 (43) $ 0.19
---------- ---------
Balance at March 31, 1995................................ 254 1,296 $ 0.30
Additional shares authorized .......................... 400 --
Options granted at market price ....................... (240) 240 $ 10.39
Options granted below market price .................... (232) 232 $ 3.07
Options exercised ..................................... -- (734) $ 0.32
Options canceled ...................................... 120 (120) $ 4.12
---------- ---------
Balance at March 31, 1996................................ 302 914 $ 3.26
Additional shares authorized .......................... 1,000 --
Options granted at market price........................ (1,358) 1,358 $ 31.18
Options exercised ..................................... -- (210) $ 0.94
Options canceled ...................................... 583 (583) $ 36.00
---------- ---------
Balance at March 31, 1997................................ 527 1,479 $ 16.09
========== =========
A summary of outstanding and exercisable stock options as of March 31,
1997 is as follows (in thousands, except per share amounts):
Options Outstanding Options Exercisable
================================================== ==========================
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
------ ----------- ---- ----- ----------- -----
$ 0.07 - $ 1.07 333 7.3 $ 0.43 333 $ 0.43
$2.27 - $ 3.33 208 8.0 3.02 208 3.02
$6.00 - $ 9.00 118 8.0 7.23 118 7.23
$25.00 - $25.63 226 9.7 25.34 -- --
$26.88 - $35.13 594 9.2 27.72 16 27.68
----------- ----------- --------- ------------ ---------
1,479 8.6 16.09 675 3.04
=========== ============
PRO FORMA DISCLOSURE
The Company has elected to continue to follow the provisions of APB No.
25, "Accounting for Stock Issued to Employees," for financial reporting purposes
and has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation."
The weighted average estimated grant date fair value, as defined by
SFAS 123, for options granted at market price under the Company's stock option
plans during fiscal 1997 was $9.10 per share. The weighted average estimated
grant date fair value of options granted at market price and below market price
under the Company's Stock option plans during fiscal 1996 was $3.57 and $1.08
per share, respectively. The
34
37
ARBOR SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
weighted average estimated grant date fair value, as defined by SFAS 123, for
purchase awards under the Company's Purchase Plan during fiscal 1997 and 1996
was $15.36 and $4.50, respectively. The estimated grant date fair value
disclosed by the Company is calculated using the Black-Scholes model. The
Black-Scholes model, as well as other currently accepted option valuation
models, was developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which significantly differ
from the Company's stock option awards. These models also require highly
subjective assumptions, including future stock price volatility and expected
time until exercise, which greatly affect the calculated grant date fair value.
The following weighted average assumptions are included in the
estimated grant date fair value calculations for the Company's stock option and
purchase awards:
Fiscal Fiscal
1997 1996
---- ----
Stock option plans:
Expected dividend yield............................ 0% 0%
Expected stock price volatility ................... 65% 65%
Risk free interest rate............................ 6.28% 5.88%
Expected life (years).............................. 2.41 2.75
Stock purchase plan:
Expected dividend yield............................ 0% 0%
Expected stock price volatility.................... 65% 65%
Risk free interest rate............................ 5.34% 5.44%
Expected life (years).............................. 0.58 0.97
PRO FORMA NET INCOME AND NET INCOME PER SHARE
.........Had the Company recorded compensation based on the estimated grant date
fair value, as defined by SFAS 123, for awards granted under its stock option
plans and stock purchase plan, the Company's net income and net income per share
would have been reduced to the pro forma amounts below for the fiscal years
ended March 31, 1997 and 1996 (in thousands, except per share amounts):
Fiscal Fiscal
1997 1996
---- ----
Net income as reported............................. $ 5,826 $ 2,878
Pro forma net income .............................. 2,160 2,547
Net income per share as reported................... $ 0.50 $ 0.27
Pro forma net income per share..................... 0.19 0.24
The pro forma effect on net income and net income per share for 1997
and 1996 is not representative of the pro forma effect on net income in future
years because it does not take into consideration pro forma compensation expense
related to grants made prior to fiscal year 1996.
35
38
ARBOR SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- INCOME TAXES:
The tax provisions for fiscal 1997, 1996 and 1995 consist of the
following:
YEARS ENDED MARCH 31,
==============================================
1997 1996 1995
----------- --------- --------
(IN THOUSANDS)
Provision (benefit) for income taxes:
Current:
Federal.................................. $ 4,671 $ 1,234 $ 22
State ................................... 1,438 382 2
Foreign.................................. 331 -- --
----------- ----------- -----------
6,440 1,616 $ 24
----------- ----------- -----------
Deferred:
Federal.................................. (2,315) (900) --
State ................................... (988) -- --
------------ ----------- -----------
(3,303) (900) --
------------ ------------ -----------
$ 3,137 $ 716 $ 24
=========== =========== ===========
The tax provision reconciles to the amount computed by multiplying
income before taxes by the U.S. statutory rate (35%), as follows:
YEARS ENDED MARCH 31,
====================================
1997 1996 1995
---------- --------- --------
(IN THOUSANDS)
Provision at statutory rate....................................... $ 3,137 $ 1,258 $ 135
State taxes, net of federal benefit............................... 515 247 1
Permanent differences............................................. 147 45 15
Utilization of net operating loss carryforwards................... -- (997) (127)
Utilization of research and development carryforwards............. (131) (327) --
Change in deferred tax asset...................................... (691) 380 --
Foreign loss with no federal benefit.............................. -- 110 --
Other .......................................................... 160 -- --
---------- --------- ---------
$ 3,137 $ 716 $ 24
========== ========= =========
Net deferred tax assets of $4,203,000 million at March 31, 1997 are
based on the Company's carryback capacity and expected future income in the next
twelve months. The Company provides a valuation allowance for deferred tax
assets when it is more likely than not, based on available evidence, that some
portion or all of the deferred tax assets will not be realized. Based on a
reevaluation of the realizability of future tax benefits based on income earned
in 1997, creating available carryback capacity and expected future income in the
next twelve months, the Company released $1,600,000 of the previously
established valuation allowance during fiscal 1997. Significant components of
the Company's deferred tax assets were as follows (in thousands):
MARCH 31,
================================
1997 1996
-------------- ------------
(IN THOUSANDS)
Deferred revenue.............................. $ 2,902 $ 1,258
Accrued expenses and reserves................. 988 740
Depreciation.................................. 149 75
Other......................................... 164 427
------------ ------------
4,203 2,500
Less: deferred tax asset valuation allowance -- (1,600)
------------ ------------
Net deferred tax asset........................ $ 4,203 $ 900
============ ============
36
39
ARBOR SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- COMMITMENTS AND CONTINGENCIES
The Company leases its facilities under noncancelable operating lease
agreements which expire at various dates through 2003. Certain leases provide
for escalating monthly payments and are being charged to operations ratably over
the lease term. In December 1996, the Company entered into a sublease agreement
for a portion of its Sunnyvale, California office facility with a third party,
which sublease expires in June 1998. Future rent payments under the sublease
agreement total $446,000 and $111,000 in fiscal 1998 and 1999, respectively. In
addition, the Company leases certain equipment under long-term lease agreements
that are classified as capital leases. These capital leases terminate at various
dates through 1999. Total property and equipment acquired under these
capitalized leases, which secure such borrowings, are as follows:
MARCH 31,
==============================
1997 1996
------------- -------------
(IN THOUSANDS)
Computer equipment........................................ $ 2,020 $ 2,020
Furniture, fixtures, and office equipment................. 639 639
Leasehold improvements.................................... 27 27
------------- -------------
2,686 2,686
Less: accumulated depreciation and amortization........... (1,853) (1,013)
------------- -------------
$ 833 $ 1,673
============= =============
Future minimum lease payments under all noncancelable operating and capital
leases are as follows:
OPERATING CAPITAL
LEASES LEASES
------ ------
YEAR ENDING MARCH 31, (IN THOUSANDS)
1998 ................................................... $ 1,908 $ 877
1999 ................................................... 1,505 327
2000 ................................................... 1,551 --
2001 ................................................... 1,581 --
2002 ................................................... 1,670 --
Thereafter................................................ 1,250 --
------------- -------------
Total minimum payments.................................... $ 9,465 1,204
=============
Less: amount representing interest........................ (164)
-------------
Present value of capital lease obligations................ 1,040
Less: current portion..................................... 761
-------------
Lease obligations, long-term.............................. $ 279
=============
Rent expense under operating leases totaled $1,301,000, $659,000 and
$387,000 during fiscal 1997, 1996 and 1995, respectively. Rent expense for
fiscal 1997 is net of $111,000 received under the sublease agreement.
In September 1996, the Company filed an action against Comshare, an
indirect channel partner. The action alleges that Comshare has breached its
obligations under its license agreement with the Company by underpaying
royalties and that Comshare fraudulently induced the Company into entering into
the agreement. The action seeks monetary and injunctive relief with respect to
future distribution of Essbase. In October 1996, Comshare filed its answer and
counterclaim against the Company alleging interference with prospective economic
advantage, unfair competition, defamation and disparagement, and breach of
contract. In its counterclaim, Comshare claims that the Company disseminated
false and misleading information concerning Comshare's rights under the
agreement and that the Company violated certain provisions of the agreement, and
requests monetary and injunctive relief, including punitive damages. The Company
believes that it has meritorious claims against Comshare and that it has
meritorious defenses to each of Comshare's counterclaims, and intends to
vigorously pursue its claims and defend itself against the counterclaims. The
outcome of the litigation is uncertain at this time and no assurance can be
given as to the outcome of the litigation. However,
37
40
ARBOR SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
management does not believe that the outcome of the litigation will have a
material adverse effect on the Company although it does anticipate unpredictable
variations in royalty revenues and substantial legal costs during the course of
the litigation.
In the course of its business, the Company has been named as a
defendant in certain other actions and could incur an uninsured liability in one
or more of them. Management does not believe that the outcome of either of these
litigious matters will have a material adverse effect on the Company although it
does anticipate substantial legal costs during the course of the litigation.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
38
41
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors is incorporated herein by reference
from the section entitled "Election of Directors" of the Company's definitive
Proxy Statement to be filed pursuant to Regulation 14A of the Securities
Exchange Act of 1934, as amended, for the registrant's Annual Meeting of
Stockholders to be held August 13, 1997 (the "Proxy Statement"). The Proxy
Statement is anticipated to be filed within 120 days after the end of the
registrant's fiscal year ended March 31, 1997. For information regarding
executive officers of the Company, see the information appearing under the
caption "Executive Officers of the Registrant" in Part I, Item 4a of this Report
on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is incorporated herein by
reference from the section entitled "Executive Compensation" of the Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners
and management is incorporated herein by reference from the section entitled
"Stock Ownership of Certain Beneficial Owners and Management" of the Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
39
42
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The consolidated financial statements and supplemental schedule of the
registrant as set forth under Item 8 are filed as part of this Annual
Report on Form 10-K
(a) (2) Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts is filed on page 41 of
this Report on Form 10-K.
Financial statement schedules other than the schedule listed in Item 8
have been omitted since they are either not required, not applicable,
or the information is otherwise included.
The independent accountants' report with respect to the above-listed
financial statements and schedule appears on page 23 of this report on
Form 10-K.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the registrant during the fourth
quarter of fiscal year ended 1997.
(c) Exhibit Listing
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Registrant's Restated Certificate of Incorporation
3.2 (1) Registrant's Bylaws
4.1 (1) Specimen Certificate of the Registrant's Common Stock
4.2 (1) Amended and Restated Investor Rights Agreement between the
Registrant and the Investors specified therein dated as of
September 16, 1993
10.1 (1) Master Lease Agreement and Warrant Agreement between the
Registrant and Phoenix Leasing. dated as of June 30, 1993
10.2 (1) 1992 Stock Option Plan
10.3 1995 Stock Option/Stock Issuance Plan
10.4 Employee Stock Purchase Plan
10.5 (1) Form of Indemnification Agreement
10.6 (1) License Agreement dated December 23, 1993, between the
Company and Comshare Incorporated
10.7 Real Property Lease between the Registrant and SBC&D &
Company dated as of July 16, 1996
11.1 Statement Regarding Computation of Net Income Per Share
22.1 List of subsidiaries of the Registrant
23.1 Consent of Price Waterhouse LLP
27.1 Financial Data Schedule
(1) Incorporated by reference to such exhibit as filed in the Registrant's
Registration Statement on Form S-1, filed November 6, 1995 (File No.
33-97098), as amended.
40
43
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(IN THOUSANDS)
Years Ended March 31
-----------------------------
1997 1996 1995
---- ---- ----
Balance at beginning of period ........................... $ 388 $ 208 $ 177
Additions charged to statement of operations ............. 397 269 106
Deductions from reserves.................................. (2) (89) (75)
------- ------ ------
Balance at end of period.................................. $ 783 $ 388 $ 208
======= ======= ======
41
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Sunnyvale, State of California, on June 27, 1997.
ARBOR SOFTWARE CORPORATION
By /s/ JAMES A. DORRIAN
-----------------------------
James A. Dorrian,
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on June 27, 1997.
SIGNATURE TITLE
--------- -----
/s/ JAMES A. DORRIAN Chairman of the Board of Directors,
- -------------------------- Chief Executive Officer and Director
James A. Dorrian
/s/ JOHN M. DILLON President, Chief Operating Officer
- -------------------------- and Director
John M. Dillon
/s/ DOUGLAS M. LEONE Director
- --------------------------
Douglas M. Leone
/s/ MARK W. PERRY Director
- --------------------------
Mark W. Perry
/s/ ANN L. WINBLAD Director
- --------------------------
Ann L. Winblad
/s/ STEPHEN V. IMBLER Senior Vice President and Chief Financial Officer
- -------------------------- (Principal Financial and Accounting Officer)
Stephen V. Imbler
42