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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1996
/ / 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 (I.R.S. Employer
of Identification No.)
incorporation or
organization)
1325 CHESAPEAKE TERRACE, 94089
SUNNYVALE, CALIFORNIA (Zip Code)
(Address of principal
executive office)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (408) 727-5800
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. / /
The aggregate market value of the Common Stock held by non-affiliates of the
registrant as of May 31, 1996 was $663,503,603.
The number of shares outstanding of the registrant's Common Stock as of May
31, 1996 was 10,921,870.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement dated June 24, 1996 to be
delivered to stockholders in connection with the Annual Meeting of Stockholders
to be held July 23, 1996 are incorporated by reference into Part III.
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ARBOR SOFTWARE CORPORATION
FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 31, 1996
INDEX
PAGE
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PART I
Item 1. Business....................................................................................... 1
Item 2. Properties..................................................................................... 12
Item 3. Legal Proceedings.............................................................................. 12
Item 4. Submission of Matters to a Vote of Security Holders............................................ 13
Item 4a. Executive Officers of the Registrant........................................................... 13
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters........................... 14
Item 6. Selected Consolidated Financial Data........................................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 15
Item 8. Financial Statements and Supplementary Data.................................................... 20
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures.......... 34
PART III
Item 10. Directors and Executive Officers of the Registrant............................................. 34
Item 11. Executive Compensation......................................................................... 34
Item 12. Security Ownership of Certain Beneficial Owners and Management................................. 34
Item 13. Certain Relationships and Related Transactions................................................. 34
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................ 34
Signatures ................................................................................................ 37
PART I
THE DISCUSSION IN THIS REPORT 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 THAT MAY AFFECT FUTURE RESULTS" AS WELL AS THOSE DISCUSSED IN THIS
SECTION AND ELSEWHERE IN THIS REPORT, AND THE RISKS DISCUSSED IN THE "RISK
FACTORS" SECTION INCLUDED IN THE COMPANY'S REGISTRATION STATEMENT ON FORM S-1 AS
DECLARED EFFECTIVE BY THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 6, 1995
(REG. NO. 33-97098).
ITEM 1. BUSINESS
GENERAL
Arbor Software Corporation ("Arbor" or the "Company") develops, markets and
supports client/server multidimensional database software for business
planning, analysis, and management reporting. 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 the most popular spreadsheets.
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.
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.
On-line analytical processing software is an emerging category of software
specifically designed for business planning and analysis. OLAP provides a basis
for strategic and tactical decision making by allowing users to work with large
volumes of historical and projected data located throughout an enterprise and
transform such data into useful information.
The powerful 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 resources. Essbase consists 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 intuitive, 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 realization of 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
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further the establishment of Essbase as a standard platform for on-line
analytical processing, the Company intends to ensure that Essbase adheres to
industry standards, leverages existing customer investments in information
technology and focuses on solutions in a broad range of markets.
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 that extend and
enhance Essbase functionality.
THE ESSBASE SERVER. The Essbase Server is a 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 data model, all data and data security
controls reside at the Essbase Server, where data computation functions are
performed. This approach to database 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.
The Essbase Server operates on Windows NT, OS/2 and Unix operating systems.
THE ESSBASE SPREADSHEET CLIENT. The Essbase Spreadsheet Client enables
users with a variety of third party front-ends, including 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:
- DATABASE DEFINITION. The database structure is defined using an intuitive
outline format and is stored separately from the actual database. During
the definition of the database structure, the Essbase Application Manager
provides an evolving visual representation of dimensions, hierarchical
structures within dimensions and embedded dimensional calculations.
- 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.
- DIMENSION BUILDING. The Essbase Application Manager allows new database
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.
- CALCULATIONS DEFINITION. The Essbase Application Manager allows users to
define calculations based on data in multiple dimensions which are
executed by the powerful Essbase calculation
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engine. In addition to allowing users to create custom calculation
formulas and scripts, the Essbase Application Manager can utilize over 100
pre-defined analytical functions, such as net present value and internal
rate of return which are commonly required for planning and analysis.
Calculations can be performed in the Essbase database or in defined fields
derived from other calculated data fields.
- SECURITY. The Essbase Application Manager has an intuitive graphical
interface which 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:
- 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 the data.
The API supports Microsoft Visual Basic, PowerBuilder, C or C++ and works
with Windows, Macintosh, OS/2 and Unix clients.
- 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.
- 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.
- 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.
- 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.
- ESSBASE WEB GATEWAY. Enables access to Essbase server over the World Wide
Web using web browsers. Availability targeted for the second half of
calendar 1996.
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.
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CUSTOMERS
The Company sells its products to a variety of business and other
organizations worldwide. The Company believes the following is a representative
list of the Company's customers with active licenses or contracts as of March
31, 1996.
BANKING/FINANCE
Associates Financial Services
Bank of Boston
Barclays
Barnett Bank
Chemical Bank
Citibank
Core States Financial
Fannie Mae
Finova Capital
First Chicago
Key Corporation
Standard Charter Bank
State Street Bank & Trust
UJB Financial
United Swiss Bank
CONSUMER GOODS
Chiquita Brand
Clorox
Nabisco
Nestle
Pepsi
Sara Lee Knits
Sega
Williams Sonoma
ENERGY
American Power
Atlantic Richfield
Carolina Power
Pennzoil
Shell Oil
Southern California Gas
Union Pacific Resources
INSURANCE
CNA
Liberty Mutual
Sun Life of Canada
PHARMACEUTICAL
Allergan
Merck
RETAIL
May Department Stores
Sears
Smith's Food & Drugs
J.C. Penny
TECHNOLOGY
Bay Networks
Cirrus Logic
Compaq Computer
Digital Equipment
EMC
Hewlett-Packard
Hitachi Data Systems
IBM, PC Division
Motorola
National Semiconductor
Quantum
Software Publishing
Seagate Technology
Symantec
Tandem Computers
Texas Instruments
TRW
3Com
VLSI Technology
Xerox
Zenith
OTHER
Allied Signal Automotive
British Airways
Chrysler
Computech Systems
DreamWorks Interactive
Echo Bay Mines
Essex Group
Federal Express
GTE Directories
Holiday Station Stores
Morton International
Protein Technology
Tribune
UCLA
SALES AND MARKETING
The Company markets and sells Essbase in the United States and Europe
through the Company's direct sales force and worldwide through OEMs and VARs.
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 one to
four months. Sales representatives are commissioned on a six-month rolling
average monthly compensation plan in order to motivate consistent performance.
The direct sales force is responsible for local partner support, joint sales
efforts and resolution of channel conflict. 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 72 employees as
of March 31, 1996. The sales staff is based at the Company's corporate
headquarters in Sunnyvale and at field sales
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offices in the metropolitan areas of Atlanta, Boston, Chicago, Dallas, Los
Angeles, New York, Washington, D.C. and London, England. 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.
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. The Company's indirect channel
partners include Comshare, Track Business Solutions LTD., Fiserv, QuickResponse
Services and Walker Interactive. Indirect channel revenues accounted for 28% and
29% of the Company's total revenues in fiscal 1996 and 1995, respectively. There
can be no assurance that the Company's indirect channel partners will choose, or
be able, to market or maintain and support Essbase effectively, that economic
conditions or industry demand will not adversely affect the Company's indirect
channel partners, that any indirect channel partners will continue to market and
support the Company's products or that the Company's indirect channel partners
will not devote greater resources to marketing and supporting the products of
other companies. The loss of, or a significant reduction in revenue from, any of
the Company's indirect channel partners, particularly Comshare, would have a
material adverse effect on the Company's business, operating results and
financial condition.
The Company's largest reseller is Comshare, a leading provider of executive
information systems that currently markets a family of products that are based
upon, or can be used with, Essbase, including: Commander OLAP, a complete OLAP
solution that packages the Essbase Server, Essbase Spreadsheet Client and
Essbase Applications Manager; Execu-View, an EIS product that is used with
Essbase to navigate and view multidimensional data; ADL, a data movement product
that transfers data into and between Essbase servers; and Detect and Alert,
agent software that alerts the user to defined data conditions found in Essbase.
Essbase and these value-added products are marketed and supported by Comshare
and Comshare's agents and indirect channel partners around the world. Under the
Company's agreement with Comshare, Comshare is 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. Sales attributable to
Comshare accounted for 26% of the total revenue for fiscal 1996. The Comshare
License Agreement provides that, in the event that certain competitors of
Comshare were to acquire at least a 20% equity interest in the Company,
substantially all of the Company's assets or 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 50%, and Comshare could elect to terminate the Comshare License Agreement.
Accordingly, the possibility of termination of the Comshare License Agreement or
a 50% 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 an exclusivity
provision prohibiting the Company from licensing its products to certain of the
Company's competitors, and the elimination of any potential customers limits the
Company's potential market share to some degree. The Company recently initiated
discussions with Comshare regarding alleged royalties due to the Company
pursuant to the distribution agreement with Comshare. The Company and Comshare
have initiated arbitration proceedings to resolve the dispute. See "Item 3.
Legal Proceedings."
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.
International revenues accounted for 9%, 5% and 12% of the Company's total
revenues in fiscal 1996, 1995 and 1994, respectively. In addition, although the
Company records revenues from its
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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 majority of the
Company's sales by indirect channel partners. Based on reports from Comshare,
the Company believes approximately 50% and 37% of revenues generated by Comshare
in fiscal 1996 and 1995, respectively, were derived from sales to international
customers. The Company believes that in order to increase sales opportunities
and profitability, it will be required to expand its international operations.
The Company intends to continue 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.
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
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 or British pounds
sterling, 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.
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 paid. Substantially all of the Company's direct sales to customers have
maintenance and support contracts that entitle the customers to upgrades, if and
when available, and technical 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 a
bulletin board system that provides an interactive forum and a repository for
technical tips and skills. Users of Essbase can attend regional user group
conferences throughout the year, at which Essbase skills and solutions are
exchanged. In March 1996, the company began shipping its 4.0 version of Essbase
for NT and OS/2 platforms. The Company anticipates shipping its 4.0 version of
Essbase for various Unix platforms during the second half of the 1996 calendar
year. Customers who pay for maintenance and support receive these upgrades at no
additional cost.
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 multidimensional database
technology and develop new products that
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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. The research and
development organization uses a phase oriented development process inspired by
ISO 9000. ISO 9000 certification is the designation developed by the
International Standards Organization to indicate that a company has implemented
and follows certain policies and procedures to attain high quality in the
products it produces. The Company is not certified as compliant with ISO 9000
procedures. However, the processes implemented by the Company include constant
monitoring of quality, schedule, functionality, costs and customer satisfaction.
The market addressed by the Company is very sensitive to product quality and
therefore the process is aimed at continuous improvement of product quality. 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. An API is provided
to encourage partners to connect their client tools to the core Essbase Server.
The Company has architected this server technology to be platform independent so
that it can be easily ported to Windows NT, OS/2 and Unix.
The software industry, 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 versions 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 will be materially 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. In March 1996, the Company began shipping its 4.0 version
of Esssbase for NT and OS/2 platforms. The Company anticipates shipping its 4.0
version of Essbase for various Unix platforms and its recently announced Essbase
Web Gateway module during the second half of the 1996 calendar year.
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.
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As of March 31, 1996, the Company's research and development organization
consisted of 42 full-time employees including 18 development engineers, 9
quality assurance engineers, 3 technical writers and 12 technical support
personnel. During fiscal 1996, 1995 and 1994, research and development expenses
were $3.7 million, $2.0 million and $1.3 million, or 15%, 16% and 17% of total
revenues, respectively. The Company anticipates that it will continue to commit
substantial resources to research and development in the future.
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 prospective 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 (Express), Dun & Bradstreet (Pilot Lightship Server), Planning
Sciences (Gentia) and Kenan (Acumate); (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 (Decision Suite), Informix
(Stanford Technology Group), Holistic Systems (Holos) and Microstrategy (DSS
Agent). 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 may have greater name
recognition or more extensive customer bases that could be leveraged, thereby
gaining market share to the Company's detriment. For example, Oracle could
integrate its Express software, a competing multidimensional database software
product, with other widely accepted Oracle product offerings. Arbor 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. The Company's current or future indirect
channel partners may establish cooperative relationships with current or
potential competitors of the Company, thereby limiting the Company's ability to
sell its products through particular distribution channels. Accordingly, it is
possible that new competitors or alliances among current and new competitors may
emerge and rapidly gain significant market share. Such competition could
materially adversely affect the Company's ability to obtain new contracts and
maintenance and support renewals for existing contracts on terms favorable to
the Company. Further, competitive pressures, such as those resulting from Dun &
Bradstreet's discounting of its Pilot Lightship Server software, 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.
The Company competes on the basis of certain factors, including product
quality, first-to-market product capabilities, product performance, ease of use
and customer support. The Company believes it presently competes favorably with
respect to each of these factors. However, the Company's market is still
evolving and 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
successfully will have a material adverse affect upon the Company's business,
operating results and financial condition.
8
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 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
limited number of its customers and indirect channel partners requiring release
of source code. 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 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. In October 1995, the Company received correspondence from counsel to
Kenan Systems Corporation ("Kenan") asserting that the Company's use of the
trademark "Arbor" infringes Kenan's trademark rights. The Company has
investigated Kenan's use of the Arbor trademark, the differences between Kenan's
products and the Company's products, the market segment to which such products
are marketed, the manner in which such products are marketed and other factors.
Based upon facts currently known to it, the Company believes that it has
meritorious defenses to Kenan's claim of infringement. However, there can be no
assurance that the Company would prevail in the event of any litigation
regarding Kenan's claim, and, if Kenan were to bring such an action, the Company
could be required to change its name and adopt a new trademark to replace the
Arbor mark. In such event, the Company could incur significant additional
expenses attendant to related litigation and the marketing of a replacement
trademark. 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.
9
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.
EMPLOYEES
As of March 31, 1996, the Company had a total of 130 employees, including 42
in research and development and technical support, 72 in sales and marketing and
related customer support services and 16 in administration. Of these employees,
118 were located in the United States and 12 were located in the United Kingdom.
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'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.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company operates in a rapidly changing environment that involves a
number of risks, some of which are beyond the Company's control. The following
discussion highlights some of these risks. These risks should be read in
conjunction with the "Risk Factors" section included in the Company's
Registration Statement on Form S-1 as declared effective by the Securities and
Exchange Commission on November 6, 1995 (Reg. No. 33-97098).
LIMITED OPERATING HISTORY; FLUCTUATIONS IN QUARTERLY RESULTS; FUTURE
OPERATING RESULTS UNCERTAIN. The Company commenced operations in April 1991 and
did not begin shipping the initial version of Essbase until April 1992. The
Company's limited operating history makes the prediction of future operating
results difficult, if not impossible. 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 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, if any, 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 or 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. In addition, the
operating results of many
10
software companies reflect seasonal trends, and the Company's business,
operating results and financial condition may be affected by such trends in the
future. Essbase orders are typically shipped shortly after receipt, and,
consequently order backlog at the beginning of any quarter has in the past
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
quarter's revenues are derived from sales of the Company's Essbase software in
the prior quarter by Comshare. Revenues from Comshare accounted for 26% of total
revenues in each of fiscal 1996 and 1995. 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 will not fluctuate significantly in
subsequent periods or terminate entirely.
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 recently experienced significant revenue growth, the Company does not
believe that such growth rates are sustainable. Accordingly, the rate at which
the Company has grown in the past should not be considered indicative of future
revenue growth, if any, or of future operating results.
The Company's expense levels are based in significant part on the Company's
expectations of future revenues and therefore 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 adversely
affected.
PRODUCT CONCENTRATION; DEPENDENCE UPON THE EMERGING MARKET FOR
MULTIDIMENSIONAL DATABASE SOFTWARE FOR ON-LINE ANALYTICAL PROCESSING. All of
the Company's revenues to date have been derived from licenses for Essbase and
related 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.
Although demand for Essbase has grown in recent years, the market for
multidimensional database software for on-line analytical processing is still
emerging and there can be no assurance that it will continue to grow or that,
even if the market does grow, businesses will adopt 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
11
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.
NEED TO MANAGE A CHANGING AND GROWING BUSINESS. The Company has recently
experienced a period of significant growth. As a result of such growth, the
Company currently is seeking additional facilities in which to operate. The
failure to find additional facilities could have a material adverse effect upon
the Company's business, operating results and financial condition. 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.
PENDING AND POTENTIAL LITIGATION. The Company and Comshare have initiated
arbitration proceedings relating to royalty payments to the Company by Comshare.
The Company also is involved in litigation relating to alleged infringement of a
patent held by the Company by Planning Sciences, Inc. and Planning Sciences
International plc (collectively, "Planning Sciences"). These disputes, and any
additional litigation, may result in substantial costs and expenses to the
Company and significant diversion of management time and attention. See "Item 3.
Legal Proceedings."
POTENTIAL VOLATILITY OF STOCK PRICE. The market price of the shares of
Common Stock is highly volatile and may be significantly affected by factors
such as actual or anticipated fluctuations in the Company's operating results,
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 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.
ITEM 2. PROPERTIES
The Company's principal administrative, sales, marketing, and research and
development facility occupies approximately 26,000 square feet in Sunnyvale,
California pursuant to a lease which expires in March 1997. In addition, the
Company also leases sales offices in the metropolitan areas of Atlanta, Boston,
Chicago, Dallas, Los Angeles, New York, Washington, D.C. and London, England.
The Company believes that its existing facilities will be inadequate for its
needs in the near future and is currently seeking additional space. The failure
to secure suitable additional or alternative space on commercially reasonable
terms could have a material adverse impact upon the Company's business,
operating results and financial condition.
ITEM 3. LEGAL PROCEEDINGS
PENDING AND POTENTIAL LITIGATION
In October 1995, the Company received correspondence from counsel to Kenan
Systems Corporation ("Kenan") asserting that the Company's use of the name
"ARBOR" infringes Kenan's trademark rights. The Company has investigated Kenan's
use of ARBOR as a product name, the differences between Kenan's products and the
Company's products, the market segment to which such products are marketed, the
manner in which such products are marketed and other factors. Based upon facts
currently known to it, the Company believes that it has meritorious defenses to
Kenan's claim of
12
infringement. However, there can be no assurance that the Company would prevail
in the event of any litigation regarding Kenan's claim, and, if Kenan were to
bring such an action, the Company could be required to change its name and adopt
a new trademark to replace the Arbor mark. In such event, the Company could
incur significant additional expenses attendant to related litigation and the
marketing of a replacement trademark.
The Company recently initiated discussions with Comshare regarding alleged
royalties due to the Company pursuant to the distribution agreement with
Comshare. The Company and Comshare have initiated arbitration proceedings to
resolve the dispute.
In April 1996, Planning Sciences filed an action for declaratory judgment
against the Company in the United States District Court for the District of
Massachusetts alleging that U.S. Patent No. 5,359,724 ("the '724 patent"), owned
by the Company, is invalid and not infringed by Planning Sciences' products. On
April 18, 1996, the Company filed an action against Planning Sciences in the
United States District Court, Northern District of California alleging that
Planning Sciences infringes the '724 patent, seeking an injunction and treble
damages.
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 1996.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are biographical summaries of the current executive officers
of the Company, as of March 31, 1996:
NAME AGE POSITION
- ----------------------- --- ----------------------------------------
James A. Dorrian 43 President, Chief Executive Officer and
Director
Kirk A. Cruikshank 40 Vice President of Marketing
George H. Colliat 49 Vice President of Engineering
John M. Dillon 46 Vice President of Sales
Stephen V. Imbler 44 Vice President of Finance and Chief
Financial Officer
Mr. Dorrian, co-founder of the Company, has served as its President and
Chief Executive Officer since the inception of the Company in April 1991. Prior
to co-founding the Company, Mr. Dorrian was the President of Solutions
Technology, Inc., a software consulting firm specializing in financial software
systems development. Previously, Mr. Dorrian was Western States Director for
Thorn EMI Computer Software, a developer of Executive Information Systems
software. Mr. Dorrian holds a B.A. in Economics from Indiana University.
Mr. Cruikshank joined the Company in February 1993 as Vice President of
Marketing. Prior to joining the Company, Mr. Cruikshank was Vice President of
Marketing for GRiD Systems Corporation ("GRiD"). He was employed by GRiD for ten
years in various positions including director of the company's Federal Systems
Division. Prior to joining GRiD, Mr. Cruikshank held sales and marketing
positions with Electronic Data Systems, Rolm and Intercomp. Mr. Cruikshank holds
an M.B.A. from the University of Michigan and a B.A. in Economics from Ohio
Wesleyan University.
Mr. Colliat joined the Company in September 1994 as Vice President of
Engineering. From October 1993 to August 1994, Mr. Colliat was Vice President of
Product Management for Gupta Corporation ("Gupta"). From 1989 to 1993, Mr.
Colliat was employed by Bull Information Systems where his last position was
Vice President Database and Information Access. Between 1983 and 1989, Mr.
Colliat was employed by Alcatel/ITT Information Systems where he was Vice
President of Technical Operations. Mr. Colliat holds an M.S. in Electrical
Engineering from Stanford University and an Engineer's Degree from Institut
National des Sciences Appliquees.
13
Mr. Dillon joined the Company in December 1993 as Vice President of Sales.
From June 1992 to November 1993, Mr. Dillon was at Interleaf where he was a
field sales Vice President. From April 1988 to June 1992, Mr. Dillon was at
Oracle where he was a regional manager. Mr. Dillon holds a B.S. in Engineering
from the U.S. Naval Academy and an M.B.A. from Golden Gate University.
Mr. Imbler joined the Company in July 1995 as Vice President of Finance and
Chief Financial Officer. From October 1994 to June 1995, Mr. Imbler was Senior
Vice President of Finance and Operations and Chief Financial Officer for Gupta.
From 1993 to 1994, Mr. Imbler was employed by QuickResponse Services, Inc. where
he served as Vice President, Chief Financial Officer and Secretary. Between 1987
and 1993, Mr. Imbler was employed by Oracle where he served as Vice President,
Finance. Mr. Imbler holds a B.M. in Piano Performance from Wichita State
University and an M.P.A. from the University of Texas at Austin.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market tier of
The Nasdaq Stock 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 approximated 384 stockholders
of record as of June 14, 1996. Because many of such shares are held by brokers
and other institutions on behalf of stockholders, the Company is unable to
estimate the total number of stockholders represented by these record holders.
The following table sets forth the low and high sale price as of the close of
market of the Company's Common Stock in each of the Company's last two fiscal
quarters.
HIGH LOW
----- ---------
Fiscal 1996:
Third Quarter (from November 7, 1995)........................................................... $ 48 $ 34 7/8
Fourth Quarter.................................................................................. 47 29 3/4
The Company has not paid dividends and does not anticipate declaring
dividends on its Common Stock in the foreseeable future.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
PERIOD
YEAR ENDED MARCH 31, ENDED
------------------------------------ MARCH
1996 1995 1994 1993 31, 1992
------- ------- -------- -------- --------
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE DATA)
CONSOLIDATED
STATEMENT
OF
OPERATIONS
DATA:
Total
revenues... $25,134 $11,520 $ 4,268 $ 1,106 $ --
Income
(loss)
from
operations... 3,126 527 (2,128) (2,375) (1,201)
Net
income
(loss)... 2,878 374 (2,180) (2,402) (1,189)
Net
income
per
share
(1)... 0.27 0.04 -- -- --
CONSOLIDATED
BALANCE
SHEET DATA:
Total
assets... 45,883 6,494 4,289 2,302 1,097
Lease
obligations,
long-term... 1,093 833 406 307 85
Stockholders'
equity... 34,306 2,305 1,920 1,108 893
- ------------------------
(1) For an explanation of the number of shares used to compute net income per
share, see Note 1 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.
14
QUARTERLY FINANCIAL INFORMATION:
FIRST SECOND THIRD FOURTH
1996 QUARTER QUARTER QUARTER QUARTER
- ------------------------------------------------------------ --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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........................................ .03 .04 .07 .12
1995
- ------------------------------------------------------------
Total revenues.............................................. $ 2,100 $ 2,489 $ 2,979 $ 3,951
Gross profit................................................ 1,959 2,307 2,798 3,783
Income from operations...................................... 25 90 142 271
Net income.................................................. 7 53 94 219
Net income per share........................................ .00 .01 .01 .02
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE DISCUSSION IN THIS REPORT 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 THAT MAY AFFECT FUTURE RESULTS" AS WELL AS THOSE DISCUSSED IN THIS
SECTION AND ELSEWHERE IN THIS REPORT, AND THE RISKS DISCUSSED IN THE "RISK
FACTORS" SECTION INCLUDED IN THE COMPANY'S REGISTRATION STATEMENT ON FORM S-1 AS
DECLARED EFFECTIVE BY THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 6, 1995
(REG. NO. 33-97098).
OVERVIEW
Arbor was founded in April 1991 to develop, market and support client/server
multidimensional database software for business planning and analysis. 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.
Arbor sells its Essbase software and related maintenance, support and other
services through the Company's direct sales force and its indirect channel
partners. In fiscal 1996, indirect channel partners accounted for approximately
28% of the Company's total revenues, with Comshare, the Company's largest
indirect channel partner, accounting for 26% of the Company's total revenues
during this period. In fiscal 1995, indirect channel partners accounted for
approximately 29% of the Company's total revenues, with Comshare, the Company's
largest indirect channel partner, accounting for 26% of the Company's total
revenues during this period. The Company did not sell its product through
indirect channels prior to fiscal 1995. 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 economic conditions or industry demand will
not adversely affect these or other indirect channel partners, that the Company
will be able to effectively manage channel conflicts or that these indirect
channel partners will not devote greater resources to marketing and supporting
the products of other companies. 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. The Comshare License Agreement
provides that, in the event that certain competitors of Comshare were to acquire
at least a 20% equity interest in the Company, substantially all of the
Company's assets or substantially all of the intellectual property rights to the
Company's Essbase software, then the license revenues payable by Comshare to the
15
Company under the agreement would be reduced by 50%, and Comshare could elect to
terminate the Comshare License Agreement. Accordingly, the possibility of
termination of the Comshare License Agreement or a 50% reduction in license
revenues from Comshare could discourage potential acquisition proposals and
could delay or prevent a change in control of the Company. The loss of, or a
significant reduction in revenues from, any of the Company's indirect channel
partners, particularly Comshare, could have a material adverse effect on the
Company's business, operating results and financial condition. The Company
recently initiated discussions with Comshare regarding alleged royalties due to
the Company pursuant to the distribution agreement with Comshare. The Company
and Comshare have initiated arbitration proceedings to resolve the dispute. See
"Item 3. Legal Proceedings."
Since inception, the Company has invested significant resources in
developing its client/server multi-dimensional database software, as well as
building its sales and marketing organizations. As a result, since inception the
Company's operating expenses have increased in absolute dollar amounts. The
Company expects to hire additional sales and marketing personnel and to increase
its promotion and advertising expenditures for fiscal 1997.
Although the Company has experienced significant growth in total revenues in
recent years, the Company does not believe that such 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.
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:
YEAR ENDED MARCH 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
Revenues:
License................................................... 85.7% 89.1% 90.3%
Maintenance, support and other............................ 14.3 10.9 9.7
----- ----- -----
Total revenues.......................................... 100.0 100.0 100.0
----- ----- -----
Cost of revenues:
License................................................... 2.8 2.2 3.8
Maintenance, support and other............................ 3.6 3.6 4.0
----- ----- -----
Total cost of revenues.................................. 6.4 5.8 7.8
----- ----- -----
Gross profit................................................ 93.6 94.2 92.2
----- ----- -----
Operating expenses:
Sales and marketing....................................... 55.9 61.5 89.8
Research and development.................................. 14.7 17.3 29.5
General and administrative................................ 10.6 10.8 22.8
----- ----- -----
Total operating expenses................................ 81.2 89.6 142.1
----- ----- -----
Income (loss) from operations............................... 12.4 4.6 (49.9)
Interest and other income................................... 3.1 0.3 1.1
Interest expense............................................ (1.2) (1.4) (2.3)
----- ----- -----
Income (loss) before income taxes........................... 14.3 3.5 (51.1)
Provision for income taxes.................................. (2.8) (0.2) --
----- ----- -----
Net income (loss)........................................... 11.5% 3.3% (51.1)%
----- ----- -----
----- ----- -----
16
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, including the element of
licensing fees attributable to the initial warranty period, 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 by 170% from $4.3 million in fiscal 1994 to
$11.5 million in fiscal 1995 and by 118% to $25.1 million in fiscal 1996.
License revenues increased by 167% from $3.9 million in fiscal 1994 to $10.3
million in fiscal 1995 and by 110% to $21.5 million in fiscal 1996, primarily as
a result of an increase in the number of licenses sold and average transaction
size, reflecting increased acceptance of Essbase and expansion of the Company's
direct sales organization. Maintenance, support and other revenues increased
from $415,000 in fiscal 1994 to $1.3 million in fiscal 1995 and to $3.6 million
in fiscal 1996, 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 90% in fiscal 1994 to 89% in fiscal 1995 and to
86% in fiscal 1996 due to an increase in the Company's installed base, which
resulted in an increase in maintenance, support and other revenues. In each of
fiscal 1996 and 1995, revenues attributable to Comshare accounted for 26% of the
Company's total revenues.
International revenues from the Company's direct sales force accounted for
9%, 5% and 12% of total revenues in fiscal 1996, 1995 and 1994, respectively.
The Company established its direct international sales force during fiscal 1994.
The percentage of total revenues from direct international sales decreased in
fiscal 1995 primarily due to the expansion of the domestic direct sales force
and the establishment of an indirect channel partnership with Comshare. The
percentage of total revenues from direct international sales increased in fiscal
1996 primarily due to the expansion of the direct sales force in the UK. The
Company records revenues from Comshare and other United States-based indirect
channel partners as domestic revenues, although such partners sell the Company's
products both domestically and internationally. Based on reports received from
Comshare, the Company believes that approximately 50% and 37% of revenues
generated by Comshare were derived from sales to international customers in
fiscal 1996 and 1995, respectively.
The Company intends to continue to expand its sales and marketing activities
outside the United States, which will require significant management attention
and financial resources. The Company's direct international revenues involve a
number of 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, currency fluctuations 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 derived from
international licensing and service or that the foregoing factors will not have
a material adverse effect on the Company's future international license and
maintenance, support and other revenues and, consequently, on the Company's
business, operating results and financial condition. Failure to sustain or
increase such revenues would materially and adversely affect the Company's
business, operating results and financial condition.
17
COST OF REVENUES
Cost of license revenues consists primarily of product packaging,
documentation and production costs. Cost of license revenues decreased as a
percentage of license revenues from 4.2% in fiscal 1994 to 2.5% in fiscal 1995,
and increased to 3.3% in fiscal 1996. The decrease in the cost of license
revenues as a percentage of license revenues from fiscal 1994 to fiscal 1995 was
primarily attributable to increases in the average transaction size. 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.
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 42% in fiscal 1994 to 34% in fiscal 1995 and to 25% in fiscal
1996, primarily as a result of increased maintenance revenues (which has a lower
cost structure than support costs and training) on a larger installed customer
base in each successive year.
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 $3.8 million in fiscal
1994 to $7.1 million in fiscal 1995 and to $14.1 million in fiscal 1996. The
increases reflected the hiring of additional sales and marketing personnel in
connection with the building of the Company's direct sales force and higher
sales commissions associated with increased sales volume. Sales and marketing
expenses represented 90%, 62% and 56% of total revenues in fiscal 1994, 1995 and
1996, respectively. The decrease as a percentage of total revenues was due to
growth in the Company's total revenues. The Company believes that its sales and
marketing expenses will increase in absolute dollar amounts in fiscal 1997 as
the Company continues to hire additional sales and marketing personnel and
continues to increase promotion and advertising expenditures in fiscal 1997.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of salaries and other personnel-related expenses, depreciation of
development equipment and supplies. Research and development expenses increased
from $1.3 million in fiscal 1994 to $2.0 million in fiscal 1995 and to $3.7
million in fiscal 1996. The increase in each of these periods was primarily
attributable to an increase in personnel. Research and development expenses
represented 30%, 17% and 15% of total revenues in fiscal 1994, 1995 and 1996,
respectively. The decrease as a percentage of total revenues 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
research and development expenses will increase in absolute dollars in fiscal
1997. 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, MIS, human resources and general
management, as well as insurance and professional expenses. General and
administrative expenses increased from $971,000 in fiscal 1994 to $1.2 million
in fiscal 1995 and to $2.6 million in fiscal 1996. Expenses increased in each
period primarily due to increased staffing necessary to manage and support the
Company's growth. General and administrative expenses represented 23%, 11% and
11% of total revenues in fiscal 1994, 1995 and 1996, respectively. The decrease
as a percentage of total revenues from fiscal 1994 to fiscal 1995 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
1997 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.
18
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. Foreign exchange gains have been immaterial to date.
Interest expense represents foreign exchange losses which have been immaterial
to date, and interest expense on capital equipment leases.
PROVISION FOR INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." The
Company incurred net operating losses in fiscal 1994 and consequently paid no
federal, state or foreign income taxes. The Company provided $24,000 in
alternative minimum income tax for fiscal 1995. The Company's effective income
tax rate was 20% for fiscal 1996. The Company expects that its effective tax
rate will increase in fiscal 1997.
The Company had gross deferred tax assets of $2.6 million at March 31, 1996
which are partially reserved due to uncertainty of realization. Net deferred tax
assets of $900,000 at March 31, 1996 are based on the Company's carryback
capacity. Management believes that, based on a number of factors, the available
objective evidence creates sufficient uncertainty regarding the realizability of
the remainder of the deferred tax assets such that a partial valuation allowance
has been recorded. These factors include the lack of a significant history of
material profits, recent increases in expense levels to support the Company's
growth, the fact that the market in which the Company competes is intensely
competitive and characterized by rapidly changing technology, the materiality of
revenues from indirect channel partners and the uncertainty regarding market
acceptance of new versions of the Company's Essbase software. The Company will
continue to assess the realizability of the deferred tax assets based on actual
and forecasted operating results.
LIQUIDITY AND CAPITAL RESOURCES
In November 1995, the Company completed its initial public offering and its
common stock began trading on the Nasdaq National Market under the symbol ARSW.
Through the offering, the Company sold 1,880,000 shares of its common stock
which generated approximately $28.7 million of cash, net of underwriting
discounts, commissions and other offering costs.
As of March 31, 1996, the Company had $36.6 million in cash, cash
equivalents and short-term investments. Net cash used in operating activities
was $1.8 million in fiscal 1994, and net cash provided by operating activities
was $1.1 million in fiscal 1995 and $6.9 million in fiscal 1996. For fiscal
1996, net cash provided by operating activities of $6.9 million was primarily
attributable to net income of $2.9 million and increases in accrued expenses and
other current liabilities of $3.9 million and deferred revenue of $2.5 million,
offset by an increase in accounts receivable of $2.7 million.
The Company's current line of credit allows for borrowings of up to $3.0
million at the bank's prime rate plus 0.5% and expires in July 1996. As of March
31, 1996, the Company had no outstanding borrowings under its credit facility.
See Note 5 of Notes to Consolidated Financial Statements.
As of March 31, 1996, the Company's principal commitments consisted of
obligations under operating and capital leases. As of March 31, 1996, the
Company had $1.8 million in outstanding borrowings under capital leases which
are payable through 1998.
Deferred revenues consist primarily of the unrecognized portion of revenues
received under maintenance and support contracts (which revenues are deferred
and recognized ratably over the term of such contracts). Capital expenditures in
fiscal 1996 were primarily for computer workstations used for product
development, product demonstrations, customer benchmarks and customer support.
The Company expects similar capital expenditures in fiscal 1997. See Note 9 of
Notes to Consolidated Financial Statements.
The Company believes its current cash 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.
19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
-----
Report of Independent Accountants.......................................................................... 21
Consolidated Balance Sheets as of March 31, 1996 and 1995.................................................. 22
Consolidated Statements of Operations for the Years Ended March 31, 1996, 1995 and 1994.................... 23
Consolidated Statements of Cash Flows for the Years Ended March 31, 1996, 1995 and 1994.................... 24
Consolidated Statements of Stockholders' Equity for the Years Ended March 31, 1996, 1995 and 1994.......... 25
Notes to Consolidated Financial Statements................................................................. 26
The following financial statement schedule of The Registrant is filed as part of this report:
Schedule II -- Valuation and Qualifying Accounts........................................................... 36
All other schedules are omitted because they are not applicable or the
required information is shown in the Consolidated Financial Statements or notes
thereto.
20
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 subsidiary at March 31, 1996 and
1995, and the results of their operations and their cash flows for each of the
three years in the period ended March 31, 1996, 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 22, 1996
21
ARBOR SOFTWARE CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
MARCH 31,
--------------------
1996 1995
--------- ---------
Current assets:
Cash and cash equivalents................................................................ $ 10,698 $ 2,739
Short-term investments................................................................... 25,965 79
Accounts receivable, net of allowances of $388 and $208.................................. 4,505 1,829
Deferred tax assets...................................................................... 900 --
Prepaid expenses and other current assets................................................ 485 221
--------- ---------
Total current assets................................................................... 42,553 4,868
Property and equipment, net................................................................ 2,923 1,402
Other assets............................................................................... 407 224
--------- ---------
$ 45,883 $ 6,494
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................................................... $ 1,109 $ 610
Accrued expenses and other current liabilities........................................... 4,883 958
Deferred revenue......................................................................... 3,781 1,246
Current portion of lease obligations..................................................... 711 542
--------- ---------
Total current liabilities.............................................................. 10,484 3,356
Lease obligations, long-term............................................................... 1,093 833
Commitments and Contingencies (Note 9)
Stockholders' equity:
Series A convertible preferred stock, $0.001 par value; none and 2,065,000 shares
authorized; none and 2,040,000 shares issued and outstanding............................ -- 2
Series B convertible preferred stock, $0.001 par value; none and 960,000 shares
authorized, issued and outstanding...................................................... -- 1
Series C convertible preferred stock, $0.001 par value; none and 904,636 shares
authorized, none and 874,636 shares issued and outstanding.............................. -- 1
Preferred Stock, $0.001 par value; 5,000,000 shares authorized; no shares issued and
outstanding at March 31, 1996........................................................... -- --
Common stock, $0.001 par value; 25,000,000 and 8,000,000 shares authorized; 10,859,000
and 2,372,490 shares issued and outstanding............................................. 11 2
Additional paid-in capital............................................................... 36,813 7,704
Accumulated deficit...................................................................... (2,519) (5,397)
Cumulative translation adjustment........................................................ 1 (8)
--------- ---------
Total stockholders' equity............................................................. 34,306 2,305
--------- ---------
$ 45,883 $ 6,494
--------- ---------
--------- ---------
See accompanying notes to consolidated financial statements.
22
ARBOR SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED MARCH 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
Revenues:
License...................................................................... $ 21,538 $ 10,268 $ 3,853
Maintenance, support and other............................................... 3,596 1,252 415
--------- --------- ---------
Total revenues............................................................. 25,134 11,520 4,268
--------- --------- ---------
Cost of revenues:
License...................................................................... 706 253 162
Maintenance, support and other............................................... 909 420 173
--------- --------- ---------
Total cost of revenues..................................................... 1,615 673 335
--------- --------- ---------
Gross profit................................................................... 23,519 10,847 3,933
--------- --------- ---------
Operating expenses:
Sales and marketing.......................................................... 14,060 7,081 3,831
Research and development..................................................... 3,685 1,999 1,259
General and administrative................................................... 2,648 1,240 971
--------- --------- ---------
Total operating expenses................................................... 20,393 10,320 6,061
--------- --------- ---------
Income (loss) from operations.................................................. 3,126 527 (2,128)
Interest and other income...................................................... 772 39 46
Interest expense............................................................... (304) (168) (98)
--------- --------- ---------
Income (loss) before income taxes.............................................. 3,594 398 (2,180)
Provision for income taxes..................................................... (716) (24) --
--------- --------- ---------
Net income (loss).............................................................. $ 2,878 $ 374 $ (2,180)
--------- --------- ---------
--------- --------- ---------
Net income per share........................................................... $ .27 $ .04 $ --
--------- --------- ---------
--------- --------- ---------
Shares used to compute net income per share.................................... 10,502 9,718 --
--------- --------- ---------
--------- --------- ---------
See accompanying notes to consolidated financial statements.
23
ARBOR SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED MARCH 31,
--------------------------------
1996 1995 1994
---------- --------- ---------
Cash flows from operating activities:
Net income (loss)............................................................. $ 2,878 $ 374 $ (2,180)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation, amortization and other........................................ 1,062 515 280
Deferred income taxes....................................................... (900) -- --
Changes in assets and liabilities:
Accounts receivable....................................................... (2,676) (770) (742)
Prepaid expenses and other current assets................................. (264) (101) (51)
Other assets.............................................................. (183) (60) (164)
Accounts payable.......................................................... 499 142 316
Accrued expenses and other current liabilities............................ 3,925 423 113
Deferred revenue.......................................................... 2,535 573 584
---------- --------- ---------
Net cash provided by (used in) operating activities..................... 6,876 1,096 (1,844)
---------- --------- ---------
Cash flows from investing activities:
Purchases of short-term investments........................................... (25,886) -- (1,080)
Proceeds from sale of short-term investments.................................. -- 1,001 --
Acquisition of property and equipment......................................... (1,333) (147) (42)
---------- --------- ---------
Net cash provided by (used in) investing activities..................... (27,219) 854 (1,122)
---------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock, net................................... 28,956 20 10
Proceeds from issuance of preferred stock, net................................ 100 -- 2,981
Repayment of capital lease obligations........................................ (763) (416) (210)
---------- --------- ---------
Net cash provided by (used in) financing activities..................... 28,293 (396) 2,781
---------- --------- ---------
Effect of exchange rate changes on cash and cash equivalents.................... 9 (9) 1
---------- --------- ---------
Net increase (decrease) in cash and cash equivalents............................ 7,959 1,545 (184)
Cash and cash equivalents at beginning of year.................................. 2,739 1,194 1,378
---------- --------- ---------
Cash and cash equivalents at end of year........................................ $ 10,698 $ 2,739 $ 1,194
---------- --------- ---------
---------- --------- ---------
Supplemental disclosures:
Cash paid for interest........................................................ $ 304 $ 169 $ 98
Cash paid for income taxes.................................................... 625 7 --
Non-cash investing and financing activities:
Acquisition of property and equipment through capital leases.................. 1,192 1,098 372
See accompanying notes to consolidated financial statements.
24
ARBOR SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SERIES A CONVERTIBLE SERIES B CONVERTIBLE SERIES C CONVERTIBLE
COMMON
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK STOCK
------------------------ ------------------------ ------------------------ ---------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES
----------- ----------- ----------- ----------- ----------- ----------- ---------
Balance at March 31, 1993.......... 2,040 $ 2 960 $ 1 -- $ -- 2,085
Issuance of common stock pursuant
to exercise of options and
other............................. -- -- -- -- -- -- 68
Issuance of Series C convertible
preferred stock, net.............. -- -- -- -- 875 1 --
Translation adjustment............. -- -- -- -- -- -- --
Net loss........................... -- -- -- -- -- -- --
----------- ----- --- ----- --- ----- ---------
Balance at March 31, 1994.......... 2,040 2 960 1 875 1 2,153
Issuance of common stock pursuant
to exercise of options............ -- -- -- -- -- -- 220
Translation adjustment............. -- -- -- -- -- -- --
Net income......................... -- -- -- -- -- -- --
----------- ----- --- ----- --- ----- ---------
Balance at March 31, 1995.......... 2,040 2 960 1 875 1 2,372
Issuance of common stock pursuant
to exercise of options and
other............................. -- -- -- -- -- -- 734
Issuance of Series C convertible
preferred stock................... -- -- -- -- 16 1 --
Issuance of common stock pursuant
to initial public offering, net... -- -- -- -- -- -- 1,880
Conversion of preferred stock to
common stock upon completion of
initial public offering........... (2,040) (2) (960) (1) (891) (2) 5,837
Exercise of preferred stock warrant
and conversion to common stock
upon completion of initial public
offering.......................... -- -- -- -- -- -- 36
Translation adjustment............. -- -- -- -- -- -- --
Net income......................... -- -- -- -- -- -- --
----------- ----- --- ----- --- ----- ---------
Balance at March 31, 1996.......... -- $ -- -- $ -- -- $ -- 10,859
----------- ----- --- ----- --- ----- ---------
----------- ----- --- ----- --- ----- ---------
ADDITIONAL CUMULATIVE
PAID-IN ACCUMULATED TRANSLATION
AMOUNT CAPITAL DEFICIT ADJUSTMENT TOTAL
----------- ----------- ------------- ------------- ---------
Balance at March 31, 1993.......... $ 2 $ 4,694 $ (3,591) $ -- $ 1,108
Issuance of common stock pursuant
to exercise of options and
other............................. -- 10 -- -- 10
Issuance of Series C convertible
preferred stock, net.............. -- 2,980 -- -- 2,981
Translation adjustment............. -- -- -- 1 1
Net loss........................... -- -- (2,180) -- (2,180)
----- ----------- ------------- ----- ---------
Balance at March 31, 1994.......... 2 7,684 (5,771) 1 1,920
Issuance of common stock pursuant
to exercise of options............ -- 20 -- -- 20
Translation adjustment............. -- -- -- (9) (9)
Net income......................... -- -- 374 -- 374
----- ----------- ------------- ----- ---------
Balance at March 31, 1995.......... 2 7,704 (5,397) (8) 2,305
Issuance of common stock pursuant
to exercise of options and
other............................. 1 262 -- -- 263
Issuance of Series C convertible
preferred stock................... -- 99 -- -- 100
Issuance of common stock pursuant
to initial public offering, net... 2 28,715 -- -- 28,717
Conversion of preferred stock to
common stock upon completion of
initial public offering........... 5 -- -- -- --
Exercise of preferred stock warrant
and conversion to common stock
upon completion of initial public
offering.......................... 1 33 -- -- 34
Translation adjustment............. -- -- -- 9 9
Net income......................... -- -- 2,878 -- 2,878
----- ----------- ------------- ----- ---------
Balance at March 31, 1996.......... $ 11 $ 36,813 $ (2,519) $ 1 $ 34,306
----- ----------- ------------- ----- ---------
----- ----------- ------------- ----- ---------
See accompanying notes to consolidated financial statements.
25
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, markets and supports
client/server multidimensional database software for business planning and
analysis. 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 subsidiary in the United Kingdom. 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, payment is due within 90 days, 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, including the element of licensing fees attributable to the initial
warranty period, 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."
The Company entered into an agreement in December 1993 with an indirect
channel partner which provides the indirect channel partner the right to
sublicense certain of the Company's products. Under the agreement the indirect
channel partner 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 prior thereto due, in part, to the
limited history of this agreement. Such royalty revenues for the quarters ended
March 31, June 30, September 30, and December 31, 1995 totaled approximately
$1,300,000, $1,600,000, $1,650,000 and $2,066,000 respectively, and were
recorded by the Company during the quarters ended June 30, September 30 and
December 31, 1995 and March 31, 1996, respectively. Royalty revenues for the
quarter ended March 31, 1996 were approximately $2,400,000 and will be recorded
by the Company during the quarter ending June 30, 1996.
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.
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 limits the amount of
credit exposure to any one financial institution. Accounts receivable are
derived from revenues earned from customers primarily located in the U.S. and
Europe.
26
ARBOR SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- THE COMPANY AND A SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
The Company performs ongoing credit evaluations of its customers and generally
requires no collateral. The Company maintains reserves for potential credit
losses and historically such losses have been immaterial. One customer accounted
for 26% of total revenues in both fiscal 1996 and 1995. No customer accounted
for more than 10% of total revenues in fiscal 1994.
Revenues from international customers, primarily in Europe, were 9%, 5% and
12% of total revenues in fiscal 1996, 1995 and 1994, respectively.
At March 31, 1996, outstanding receivables from one customer represented 16%
of gross accounts receivable. At March 31, 1995, no single customer accounted
for more than 10% of outstanding 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, or the life of the lease,
whichever is shorter.
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 United Kingdom subsidiary 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.
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
27
ARBOR SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- THE COMPANY AND A SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
(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. Earnings per share prior
to fiscal 1995 have 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 its initial public offering.
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.
NOTE 2 -- INITIAL PUBLIC OFFERING
In November 1995, the Company completed its initial public offering and
issued 1,880,000 shares of its common stock to the public at a price of $17.00
per share. The Company received approximately $28.7 million of cash, net of
underwriting discounts, commissions and other offering costs. Simultaneously,
each outstanding share of convertible preferred stock was automatically
converted into one and one-half shares of common stock. See Note 6.
NOTE 3 -- SHORT-TERM INVESTMENTS
As of March 31, 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. As of March 31, 1995, the
Company's short-term investments consisted of a certificate of deposit and the
cost approximated fair value.
NOTE 4 -- BALANCE SHEET COMPONENTS
MARCH 31,
---------------------
1996 1995
---------- ---------
(IN THOUSANDS)
Property and equipment:
Computer equipment.............................................................. $ 3,863 $ 1,748
Furniture, fixtures and office equipment........................................ 854 556
Leasehold improvements.......................................................... 184 72
---------- ---------
4,901 2,376
Less: accumulated depreciation.................................................. (1,978) (974)
---------- ---------
$ 2,923 $ 1,402
---------- ---------
---------- ---------
Accrued expenses and other current liabilities:
Income taxes payable............................................................ $ 991 $ --
Accrued commissions............................................................. 907 309
Accrued benefits................................................................ 758 210
Other........................................................................... 2,227 439
---------- ---------
$ 4,883 $ 958
---------- ---------
---------- ---------
28
ARBOR SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- 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
$3,000,000. 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, plus 0.5% (8.75% at March 31, 1996). 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 expires in July 1996. As of March 31, 1996, there
were no borrowings outstanding under the line of credit.
NOTE 6 -- CONVERTIBLE PREFERRED STOCK AND PREFERRED STOCK WARRANT
PREFERRED STOCK
At March 31, 1996, 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.
NOTE 7 -- COMMON STOCK, STOCK OPTION PLAN AND EMPLOYEE STOCK PURCHASE PLAN
COMMON STOCK
Under certain events, the Company has the right to repurchase, at the
original issue price, a declining percentage of certain of the common shares
issued to employees under written agreements with such employees. The Company's
right to repurchase such stock declines on a percentage basis based on the
length of the employees' continual employment with the Company. At March 31,
1996, 266,381 shares of common stock were subject to repurchase by the Company.
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 is intended to serve 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
29
ARBOR SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- COMMON STOCK, STOCK OPTION PLAN AND EMPLOYEE STOCK PURCHASE
PLAN (CONTINUED)
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, 1996.
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, 1996.
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 as of March 31, 1996.
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 1996 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
30
ARBOR SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- COMMON STOCK, STOCK OPTION PLAN AND EMPLOYEE STOCK PURCHASE
PLAN (CONTINUED)
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 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, 1996, the Company had expensed $24,000 of compensation expense related
to these options.
A summary of the activity under the stock option plans is as follows:
OPTIONS OPTIONS OUTSTANDING
AVAILABLE ------------------------------
FOR GRANT SHARES PRICE PER SHARE
---------- ----------- -----------------
Balance at March 31, 1993........................ 147,750 707,250 $ 0.07 - $ 0.20
Additional shares authorized................... 375,000 --
Options granted................................ (277,875) 277,875 $ 0.20 - $ 0.23
Options exercised.............................. -- (60,061) $ 0.07 - $ 0.20
Options canceled............................... 39,689 (39,689) $ 0.07 - $ 0.23
---------- -----------
Balance at March 31, 1994........................ 284,564 885,375 $ 0.07 - $ 0.23
Additional shares authorized................... 600,000 --
Options granted................................ (673,950) 673,950 $ 0.23 - $ 1.07
Options exercised.............................. -- (219,928) $ 0.07 - $ 0.50
Options canceled............................... 43,156 (43,156) $ 0.07 - $ 0.33
---------- -----------
Balance at March 31, 1995........................ 253,770 1,296,241 $ 0.07 - $ 1.07
Additional shares authorized................... 400,000 --
Options granted................................ (471,531) 471,531 $ 2.27 - $42.75
Options exercised.............................. -- (733,510) $ 0.07 - $ 4.00
Options canceled............................... 120,322 (120,322) $ 0.07 - $42.75
---------- -----------
Balance at March 31, 1996........................ 302,561 913,940 $ 0.07 - $42.75
---------- -----------
---------- -----------
Vested at March 31, 1996......................... 199,273 $ 0.07 - $ 2.27
-----------
-----------
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.
31
ARBOR SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- INCOME TAXES
Through March 31, 1994, the Company incurred net operating losses and had no
provision or benefit for income taxes. The tax provision for fiscal 1996 and
1995 consists of the following:
YEAR ENDED
MARCH 31,
-----------
1996 1995
------ ---
(IN
THOUSANDS)
Provision (benefit) for income taxes:
Current:
Federal....................................... $1,234 $22
State......................................... 382 2
------ ---
1,616 24
------ ---
Deferred:
Federal....................................... (900) --
State......................................... -- --
------ ---
(900) --
------ ---
$ 716 $24
------ ---
------ ---
The tax provision reconciles to the amount computed by multiplying income
before tax by the U.S. statutory rate (35%), as follows:
YEAR ENDED
MARCH 31,
-------------
1996 1995
------ -----
(IN
THOUSANDS)
Provision at statutory rate....................... $1,258 $ 135
State taxes, net of federal benefit............... 247 1
Permanent differences............................. 45 15
Utilization of net operating loss carryforwards... (997) (127)
Utilization of research and development
carryforwards.................................... (327) --
Change in deferred tax asset net of valuation
allowance reduction.............................. 380 --
Foreign loss with no federal benefit.............. 110 --
------ -----
$ 716 $ 24
------ -----
------ -----
Deferred tax assets are comprised of the following:
MARCH 31,
----------------
1996 1995
------- -------
(IN THOUSANDS)
Net operating loss carryforwards.................. $ -- $ 1,092
Research and development carryforwards............ -- 200
Deferred revenue.................................. 1,258 414
Accrued expenses and reserves..................... 740 239
Depreciation...................................... 75 --
Other............................................. 427 449
------- -------
2,500 2,394
------- -------
Less: deferred tax asset valuation allowance...... (1,600) (2,394)
------- -------
Net deferred tax asset............................ $ 900 $ --
------- -------
------- -------
32
ARBOR SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- INCOME TAXES (CONTINUED)
Net deferred tax assets of $900,000 at March 31, 1996 are based on the
Company's carryback capacity. Management believes, based upon a number of
factors, that the available objective evidence creates sufficient uncertainty
regarding the realizability of the remainder of the deferred tax assets and has
recorded a valuation allowance against these assets. Such factors include the
lack of a significant history of material profits, recent increases in expense
levels to support the Company's growth, the fact that the market in which the
Company operates is intensely competitive and characterized by rapidly changing
technology, the materiality of revenues from indirect channel partners and the
uncertainty regarding market acceptance of new versions of the Company's Essbase
software.
NOTE 9 -- COMMITMENTS AND CONTINGENCIES
The Company leases its facilities under noncancelable operating lease
agreements which expire at various dates through 2000. Certain leases provide
for escalating monthly payments and are being charged to operations ratably over
the lease term. 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 2000. Total property and equipment
acquired under these capitalized leases, which secure such borrowings, are as
follows:
MARCH 31,
--------------------
1996 1995
--------- ---------
(IN THOUSANDS)
Computer equipment................................................................ $ 2,020 $ 1,613
Furniture, fixtures, and office equipment......................................... 639 469
Leasehold improvements............................................................ 27 27
--------- ---------
2,686 2,109
Less: accumulated depreciation.................................................... (1,013) (819)
--------- ---------
$ 1,673 $ 1,290
--------- ---------
--------- ---------
Future minimum lease payments under all noncancelable operating and capital
leases are as follows:
OPERATING CAPITAL
YEAR ENDING MARCH 31, LEASES LEASES
- ---------------------------------------------------------------------------------- ----------- ---------
(IN THOUSANDS)
1997.............................................................................. $ 585 $ 1,094
1998.............................................................................. 92 907
1999.............................................................................. 88 407
2000.............................................................................. 88 1
----- ---------
Total minimum payments............................................................ $ 853 2,409
-----
-----
Less: amount representing interest................................................ (605)
---------
Present value of capital lease obligations........................................ 1,804
Less: current portion............................................................. 711
---------
Lease obligations, long-term...................................................... $ 1,093
---------
---------
Rent expense under operating leases totaled $659,000, $387,000 and $229,000
during fiscal 1996, 1995 and 1994, respectively.
33
ARBOR SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
In the course of its business, the Company has been named as a defendant in
certain actions and could incur an uninsured liability in one or more of them.
However, in the opinion of management, the outcome of such litigation will not
have a material adverse effect on the results of operations or financial
condition of the Company.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to Directors may be found under the caption
"Election of Directors" on pages 3-4 of the Company's Proxy Statement dated June
24, 1996, for the Annual Meeting of Stockholders to be held July 23, 1996 (the
"Proxy Statement"). Such information is incorporated herein by reference.
Information with respect to Executive Officers may be found on pages 18-20 of
the Proxy Statement, under the caption "Executive Compensation and Related
Information."
ITEM 11. EXECUTIVE COMPENSATION
The information in the Proxy Statement set forth under the captions
"Executive Compensation and Related Information" on page 18 and "Director
Compensation" on page 4 is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Stock Ownership of Certain
Beneficial Owners and Management" on page 14 of the Proxy Statement is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules
The financial statements and supplemental schedule of the Company as set
forth under Item 8 are filed as part of this report.
Financial statement schedules other than those 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 21 of this report.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of fiscal 1996.
34
(c) Exhibit Listing
EXHIBIT
NUMBER DESCRIPTION
- ----------- ----------------------------------------------------------------------------------------------
3.1* Registrant's Restated Certificate of Incorporation
3.2* Registrant's Bylaws
3.3* Form of Restated Certificate of Incorporation filed upon the closing of the offering under the
Registration Statement
3.4* Form of Amended and Restated Bylaws effective upon the closing of the offering under the
Registration Statement
4.1* Specimen Certificate of the Registrant's Common Stock
4.2* Amended and Restated Investor Rights Agreement between the Registrant and the Investors
specified therein dated as of September 16, 1993
10.1* Master Lease Agreement and Warrant Agreement between the Registrant and Comdisco, Inc. Dated
as of August 15, 1991
10.2* Real Property Lease between the Registrant and South Bay/Caribbean dated as of March 1, 1994
10.3* 1992 Stock Option Plan
10.4* 1995 Stock Option/Stock Issuance Plan
10.5* Employee Stock Purchase Plan
10.6* Form of Indemnification Agreement
10.7* License Agreement dated December 23, 1993, between the Company and Comshare Incorporated
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
- ------------------------
*Incorporated by reference to Registration Statement on Form S-1 (Reg. No.
33-97098).
35
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(IN THOUSANDS)
YEAR ENDED MARCH 31
-------------------------------
1996 1995 1994
--------- --------- ---------
Balance at beginning of period........................................................ $ 208 $ 177 $ 22
Additions charged to statement of operations.......................................... 269 106 192
Deductions from reserves.............................................................. (89) (75) (37)
--------- --------- ---------
Balance at end of period.............................................................. $ 388 $ 208 $ 177
--------- --------- ---------
--------- --------- ---------
36
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 19, 1996.
ARBOR SOFTWARE CORPORATION
By /s/ JAMES A. DORRIAN
-----------------------------------
James A. Dorrian,
PRESIDENT AND 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 19, 1996.
SIGNATURE TITLE
- -------------------------------------------------------- --------------------------------------
/S/ JAMES A. DORRIAN
-------------------------------------------- President, Chief Executive Officer
James A. Dorrian and Director
/s/ JOHN T. CHAMBERS
-------------------------------------------- Director
John T. Chambers
/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 Vice President, Finance and Chief
-------------------------------------------- Financial Officer (Principal
Stephen V. Imbler Financial and Accounting Officer)
37