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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-26934
ARBOR SOFTWARE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 77-0277772
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1325 CHESAPEAKE TERRACE
SUNNYVALE, CALIFORNIA 94089
(Address of principal executive offices)
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(408) 727-5800
(Registrant's telephone number, including area code)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
As of July 31, 1996 there were 10,936,732 shares of the Registrant's
common stock outstanding.
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ARBOR SOFTWARE CORPORATION
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
At June 30, 1996 and March 31, 1996 . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations
For the three months ended June 30, 1996 and 1995 . . . . . . 4
Condensed Consolidated Statements of Cash Flows
For the three months ended June 30, 1996 and 1995 . . . . . . . 5
Notes to Condensed Consolidated Financial Statements . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . 7
PART II.OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . 16
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . 16
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 17
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARBOR SOFTWARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
JUNE 30, MARCH 31,
1996 1996
--------- ---------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . $ 6,527 $10,698
Short-term investments . . . . . . . . . . . . 29,229 25,965
Accounts receivable, net of allowances of $482
and $388 . . . . . . . . . . . . . . . . . . . 5,081 4,505
Deferred tax assets . . . . . . . . . . . . . . 900 900
Prepaid expenses and other current assets . . . 614 485
--------- ---------
Total current assets . . . . . . . . . . . . 42,351 42,553
Property and equipment, net . . . . . . . . . . . 3,656 2,923
Other assets . . . . . . . . . . . . . . . . . . 410 407
--------- ---------
$46,417 $45,883
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . $ 952 $ 1,109
Accrued expenses and other current liabilities. 4,217 4,883
Deferred revenue . . . . . . . . . . . . . . . 3,627 3,781
Current portion of lease obligations . . . . . 802 711
--------- ---------
Total current liabilities . . . . . . . . . . 9,598 10,484
--------- ---------
Lease obligations, long-term . . . . . . . . . . 830 1,093
--------- ---------
Stockholders' equity:
Common stock, $0.001 par value; 25,000,000
shares authorized; 10,924,000 and 10,859,000
shares issued and outstanding . . . . . . . . 11 11
Additional paid-in capital . . . . . . . . . . 37,309 36,813
Accumulated deficit . . . . . . . . . . . . . . (1,325) (2,519)
Cumulative translation adjustment . . . . . . . (6) 1
--------- ---------
Total stockholders' equity . . . . . . . . . 35,989 34,306
--------- ---------
$46,417 $45,883
--------- ---------
--------- ---------
See accompanying notes to Condensed Consolidated Financial Statements.
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ARBOR SOFTWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA; UNAUDITED)
THREE MONTHS ENDED
JUNE 30,
----------------------
1996 1995
--------- ---------
Revenues:
License . . . . . . . . . . . . . . . . . . . . $ 7,742 $ 4,237
Maintenance, support and other . . . . . . . . 1,528 529
--------- ---------
Total revenues . . . . . . . . . . . . . . . 9,270 4,766
--------- ---------
Cost of revenues:
License . . . . . . . . . . . . . . . . . . . . 172 95
Maintenance, support and other . . . . . . . . 715 195
--------- ---------
Total cost of revenues . . . . . . . . . . . 887 290
--------- ---------
Gross profit . . . . . . . . . . . . . . . . . . 8,383 4,476
--------- ---------
Operating expenses:
Sales and marketing . . . . . . . . . . . . . . 4,698 2,668
Research and development . . . . . . . . . . . 1,321 774
General and administrative . . . . . . . . . . 903 625
--------- ---------
Total operating expenses . . . . . . . . . . 6,922 4,067
--------- ---------
Income from operations . . . . . . . . . . . . . 1,461 409
Interest and other income . . . . . . . . . . . . 449 20
Interest expense . . . . . . . . . . . . . . . . (73) (63)
--------- ---------
Income before income taxes . . . . . . . . . . . 1,837 366
Provision for income taxes . . . . . . . . . . . (643) (56)
--------- ---------
Net income . . . . . . . . . . . . . . . . . . . $ 1,194 $ 310
--------- ---------
--------- ---------
Net income per share . . . . . . . . . . . . . . $ .10 $ .03
--------- ---------
--------- ---------
Shares used to compute net income per share . . . 11,717 9,720
--------- ---------
--------- ---------
See accompanying notes to Condensed Consolidated Financial Statements.
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ARBOR SOFTWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS; UNAUDITED)
THREE MONTHS ENDED
JUNE 30,
----------------------
1996 1995
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . $ 1,194 $ 310
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation, amortization and other . . . . . . . 395 230
Changes in assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . (576) (590)
Prepaid expenses and other current assets. . . . (129) 49
Other assets . . . . . . . . . . . . . . . . . . (3) (1)
Accounts payable . . . . . . . . . . . . . . . . (157) 70
Accrued expenses and other current liabilities . (666) 146
Deferred revenue . . . . . . . . . . . . . . . . (154) 651
--------- ---------
Net cash provided by (used in) operating
activities . . . . . . . . . . . . . . . . . (96) 865
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments, net . . . . . . (3,264) --
Acquisition of property and equipment . . . . . . . (1,114) (160)
--------- ---------
Net cash used in investing activities . . . . (4,378) (160)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net . . . . 482 94
Proceeds from issuance of preferred stock, net . . . -- 100
Repayment of capital lease obligations . . . . . . . (172) (157)
--------- ---------
Net cash provided by financing activities. . . 310 37
--------- ---------
Effect of exchange rate changes on cash and cash
equivalents . . . . . . . . . . . . . . . . . . . . . . (7) (4)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . (4,171) 738
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD . . . . 10,698 2,739
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . . . $ 6,527 $ 3,477
--------- ---------
--------- ---------
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest . . . . . . . . . . . . . . . $ 73 $ 63
Cash paid for income taxes . . . . . . . . . . . . . 1,483 15
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of property and equipment through capital
leases . . . . . . . . . . . . . . . . . . . . . . -- 697
See accompanying notes to Condensed Consolidated Financial Statements.
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ARBOR SOFTWARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements included herein
reflect all adjustments, consisting only of normal recurring adjustments,
which in the opinion of management are necessary to fairly state the
Company's consolidated financial position, results of operations and cash
flows for the periods presented. These financial statements should be read
in conjunction with the Company's audited consolidated financial statements
as included in the Company's fiscal year 1996 Annual Report on Form 10-K.
The consolidated results of operations for the period ended June 30, 1996 are
not necessarily indicative of the results to be expected for any subsequent
quarter or for the entire fiscal year ending March 31, 1997. The March 31,
1996 balance sheet was derived from audited financial statements, but does
not include all disclosures required by generally accepted accounting
principles.
2. 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 method).
Common equivalent shares are excluded from the computation if their effect
is antidilutive, except that, pursuant to the Securities and Exchange
Commission Staff Accounting Bulletin, convertible preferred stock (using the
if converted method) and common equivalent shares (using the treasury 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 through the effective date of the Company's initial public
offering.
3. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following
(in thousands):
JUNE 30, MARCH 31,
1996 1996
--------- ---------
(UNAUDITED)
Accrued commissions . . . . . . . . . . . . . $ 904 $ 907
Accrued income taxes . . . . . . . . . . . . 377 991
Accrued benefits . . . . . . . . . . . . . . 709 758
Accrued other . . . . . . . . . . . . . . . . 2,227 2,227
--------- ---------
$4,217 $4,883
--------- ---------
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ARBOR SOFTWARE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
THE DISCUSSION IN THIS REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL
RESULTS MAY 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 THAT MAY AFFECT FUTURE RESULTS" SECTION
INCLUDED IN THE COMPANY'S FISCAL YEAR 1996 ANNUAL REPORT ON FORM 10-K.
RESULTS OF OPERATIONS
The following table sets forth certain items in the Company's condensed
consolidated statements of operations as a percentage of total revenues
for the periods indicated:
THREE MONTHS ENDED
JUNE 30,
----------------------
1996 1995
--------- ---------
Revenues:
License . . . . . . . . . . . . . . . . . . . 83.5% 88.9%
Maintenance, support and other . . . . . . . 16.5 11.1
--------- ---------
Total revenues . . . . . . . . . . . . . . 100.0 100.0
--------- ---------
Cost of revenues:
License . . . . . . . . . . . . . . . . . . . 1.9 2.0
Maintenance, support and other . . . . . . . 7.7 4.1
--------- ---------
Total cost of revenues . . . . . . . . . . 9.6 6.1
--------- ---------
Gross profit . . . . . . . . . . . . . . . . . 90.4 93.9
--------- ---------
Operating expenses:
Sales and marketing . . . . . . . . . . . . . 50.7 56.0
Research and development . . . . . . . . . . 14.2 16.2
General and administrative . . . . . . . . . 9.7 13.1
--------- ---------
Total operating expenses . . . . . . . . . 74.6 85.3
--------- ---------
Income from operations . . . . . . . . . . . . 15.8 8.6
Interest and other income . . . . . . . . . . . 4.8 0.4
Interest expense . . . . . . . . . . . . . . . (0.8) (1.3)
--------- ---------
Income before income taxes . . . . . . . . . . 19.8 7.7
Provision for income taxes . . . . . . . . . . (6.9) (1.2)
--------- ---------
Net income . . . . . . . . . . . . . . . . . . 12.9% 6.5%
--------- ---------
--------- ---------
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 software. 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
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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.
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 for the three months ended June 30, 1996
increased 95% to $9.3 million from $4.8 million for the three months ended
June 30, 1995. License revenues for the three months ended June 30, 1996
increased 83% to $7.7 million from $4.2 million for the three months ended
June 30, 1995. The increase is attributable to 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. Direct
and indirect sales for the three months ended June 30, 1996 increased by 97%
and 88%, respectively, when compared to the same for the three months ended
June 30, 1995. Maintenance, support and other revenues for the three months
ended June 30, 1996 increased 189% to $1.5 million from $529,000 for the
three months ended June 30, 1995. The increase is attributable to a larger
installed base requiring incremental maintenance and support. The percentage
of the Company's total revenues attributable to software licenses decreased
to 84% for the three months ended June 30, 1996 from 89% for the three months
ended June 30, 1995. The percentage decrease is due to an increase in the
Company's installed base, which resulted in an increase in maintenance,
support and other revenues.
Sales derived through indirect channel partners accounted for
approximately 27% of the Company's total revenues in each of the three month
periods ended June 30, 1996 and 1995. In the three months ended June 30,
1996 and 1995, revenues attributable to Comshare accounted for 26% and 27%,
respectively, of the Company's total revenues. License revenues from
Comshare for the quarters ended March 31, 1996 and 1995, totaled
approximately $2.4 million and $1.3 million, and were recorded by the Company
during the quarters ended June 30, 1996 and 1995, respectively. 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.
International revenues from the Company's direct sales force accounted
for 10% and 9% of total revenues for the three months ended June 30, 1996 and
1995, respectively. International license and service revenues increased to
$883,000 for the three months ended June 30, 1996 from $452,000 for the three
months ended June 30, 1995, primarily due to expansion of the international
direct sales force. 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 54% of the revenues recorded during the three
months ended June 30, 1996 attributable to Comshare were derived from sales
to international customers. See discussion of legal proceedings in Item 1.
COST OF REVENUES
COST OF LICENSE REVENUES. Cost of license revenues consists primarily of
product packaging, documentation and production costs. Cost of license
revenues remained unchanged at 2.2% as a percentage of license revenues for
the three months ended June 30, 1996 as compared to the corresponding period
in 1995.
COST OF MAINTENANCE, SUPPORT AND OTHER. Cost of maintenance, support and
other revenues consists primarily of customer support costs and direct costs
associated with providing other services such as consulting and training.
Customer support includes telephone question and answer services,
newsletters, on-site visits and other support. Cost of maintenance, support
and other revenues increased as a percentage of maintenance, support and
other revenues to 47% for the three months ended June 30, 1996 from 37% for
the three months ended June 30, 1995. The increase is primarily due to the
establishment of the Customer Advocacy Group during the first quarter of fiscal
year 1997,
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which is comprised of the Technical Support, Field Services, Services
Marketing and Courseware Development departments. The Customer Advocacy
Group's mission is to coordinate services for Arbor's customers.
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 to $4.7 million for
the three months ended June 30, 1996 from $2.7 million for the three months
ended June 30, 1995, representing 51% and 56% of total revenues for the three
months ended June 30, 1996 and 1995, respectively. The increase in dollar
amount was primarily due to costs associated with the expansion of the direct
sales force, particularly the expansion of the European operations, including
new offices in France and Germany, and increased hiring in the UK. Other
factors included personnel increases in the marketing group, increased costs
associated with advertising, public relations, seminars and trade shows. The
decrease as a percentage of total revenues was primarily due to growth in the
Company's total revenues and the increase in indirect channel revenues, which
do not have associated sales and marketing costs. Additionally, in fiscal 1996,
the Company incurred significant sales and marketing expenses to help establish
the OLAP market and to build infrastructure. The Company expects to continue
hiring additional sales and marketing personnel and to increase promotion and
advertising expenditures for the remainder of fiscal 1997.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of salaries and other personnel-related expenses, outside contractor
expenses, depreciation of development equipment and supplies. Research and
development expenses increased to $1.3 million for the three months ended
June 30, 1996 from $774,000 for the three months ended June 30, 1995,
representing 14%, and 16% of total revenues for the three months ended June
30, 1996 and 1995, respectively. The increase in dollar amount was primarily
due to an increase in the number of software engineers and associated support
required to develop Essbase enhancements and the overall growth of the
Company. The decrease as a percentage of total revenues was primarily 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. 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 for the remainder of fiscal 1997. To date, all research and
development costs have been expensed as incurred.
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 to $903,000 for the three months ended June
30, 1996 from $625,000 for the three months ended June 30, 1995, representing
10%, and 13% of total revenues for the three months ended June 30, 1996 and
1995, respectively. The increase in dollar amount was primarily due to
increased staffing and professional fees necessary to manage and support the
Company's recent growth and to provide the infrastructure required for a
public company. The decrease as a percentage of total revenues was primarily
due to growth in the Company's total revenues. The Company believes that its
general and administrative expenses will increase in absolute dollar amounts
for the remainder of 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.
INTEREST AND OTHER INCOME; INTEREST EXPENSE
Interest and other income represents interest income earned on the
Company's cash, cash equivalents and short-term investments, and other items
including foreign exchange gains and losses. Interest and other income
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increased to $449,000 for the three months ended June 30, 1996 from $20,000
for the three months ended June 30, 1995, primarily due to higher cash
balances resulting from the infusion of cash from the initial public
offering. Interest expense increased insignificantly to $73,000 for the
three months ended June 30, 1996 from $63,000 for the three months ended June
30, 1995.
PROVISION FOR INCOME TAXES
The provision for income taxes increased to $643,000 for the three months
ended June 30, 1996 from $56,000 for the three months ended June 30, 1995.
The Company's effective tax rate was 20% for fiscal 1996 due to the
utilization of prior years net operating loss carryovers. The Company
exhausted all of these net operating loss carryovers in fiscal 1996 and as a
result had an estimated effective tax rate of 35% for the first quarter of
fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1996, the Company had $35.8 million in cash, cash
equivalents and short-term investments. Net cash used in operating
activities was $96,000 for the three months ended June 30, 1996, and was
primarily attributable to a decrease in accrued expenses and other current
liabilities of $666,000 and an increase in accounts receivable of $576,000,
offset by net income of $1.2 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 September 1996. As
of June 30, 1996, the Company had no outstanding borrowings under its credit
facility.
As of June 30, 1996, the Company's principal commitments consisted of
obligations under operating and capital leases. As of June 30, 1996, the
Company had $1.6 million in outstanding borrowings under capital leases which
are payable through 1998.
The Company expects to incur a significant amount of expenses in the next
two quarters on capital improvements relating to the relocation of the Company's
corporate headquarters.
The Company believes its current cash balances 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.
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 That May Affect Future Results"
section included in the Company's fiscal year 1996 Annual Report on Form 10-K.
FLUCTUATIONS IN QUARTERLY RESULTS; FUTURE OPERATING RESULTS UNCERTAIN.
The Company's quarterly operating results have in the past varied
significantly and will likely in the future vary significantly depending on
factors such as demand for the Company's Essbase software, the stability of
it's distributors, particularly Comshare, 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
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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 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% and 27% of the Company's total
revenues for the three months ended June 30, 1996 and 1995, respectively.
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. In addition, given recent announcements by Comshare regarding the
delay of their June quarter earnings release to complete a review of certain
accounts in several foreign countries, there can be no assurance that the
Company can expect to receive timely sales reports or be able to rely on the
sales reports of Essbase by Comshare.
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.
DEPENDENCE UPON COMSHARE AND OTHER INDIRECT CHANNEL PARTNERS. In
addition to its direct sales force, the Company relies on indirect channel
partners such as original equipment manufacturers ("OEMs") and valued added
resellers ("VARs") for licensing and support of its products in the United
States and internationally. The Company's indirect channel partners
generally offer products of several different companies, including, in some
cases, products that compete with Essbase. There can be no assurance that
the Company's current indirect channel partners will elect, or be able, to
market or support Essbase effectively, that the Company will be able to
effectively manage channel conflicts, that economic conditions or industry
demand will not adversely affect these or other indirect channel partners or
that these indirect channel partners will not devote greater resources to
marketing and supporting the products of other companies. 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
11
<PAGE>
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% and 27% of the
total revenue for the three months ended June 30, 1996 and 1995,
respectively. The Comshare License Agreement provides that, in the event that
certain competitors of Comshare were to acquire at least a twenty percent
equity interest in the Company, 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 fifty percent, and Comshare could
elect to terminate the Comshare License Agreement. Accordingly, the
possibility of termination of the Comshare License Agreement or a fifty
percent reduction in license revenues from Comshare could discourage
potential acquisition proposals and could delay or prevent a change in
control of the Company. In addition, the Comshare License Agreement contains
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.
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,
12
<PAGE>
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.
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 conditions during which MIS budgets often decrease. As a
result, the Company's business, operating results and financial condition may
in the future reflect substantial fluctuations from period to period as a
consequence of patterns and general economic conditions in the software
industry.
POTENTIAL VOLATILITY OF STOCK PRICE. The market price of the Company's
Common Stock is highly volatile and may be significantly affected by factors
such as actual or anticipated fluctuations in the Company's operating
results, announcements of accounting irregularities by the Company's largest
reseller, 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.
13
<PAGE>
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS. International revenues
from the Company's direct sales force accounted for 10% and 9% of total
revenues for the three months ended June 30, 1996 and 1995, respectively.
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 54% and
53% of revenues generated by Comshare for the three months ended June 30,
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 international licenses and maintenance, support
and other contracts, or that the foregoing factors will not have a material
adverse effect on the Company's future international revenues and,
consequently, on the Company's business, operating results and financial
condition. The Company's direct international sales are currently
denominated in either United States dollars 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 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 and 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.
PROPRIETARY RIGHTS AND RISKS OF INFRINGEMENT. The Company relies
primarily on a combination of patent, copyright and trademark laws, trade
secrets, confidentiality procedures and contractual provisions to protect its
proprietary rights. The Company 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
14
<PAGE>
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.
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.
15
<PAGE>
PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS.
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 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, Incorporated
("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 the three months ended
June 30, 1996 and 1995, revenues attributable to Comshare accounted for 26%
and 27%, respectively, of the Company's total revenues.
In April 1996, Planning Sciences International plc and Planning Sciences,
Inc. (collectively, "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
At the annual meeting of stockholders of the Company on July 23, 1996,
the stockholders (i) elected five members of the Board of Directors to serve
until the next annual meeting, (ii) amended the Company's 1995 Stock
Option/Stock Issuance Plan (the "Plan") to increase the number of shares of
Common Stock reserved for issuance thereunder by 1,000,000 shares, (iii)
amended the Company's Certificate of Incorporation (the "Certificate")
increasing the number of shares of the Company's Common Stock reserved for
issuance by 25,000,000 shares, and (iv) ratified the appointment of Price
Waterhouse LLP as the Company's independent public accountants for the next
fiscal year.
The vote for nominated directors was as follows:
Nominee For Abstain
------------------ --------- -------
James A. Dorrian 7,523,367 832
John T. Chambers 7,523,367 832
Douglas M. Leone 7,523,367 832
Mark W. Perry 7,523,367 832
Ann L. Winblad 7,523,367 832
The vote for amending the Plan was as follows:
For Against Abstain Broker Non-Vote
--------- -------- ------- ---------------
5,278,577 872,993 56,640 1,315,989
16
<PAGE>
The vote for amending the Certificate was as follows:
For Against Abstain Broker Non-Vote
--------- -------- ------- ---------------
7,203,985 240,189 56,515 23,510
The vote for ratifying the appointment of Price Waterhouse LLP was as
follows:
For Against Abstain
--------- -------- -------
7,472,129 275 51,795
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Statement of Computation of Net Income Per Share (Exhibit 11.0)
Financial Data Schedule (Exhibit 27.1)
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter ended June
30, 1996.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 10, 1996 ARBOR SOFTWARE CORPORATION
(Registrant)
By: /s/ Stephen V. Imbler
--------------------------
Stephen V. Imbler
Vice President of Finance and
Administration and Chief Financial
Officer (Duly Authorized Officer
and Principal Financial Officer)
18
<PAGE>
Exhibit 11.0
ARBOR SOFTWARE CORPORATION
STATEMENT OF COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED
JUNE 30,
----------------------
1996 1995
--------- ---------
Net income . . . . . . . . . . . . . . . . . . $ 1,194 $ 310
--------- ---------
--------- ---------
Average shares outstanding . . . . . . . . . . 10,899 2,564
Options . . . . . . . . . . . . . . . . . . . . 818 1,283
Warrants . . . . . . . . . . . . . . . . . . . -- 36
Convertible preferred stock . . . . . . . . . . -- 5,837
--------- ---------
Total common stock and common stock
equivalents . . . . . . . . . . . . . . . . 11,717 9,720
--------- ---------
--------- ---------
Net income per common share . . . . . . . . . . $ .10 $ .03
--------- ---------
--------- ---------
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ARBOR
SOFTWARE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS AND CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 6,527
<SECURITIES> 29,229
<RECEIVABLES> 5,563
<ALLOWANCES> 482
<INVENTORY> 0
<CURRENT-ASSETS> 42,351
<PP&E> 6,066
<DEPRECIATION> (2,410)
<TOTAL-ASSETS> 46,417
<CURRENT-LIABILITIES> 9,598
<BONDS> 0
0
0
<COMMON> 11
<OTHER-SE> 35,978
<TOTAL-LIABILITY-AND-EQUITY> 46,417
<SALES> 0
<TOTAL-REVENUES> 9,270
<CGS> 0
<TOTAL-COSTS> 887
<OTHER-EXPENSES> 6,922
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (73)
<INCOME-PRETAX> 1,837
<INCOME-TAX> (643)
<INCOME-CONTINUING> 1,461
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,194
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.00
</TABLE>
