<PAGE> 1
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________
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 DECEMBER 31, 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 (I.R.S. Employer
jurisdiction of Identification Number)
incorporation or organization)
1344 CROSSMAN AVENUE
SUNNYVALE, CALIFORNIA 94089
(Address of principal executive offices)
_________________________________________
(408) 744-9500
(Registrant's telephone number, including area code)
_________________________________________
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
As of January 31, 1997 there were 11,104,737 shares of the
Registrant's common stock outstanding.
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<PAGE> 2
ARBOR SOFTWARE CORPORATION
FORM 10-Q
INDEX
<TABLE>
<S> <C> <C>
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
At December 31, 1996 and March 31, 1996 . . . . . . . . . . . 3
Condensed Consolidated Statements of Income
For the three months and nine months ended
December 31, 1996 and 1995 . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows
For the nine months ended December 31, 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 . . . . . . . . . . . . . . . . . . . . . . 17
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 19
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARBOR SOFTWARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1996
------------- -------------
(UNAUDITED)
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . $ 7,276 $ 10,698
Short-term investments . . . . . . . . . . . . . . . . . . . . . . 26,743 25,965
Accounts receivable, net of allowances of $650 and $388 . . . . . . 9,576 4,505
Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . 900 900
Prepaid expenses and other current assets . . . . . . . . . . . . . 948 485
------------- -------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . 45,443 42,553
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . 7,516 2,923
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 611 407
------------- -------------
$ 53,570 $ 45,883
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,354 $ 1,109
Accrued expenses and other current liabilities . . . . . . . . . . . 6,461 4,883
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . 4,876 3,781
Current portion of lease obligations . . . . . . . . . . . . . . . . 759 711
------------- -------------
Total current liabilities . . . . . . . . . . . . . . . . . . . 13,450 10,484
------------- -------------
Lease obligations, long-term . . . . . . . . . . . . . . . . . . . . . 500 1,093
------------- -------------
Stockholders' equity:
Common stock, $0.001 par value; 50,000,000 and 25,000,000 shares
authorized; 11,037,000 and 10,859,000 shares issued and outstanding 11 11
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . 37,964 36,813
Retained earnings (accumulated deficit) . . . . . . . . . . . . . . 1,595 (2,519)
Cumulative translation adjustment . . . . . . . . . . . . . . . . . 50 1
------------- -------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . 39,620 34,306
------------- -------------
$ 53,570 $ 45,883
============= =============
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
3
<PAGE> 4
ARBOR SOFTWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA; UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------------- -------------------------------
1996 1995 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
License . . . . . . . . . . . . . . . . $ 10,230 $ 5,733 $ 26,914 $ 14,643
Maintenance, support and other . . . . 2,244 1,026 5,625 2,264
------------- ------------- ------------- -------------
Total revenues . . . . . . . . . . . 12,474 6,759 32,539 16,907
------------- ------------- ------------- -------------
Cost of revenues:
License . . . . . . . . . . . . . . . . 130 159 553 367
Maintenance, support and other . . . . 1,078 244 2,642 628
------------- ------------- ------------- -------------
Total cost of revenues . . . . . . . 1,208 403 3,195 995
------------- ------------- ------------- -------------
Gross profit . . . . . . . . . . . . . . . 11,266 6,356 29,344 15,912
------------- ------------- ------------- -------------
Operating expenses:
Sales and marketing . . . . . . . . . . 6,166 3,831 15,990 9,619
Research and development . . . . . . . 2,041 966 4,994 2,599
General and administrative . . . . . . 1,161 697 3,165 1,917
------------- ------------- ------------- -------------
Total operating expenses . . . . . . 9,368 5,494 24,149 14,135
------------- ------------- ------------- -------------
Income from operations . . . . . . . . . . 1,898 862 5,195 1,777
Interest and other income . . . . . . . . 471 231 1,329 285
Interest expense . . . . . . . . . . . . . (57) (80) (195) (220)
------------- ------------- ------------- -------------
Income before income taxes . . . . . . . . 2,312 1,013 6,329 1,842
Provision for income taxes . . . . . . . . (809) (200) (2,215) (366)
------------- ------------- ------------- -------------
Net income . . . . . . . . . . . . . . . .
$ 1,503 $ 813 $ 4,114 $ 1,476
============= ============= ============= =============
Net income per share . . . . . . . . . . . $ .13 $ .07 $ .35 $ .15
============= ============= ============= =============
Shares used to compute net income per share 11,713 10,889 11,715 10,110
============= ============= ============= =============
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
4
<PAGE> 5
ARBOR SOFTWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS; UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
------------------------------
1996 1995
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . $ 4,114 $ 1,476
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, amortization and other . . . . . . . . 1,457 724
Provision for doubtful accounts . . . . . . . . . . 262 132
Changes in assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . (5,333) (1,406)
Prepaid expenses and other current assets . . . (463) (463)
Other assets . . . . . . . . . . . . . . . . . . (204) 11
Accounts payable . . . . . . . . . . . . . . . . 245 454
Accrued expenses and other current liabilities . 1,578 2,115
Deferred revenue . . . . . . . . . . . . . . . . 1,095 1,679
------------- -------------
Net cash provided by operating activities . 2,751 4,722
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments, net . . . . . . . . (778) --
Acquisition of property and equipment . . . . . . . . . (6,008) (745)
------------- -------------
Net cash used in investing activities . . . (6,786) (745)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net . . . . . . 1,109 28,959
Proceeds from issuance of preferred stock, net . . . . . -- 100
Repayment of capital lease obligations . . . . . . . . . (545) (546)
------------- -------------
Net cash provided by financing activities . 564 28,513
------------- -------------
Effect of exchange rate changes on cash and cash equivalents 49 --
------------- -------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS . . . . (3,422) 32,490
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD . . . . . . 10,698 2,739
============= =============
CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . . . . . $ 7,276 $ 35,229
============= =============
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest . . . . . . . . . . . . . . . . . $ 194 $ 220
Cash paid for income taxes . . . . . . . . . . . . . . . 2,557 295
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of property and equipment through capital leases -- 1,150
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
5
<PAGE> 6
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 December 31, 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 for all
periods 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):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1996
--------------- --------------
(UNAUDITED)
<S> <C> <C>
Commissions . . . . . . . . . . . . $ 1,675 $ 1,055
Income taxes . . . . . . . . . . . . 865 991
Employee benefits . . . . . . . . . 878 758
Other . . . . . . . . . . . . . . . 3,043 2,079
--------------- --------------
$ 6,461 $ 4,883
=============== ==============
</TABLE>
6
<PAGE> 7
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 Income as a percentage of total revenues
for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
---------------------- ----------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
License . . . . . . . . . . 82.0% 84.8% 82.7% 86.6%
Maintenance, support and other 18.0 15.2 17.3 13.4
--------- --------- --------- ---------
Total revenues . . . . . 100.0 100.0 100.0 100.0
--------- --------- --------- ---------
Cost of revenues:
License . . . . . . . . . . 1.1 2.4 1.7 2.2
Maintenance, support and other 8.6 3.6 8.1 3.7
--------- --------- --------- ---------
Total cost of revenues . 9.7 6.0 9.8 5.9
--------- --------- --------- ---------
Gross profit . . . . . . . . . 90.3 94.0 90.2 94.1
--------- --------- --------- ---------
Operating expenses:
Sales and marketing . . . . 49.4 56.6 49.2 56.9
Research and development . . 16.4 14.3 15.3 15.4
General and administrative . 9.3 10.3 9.7 11.3
--------- --------- --------- ---------
Total operating expenses 75.1 81.2 74.2 83.6
--------- --------- --------- ---------
Income from operations . . . . 15.2 12.8 16.0 10.5
Interest and other income . . 3.8 3.4 4.0 1.7
Interest expense . . . . . . . (0.5) (1.2) (0.6) (1.3)
--------- --------- --------- ---------
Income before income taxes . . 18.5 15.0 19.4 10.9
Provision for income taxes . . (6.5) (3.0) (6.8) (2.2)
--------- --------- --------- ---------
Net income . . . . . . . . . . 12.0% 12.0% 12.6% 8.7%
========= ========= ========= =========
</TABLE>
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 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.
7
<PAGE> 8
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 December 31,
1996 increased 85% to $12.5 million from $6.8 million for the three months
ended December 31, 1995, and for the nine months ended December 31, 1996
increased 93% to $32.5 million from $16.9 million for the nine months ended
December 31, 1995. License revenues for the three months ended December 31,
1996 increased 78% to $10.2 million from $5.7 million for the three months
ended December 31, 1995, and for the nine months ended December 31, 1996
increased 84% to $26.9 million from $14.6 million for the nine months ended
December 31, 1995. The increase is attributable to an increase in the number
of licenses sold, reflecting increased acceptance of Essbase and expansion of
the direct and indirect sales forces. Direct and indirect revenues for the
three months ended December 31, 1996 increased by 95% and 45%, respectively,
when compared to the three months ended December 31, 1995, and for the nine
months ended December 31, 1996 increased by 93% and 66%, respectively, when
compared to the nine months ended December 31, 1995. Maintenance, support and
other revenues for the three months ended December 31, 1996 increased 119% to
$2.2 million from $1.0 million for the three months ended December 31, 1995,
and for the nine months ended December 31, 1996 increased 148% to $5.6 million
from $2.3 million for the nine months ended December 31, 1995. The increase is
attributable to a larger installed base providing incremental maintenance and
support. The percentage of the Company's total revenues attributable to
software licenses decreased to 82% for the three months ended December 31, 1996
from 85% for the three months ended December 31, 1995, and for the nine months
ended December 31, 1996 decreased to 83% from 87% for the nine months ended
December 31, 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.
Revenues derived through indirect channel partners accounted for
approximately 22%, 28%, 25% and 29% of the Company's total revenues for the
three months ended December 31, 1996 and 1995, and the nine months ended
December 31, 1996 and 1995, respectively. In the three months ended December
31, 1996 and 1995, and the nine months ended December 31, 1996 and 1995,
revenues attributable to Comshare, Incorporated ("Comshare"), the Company's
largest reseller, accounted for 11%, 24%, 20% and 27%, respectively, of the
Company's total revenues. 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. License revenues from Comshare for the
quarters ended September 30, 1996, June 30, 1996, March 31, 1996 and December
31, 1995, totaled approximately $1.4 million, $2.5 million, $2.4 million and
$2.1 million, respectively, and were recorded by the Company during the quarters
ended December 31, 1996, September 30, 1996, June 30, 1996 and March 31, 1996,
respectively. Although royalty revenue from Comshare decreased $1.1 million
from the prior quarter, indirect revenue from other channel partners contributed
$1.4 million to indirect revenues during the third quarter of fiscal 1997. The
Company believes this shortfall of royalty revenue from Comshare was due to a
decline in Comshare's software license revenues to $6.6 million for the three
months ended September 30, 1996 from $11.0 million for the quarter ending June
30, 1996. The Company reports revenue derived from other indirect channel
partners in the period in which the revenues are reported to the Company. No
assurance can be given that revenues derived from Comshare will not fluctuate
significantly in subsequent periods or terminate entirely. In addition, the
Company has initiated litigation against Comshare and has alleged breach of
contract and fraud in connection with its distribution contract. See "Legal
Proceedings" in Part II, Item 1 below. See "Risk Factors That May Affect Future
Results", in particular, "Fluctuations in Quarterly Results; Future Operating
Results Uncertain", "Dependence Upon Comshare and Other Indirect Channel
Partners" and "Risks Associated with Litigation and Related Costs".
International revenues from the Company's direct sales force accounted
for 10%, 8%, 10% and 7% of total revenues for the three months ended December
31, 1996 and 1995, and the nine months ended December 31, 1996 and 1995,
respectively. International license and service revenues increased to $1.2
million for the three months ended December 31, 1996 from $518,000 for the
three months ended December 31, 1995, and increased to $3.3 million for the
nine months ended December 31, 1996 from $1.1 million for the nine months ended
December 31, 1995, primarily due to expansion of the international direct sales
force. The Company records revenues from
8
<PAGE> 9
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 approximately 55%, 58%, 61% and 51% of revenues generated by Comshare
during the three months ended December 31, 1996 and 1995, and the nine months
ended December 31, 1996 and 1995, respectively, were derived from sales to
international customers.
COST OF REVENUES
Cost of License Revenues. Cost of license revenues consists primarily
of product packaging, documentation and production costs. Cost of license
revenues for the three months ended December 31, 1996 decreased as a percentage
of license revenues to 1% from 3% for the three months ended December 31, 1995,
and decreased to 2% for the nine months ended December 1996 from 3% for the
nine months ended December 31, 1995, primarily as a result of a decrease in
shipments of the upgrade release of Essbase versions 4.0 and 4.0.2.
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 48% for the three months ended December 31, 1996 from 24% for the three
months ended December 31, 1995, and increased to 47% for the nine months ended
December 31, 1996 from 28% for the nine months ended December 31, 1995. The
increase is primarily due to a shifting of operating expenses to cost of
services as a result of the establishment of the Customer Advocacy Group during
the first quarter of fiscal year 1997 and due to additional headcount and
related personnel expenses. This new organization is comprised of the
Technical Support, Field Services and Customer Services 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 $6.2 million for
the three months ended December 31, 1996 from $3.8 million for the three months
ended December 31, 1995, and increased to $16.0 million for the nine months
ended December 31, 1996 from $9.6 million for the nine months ended December
31, 1995, representing 49%, 57%, 49% and 57% of total revenues for the three
months ended December 31, 1996 and 1995, and the nine months ended December 31,
1996 and 1995, respectively. The increase in dollar amount was primarily due
to costs associated with the expansion of the direct sales force in the U.S.
and Europe, including new offices in France, Germany and Australia. Other
factors included personnel increases in the marketing group, and increased
costs associated with advertising, public relations, seminars and trade shows.
The decrease as a percentage of total revenues was due to growth in the
Company's total revenues and associated economies of scale, which do not have
associated sales and marketing costs and the shifting of expenses to the newly
established Customer Advocacy Group in the first quarter of fiscal year 1997.
Additionally, in fiscal 1996 the Company had higher 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 and outside
contractor expenses. Research and development expenses increased to $2.0
million for the three months ended December 31, 1996 from $966,000 for the
three months ended December 31, 1995, and increased to $5.0 million for the
nine months ended December 31, 1996 from $2.6 million for the
9
<PAGE> 10
nine months ended December 31, 1995, representing 16%, 14%, 15% and 15% of
total revenues for the three months ended December 31, 1996 and 1995, and the
nine months ended December 31, 1996 and 1995, respectively. The increases in
dollar amount and as a percentage of revenue were primarily due to an increase
in the number of software engineers and an increase in consulting fees relating
to applications, joint development projects and associated support required to
develop Essbase enhancements. 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, insurance and professional fees and additions to the
reserve for doubtful accounts. General and administrative expenses increased
to $1.2 million for the three months ended December 31, 1996 from $697,000 for
the three months ended December 31, 1995, and increased to $3.2 million for the
nine months ended December 31, 1996 from $1.9 million for the nine months ended
December 31, 1995, representing 9%, 10%, 10% and 11% of total revenues for the
three months ended December 31, 1996 and 1995, and the nine months ended
December 31, 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 legal costs
related to pending litigation with Comshare and Planning Sciences International
plc and Planning Sciences, Inc. (collectively "Planning Sciences"). See "Legal
Proceedings" in Part II, Item 1 below.
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. Foreign exchange gains were not significant
during any of the periods presented. Interest and other income increased to
$471,000 for the three months ended December 31, 1996 from $231,000 for the
three months ended December 31, 1995, and increased to $1.3 million for the
nine months ended December 31, 1996 from $285,000 for the nine months ended
December 31, 1995, primarily due to higher cash balances resulting from the
Company's initial public offering. Interest expense represents foreign
exchange losses, which have been immaterial to date, and interest expense on
capital leases. Interest expense decreased to $57,000 for the three months
ended December 31, 1996 from $80,000 for the three months ended December 31,
1995, and decreased to $195,000 for the nine months ended December 31, 1996
from $220,000 for the nine months ended December 31, 1995. The decrease is due
to a decline in the outstanding balance of capital lease obligations.
PROVISION FOR INCOME TAXES
The provision for income taxes increased to $809,000 for the three
months ended December 31, 1996 from $200,000 for the three months ended
December 31, 1995, and increased to $2.2 million for the nine months ended
December 31, 1996 from $366,000 for the nine months ended December 31, 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 estimates
its effective tax rate for fiscal 1997 to be approximately 35%.
10
<PAGE> 11
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the Company had $34.0 million in cash, cash
equivalents and short-term investments. Net cash provided by operating
activities was $2.8 million for the nine months ended December 31, 1996, and
was primarily attributable to net income of $4.1 million and increases in
accrued expenses and other current liabilities of $1.6 million and deferred
revenue of $1.1 million, offset by an increase in net accounts receivable of
$5.1 million.
The Company's current line of credit, which is unsecured, allows for
borrowings of up to $5.0 million at the bank's prime rate and expires in
October 1997. As of December 31, 1996, the Company had no outstanding
borrowings under its credit facility.
As of December 31, 1996, the Company's principal commitments consisted
of obligations under operating and capital leases. As of December 31, 1996,
the Company had $1.3 million in outstanding borrowings under capital leases
which are payable through 1998.
The Company moved into new corporate headquarters in December 1996.
The Company expects increases in operating expenses going forward due to
increased depreciation charges and facility costs relating to the new and
larger corporate headquarters.
The Company 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 its indirect channel
partners, 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 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; the impact of acquisitions of competitors and indirect channel
partners; the level of the Company's international revenues; foreign currency
exchange rates; the renewal of maintenance and support agreements; product life
cycles; software defects and other product quality problems; personnel changes;
changes in Company strategy; changes in the level of operating expenses and
general domestic and international economic and political conditions, among
others. The operating results of many software companies reflect seasonal
trends, and the Company's business, operating results and financial condition
may experience comparatively slower growth in its first fiscal quarter and
summer months, which overlap into the second fiscal quarter. The Company sells
substantially more product towards the end of each quarter, due in part to
established buying patterns within the software industry. As a result, the
magnitude of any quarterly fluctuations may not become evident until late in the
quarter. Essbase orders are typically shipped shortly after receipt, and
11
<PAGE> 12
consequently, in the past, order backlog at the beginning of any quarter has
represented only a small portion of that quarter's expected revenues. As a
result, license revenues in any quarter are substantially dependent on orders
booked and shipped in that quarter.
In addition, a significant portion of each quarter's revenues are
derived from sales of the Company's Essbase software in the prior quarter by
Comshare. Revenues from Comshare accounted for 11% and 24% of the Company's
total revenues for the three months ended December 31, 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. In addition, no assurance can be given that revenues
derived from Comshare will not fluctuate significantly in subsequent periods or
terminate entirely. The Company has initiated litigation against Comshare and
has alleged breach of contract and fraud in connection with its distribution
contract. See "Legal Proceedings" in Part II, Item 1 below. See "Risk Factors
That May Affect Future Results", in particular, "Fluctuations in Quarterly
Results; Future Operating Results Uncertain", "Dependence Upon Comshare and
Other Indirect Channel Partners" and "Risks Associated with Litigation and
Related Costs".
Due to all of the foregoing, revenues for any future quarter are not
predictable with any significant degree of accuracy. Quarterly revenues are
also difficult to forecast because the Company's sales cycle, from initial
evaluation to license and maintenance and support purchases, varies
substantially from customer to customer. Accordingly, the Company believes that
period-to-period comparisons of its operating results are not necessarily
meaningful and should not be relied upon as indications of future performance.
Although the Company has 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 value 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 indirect
channel partner 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. Essbase distributed by Comshare is supported by them
and their agents and 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. Revenues
attributable to Comshare accounted for 11% and 24% of the total revenue for the
three months ended December 31, 1996 and 1995,
12
<PAGE> 13
respectively. The Comshare License Agreement provides that, in the event that
certain competitors of Comshare were to acquire at least a twenty percent equity
interest in the Company, in substantially all of the Company's assets or in
substantially all of the intellectual property rights to the Company's Essbase
software, the license revenues payable by Comshare to the Company under the
agreement would be reduced by fifty percent, and Comshare could elect to
terminate the Comshare License Agreement. Accordingly, the possibility of
termination of the Comshare License Agreement or a fifty percent reduction in
license revenues from Comshare could discourage potential acquisition proposals
and could delay or prevent a change in control of the Company. In addition, the
Comshare License Agreement contains a provision prohibiting the Company from
licensing its products to certain of Comshare's competitors, and the
elimination of any potential customers limits the Company's potential market
share to some degree. The Company has initiated litigation with Comshare
alleging that Comshare has breached its obligations under its distribution
agreement with the Company by underpaying royalties and that Comshare
fraudulently induced the Company into entering into the agreement. Consequently,
no assurance can be given that revenues derived from Comshare will not fluctuate
significantly in subsequent periods or terminate entirely. The inability of the
Company to prevail in the litigation with Comshare could have a material adverse
effect on the Company's business, financial condition and operating results.
Even if the outcome of the litigation were favorable to the Company, it could
result in substantial costs to the Company and consequently, have an adverse
effect on the Company's earnings. See "Legal Proceedings" in Part II, Item 1
below. See "Risk Factors That May Affect Future Results", in particular,
"Fluctuations in Quarterly Results; Future Operating Results Uncertain",
"Dependence Upon Comshare and Other Indirect Channel Partners" and "Risks
Associated with Litigation and Related Costs".
Competition. The market in which the Company competes is intensely
competitive, highly fragmented and characterized by rapidly changing technology
and evolving standards. The Company's current and potential competitors offer a
variety of planning and analysis software solutions and generally fall within
three categories: (i) vendors of multidimensional database and analysis
software such as Oracle Corporation (Express), Pilot Software, Inc., a division
of Cognizant Corporation (Pilot Analysis Server), Planning Sciences, Inc.
(Gentia), Kenan Systems Corporation (Acumate) and Microsoft Corporation,
through its recent acquisition of OLAP technology from Panorama Software of Tel
Aviv, Israel; (ii) vendors of dedicated software applications for budgeting and
financial consolidation such as Hyperion Software Corporation (Hyperion and
FYPlan); and (iii) vendors of OLAP/relational database software (ROLAP) such as
Information Advantage, Inc. (Decision Suite), Informix Corporation (Stanford
Technology Group), Holistic Systems, a division of Seagate Technology, Inc.
(Holos) and Microstrategy, Inc. (DSS Agent). The Company does not believe that
the Panorama technology, as acquired by Microsoft, is currently competitive
with the Company's Essbase product. However, there can be no assurance that
Microsoft will not enhance such technology in order to market a competitive
product in the future.
The Company has experienced and expects to continue to experience
increased competition from current and potential competitors, many of whom have
significantly greater financial, technical, marketing and other resources than
the Company. Such competitors may be able to respond more quickly to new or
emerging technologies and changes in customer requirements or devote greater
resources to the development, promotion and sale of their products than the
Company. Also, certain current and potential competitors have greater name
recognition or more extensive customer bases that could be leveraged, thereby
gaining market share to the Company's detriment. 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
13
<PAGE> 14
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 competitors discounting of their products, may require the
Company to reduce the price of Essbase, which would materially adversely affect
the Company's business, operating results and financial condition. There can be
no assurance that the Company will be able to compete successfully against
current and future competitors, and the failure to do so would have a material
adverse effect upon the Company's business, operating results and financial
condition.
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 products and services. The Company currently expects that
Essbase-related revenues, including maintenance and support contracts, will
continue to account for all or substantially all of the Company's revenues for
the foreseeable future. As a result, the Company's future operating results
are dependent upon continued market acceptance of Essbase and enhancements
thereto. There can be no assurance that Essbase will achieve continued market
acceptance or that the Company will be successful in marketing Essbase or
enhancements thereto. A decline in demand for, or market acceptance of,
Essbase as a result of competition, technological change or other factors would
have a material adverse effect on the Company's business, operating results and
financial condition. The Company intends to continue its "Open OLAP Framework"
architecture strategy, which includes investing its efforts to improve and
enhance Essbase by maintaining its commitment to an open architecture,
extending its partnerships, integrating third party technologies, continuing to
evolve the Essbase multidimensional database server, and developing new
application development products and middleware tools.
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,
relationships with indirect channel partners, 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.
14
<PAGE> 15
Risks Associated with International Operations. International revenues
from the Company's direct sales force accounted for 10%, 8%, 10% and 7% of
total revenues for the three months ended December 31, 1996 and 1995, and the
nine months ended December 31, 1996 and 1995, respectively. The Company's
largest indirect channel partner, Comshare, accounts for a significant portion
of the Company's international revenues. Based on reports received from
Comshare, the Company believes approximately 55%, 58%, 61% and 51% of revenues
generated by Comshare during the three months ended December 31, 1996 and 1995,
and the nine months ended December 31, 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 recently opened offices in
Paris, France, Hamburg, Germany and Sydney Australia. 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.
15
<PAGE> 16
Currently, the Company is engaged in litigation with Planning Sciences
International plc and Planning Sciences, Inc. concerning the enforcement and
validity of the Company's U.S. patent. See "Legal Proceedings" in Item 1, Part
II below. See "Risk Factors That May Affect Future Results", in particular,
"Fluctuations in Quarterly Results; Future Operating Results Uncertain" and
"Risks Associated with Litigation and Related Costs".
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 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 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.
Personnel. The effective management of the Company's anticipated
growth will depend, in large part, upon the Company's ability to retain its
highly skilled technical, managerial and marketing personnel as well as its
ability to attract and maintain additions to such personnel in the future.
Risks Associated with Litigation and Related Costs. The Company's
ongoing litigation with Comshare and Planning Sciences could potentially lead
to increased legal costs to the Company. There is no guarantee as to when
these litigation proceedings will be resolved or that management will not be
distracted from their normal duties as a result of these litigation
proceedings. The inability of the Company to prevail in these litigation
proceedings could have a material adverse effect on the Company's business,
financial condition and operating results. Even if the outcome of either of
the litigation proceedings was favorable to the Company each could result in
substantial costs to the Company and consequently, have an adverse effect on
the Company's earnings.
16
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 27, 1996, the Company filed an action against Comshare,
Incorporated ("Comshare"), the Company's largest reseller, in the United States
District Court for the Northern District of California. The action alleges
that Comshare has breached its obligations under its distribution agreement
with the Company by underpaying royalties and that Comshare fraudulently
induced the Company into entering into the agreement. The action seeks
monetary and injunctive relief preventing Comshare from future distribution of
Essbase. On October 21, 1996, Comshare filed its answer as well as
counterclaims against the Company alleging interference with prospective
economic advantage, unfair competition, defamation and disparagement, and
breach of contract. Comshare claims that the Company has disseminated false and
misleading information concerning Comshare's rights under the agreement and
that the Company has violated certain provisions of the agreement. Comshare
seeks monetary relief, including punitive damages. On October 21, 1996,
Comshare filed a motion to dismiss the Company's fraud cause of action and to
strike its requests for exemplary damages, injunctive relief and attorney's
fees. Comshare also filed a motion seeking a preliminary injunction
prohibiting the Company from disseminating information which suggests or
implies (i) that Comshare is at risk of losing any rights under the agreement,
(ii) that Comshare engages in fraudulent business practices, or (iii) that the
Company has a basis for seeking injunctive relief against Comshare. On January
21, 1997, the Court entered an order denying Comshare's motion for a
preliminary injunction and denying Comshare's motion to dismiss Arbor's fraud
claim and to strike Arbor's request for exemplary damages. The Court granted
Comshare's motion to strike Arbor's requests for injunctive relief and
attorney's fees, but provided Arbor with leave to amend its complaint to allege
facts supporting a right to injunctive relief and attorney's fees. On January
31, 1997, Arbor filed an amended complaint in accordance with the Court's
order. The parties have exchanged initial discovery disclosures and full
discovery is expected to begin during the quarter ending March 31, 1997.
The Company believes that it has meritorious claims against Comshare
and that it has meritorious defenses to each of Comshare's counterclaims, and
intends to vigorously pursue its claims and defend itself against the
counterclaims. No assurance can be given as to the outcome of the litigation.
On April 16, 1996, Planning Sciences International plc and Planning
Sciences, Inc. (collectively, "Planning Sciences") filed an action against the
Company in the United States District Court for the District of Massachusetts
(the "Massachusetts action") seeking a declaratory judgment that U.S. Patent
No. 5,359,724 (the "724 patent"), owned by the Company, is invalid and not
infringed by Planning Sciences' products. On April 18, 1996, the Company filed
an action against Planning Sciences in the United States District Court for the
Northern District of California (the "California action") alleging that
Planning Sciences infringes the '724 patent and seeking a permanent injunction
and monetary damages, including treble damages. On May 8, 1996, Planning
Sciences filed its answer in the California action including a counterclaim
seeking to declare the '724 patent invalid. Planning Sciences also filed a
motion to dismiss, stay or transfer the action to Massachusetts, which the
California court denied on December 12, 1996. The Massachusetts Court granted
the Company's motion to transfer the action on November 18, 1996. The Company
filed its answer and a counterclaim for patent infringement in the transferred
case on December 12, 1996. Presently, both the action instituted by Planning
Sciences and the action instituted by the Company are pending before the same
judge in the United States District Court for the Northern District of
California. Discovery has not yet begun in either action.
The Company believes that it has meritorious claims against Planning
Sciences and that it has meritorious defenses against Planning Sciences' claims
that the '724 patent is invalid, and intends to vigorously pursue its claims
and defend itself against Planning Sciences' claims. No assurance can be given
as to the outcome of the litigation.
17
<PAGE> 18
The preceding pending litigation and any future litigation against
the Company or its employees, regardless of the outcome, is expected to result
in substantial costs and expenses to the Company and significant diversion of
attention by the Company's management personnel. Accordingly, any such
litigation could have a material adverse effect on the Company's business,
operating results and financial condition.
18
<PAGE> 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Statement of Computation of Net Income Per Share (Exhibit 11.1)
Financial Data Schedule (Exhibit 27.1)
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter ended
December 31, 1996.
19
<PAGE> 20
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: February 11, 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)
20
<PAGE> 21
Exhibit Index
Exhibit Description
- ------- ------------------------
11.1 Statement of Computation of Net Income Per Share
27.1 Financial Data Schedule
<PAGE> 1
Exhibit 11.1
ARBOR SOFTWARE CORPORATION
STATEMENT OF COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
----------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Net income . . . . . . . . . . . . . . . $ 1,503 $ 813 $ 4,114 $ 1,476
=========== ========== ========== =========
Average shares outstanding . . . . . . . 11,022 7,486 10,960 4,277
Options . . . . . . . . . . . . . . . . 691 1,042 755 1,130
Warrants . . . . . . . . . . . . . . . . -- 14 -- 29
Convertible preferred stock . . . . . . -- 2,347 -- 4,674
----------- ---------- ---------- ---------
Total common stock and common
stock equivalents . . . . . . . . . 11,713 10,889 11,715 10,110
=========== ========== ========== =========
Net income per share . . . . . . . . . . $ .13 $ .07 $ .35 $ .15
=========== ========== ========== =========
</TABLE>
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from (a) Arbor
Software Corporation condensed consolidated balance sheets and condensed
consolidated statements of income and is qualified in its entirety by reference
to such (b) financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 7,276
<SECURITIES> 26,743
<RECEIVABLES> 10,226
<ALLOWANCES> (650)
<INVENTORY> 0
<CURRENT-ASSETS> 45,443
<PP&E> 10,911
<DEPRECIATION> (3,395)
<TOTAL-ASSETS> 53,570
<CURRENT-LIABILITIES> 13,450
<BONDS> 0
0
0
<COMMON> 11
<OTHER-SE> 39,609
<TOTAL-LIABILITY-AND-EQUITY> 53,570
<SALES> 12,474
<TOTAL-REVENUES> 12,474
<CGS> 0
<TOTAL-COSTS> 1,208
<OTHER-EXPENSES> 9,368
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (57)
<INCOME-PRETAX> 2,312
<INCOME-TAX> (809)
<INCOME-CONTINUING> 1,898
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,503
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0
</TABLE>
