<PAGE> 1
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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, 1998
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)
1344 CROSSMAN AVENUE
SUNNYVALE, CALIFORNIA 94089
(Address of principal executive offices)
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(408) 744-9500
(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, 1998 there were 11,522,782 shares of the Registrant's common
stock outstanding.
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ARBOR SOFTWARE CORPORATION
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
At June 30, 1998 and March 31, 1998....................... 3
Condensed Consolidated Statements of Income
For the three months ended June 30, 1998 and 1997......... 4
Condensed Consolidated Statements of Cash Flows
For the three months ended June 30, 1998 and 1997......... 5
Notes to Condensed Consolidated Financial Statements...... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................... 24
Item 6. Exhibits and Reports on Form 8-K.......................... 25
SIGNATURES............................................................. 26
</TABLE>
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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)
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1998 1998
--------- ---------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 89,885 $ 102,307
Short-term investments........................................... 53,554 35,479
Accounts receivable, net of allowances of $1,627 and $1,392...... 17,753 20,193
Deferred tax assets.............................................. 4,207 4,207
Prepaid expenses and other current assets........................ 5,139 3,991
--------- ---------
Total current assets......................................... 170,538 166,177
Property and equipment, net.......................................... 13,748 12,975
Goodwill and intangible assets, net.................................. 2,625 2,812
Other assets......................................................... 4,382 4,269
--------- ---------
$ 191,293 $ 186,233
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................. $ 1,577 $ 1,518
Accrued income taxes............................................. 2,915 1,969
Accrued expenses and other current liabilities................... 11,630 13,508
Deferred revenue................................................. 14,285 12,840
Lease obligations................................................ 165 314
--------- ---------
Total current liabilities.................................... 30,572 30,149
--------- ---------
Long-term liabilities................................................ 100,000 100,000
--------- ---------
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized;
none issued and outstanding.................................. -- --
Common stock, $0.001 par value; 50,000,000 shares authorized;
11,506,000 and 11,400,000 shares issued and outstanding...... 12 11
Additional paid-in capital....................................... 47,557 45,831
Retained earnings................................................ 13,107 10,223
Cumulative translation adjustment................................ 45 19
--------- ---------
Total stockholders' equity................................... 60,721 56,084
--------- ---------
$ 191,293 $ 186,233
========= =========
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
3
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ARBOR SOFTWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
1998 1997
--------- --------
<S> <C> <C>
Revenues:
License.......................................................... $ 21,323 $ 13,103
Maintenance, support and other................................... 5,785 3,008
--------- --------
Total revenues............................................... 27,108 16,111
--------- --------
Cost of revenues:
License.......................................................... 618 273
Maintenance, support and other................................... 2,219 1,343
--------- --------
Total cost of revenues....................................... 2,837 1,616
--------- --------
Gross profit......................................................... 24,271 14,495
--------- --------
Operating expenses:
Sales and marketing.............................................. 13,463 8,362
Research and development......................................... 4,372 2,024
General and administrative....................................... 2,200 1,580
--------- --------
Total operating expenses..................................... 20,035 11,966
--------- --------
Income from operations............................................... 4,236 2,529
Interest and other income............................................ 1,685 271
Interest expense..................................................... (1,270) (39)
--------- --------
Income before income taxes........................................... 4,651 2,761
Provision for income taxes........................................... (1,767) (1,022)
--------- --------
Net income........................................................... $ 2,884 $ 1,739
========= ========
Earnings per share:
Basic ................................................... $ 0.25 $ 0.16
======== ========
Diluted .................................................... $ 0.24 $ 0.15
======== ========
Shares used to compute earnings per share:
Basic ......................................................... 11,453 11,164
======== ========
Diluted.......................................................... 12,150 11,770
======== ========
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
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ARBOR SOFTWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
1998 1997
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................................. $ 2,884 $ 1,739
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ..................................... 1,710 1,030
Provision for doubtful accounts.................................... 235 142
Changes in assets and liabilities:
Accounts receivable............................................ 2,205 625
Prepaid expenses and other current assets...................... (1,148) (1,193)
Other assets................................................... (113) (28)
Accounts payable............................................... 59 (1,055)
Accrued expenses, income taxes and other current liabilities... (932) 999
Deferred revenue............................................... 1,445 1,701
--------- --------
Net cash provided by operating activities................. 6,345 3,960
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales (purchases) of short-term investments, net......................... (18,075) 4,061
Acquisition of property and equipment.................................... (2,282) (1,311)
--------- --------
Net cash provided by (used in) investing activities........ (20,357) 2,750
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net.............................. 1,713 781
Repayment of capital lease obligations................................... (149) (217)
--------- --------
Net cash provided by financing activities.................. 1,564 564
--------- --------
Effect of exchange rate changes on cash and cash equivalents............... 26 107
--------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....................... (12,422) 7,381
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD........................... 102,307 5,647
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................................. $ 89,885 $ 13,028
========= ========
</TABLE>
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 1998 Annual Report on Form 10-K. The condensed
consolidated results of operations for the period ended June 30, 1998 are not
necessarily indicative of the results to be expected for any subsequent quarter
or for the entire fiscal year ending March 31, 1999. The March 31, 1998 balance
sheet was derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles.
2. RECENT EVENTS
-------------
On May 25, 1998, the Company, Hyperion Software Corporation ("Hyperion")
and HSC Merger Corp. entered into an Agreement and Plan of Merger. The merger
contemplated therein (the "Merger") will be effected by the issuance of 0.95
shares of the Company's common stock for each share of Hyperion common stock.
Concurrent with the exchange, the continuing company will be renamed Hyperion
Solutions Corporation. This transaction is expected to be accounted for as a
pooling of interests. The merger is subject to approval by the stockholders of
the Company and Hyperion. See also the Company's Current Report on Form 8-K
dated May 25, 1998 and joint proxy statement / registration statement on Form
S-4 originally filed with the Securities and Exchange Commission on June 18,
1998, as amended for a description of the merger and the related agreement and
exhibits.
3. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
----------------------------------------------
Accrued expenses and other current liabilities consist of the following (in
thousands):
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1998 1998
----------- ---------
(UNAUDITED)
<S> <C> <C>
Accrued commissions................... 1,314 4,074
Accrued benefits...................... 2,404 2,848
Interest payable on convertible
subordinated notes................ 1,313 188
Other................................. 6,599 6,398
----------- ---------
$ 11,630 $ 13,508
=========== =========
</TABLE>
4. COMPREHENSIVE INCOME
--------------------
Effective April 1, 1998, the Company adopted Financial Accounting Standards
Board (FASB) statement No. 130 (FAS 130), "Reporting Comprehensive Income,"
which requires that all items that are recognized under accounting standards as
components of comprehensive income be reported in the financial statements.
Comprehensive income is defined as the change in equity of a company during a
period from transactions and other events and circumstances excluding
transactions resulting from investments by owners and distributions to owners.
The primary difference between net income and comprehensive income, for the
Company, results from foreign currency translation adjustments.
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Comprehensive income for the three months ended June 30, 1998 and 1997 is
as follows:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1998 1997
-------- --------
(UNAUDITED)
<S> <C> <C>
Net Income ..................................... $ 2,884 $ 1,739
Currency translation adjustment, net of tax..... 16 67
-------- --------
$ 2,900 $ 1,806
======== ========
</TABLE>
5. EARNINGS PER SHARE
The following table sets forth a reconciliation of the computation of the
basic and diluted earnings per share under the provisions of FAS 128:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
1998 1997
-------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<S> <C> <C>
Net income........................................... $ 2,884 $ 1,739
========= ========
Shares used to compute basic earnings per
share (weighted average number of common
shares outstanding during the period)............. 11,453 11,164
Incremental common shares attributable to exercise
of outstanding options and warrants............... 697 606
-------- --------
Shares used to compute diluted earnings per share.... 12,150 11,770
======== ========
Basic earnings per share............................. $ 0.25 $ 0.16
======== ========
Diluted earnings per share........................... $ 0.24 $ 0.15
======== ========
</TABLE>
Substantially all options were included in the computation of diluted
earnings per share for all years presented. Shares of common stock issuable upon
conversion of the convertible subordinated notes due 2005 which were issued in
March 1998 have been excluded from the computation for the three months ended
June 30, 1998 as their effect is antidilutive.
6. REVENUE RECOGNITION
The Company's revenues are derived from software license sales and support
and consulting services. Annual support services are charged separately for
software licenses.
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License revenues are recognized upon shipment of the product if no
significant vendor obligations remain and collection of the resulting receivable
is probable. In instances where a significant vendor obligation exists, revenue
recognition is delayed until the obligation has been satisfied.
Annual support revenues consist of ongoing support and product updates and
are recognized ratably over the term of the related contract. Payment received
in advance of revenue recognition are recorded as deferred revenue. Training and
consulting service revenue is recognized as the services are performed.
The Company's license agreements typically require the payment of a
nonrefundable, one-time license fee for a license of a specified term, which may
be perpetual. Customers can terminate the license at any time but do not have a
right of refund for the license fees. The Company can terminate the license
agreement only upon a material breach by the other party, provided that the
breach is not cured within a specified period.
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position No. 97-2 ("SOP 97-2"), "Software Revenue
Recognition" which the Company has adopted for transactions entered into in the
fiscal year beginning April 1, 1998. SOP 97-2 provides guidance on recognizing
revenue on software transactions and supersede SOP 91-1 "Software Revenue
Recognition." In March 1998, the AICPA issued Statement of Position No. 98-4
("SOP 98-4"), "Deferral of the Effective Date of Provision of SOP 97-2, Software
Revenue Recognition." SOP 98-4 defers, for one year, the application of certain
passages in SOP 97-2 which limit what is considered vendor-specific objective
evidence necessary to recognize revenue for software licenses in
multiple-element arrangements when undelivered elements exist. Additional
guidance is expected to be provided prior to adoption of the deferred provision
of SOP 97-2. The Company will determine the impact, if any, the additional
guidance will have on current revenue recognition practices when issued.
Adoption of the remaining provisions of SOP 97-2 did not have a material impact
on revenue recognition during to three months ended June 30, 1998.
During the first quarter of fiscal 1999, the Company adopted SOP 97-2. The
provisions of SOP 97-2 have been applied to transactions entered into beginning
April 1, 1998. SOP 97-2 generally requires revenue earned on software licenses
involving multiple elements to be allocated to each element based on the
relative fair values of the elements using vendor specific objective evidence of
such value. The revenue allocated to software licenses generally is recognized
upon delivery of the products. The revenue allocated to support is recognized
ratably over the term of the support and revenue allocated to service elements
is recognized as the services are performed. In connection with the adoption of
SOP 97-2, the Company analyzed all of the elements included in its
multiple-element arrangements and determined that the Company has sufficient
evidence to allocate revenue to the license an support components of certain of
its licenses.
7. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("FAS 131"). This statement
establishes standards for the way companies report information about operating
segments in annual financial statements. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. The Company has not yet determined the impact, if any, of adopting
this new standard. The disclosures prescribed by FAS 131 are effective for the
Company's annual consolidated financial statements for the year ending March 31,
1999.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides
guidance on capitalization of the costs incurred for computer software developed
or obtained for internal use. It also provides guidance for determining whether
computer software is internal-use software and on accounting for the proceeds of
computer software originally developed or obtained for internal use and then
subsequently sold to the public. The Company has not yet determined the impact,
if any, of adopting this
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statement. The disclosures prescribed by SOP 98-1 will be effective for the
Company's consolidated financial statements for the fiscal year ending March 31,
2000.
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133). The statement is effective for
all fiscal quarters of fiscal years beginning after June 15, 1999 and
establishes accounting and reporting standards for derivative instruments,
embedded in other contracts, and for hedging activities. The Company currently
does not invest in derivative instruments.
9
<PAGE> 10
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" in this Part I, Item 2 as well as those discussed elsewhere in
this section and elsewhere in this Report, and the risks discussed in "Risk
Factors" in Part I, Item 1 -- Business included in the Company's fiscal year
1998 Annual Report on Form 10-K and in "Risk Factors" in the Company's joint
proxy statement / registration statement on Form S-4 originally filed with the
Securities and Exchange Commission on June 18, 1998, as amended.
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
ENDED JUNE 30,
1998 1997
---------- -------
(UNAUDITED)
<S> <C> <C>
Revenues:
License............................. 78.7% 81.3%
Maintenance, support and other...... 21.3 18.7
---------- ----------
Total revenues................... 100.0 100.0
---------- ----------
Cost of revenues:.....................
License............................. 2.3 1.7
Maintenance, support and other...... 8.2 8.3
---------- ----------
Total cost of revenues........... 10.5 10.0
---------- ----------
Gross profit.......................... 89.5 90.0
---------- ----------
Operating expenses:...................
Sales and marketing................. 49.7 51.9
Research and development............ 16.1 12.6
General and administrative.......... 8.1 9.8
---------- ----------
Total operating expenses......... 73.9 74.3
---------- ----------
Income from operations................ 15.6 15.7
Interest and other income............. 6.2 1.6
Interest expense...................... (4.7) (0.2)
----------- -----------
Income before income taxes............ 17.1 17.1
Provision for income taxes............ (6.5) (6.3)
----------- -----------
Net income............................ 10.6% 10.8%
========== ==========
</TABLE>
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REVENUES
Revenues. The Company's total revenues are derived from license revenues
for its Arbor Essbase software and Arbor Essbase-related products, as well as
software maintenance and support, training and consulting revenues from Arbor
Essbase licensees. Revenues for maintenance and support services, training and
consulting are charged separately from the license of Arbor Essbase and Arbor
Essbase-related products.
The Company's total revenues for the three months ended June 30, 1998
increased 68% to $27.1 million from $16.1 million for the three months ended
June 30, 1997. The increase is attributable to an increase in the number of
licenses sold due in part to the continued expansion of the direct and indirect
sales forces. License revenues for the three months ended June 30, 1998
increased 63% to $21.3 million from $13.1 million for the three months ended
June 30, 1997. Maintenance, support and other revenues for the three months
ended June 30, 1998 increased 92% to $5.8 million from $3.0 million for the
three months ended June 30, 1997. These increases are attributable to a larger
installed base providing incremental maintenance and support. The percentage of
the Company's total revenues attributable to software licenses decreased from
81% for the three months ended June 30, 1997 to 79% for the three months ended
June 30, 1998.
Revenues derived through indirect channel partners accounted for
approximately 29%, and 20% of the Company's total revenues for the three months
ended June 30, 1998 and 1997, respectively. The percentage increase is due
primarily to increased revenues from new partnerships entered into subsequent to
June 30, 1997.
Total international revenues, which are attributable primarily to direct
export sales to customers in Europe, accounted for approximately 14% and 13% of
the Company's total revenues for the three months ended June 30, 1998 and 1997,
respectively. International license and service revenues increased from $2.1
million for the three months ended June 30, 1997 to $3.7 million for the three
months ended June 30, 1998, primarily due to expansion of the international
direct and indirect sales forces.
Revenues are gross revenues less allowances for estimated future returns
which are estimated and provided for at the time of shipment of the product. See
"Risk Factors--Dependence Upon Indirect Channel Partners" and "--Risks
Associated with International Operations."
COST OF REVENUES
Cost of License Revenues. Cost of license revenues consists primarily of
product packaging, documentation, production costs, amortization of purchased
technology and royalties paid for licensed technologies. Cost of license
revenues for the three months ended June 30, 1998 increased as a percentage of
license revenues to 2.9% from 2.1% for the three months ended June 30, 1997.
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. Customer support includes telephone
question and answer services, newsletters, on-site visits and other support.
Cost of maintenance, support and other revenues decreased as a percentage of
maintenance, support and other revenues to 38% for the three months ended June
30, 1998 from 45% for the three months ended June 30, 1997. The decrease from
June 30, 1997 to June 30, 1998 was primarily due to increased maintenance
revenues, resulting from the larger installed user base, which have a lower cost
structure than support and training.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses consist primarily of
personnel costs, including sales commissions, of all personnel involved in the
sales process, as well as costs of advertising, public relations, seminars and
trade shows. Sales and marketing expenses increased from $8.4 million for the
three months ended June 30, 1997 to $13.5 million for the three months ended
June 30, 1998, approximating 52%, and 50% of total revenues, respectively. The
increase in dollar amount was primarily due to costs associated with the
expansion of
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the sales force in North America, Europe and Australia, including new offices in
Canada, 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 Company expects to
continue hiring additional sales and marketing personnel and to increase
promotion and advertising expenditures for fiscal 1999.
Research and Development. Research and development expenses consist
primarily of salaries and other personnel-related expenses, consultants,
depreciation of development equipment and supplies. Research and development
expenses increased from $2.0 million for the three months ended June 30, 1997 to
$4.4 million for the three months ended June 30, 1998, approximating 13%, and
16% of total revenues, respectively. The increase in dollar amount was 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 Arbor Essbase enhancements. The Company
expects to continue hiring additional research and development personnel during
fiscal 1999. 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, investor relations, legal and
contracts, human resources and general management, as well as bad debt,
insurance and professional expenses. General and administrative expenses
increased from $1.6 million for the three months ended June 30, 1997 to $2.2
million for the three months ended June 30, 1998, approximating 10% and 8% of
total revenues, respectively. The increase in dollar amount was primarily due to
increased staffing necessary to manage and support the Company's expansion as
well as increased professional fees. The decrease as a percentage of total
revenues was due to growth in the Company's total revenues.
INTEREST AND OTHER INCOME AND INTEREST EXPENSE
Interest and other income represents interest income earned on the
Company's cash, cash equivalents and short-term investments, and other income
(expense), including foreign exchange gains and losses and interest expense.
Interest and other income increased from $271,000 for the three months ended
June 30, 1997 to $1.7 million for the three months ended June 30, 1998. Interest
income increased from June 30, 1997 to 1998 primarily due to the investment of
the proceeds from the issuance of $100.0 million Convertible Subordinated Notes
in March of 1998. Foreign exchange gains and losses were not material for any of
the periods presented. Interest expense increased from $39,000 for the three
months ended June 30, 1997 to $1.3 million for the three months ended June 30,
1998 primarily due to interest and amortization on deferred issuance costs
related to the Company's $100.0 million Convertible Subordinated Notes.
PROVISION FOR INCOME TAXES
The provision for income taxes increased from $1.0 million for the three
months ended June 30, 1997 to $1.8 million for the three months ended June 30,
1998. The Company's effective tax rate was 37% and 38% for the three months
ended June 30, 1997 and 1998, respectively. The Company expects that its
effective tax rate will be approximately 38% for the remainder of fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1998, the Company had $143 million in cash, cash equivalents
and short-term investments. Cash and cash equivalents are highly liquid
investments with original maturities of ninety days or less. Net cash provided
by operating activities was $ 4.0 million for the three months ended June 30,
1997 and $6.3 million for the three months ended June 30, 1998. For the three
months ended June 30, 1998, net cash provided by operating activities was
primarily attributable to net income of $2.9 million, a decrease in net accounts
receivable of $2.4 million, an increase in deferred revenue of $1.4 million as
well as depreciation and amortization of $1.7 million, offset by an increase in
prepaid expenses and other current assets of $1.1 million and a decrease in
accrued expenses, income taxes payable and other current liabilities of $0.9
million.
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<PAGE> 13
The Company used $2.3 million of cash during the three months ended June
30, 1998 for the acquisition of property and equipment. The capital expenditures
were primarily for tenant improvements for the Company's new corporate
facilities, and related furniture and equipment, as well as for computer
equipment used throughout the Company.
The Company's current line of credit allows for borrowings of up to $5.0
million at the bank's prime rate and expires in 1999. As of June 30, 1998, the
Company had no outstanding borrowings under its credit facility.
In March 1998, the Company issued $100.0 million of 4.5% Convertible
Subordinated Notes (the "Notes"), due 2005. Net proceeds to the Company from the
issuance of the Notes were $97.0 million. The Notes are Subordinated to all
existing and future senior debt and are convertible into shares of the Company's
Common Stock at a conversion price of $56.36 per share. The Notes are redeemable
at the option of the Company, in whole or in part, at any time on or after March
20, 2001 at 104.5% of the principal amount initially, and thereafter at prices
declining to 100% at maturity, in each case together with accrued interest. Each
holder of these Notes has the right, subject to certain conditions and
restrictions, to require the Company to offer to repurchase all outstanding
Notes, in whole or in part, owned by such holder, at specified repurchase prices
together with accrued interest upon the occurrence of certain events. The
Company incurred $3.3 million of costs in connection with the issuance of the
notes which have been deferred and are included in other assets. These
unamortized costs will be recognized as interest expense over the term of the
Notes using the straight-line method, which approximates the effective interest
method. Interest on the Notes began accruing March 16, 1998 and is payable
semi-annually on March 15 and September 15, commencing September 15, 1998. The
Company expects to use the net proceeds of the offering to strengthen its
financial condition, to provide working capital and for general corporate
purposes, and to provide itself with additional financial flexibility to take
advantage of business opportunities as they may arise.
The Company believes its current cash and short-term investment balances,
its credit facility and the cash flows generated from operations, if any, will
be sufficient to meet its anticipated cash needs for working capital and capital
expenditures for at least the next 12 months.
YEAR 2000 COMPLIANCE
The Company uses a significant number of computer software programs and
operating systems in its internal operations. The use of computer programs that
rely on two-digit date programs to perform computations and decision-making
functions may cause computer systems to malfunction in the year 2000 and lead to
significant business delays and disruptions. While the Company believes that the
significant software applications that it uses in its business are year 2000
compliant, to the extent that any of these software applications contain source
code that is unable to appropriately interpret the upcoming calendar year 2000,
some level of modification or possible replacement of such source code or
applications will be necessary. The Company has analyzed the significant
software applications that it uses in its business and, as a result, the Company
at this time does not anticipate any significant expense in ensuring that they
are year 2000 compliant. However, until the year 2000 arrives, the Company
cannot be absolutely certain that its analysis is correct. The Company has also
initiated discussions with its significant vendors, service providers and large
customers to evaluate Year 2000 issues, if any, relating to the interaction of
their systems with the Company's internal systems. Failure of third-party
enterprises with which the Company interacts to achieve year 2000 compliance
could have a material adverse effect on the Company's business, financial
condition and results of operations. While the Company believes that its
planning efforts are adequate to address its Year 2000 issues on a timely basis,
there can be no assurance that there will not be a delay in, or increased costs
associated with, implementation of changes to address any such issues, which
could have a material adverse effect on the Company and its financial position
and future results of operations.
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RISK FACTORS
All forward-looking statements included in this Report on Form 10-Q are
based on information available to the Company on the date hereof, and all
forward looking statements in document incorporated by reference are based on
information available to the Company as of the date of such documents. The
Company assumes no obligation to update any such forward looking statements. The
Company's actual results may differ materially from those discussed in the
forward looking statements as a result of certain factors, including those set
forth in the following risk factors and elsewhere in this document and
incorporated by reference herein.
Fluctuations in Quarterly Results; Future Operating Results Uncertain. The
Company's quarterly operating results could vary significantly in the future
depending on a number of factors, including: (i) demand for the Company's Arbor
Essbase software and related products; (ii) the number, timing and significance
of product enhancements and new product announcements by the Company and its
current or future competitors; (iii) changes in pricing policies by the Company
or its competitors; (iv) the level of price and product competition; (v)
unanticipated events or announcement relating to the Merger; (vi) the Company's
relationships with and the consistency of sales generated by its indirect
channel partners; (vii) the integration of newly acquired products, technologies
and businesses, if any, by the Company; (viii) the impact of acquisitions by
competitors and indirect channel partners; (ix) changes in the mix of indirect
channels through which its products are offered; (x) customer order deferrals in
anticipation of enhancements to its products or enhancements or new products of
competitors or in anticipation of the Merger; (xi) the ability of the Company to
develop, introduce and market new and enhanced versions of Arbor Essbase and
complementary products on a timely basis; (xii) changes in the Company's sales
incentive strategy; (xiii) the timing of revenue recognition under the Company's
agreements and changes in accounting standards with respect to revenue
recognition; (xiv) the size, timing and structure of significant licenses; (xv)
changes in Company strategy; (xvi) the level of the Company's international
revenues; (xvii) the renewal of maintenance and support agreements; (xviii)
product life cycles; (xix) software defects and other product quality problems;
(xx) personnel changes; (xxi) changes in the level of operating expenses; (xxii)
successful development and marketing of platform-specific versions of Arbor
Essbase by certain third parties that independently market such versions;
(xxiii) foreign currency exchange rates; and (xxiv) general domestic and
international economic and political conditions. The operating results of many
software companies reflect seasonal trends, and the Company's business,
operating results and financial condition may experience comparatively slower
growth in its first fiscal quarter and summer months, which overlap into its
second fiscal quarter. The Company sells substantially more product towards the
end of each quarter, particularly in the last two weeks of the quarter, due in
part to established buying patterns within the software industry. As a result,
the magnitude of any quarterly fluctuations have not been, and may not become in
the future, evident until the last few days of a quarter. Orders for the
Company's products are typically shipped shortly after receipt, and as a result
the Company has limited ability to predict quarterly revenues at the beginning
of any quarter. As a result, license revenues in any quarter are substantially
dependent on orders booked and shipped in that quarter.
Due to all of the foregoing, revenues for any future quarter are not
predictable with any significant degree of accuracy. Quarterly revenues are also
difficult to forecast because the Company's sales cycle, from initial evaluation
to license and maintenance and support purchases, varies substantially from
customer to customer. Accordingly, the Company believes that period-to-period
comparisons of its operating results are not necessarily meaningful and should
not be relied upon as indications of future performance. Although the Company
has experienced significant growth in total revenues in recent years, the
Company does not believe that historical growth rates are sustainable.
Accordingly, the rate at which the Company has grown in the past should not be
considered indicative of future revenue growth, if any, or future operating
results. There can be no assurance that the Company will remain profitable on a
quarterly or annual basis.
The Company's expense levels are based in significant part on the Company's
expectations of future revenues and therefore are higher than past expense
levels, and are relatively fixed in the short run. If revenue levels are below
expectations, net income is likely to be disproportionately affected. There can
be no assurance
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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 or 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.
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); Gentia Software plc (formerly known as
Planning Sciences International plc and Planning Sciences, Inc.) (Gentia);
Seagate Software, a subsidiary of Seagate Technology, Inc. (Holos); and
Microsoft Corporation (Microsoft OLAP Server, currently in beta); (ii) vendors
of dedicated software applications for budgeting and financial consolidation
such as Hyperion Software Corporation (Hyperion and FYPlan); and (iii) vendors
of relational/on-line analytical processing database software (ROLAP) such as
Information Advantage, Inc. (Decision Suite); Informix Corporation (Metacube);
and Microstrategy, Inc. (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 have greater name
recognition or more extensive customer bases that could be leveraged, thereby
gaining market share to the Company's detriment. The Company expects additional
competition as other established and emerging companies enter into the OLAP
software market and new products and technologies are introduced. In addition,
as the Company develops and enhances Arbor Essbase and complementary products,
the resulting new functionality may duplicate the functionality of, and thus
compete with, other products offered by indirect channel partners. 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.
The Company's future success depends, in part, upon the availability of
third party tools and applications that address customer requirements and work
with Arbor Essbase through the Company's Arbor Essbase API. Failure by third
parties to support the Company's API or failure by the Company to adopt industry
standard API's, if and when they emerge, could 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 existing and prospective customers. Further competitive pressures,
such as those resulting from competitors' discounting of their products, may
require the Company to reduce the price of Arbor Essbase and complementary
products, 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.
Management of Growth; Acquisition-related Risks. The Company's rapid growth
has placed, and is expected to continue to place, a significant strain on the
Company's managerial, operational, financial and other resources. As of June 30,
1998, the Company had grown to 456 employees since its inception in April 1991,
and the Company expects that continued hiring of new personnel will be required
to support the growth of its business. The Company's future success will depend,
in part, upon its ability to manage its growth effectively, particularly as
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<PAGE> 16
the Company enhances and extends the functionality of Arbor Essbase with
complementary products and expands its international distribution. This will
require that the Company continue to implement and improve its operational,
administrative and financial and accounting systems and controls and to expand,
train and manage its employee base. There can be no assurance that the Company's
systems, procedures or controls will be adequate to support the Company's
operations or that the Company's management will be able to achieve the rapid
execution necessary to exploit the market for the Company's business model. See
" -- Hiring and Retention of Personnel."
A key component of the Company's growth strategy is the acquisition of
complementary businesses, products and technologies that meet the Company's
criteria for revenues, profitability, growth potential and operating strategy.
The successful implementation of this strategy depends on the Company's ability
to identify suitable acquisition candidates, acquire such companies on
acceptable terms and integrate their operations successfully with those of the
Company. There can be no assurance that the Company will be able to identify
suitable acquisition candidates or that the Company will be able to acquire such
candidates on acceptable terms. Moreover, in pursuing acquisition opportunities
the Company may compete with other companies with similar growth strategies,
certain of which competitors may be larger and have greater financial and other
resources than the Company. Competition for these acquisition targets could also
result in increased prices of acquisition targets and a diminished pool of
companies available for acquisition. Acquisitions, such as the acquisition of
AppSource Corporation in December 1997 and the pending Merger of the Company
with Hyperion as described in the Company's Current Report on Form 8-K, dated
May 25, 1998 and on form S-4, dated June 18, 1998 involve a number of other
risks, including, among other things, adverse effects on the Company's reported
operating results from goodwill amortization, acquired in-process technology,
stock compensation expense and increased compensation expense resulting from
newly hired employees, difficulties in managing diverse geographic sales and
research and development operations, the diversion of management attention,
potential disputes with the sellers of acquired entities and the possible
failure to retain key acquired personnel and the impairment of relationships
with employees and strategic partners as a result of such acquisitions or the
integration of new personnel. Due to the foregoing, the Company's pursuit of an
acquisition strategy or any individual acquisition may have a material adverse
effect on the Company's business, operating results and financial condition.
The Company's future performance will depend on the Company's ability to
integrate any organizations acquired by the Company, including Hyperion if the
Merger is approved. Even if successful, integration may take a significant
period of time, will place a significant strain on the Company's resources and
could subject the Company to additional expenses during the integration process.
As a result, there can be no assurance that the Company will be able to
integrate acquired businesses successfully, or in a timely manner in accordance
with its strategic objectives. If the Company is unable to manage internal or
acquisition-based growth effectively, the Company's business, operating results
and financial condition will be materially adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business -- Competition" and "-- Employees."
Uncertainty Relating to Integration as a Result of the Merger. The
integration of Hyperion's and the Company's business and personnel following the
Merger presents difficult challenges for Arbor's management, particularly in
light of the increased time and resources required to effect the combination
with Hyperion. Further, both the Company and Hyperion entered into the Agreement
and Plan of Merger with the expectation that the Merger will result in synergies
for the combined company. The combined company, however, will be more complex
and diverse than either Arbor or Hyperion individually, and the combination and
continued operation of their business operations will be difficult. While the
management and the board of directors of both the Company and Hyperion believe
that the combination can be accomplished in a manner that will realize the value
of the combined company, the management group of the combined company has
limited experience in combinations of this complexity or size. Accordingly,
there can be no assurance that the combinations of the businesses can be
effectively managed to realize the synergies anticipated to result therefrom.
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The Company and Hyperion entered into the Agreement and Plan of Merger,
among other reasons, in order to achieve potential mutual benefits from
combining each of their respective expertise and product lines for the
enterprise software market. Realization of these potential benefits will
require, among other things, integrating the companies' respective product
offerings and coordinating the combined company's sales and marketing and
research and development efforts. The Company and Hyperion each have different
systems and procedures in many operational areas that must be rationalized and
integrated. There can be no assurance that such integration will be accomplished
effectively, expeditiously or efficiently. The difficulties of such integration
may be increased by the necessity of coordinating geographically separated
divisions, integrating personnel with disparate business backgrounds and
combining different corporate cultures. The integration of certain operations
following the Merger will require the dedication of management resources that
may temporarily distract attention from the day-to-day business of the combined
company. The business of the combined company may also be disrupted by employee
uncertainty and lack of focus during such integration. There can also be no
assurance that the combined company will be able to retain all of its key
technical, sales and other key personnel. Failure to effectively accomplish the
integration of the operations of the Company and Hyperion could have a material
adverse effect on the combined company's business, operating results and
financial condition. Moreover, uncertainty in the marketplace or customer
hesitation relating to the Merger could negatively affect the combined company's
business, operating results and financial condition.
Cost of Integration; Transaction Expenses. Transaction costs relating to
the Merger and the anticipated combination of certain operations of the Company
and Hyperion are expected to result in one-time charges to the combined
company's earnings. Although it will not be feasible to determine the actual
amount of these charges until the operational and transition plans are
completed, the management of the Company and Hyperion believe that the aggregate
charge will be approximately $20.0 million before taxes, although such amount
may be increased by unanticipated additional expenses incurred in connection
with the Merger. This aggregate charge is expected to include the estimated
costs associated with financial advisory, accounting and legal fees, printing
expenses, filing fees and other merger-related costs. While the exact timing of
these expenses cannot be determined at this time, the management of the Company
anticipates that this aggregate charge to earnings will be recorded primarily in
the quarter ending September 30, 1998, the time at which the Merger is expected
to be consummated.
Potential Dilutive Effect to Stockholders. Although the Company and
Hyperion believe that beneficial synergies will result from the Merger, there
can be no assurance that the combining of the Company's and Hyperion's
businesses, even if achieved in an efficient and effective manner, will result
in combined results of operations and financial condition superior to that which
would have been achieved by each company independently, or as to the period of
time required to achieve such result. The issuance of the Company's Common Stock
in connection with the Merger is likely initially to have a dilutive effect on
the Company's earnings per share and there is no assurance that Company
stockholders would not achieve greater returns on investment were the Company to
remain an independent company.
Dependence Upon Indirect Channel Partners. In addition to its direct sales
force, the Company relies on indirect channel partners such as OEMs, VARs and
distributors for licensing and support of Arbor Essbase 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 Arbor Essbase, and if the Merger is approved, products that are
competitive with Hyperion. Further, as the Company enhances the functionality in
Arbor Essbase and develops complementary products or expands its product
offerings through acquisition or other means, including the Merger, such
enhancements and complementary products may duplicate the functionality of
products already offered by its channel partners. In such event, sales of the
Company's products by such channel partner may decline. There can be no
assurance that the Company's current indirect channel partners will elect, or be
able, to market or support Arbor Essbase or the Company's complementary products
effectively or be able to release their Arbor Essbase embedded products in a
timely manner, that the Company will be able to effectively manage channel
conflicts, that economic conditions or industry demand will not adversely affect
these or other
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indirect channel partners or that these indirect channel partners will not
devote greater resources to marketing and supporting the products of other
companies. No assurance can be given that revenues derived from indirect channel
partners will not fluctuate significantly in subsequent periods or terminate
entirely. The Company has been involved in litigation with a significant channel
partner and, although such litigation has been settled, there can be no
assurance that there will be no future disputes with current or future channel
partners. Such disputes could materially adversely affect the Company's
business, operating results and financial condition.
Product Concentration; Dependence upon the Market for OLAP Server Software.
All of the Company's revenues to date have been derived from licenses for Arbor
Essbase and complementary products and services. The Company currently expects
that Arbor Essbase-related revenues, including revenues from complementary
products, as well as maintenance and support contracts, will continue to account
for substantially all of the Company's revenues for the foreseeable future. If
the Merger is approved by the respective stockholders of Arbor and Hyperion and
the other closing conditions are satisfied, Arbor Essbase related revenues are
expected to still account for a significant portion of the combined company's
revenues for the foreseeable future. As a result, the Company's future operating
results are dependent upon continued market acceptance of Arbor Essbase,
enhancements and extensions thereto and applications and tools therefor. There
can be no assurance that Arbor Essbase will achieve continued or increased
market acceptance or that the Company will be successful in marketing Arbor
Essbase, enhancements thereto or applications therefor. A decline in demand for,
or market acceptance of, Arbor Essbase as a result of competition, technological
change or other factors would have a material adverse effect on the Company's
business, operating results and financial condition. The Company intends to
continue its efforts to improve and enhance Arbor Essbase by maintaining its
commitment to an open architecture, extending its partnerships, integrating
third party technologies, enhancing its linkage with leading general-purpose
database management systems, continuing to evolve the Arbor Essbase OLAP Server,
and developing complementary products. No assurance can be given that such
efforts will enhance the value of the Company's product offerings to customers.
Although sales of Arbor Essbase have increased in recent years, the market
in which the Company competes is undergoing rapid change, and there can be no
assurance that existing customers will continue to purchase or that potential
customers will purchase Arbor Essbase and complementary products. The Company
has spent, and intends to continue to spend, considerable resources educating
potential customers about Arbor Essbase and its functions and the market for
OLAP solutions. However, there can be no assurance that such expenditures will
enable Arbor Essbase to achieve any additional degree of market acceptance, and
if the market for Arbor Essbase or utilization of OLAP tools and complementary
applications in general 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.
Risks Associated with International Operations. The Company's future
financial performance will depend in large part on the growth and performance of
the Company's international operations. The Company believes that in order to
increase sales opportunities and profitability it will be required to expand its
international operations. The Company maintains offices in Vancouver, British
Columbia, Canada; London, United Kingdom; Paris, France; Frankfurt, Hamburg and
Munich, Germany; and Sydney, Australia and is currently investing significant
time, financial resources and management attention to developing its
international operations, including the development of certain third party
distributor relationships and the hiring of additional sales representatives.
However, there can be no assurance that the Company will be successful in
expanding its international operations or that the Company will be able to
maintain or increase international market demand for Arbor 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. In
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the event of a dispute with an international distributor, it is possible that
the Company would incur additional costs and expenses and certain obstacles to
termination of the relationship, as the laws of certain foreign jurisdictions
are more favorable to distributors than those of the United States. In addition,
as the Company establishes and protects its trademarks in jurisdictions outside
the United States, it is possible it will encounter opposition from entities
claiming rights to such trademarks in those jurisdictions.
International revenues, which are attributable primarily to direct export
sales to customers in Europe, are subject to inherent risks, including the
impact of possible recessionary environments in economies outside the United
States, higher costs of doing business, costs of localizing products for
different languages, 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 services, or that the
foregoing factors will not have a material adverse effect on the Company's
future international revenues and, consequently, on the Company's business,
operating results and financial condition. The Company's direct international
sales are currently denominated in either United States dollars, British pounds
sterling, German deutsche marks or French francs. Although exposure to currency
fluctuations has not been material to date, there can be no assurance that
fluctuations in the currency exchange rates in the future will not have a
material adverse impact on revenues from direct international sales and thus the
Company's business, operating results or financial condition. Sales generated by
the Company's indirect channel partners are currently 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.
Risks Associated with New Versions and New Products; Rapid Technological
Change. The software industry, and specifically the market in which the Company
competes, is characterized by rapid technological change, frequent introductions
of new products, changes in customer demands and evolving industry standards.
The introduction of products embodying new technologies and the emergence of new
industry standards can render existing products obsolete and unmarketable. The
life cycle of each version of Arbor Essbase is difficult to estimate. The
Company's future success will depend upon its ability to address the
increasingly sophisticated needs of its customers by developing and introducing
enhancements to Arbor Essbase and complementary products on a timely basis that
keep pace with technological developments and emerging industry standards and
customer requirements. There can be no assurance that the Company will be
successful in developing and marketing enhancements to Arbor Essbase and
complementary products that respond to technological change, evolving industry
standards or customer requirements, that the Company will not experience
difficulties that could delay or prevent the successful development,
introduction and sale of such enhancements or that such enhancements will
adequately meet the requirements of the marketplace and achieve any significant
degree of market acceptance. The Company has in the past experienced delays in
the release dates of enhancements to Arbor Essbase and complementary products.
If the release dates of any future enhancements of Arbor Essbase or
complementary products are delayed, or if when released, such products fail to
achieve market acceptance, the Company's business, operating results and
financial condition could be materially adversely affected. There can be no
assurance that the introduction or announcement of new product offerings by the
Company or the Company's competitors will not cause customers to defer or forego
purchases of current versions of Arbor Essbase or complementary products, which
could have a material adverse effect on the Company's business, operating
results and financial condition.
Hiring and Retention of Personnel. The Company's future operating results
depend in significant part upon the continued service of its key technical,
sales and senior management personnel, none of whom is bound by an employment
agreement for a term of service. The Company's future success also depends on
its continuing ability to attract and retain highly qualified technical, sales
and managerial personnel. Competition for such
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personnel is intense, and there can be no assurance that the Company will be
able to retain its key managerial, financial, technical or sales personnel or
attract such personnel in the future. The Company has at times experienced and
continues to experience difficulty in recruiting qualified personnel, and there
can be no assurance that the Company will not experience such difficulties in
the future, particularly in the San Francisco Bay Area, where the employment
market for qualified marketing, finance and engineering personnel is extremely
competitive. The Company, either directly or through personnel search firms,
actively recruits qualified research and development, financial and sales
personnel. If the Company is unable to hire and retain qualified personnel in
the future, such inability could have a material adverse effect on the Company's
business, operating results and financial condition. As stock options are a
customary component of compensation packages in the software industry, the
Company will need to increase the size of its stock option pool, and there can
be no assurance that requisite stockholder approval will be achieved. Without
adequate stock option reserves, recruiting may be increasingly difficult. The
business of the Company is likely to be disrupted by employee uncertainty and
lack of focus as a result of the Merger, and the necessary integration of the
combined company if such Merger is approved and the other closing conditions are
satisfied. Such disruption could materially adversely affect the Company's
business, operating results and financial condition.
Risk of Software Defects. Software products as internally complex as Arbor
Essbase frequently contain errors or defects, especially when first introduced
or when new versions or enhancements are released. Despite product testing by
the Company, the Company has in the past released versions of Arbor Essbase with
defects and has discovered software errors in Arbor Essbase and certain enhanced
versions of Arbor Essbase after their introduction. Although the Company has not
experienced material adverse effects resulting from any such defects and errors
to date, there can be no assurance that, despite testing by the Company and by
current and potential customers, defects and errors will not be found in new
versions or enhancements after commencement of commercial shipments, including
the recently released Arbor Essbase OLAP Server 5 ("Arbor Essbase 5"), resulting
in loss of revenues or delay in market acceptance, which could have a material
adverse effect upon the Company's business, operating results and financial
condition.
Risks Associated with Litigation and Related Costs. The Company's ongoing
litigation with Gentia Software plc (formerly known as Planning Sciences
International plc and Planning Sciences, Inc.) ("Gentia Software") has resulted
in and will continue to result in increased legal costs to the Company. No
assurance can be given as to when the litigation proceedings will be resolved or
that management will not be distracted from their normal duties as a result of
the proceedings. The Company believes that it has meritorious claims of patent
infringement against Gentia Software and meritorious defenses against Gentia
Software's claims that U.S. Patent No. 5,359,724 (the " `724 patent"), owned by
the Company is invalid, and intends to pursue vigorously its claims and defend
against Gentia Software's claims. In addition, Gentia Software has filed two
requests for reexamination of the `724 patent by the U.S. Patent and Trademark
Office, both of which have been granted. The reexamination proceedings are
currently pending. The outcomes of the Gentia Software litigation and the patent
reexamination proceedings are uncertain at this time, and no assurance can be
given that the outcome of the litigation will be in the Company's favor, or that
the U.S. Patent and Trademark Office will not declare the `724 patent invalid or
narrow the scope of its claims. Management believes that the outcome of the
Gentia Software litigation or the reexamination proceedings will not have a
material adverse effect on the Company's business, operating results or
financial condition. However, should the `724 patent be declared invalid or the
scope of its claims narrowed, competitors may be able to implement the
technology described in the `724 patent, which could result in increased
competition. Increased competition could materially adversely affect the
Company's future business. See "-- Competition" and "Business -- Legal
Proceedings."
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
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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 before applicable governmental patent agencies, 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. See "-- 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 under certain conditions. Such agreements
provide that such parties will have a limited, non-exclusive right to use such
code in the event that there is a bankruptcy proceeding by or against the
Company, if the Company ceases to do business or if the Company fails to meet
its contractual obligations. The provision of source code may increase the
likelihood of misappropriation by third parties.
The Company expects that software developers will increasingly be subject
to infringement claims, particularly patent 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 is engaged currently in litigation with Gentia Software concerning the
enforcement and validity of the `724 patent. In addition, Gentia Software has
filed two requests for reexamination of the `724 patent by the U.S. Patent and
Trademark Office, both of which have been granted. The reexamination proceedings
are currently pending. See "--Risks Associated with Litigation and Related
Costs" and "Business--Legal Proceedings."
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 the Company's products 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. In addition, there can be
no assurance that third parties will not claim infringement by the Company with
respect to the Company's products or enhancements thereto.
Year 2000 Compliance. Many currently installed computer systems and
software products are coded to accept only two digit entries in the date code
field. These date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, in less
than two years, computer systems and/or software used by many companies may need
to be upgraded to comply with such "Year 2000" requirements.
21
<PAGE> 22
Management does not believe that the functioning of Arbor Essbase is materially
affected by dates containing the year 2000 or subsequent years. This is due to
the fact that Arbor Essbase does not store date information as a data type in
its database and does not perform date calculations. However, the Company could
be adversely impacted by Year 2000 issues in its internal computer systems, as
well as by Year 2000 issues faced by customers, resellers and service providers.
For example, customer allocations of financial resources to deal with this issue
may reduce their ability to purchase products such as Arbor Essbase and related
products and services. This reallocation of financial resources could have an
adverse effect on the Company's business, operating results and financial
condition. Significant uncertainty exists in the software industry concerning
the potential effects associated with such compliance. Although the Company
believes its software products are Year 2000 compliant, there can be no
assurance that the Company's software products contain all necessary software
routines and programs necessary for the accurate calculation, display, storage
and manipulation of data involving dates. If any of the Company's licensees
experience Year 2000 problems, such licensee could assert claims for damages
against the Company. Any such litigation could result in substantial costs and
diversion of the Company's resources even if ultimately decided in favor of the
Company. The occurrence of any of the foregoing could have a material adverse
effect on the Company's business, operating results or financial condition.
Product Liability. The Company's license agreements with its customers
typically contain provisions designed to limit the Company's exposure to
potential product liability claims. It is possible, however, that the limitation
of liability provisions contained in the Company's license agreements may not be
effective as a result of federal, state or local laws or ordinances enacted in
the future or judicial decisions. Although the Company has not experienced any
material product liability claims to date, the sale and support of Arbor Essbase
by the Company may entail the risk of such claims. A successful product
liability claim brought against the Company could have a material adverse effect
upon the Company's business, operating results and financial condition. See
"--Year 2000 Compliance."
Possible Price Volatility of the Company's Securities. The market prices
for securities of technology companies have been highly volatile. The market
price of the Company's Convertible Subordinated Notes (the "Notes") and the
shares of Common Stock into which the Notes are convertible may be significantly
affected by factors such as actual or anticipated fluctuations in the Company's
operating results, relationships with indirect channel partners, announcements
relating to the Company's current litigation with Gentia Software or other
disputes with indirect channel partners, customers or others, 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 industry, adoption of new
accounting standards by the software industry, changes in financial estimates by
securities analysts, general market conditions, and other factors. In addition,
the stock market has experienced extreme price and volume fluctuations that have
particularly affected the market price for many high technology companies, and
that have often been unrelated to the operating performance of these companies.
The Company's stock price has been, and is likely to continue to be, highly
volatile. These broad market fluctuations may adversely affect the market price
of the Notes and the Common Stock into which the Notes are convertible, and
there can be no assurance that the market price of the Notes and the Common
Stock into which the Notes are convertible will remain at or near its current
level. The market price (closing sale price) of the Company's Common Stock has
fluctuated substantially in recent periods. 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. Such
litigation, if brought against the Company, could result in substantial costs
and a diversion of management's attention and resources. See "Market for
Registrant's Common Stock and Related Stockholder Matters."
Effect of Certain Charter Provisions; Certificate of Incorporation, Bylaws,
and Delaware Law. Certain provisions of the Company's Restated Certificate of
Incorporation and Bylaws and certain provisions of Delaware law could delay or
make difficult a merger, tender offer or proxy contest involving the Company.
The authorized but unissued capital stock of the Company includes 5,000,000
shares of preferred stock. The Board of Directors is authorized to provide for
the issuance of such preferred stock in one or more series and to fix the
designations,
22
<PAGE> 23
preferences, powers and relative, participating, optional or other rights and
restrictions thereof. Accordingly, the Company may in the future issue a series
of preferred stock, without further stockholder approval, that will have
preference over the Common Stock with respect to the payment of dividends and
upon liquidation, dissolution or winding-up of the Company. See "Description of
Capital Stock--Preferred Stock." Further, Section 203 of the General Corporation
Law of the State of Delaware (as amended from time to time, the "DGCL"), which
is applicable to the Company, prohibits certain business combinations with
certain stockholders for a period of three years after they acquire 15% or more
of the outstanding voting stock of a corporation. Any of the foregoing could
adversely affect holders of the Company's Common Stock or discourage or make
difficult any attempt to obtain control of the Company.
23
<PAGE> 24
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 16, 1996, Gentia Software filed an action against the Company in
the United States District Court for the District of Massachusetts (the
"Massachusetts action") seeking a declaratory judgment that U.S. Patent No.
5,359,724 (the " `724 patent"), owned by the Company, is invalid and not
infringed by Gentia Software's products. On April 18, 1996, the Company filed an
action against Gentia Software in the United States District Court for the
Northern District of California (the "California action") alleging that Gentia
Software infringes the `724 patent, and seeking a permanent injunction and
monetary damages, including treble damages. On May 8, 1996, Gentia Software
filed its answer in the California action, including a counterclaim seeking to
declare the `724 patent invalid. Gentia Software also filed a motion to dismiss,
stay or transfer the action to Massachusetts, which the California court denied
on December 12, 1996. On May 13, 1996, the Company filed a motion to transfer
the Massachusetts action to California, which was granted on November 18, 1996.
The Company filed its answer and a counterclaim for patent infringement in the
transferred case on December 12, 1996. On April 7, 1997, the Court consolidated
both actions into a single case pending in the United States District Court for
the Northern District of California.
On July 11, 1997, Gentia Software filed a request for reexamination of the
`724 patent with the United States Patent and Trademark Office (the "PTO"). On
September 11, 1997, the PTO granted the request for reexamination. The
reexamination proceedings are currently pending. On December 11, 1997, the Court
ordered that the litigation will not be set for trial until after completion of
the reexamination proceedings, but denied Gentia Software's request to stay the
entire litigation. The parties are presently engaged in discovery. On February
27, 1998, Gentia Software filed a request for a second reexamination of the `724
patent with the PTO. On May 22, 1998, the PTO granted that request for
reexamination. The reexamination proceedings are currently pending.
Arbor believes that it has meritorious claims against Gentia Software and
meritorious defenses against Gentia Software's claims that the `724 patent is
invalid, and intends to pursue vigorously its claims and defend against Gentia
Software's claims. The outcomes of the Gentia Software litigation and the patent
reexamination proceedings are uncertain at this time and no assurance can be
given that the outcome of the litigation will be in the Company's favor, or that
the PTO will not declare the `724 patent invalid or narrow the scope of its
claims. Management believes that the outcome of the Gentia Software litigation
or the reexamination will not have a material adverse effect on the Company's
business, operating results or financial condition. However, should the `724
patent be declared invalid or narrowed in scope, competitors may be able to
implement the technology described in the `724 patent, which could result in
increased competition. Increased competition could materially adversely affect
the Company's future business.
The preceding current litigation and any future litigation against the
Company or its employees, regardless of the outcome, is expected to result in
substantial costs and expenses to the Company and significant diversion of
attention by the Company's management personnel. See "Risk Factors--Risks
Associated with Litigation and Related Costs" in Part I, Item 2 above.
24
<PAGE> 25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Financial Data Schedule (Exhibit 27.1)
(b) Reports on Form 8-K
The Company filed two reports on form 8-K during the first
quarter ended June 30, 1998. The reports were filed on May 25 and
June 17, the latter being amended on June 25, 1998.
25
<PAGE> 26
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 12, 1998 ARBOR SOFTWARE CORPORATION
(Registrant)
By: /s/ Stephen V. Imbler
-----------------------------------------
Stephen V. Imbler
Senior Vice President and Chief Financial
Officer Duly Authorized Officer and
Principal Financial Officer)
26
<PAGE> 27
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 89,885
<SECURITIES> 53,554
<RECEIVABLES> 19,380
<ALLOWANCES> 1,627
<INVENTORY> 0
<CURRENT-ASSETS> 170,538
<PP&E> 23,588
<DEPRECIATION> 9,840
<TOTAL-ASSETS> 191,293
<CURRENT-LIABILITIES> 30,572
<BONDS> 100,000
0
0
<COMMON> 12,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 191,293
<SALES> 0
<TOTAL-REVENUES> 27,108
<CGS> 618
<TOTAL-COSTS> 2,837
<OTHER-EXPENSES> 20,035
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,270)
<INCOME-PRETAX> 4,651
<INCOME-TAX> (1,767)
<INCOME-CONTINUING> 2,884
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,884
<EPS-PRIMARY> 0.25<F1>
<EPS-DILUTED> 0.24
<FN>
<F1>FOR PURPOSE OF THIS STATEMENT, PRIMARY MEANS BASIC
</FN>
</TABLE>
