-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WZCK27ZtRTFrK4HG8kqd5N2lQB1woDZ1oMyEwvKorn1t90/Xf7Bi6cZmsn22LNbi vWXmrcsgy/JjW6+CMeuuRg== 0000891618-97-002760.txt : 19970630 0000891618-97-002760.hdr.sgml : 19970630 ACCESSION NUMBER: 0000891618-97-002760 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970627 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARBOR SOFTWARE CORP CENTRAL INDEX KEY: 0001001113 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 770277772 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-26934 FILM NUMBER: 97631810 BUSINESS ADDRESS: STREET 1: 1325 CHESAPEAKE TERRACE CITY: SUNNYVALE STATE: CA ZIP: 94089 BUSINESS PHONE: 4087275800 MAIL ADDRESS: STREET 1: 1325 CHESAPEAKE TERRACE CITY: SUNNYVALE STATE: CA ZIP: 94089 10-K 1 FORM 10-K FOR PERIOD ENDED MARCH 31, 1997 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ________________________ FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 0-26934 ARBOR SOFTWARE CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 77-0277772 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 1344 CROSSMAN AVENUE, SUNNYVALE, CALIFORNIA 94089 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (408) 744-9500 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No[ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the Common Stock held by non-affiliates of the registrant as of May 31, 1997 was $332,529,376. The number of shares outstanding of the registrant's common stock as of May 31, 1997 was 11,177,458. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive Proxy Statement to be issued in connection with the registrant's Annual Meeting of Stockholders to be held August 13, 1997. ================================================================================ 2 ARBOR SOFTWARE CORPORATION FORM 10-K FOR THE FISCAL YEAR ENDED MARCH 31, 1997 INDEX
Page ---- PART I Item 1. Business ........................................................................................ 1 Item 2. Properties ...................................................................................... 13 Item 3. Legal Proceedings ............................................................................... 13 Item 4. Submission of Matters to a Vote of Security Holders ............................................. 14 Item 4a. Executive Officers of the Registrant ............................................................ 15 PART II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters ............................ 16 Item 6. Selected Consolidated Financial Data ............................................................ 16 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 17 Item 8. Financial Statements and Supplementary Data ..................................................... 22 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures............ 38 PART III Item 10. Directors and Executive Officers of the Registrant .............................................. 39 Item 11. Executive Compensation........................................................................... 39 Item 12. Security Ownership of Certain Beneficial Owners and Management .................................. 39 Item 13. Certain Relationships and Related Transactions .................................................. 39 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ................................. 40 Signatures ...................................................................................... 42
3 PART I The discussion in this Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in "Risk Factors" as well as those discussed in this section and elsewhere in this Report. ITEM 1. BUSINESS GENERAL Arbor Software Corporation ("Arbor" or the "Company") develops and markets enterprise software for management reporting, analysis and planning. The Company's Essbase software is a powerful on-line analytical processing ("OLAP") solution that integrates data from throughout an enterprise, including data from relational databases, data warehouses and other data repositories, and allows users to perform multidimensional analysis on this data utilizing spreadsheets, query tools, report writers and web browsers. Essbase users can easily access and organize large volumes of historical and projected data, rapidly perform interactive what-if scenario analyses and share this information with users throughout the enterprise. The powerful Arbor Essbase OLAP solution enables users to easily organize and view in multiple dimensions large volumes of historical and projected data from heterogeneous sources, to rapidly perform interactive scenario analyses and to share information with other users throughout the enterprise without significant utilization of MIS (Management Information Services) resources. The Company believes that to succeed in today's increasingly competitive markets, businesses must accelerate the rate at which they identify and respond to changing business conditions. An organization's market agility and ultimate success are dependent upon its ability to rapidly collect, organize and analyze data to make effective business decisions. Many organizations have begun to implement business process reengineering initiatives to improve planning and analysis and decision making. Consequently, they have made substantial investments in information systems to automate many activities, resulting in the generation of large quantities of data. Spreadsheets, databases, data warehouses and query and reporting tools are used to store, manipulate and review this data. Each performs specific functions but does not fully address an organization's need to transform data into useful information upon which decisions can be based. Essbase consists principally of the Essbase Server, Essbase Spreadsheet Client and Essbase Application Manager, and may be augmented with optional tools to extend and enhance the functionality of the Essbase solution. Essbase is easy to use and rapidly deployable, possesses robust calculation capabilities, provides rapid response to user requests and incorporates user-generated scenario data. Essbase also has the flexibility to reorganize and present data from a variety of perspectives without disturbing the integrity of the underlying historical data or causing the degradation of network performance. The Company believes that its future success will be largely dependent upon its ability to establish Essbase as a standard platform for on-line analytical processing. To accelerate the adoption of Essbase as a standard for OLAP, the Company plans to maintain its technology leadership in performance, analytical power, deployability, and open architecture and to foster strategic relationships with providers of software applications, tools, services and hardware platforms. In addition, to further the establishment of Essbase as a standard platform for on-line analytical processing, the Company intends to ensure that Essbase adheres to key industry standards, leverages existing customer investments in information technology and focuses on solutions in a broad range of markets. 1 4 ESSBASE SOFTWARE Essbase is a comprehensive on-line analytical processing solution comprised of the Essbase Server, Essbase Spreadsheet Client and Essbase Application Manager. In addition, the Company offers optional modules and tools that extend and enhance Essbase functionality. The Essbase Server. Essbase is an OLAP server multidimensional database engine that supports simultaneous, multi-user access, analysis and write-back of data using multiple dimensions such as channel, geography, customer, fiscal period or budget versus actual. The analytical model, all data and data security controls reside at the Essbase Server, where data computation functions are performed. This approach to analytical calculations maximizes data integrity, reduces network traffic requirements and eliminates the need for high-performance client PCs and workstations. Specifically implemented as a client/server solution, Essbase can support simultaneous reading and writing by multiple users without perceptible impact on network performance and presents data to the user through a spreadsheet client or other common client interface. A version of Essbase was ported by a third party for the AS/400 platform in fiscal 1997. Additionally, the Company signed a joint development agreement with International Business Machines Corporation ("IBM") in fiscal 1997 that will integrate the Essbase OLAP server directly with IBM's DB2 and other relational database software to create a new Essbase product configuration option as well as a new IBM based product offering tentatively called the IBM DB2 OLAP server. The Essbase Server operates on Windows NT, OS/2 and various Unix operating systems. The Essbase Spreadsheet Client. The Essbase Spreadsheet Client enables users with Microsoft Excel (Windows and Macintosh) and Lotus 1-2-3 for Windows to connect and seemlessly interact with Essbase. Users work within the spreadsheet interface to activate special Essbase features through mouse clicks and familiar "drag and drop" operations. For example, to retrieve data into a spreadsheet from the Essbase Server, the user chooses the "Retrieve" command from the pull-down Essbase menu, and clicks the mouse. The requested data is immediately displayed and available to be analyzed, manipulated and charted within the user's spreadsheet. Besides providing immediate data access, the Essbase Spreadsheet Client provides multidimensional analysis capabilities such as drill down and pivoting. Because of the tight integration of the Essbase Spreadsheet Client with the most widely used spreadsheet applications, the Essbase Spreadsheet Client can be easily deployed throughout the organization. The Essbase Application Manager. The primary functions of the Essbase Application Manager are: o Model definition. The analytical model is defined using an intuitive outline format and is stored separately from the actual database. During the definition of the analytical model, the Essbase Application Manager provides a visual representation of dimensions, hierarchical structures within dimensions and embedded dimensional calculations. o Data loading. The Essbase Application Manager provides powerful functions for loading data into an Essbase database and building tight links between data repositories and Essbase applications. Data can be loaded from relational databases, data warehouses, legacy database repositories, production systems, flat file extracts and spreadsheet files or any combination of each. Users can select, manipulate or substitute incoming data values as desired. Once defined, these rules can be stored and used on all subsequent data loads. o Dimension building. The Essbase Application Manager allows new dimensions to be defined and new members of a dimension to be added to an existing outline, off-line from the actual database. Essbase dimension building capabilities are designed for quick and flexible adaptation of data structures to changing business conditions. New dimensions can be added automatically when new data is loaded. In addition, users can automatically aggregate data to new dimensions without having to reload the entire database. o Calculations definition. The Essbase Application Manager allows users to define analytical calculations which are executed by the powerful Essbase calculation engine. In addition to allowing users to create custom calculation formulas and scripts, the Essbase Application Manager can utilize over 100 pre-defined 2 5 analytical functions, such as net present value and internal rate of return which are commonly required for planning and analysis applications. o Security. The Essbase Application Manager has an intuitive graphical interface that allows administrators to limit access to applications or databases, specific dimensions, members, ranges of members or modification capabilities. The ability to define security groups also simplifies assigning access privileges. Access privileges, such as read, read-write and no access, can be created for specified groups and individuals and can be assigned to such groups without having to recreate the individual security profile for each user. Optional Tools to Extend and Enhance Essbase Functionality. The Company markets additional separately sold modules that extend Essbase's functionality. These modules include the following: o Application Programming Interface ("API"). The Essbase API enables developers to use standard tools for creating custom applications that take advantage of the robust data storage, computational and retrieval capabilities of Essbase. For example, the API can be used to design customized data entry screens or screens for executive access to data. The API supports Microsoft Visual Basic, C or C++ and works with Windows, Macintosh, OS/2 and various Unix clients. o Extended Spreadsheet Toolkit. The Extended Spreadsheet Toolkit includes more than 20 macros and Visual Basic for Applications functions, enabling users to build customized third-party spreadsheet applications incorporating Essbase functions. o SQL Interface. The Essbase SQL Interface provides access to more than 20 relational and PC data sources by making the Essbase Server operate as an open database connectivity ("ODBC") client. The SQL Interface is used to move data from diverse sources into the Essbase Server for user access and analysis. o SQL Drill-Through. The Essbase SQL Drill-Through module creates tight links between summary data residing in Essbase and detail data residing in relational stores for OLTP or data warehouse repositories. The SQL Drill-Through module generates SQL queries that enable users without any knowledge of SQL commands to retrieve detail data from the RDBMS that corresponds to specific data cells in the Essbase Server thereby providing powerful, fully-integrated analysis capabilities. o Currency Conversion. The Essbase Currency Conversion module translates, analyzes and reports foreign financial data. The Essbase Currency Conversion Module allows users to model exchange rate scenarios and perform ad hoc conversions directly from their spreadsheets. o Essbase Web Gateway. The Essbase Web Gateway is a multi-threaded server application which enables high-speed, interactive, read and write access to Essbase for OLAP applications over the World Wide Web. The Essbase Web Gateway provides customers a comprehensive, web-based solution that delivers sophisticated management reporting, provides ad-hoc multidimensional analysis, and enables development of comprehensive OLAP applications including planning, budgeting, and forecasting over intranets or the internet. o Crystal Info for Essbase. Crystal Info for Essbase integrates Seagate Software's Crystal Reports, the industry leading production report writer, reporting server and scheduling system with the power of Essbase to deliver a comprehensive enterprise reporting system for OLAP applications. With Crystal Info for Essbase, customers are able to use an OLAP aware, high-volume production reporting solution with powerful distribution and flexible processing capabilities. This product was released for general availability in May 1997. o Arbor Essbase Adjustment Module. The Arbor Essbase Adjustment Module accelerates the management reporting process by integrating secure, auditable controls for corporate adjustments into a comprehensive reporting, analysis and planning environment. It automates recurring adjustments and reconciles 3 6 intercompany balances, reducing the adjustment period and increasing the accuracy and timeliness of management information. This functionality can be applied to a wide range of applications including budgeting, sales forecasting, consolidations, intercompany elimination management reporting. Additionally, the product provides user independence for loading and calculating data. This product was released for general availability in May 1997. The Company licenses its Essbase software for one-time license fees which are determined on a per server and per port basis. The minimum installation consists of one Essbase Server with five ports. Ports are defined by the number of concurrent users that can access a given server. The base fees for each Essbase Server and each port are currently listed at $25,000 and $2,500, respectively, with discounts based on quantity. To provide customers with a strategic platform for rapidly deploying a wide range of financial management applications, the Company announced in May 1997 the availability of the Arbor Essbase Financial Mart, an integrated platform for rapidly deploying a wide range of financial management applications. The Arbor Essbase Financial Data Mart is a packaging of the Arbor Essbase OLAP Server, Arbor Essbase Adjustment Module, Arbor Essbase Application Manager, Crystal Info for Essbase Module, Arbor Essbase Spreadsheet Client, Arbor Essbase Currency Conversion Module, Best Practices Templates and Education and Support Services. The Arbor Essbase Financial Data Mart provides robust financial management capabilities across disparate financial systems by unifying processing, modeling and management reporting within a single platform. The Arbor Essbase Financial Data Mart helps customers deliver high quality management information and eliminate unnecessary or redundant processes. Customers can utilize the Arbor Essbase Financial Data Mart to rapidly deploy enterprise-scale financial applications, including consolidation and budgeting, product profitability, activity-based costing, performance measurement and Executive Information Systems ("EIS"). SALES AND MARKETING The Company markets and sells Essbase in the United States, Canada, Europe and the Pacific Rim through the Company's direct sales force and worldwide through original equipment manufacturers ("OEMs"), value-added resellers ("VARs") and distributors. The direct sales process involves the generation of sales leads through direct mail, seminars and telemarketing or requests for proposal from prospects. The Company's field sales force conducts multiple presentations and demonstrations of the Company's products to management and users at the customer site as part of the direct sales effort. Sales cycles generally last from three to six months. The direct sales force is responsible for local partner support, joint sales efforts and channel management. The direct sales force is compensated for sales made through indirect channel partners as well as direct sales to ensure appropriate cooperation with the Company's OEMs and VARs. The Company's sales and marketing organization consisted of 130 employees as of March 31, 1997. The sales and marketing staff is based at the Company's corporate headquarters in Sunnyvale, California. The Company also has field sales offices in the metropolitan areas of Atlanta; Boston; Chicago; Dallas; Houston; Los Angeles; Washington, D.C; Vancouver, BC, Canada; Frankfurt, Hamburg and Munich, Germany; London, England; Paris, France; and Sydney, Australia. To support its sales force, the Company conducts comprehensive marketing programs, which include direct mail, public relations, advertising, seminars, trade shows, education and user group conferences. In January 1997, the Company promoted John Dillon, the Company's former Senior Vice President of Sales and Services, to President and Chief Operating Officer. The Company has been able to leverage sales and marketing through its partnering strategy with indirect channel partners that distribute or resell the Company's products in their respective markets. Indirect channel partners accounted for approximately 25%, 28% and 29% of the Company's total revenues in fiscal 1997, 1996 and 1995, respectively. The Company's indirect channel partners include Comshare, Inc. ("Comshare"), Fiserv CIR, Inc.; Fujitsu Limited; International Business Machines Corporation ("IBM"); Lawson Software; PeopleSoft, Inc.; 4 7 Shell Services Corporation; ShowCase Corporation; SQL Financials, International Inc. and Walker Interactive Systems. See "Risk Factors -- Dependence Upon Comshare and Other Indirect Channel Partners." The Company's largest indirect channel partner is Comshare, a provider of executive information systems that currently markets a family of products that employ Essbase. Essbase distributed by Comshare is supported by Comshare and their agents and channel partners around the world. Under the Company's December 1993 license agreement with Comshare (the "Comshare License Agreement"), Comshare has been granted a license to use, copy, distribute and sublicense Essbase worldwide. The Company is paid a percentage of license fees generated by Comshare with minimum commitments owed to the Company in order to maintain the scope of Comshare's distribution rights. The agreement provides for standard confidentiality and non-disclosure obligations and commits standard warranty and indemnification rights to Comshare. Revenues from Comshare accounted for 19%, 26% and 26% of the Company's total revenues for fiscal 1997, 1996 and 1995, respectively. The Comshare License Agreement provides that, in the event that certain competitors of Comshare were to acquire at least a twenty percent equity interest in the Company, in substantially all of the Company's assets or in substantially all of the intellectual property rights to the Company's Essbase software, the license revenues payable by Comshare to the Company under the agreement would be reduced by fifty percent, and Comshare could elect to terminate the Comshare License Agreement. Accordingly, the possibility of termination of the Comshare License Agreement or a fifty percent reduction in license revenues from Comshare could discourage potential acquisition proposals and could delay or prevent a change in control of the Company. In addition, the Comshare License Agreement contains a provision prohibiting the Company from licensing its products to or through certain of Comshare's competitors, and the elimination of any potential customers limits the Company's potential market share to some degree. Comshare does not report to the Company the revenues generated by its sales of the Company's Essbase software for a particular quarter until 45 days after quarter-end; accordingly, the Company records such revenues in that subsequent quarter. No assurance can be given that revenues derived from Comshare and other indirect channel partners will not fluctuate significantly in subsequent periods or will not terminate entirely. The loss of, or a significant reduction in revenues from Comshare could have a material adverse effect on the Company's business, operating results and financial condition. The Company is currently in litigation with Comshare with respect to the Comshare License Agreement and related matters. The outcome of the litigation is uncertain at this time and no assurance can be given as to the outcome of the litigation. However, management does not believe that the outcome of the litigation will have a material adverse effect on the Company although it does anticipate unpredictable variations in royalty revenues and substantial legal costs during the course of the litigation. See "Legal Proceedings" in Item 3 below. See also "Risk Factors - Dependence Upon Comshare and Other Indirect Channel Partners;" "Risks Associated with Litigation and Related Costs" and "Fluctuations in Quarterly Results; Future Operating Results Uncertain." International revenues from the Company's direct sales force accounted for 11%, 9% and 5% of total revenues in fiscal 1997, 1996 and 1995, respectively. In addition, although the Company records revenues from its United States based indirect channel partners as domestic revenues, such partners may sell Essbase to international customers. The Company's largest indirect channel partner, Comshare, accounts for a significant portion of the Company's international revenues. Based on reports received from Comshare, the Company believes that approximately 60%, 50% and 37% of revenues generated by Comshare were derived from sales to international customers in fiscal 1997, 1996 and 1995, respectively. The Company believes that in order to increase sales opportunities and profitability it will be required to expand its international operations. The Company recently opened offices in Vancouver, BC, Canada; Paris, France; Frankfurt, Hamburg and Munich, Germany and Sydney, Australia. See "Properties" in Item 2 below. See also "Principles of Consolidation" in Note 1 of Notes to Consolidated Financial Statements. The Company continues to expand its direct and indirect sales and marketing activities worldwide, which will require significant management attention and financial resources. The Company has committed and continues to commit significant time and financial resources to developing international sales and support channels. There can be no assurance, however, that the Company will be able to maintain or increase international market demand for Essbase. To the extent that the Company is unable to do so in a timely manner, the Company's international sales will be limited, and the Company's business, operating results and financial condition would be materially adversely affected. See "Risk Factors -- Risks Associated with International Operations." 5 8 CUSTOMER MAINTENANCE AND SUPPORT The Company believes that a high level of customer support is important to the successful marketing and sale of Essbase. Maintenance and support contracts, which are typically for twelve months, are offered with the initial license, and may be renewed annually and are set at a fixed percentage of the total license fee. Substantially all of the Company's direct sales to customers have maintenance and support contracts that entitle the customers to patches, updates and upgrades, at no additional cost, if and when available, and technical hotline support. In addition, the Company offers classes and training programs available at the Company's headquarters, local training centers and customer sites. Telephone hotline support is complemented by an offering of a number of web-based support services, available 24 hours a day. These include access to TechTips and FAQs (frequently asked questions), an interactive search engine for finding known problems, a patch download area, and an interface to the Company's technical support department's problem-tracking database, which allows customers to submit cases, and view the status of any of their current cases on-line. Users of Essbase can attend regional user group conferences throughout the year, at which Essbase skills and solutions are exchanged. RESEARCH AND DEVELOPMENT The Company believes that its future success will depend in large part on its ability to maintain and enhance its leadership in OLAP server technology and develop new products that meet an expanding range of customer requirements. The Company's research and development organization is divided into teams consisting of development engineers, quality assurance engineers and technical writers. As of March 31, 1997, the Company's research and development organization consisted of 49 full-time employees including 30 development engineers, 12 quality assurance engineers and 7 technical writers. The Company is presently searching for a Vice President of Product Development. The research and development organization uses a phase oriented development process which includes constant monitoring of quality, schedule, functionality, costs and customer satisfaction. The product definition is based upon a consolidation of the requirements from existing customers, from technical support and from engineering. These are prioritized by the Company's management to fit business priorities and to meet the Company's vision. The Company's core technology is based upon a proprietary technology that exploits the sparse and dense characteristics of multidimensional data. The majority of the Company's current research and development effort is spent improving the performance, analytical power, deployability and open architecture of the server implementation of this technology. The Company licenses an API (Application Program Interface) to encourage partners to connect their client tools to the core Essbase Server. The Company's server technology is platform independent so that it can be easily ported to Windows NT, Windows 95, OS/2 and various Unix operating systems. The software industry, and specifically the market in which the Company competes, is characterized by rapid technological change, frequent introductions of new products, changes in customer demands and evolving industry standards. The introduction of products embodying new technologies and the emergence of new industry standards can render existing products obsolete and unmarketable. The life cycle of each version of Essbase is difficult to estimate. The Company's future success will depend upon its ability to address the increasingly sophisticated needs of its customers by developing and introducing enhancements to Essbase on a timely basis that keep pace with technological developments and emerging industry standards and customer requirements. There can be no assurance that the Company will be successful in developing and marketing enhancements to Essbase that respond to technological change or evolving industry standards or customer requirements, that the Company will not experience difficulties that could delay or prevent the successful development, introduction and sale of such enhancements or that such enhancements will adequately meet the requirements of the marketplace and achieve any significant degree of market acceptance. The Company has in the past experienced delays in the release dates of enhancements to Essbase. If release dates of any future Essbase enhancements are delayed or if when released they fail to achieve market acceptance, the Company's business, operating results and financial condition could be materially and adversely affected. There can be no assurance that the introduction or announcement of new product offerings by the Company or the Company's competitors will not cause customers to defer or forgo purchases of current versions of Essbase, which could have a material adverse effect on the Company's business, operating results and financial condition. See "Risk Factors - Risks Associated with New Versions and New Products; Rapid Technological Change." 6 9 Software products as internally complex as Essbase frequently contain errors or defects, especially when first introduced or when new versions or enhancements are released. Despite extensive product testing by the Company, the Company has in the past released versions of Essbase with defects and has discovered software errors in Essbase and certain enhanced versions of Essbase after their introduction. Although the Company has not experienced material adverse effects resulting from any such defects and errors to date, there can be no assurance that, despite testing by the Company and by current and potential customers, defects and errors will not be found in new versions or enhancements after commencement of commercial shipments, resulting in loss of revenues or delay in market acceptance, which could have a material adverse effect upon the Company's business, operating results and financial condition. The Company anticipates that it will continue to commit substantial resources to research and development in the future. See "Risk Factors - Risk of Software Defects." The functioning of Arbor Essbase is not affected by dates containing the year 2000 or subsequent years. This is due to the fact that Essbase does not store any date information as a data type in its database and does not perform any date calculations. In addition, the definition of dates in Essbase is in the control of the user. COMPETITION The market in which the Company competes is intensely competitive, highly fragmented and characterized by rapidly changing technology and evolving standards. The Company's current and potential competitors offer a variety of planning and analysis software solutions and generally fall within three categories: (i) vendors of multidimensional database and analysis software such as Oracle Corporation (Express), Pilot Software, Inc., a division of Cognizant Corporation (Pilot Analysis Server); Gentia Software plc ("Gentia Software") (formerly known as Planning Sciences International plc and Planning Sciences, Inc.) (Gentia); Applix, Inc. (TM1); and Microsoft Corporation ("Microsoft"), through its acquisition of OLAP technology from Panorama Software of Tel Aviv, Israel ("Panorama"); (ii) vendors of dedicated software applications for budgeting and financial consolidation such as Hyperion Software Corporation (Hyperion and FYPlan); and (iii) vendors of OLAP/relational database software (ROLAP) such as Information Advantage, Inc. (Decision Suite); Informix Corporation (Metacube); Holistic Systems, a division of Seagate Technology, Inc. (Holos) and Microstrategy, Inc. (DSS Agent). The Company does not believe that the Panorama technology, as acquired by Microsoft, is currently competitive with the Company's Essbase product. However, there can be no assurance that Microsoft will not enhance such technology in order to market a competitive product in the future. See "Risk Factors - Competition" and "Risks Associated with Litigation and Related Costs." PROPRIETARY RIGHTS The Company relies primarily on a combination of patent, copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect its proprietary rights. The Company also believes that factors such as the technological and creative skills of its personnel, new product developments, frequent product enhancements, name recognition and reliable product maintenance are essential to establishing and maintaining a technology leadership position. The Company seeks to protect its software, documentation and other written materials under trade secret and copyright laws, which afford only limited protection. The Company currently has one United States patent and corresponding patent applications pending in Europe, Canada and Australia. There can be no assurance that the Company's patent will not be invalidated, circumvented or challenged, that the rights granted thereunder will provide competitive advantages to the Company or that any of the Company's pending or future patent applications, whether or not being currently challenged by applicable governmental patent examiners, will be issued with the scope of the claims sought by the Company, if at all. Furthermore, there can be no assurance that others will not develop technologies that are similar or superior to the Company's technology or design around the patents owned by the Company. Despite the Company's efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of the Company's products or to obtain and use information that the Company regards as proprietary. Policing unauthorized use of the Company's products is difficult, and while the Company is unable to determine the extent to which piracy of its software products exists, software piracy can be expected to be a persistent problem. In addition, the laws of some foreign countries do not protect the Company's proprietary rights as fully as do the laws of the United States. There can be no assurance that the Company's means of protecting its proprietary rights in the 7 10 United States or abroad will be adequate or that competitors will not independently develop similar technology. The Company has entered into source code escrow agreements with a number of its customers and indirect channel partners requiring release of source code under certain conditions. Such agreements provide that such parties will have a limited, non-exclusive right to use such code in the event that there is a bankruptcy proceeding by or against the Company, if the Company ceases to do business or if the Company fails to meet its contractual obligations. The provision of source code may increase the likelihood of misappropriation by third parties. The Company expects that software product developers will increasingly be subject to infringement claims as the number of products and competitors in the Company's industry segment grows and the functionality of products in different industry segments overlaps. Any such claims, with or without merit, could be time consuming to defend, result in costly litigation, divert management's attention and resources, cause product shipment delays or require the Company to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company, if at all. In the event of a successful claim of product infringement against the Company and failure or inability of the Company to license the infringed or similar technology, the Company's business, operating results and financial condition would be materially adversely affected. The Company relies upon certain software that it licenses from third parties, including software that is integrated with the Company's internally developed software and used in Essbase to perform key functions. There can be no assurance that these third-party software licenses will continue to be available to the Company on commercially reasonable terms. The loss of, or inability to maintain, any such software licenses could result in shipment delays or reductions until equivalent software could be developed, identified, licensed and integrated, which would materially adversely affect the Company's business, operating results and financial condition. Currently, the Company is engaged in litigation with Gentia Software concerning the enforcement and validity of the Company's U.S. patent. See "Legal Proceedings" in Part I, Item 3 below. See "Risk Factors -- Fluctuations in Quarterly Results; Future Operating Results Uncertain;" and "Risks Associated with Litigation and Related Costs." EMPLOYEES As of March 31, 1997, the Company had a total of 252 employees, including 49 in research and development, 130 in sales and marketing, 38 in services, which includes customer support services and 35 in administration. Of these employees, 206 were located in the United States and 46 were located in the United Kingdom, Germany, France, Australia and Canada. None of the Company's employees are represented by a collective bargaining agreement, nor has the Company experienced any work stoppage. The Company considers its relations with its employees to be good. The Company is presently searching for a Vice President of Product Development. See "Risk Factors - Personnel." The Company's future operating results depend in significant part upon the continued service of its key technical and senior management personnel none of whom is bound by an employment agreement. The Company's future success also depends on its continuing ability to attract and retain highly qualified technical and managerial personnel. Competition for such personnel is intense, and there can be no assurance that the Company will retain its key managerial or technical personnel or attract such personnel in the future. The Company has at times experienced and continues to experience difficulty in recruiting qualified personnel and there can be no assurance that the Company will not experience such difficulties in the future. The Company, either directly or through personnel search firms, actively recruits qualified research and development, financial and sales personnel. If the Company is unable to hire and retain qualified personnel in the future, such inability could have a material adverse effect on the Company's business, operating results and financial condition. See "Risk Factors - Personnel." 8 11 RISK FACTORS In addition to the other information in this Report on Form 10-K, the following risk factors should be considered carefully in evaluating the Company and its business: Fluctuations in Quarterly Results; Future Operating Results Uncertain. The Company's quarterly operating results have in the past varied significantly and will likely in the future vary significantly depending on factors such as: demand for the Company's Essbase software; the Company's relationship with its indirect channel partners, particularly Comshare, and the consistency of sales made by such indirect channel partners; the level of price and product competition; changes in pricing policies by the Company or its competitors; changes in the mix of indirect channels through which Essbase is offered; the number, timing and significance of product enhancements and new product announcements by the Company and its competitors; the ability of the Company to develop, introduce and market new and enhanced versions of Essbase on a timely basis; the size, timing and structure of significant licenses; changes in the Company's sales incentive strategy; the timing of revenue recognition under the Company's agreements; customer order deferrals in anticipation of enhancements to Essbase or enhancements of new products of its competitors; the impact of acquisitions of competitors and indirect channel partners; the level of the Company's international revenues; foreign currency exchange rates; the renewal of maintenance and support agreements; product life cycles; software defects and other product quality problems; personnel changes; changes in Company strategy; changes in the level of operating expenses and general domestic and international economic and political conditions, among others. The operating results of many software companies reflect seasonal trends, and the Company's business, operating results and financial condition may experience comparatively slower growth in its first fiscal quarter and summer months, which overlap into its second fiscal quarter. The Company sells substantially more product towards the end of each quarter, due in part to established buying patterns within the software industry. As a result, the magnitude of any quarterly fluctuations may not become evident until late in the quarter. Essbase orders are typically shipped shortly after receipt, and consequently in the past, order backlog at the beginning of any quarter has represented only a small portion of that quarter's expected revenues. As a result, license revenues in any quarter are substantially dependent on orders booked and shipped in that quarter. In addition, a significant portion of each year's revenues are derived from sales of the Company's Essbase software by Comshare. The Company's pending litigation could have a significant impact on Comshare's sales of Essbase. See "Legal Proceedings" in Item 3 below. See also "Risk Factors -- Dependence Upon Comshare and Other Indirect Channel Partners" and "Risks Associated with Litigation and Related Costs." Due to all of the foregoing, revenues for any future quarter are not predictable with any significant degree of accuracy. Quarterly revenues are also difficult to forecast because the Company's sales cycle, from initial evaluation to license and maintenance and support purchases, varies substantially from customer to customer. Accordingly, the Company believes that period-to-period comparisons of its operating results are not necessarily meaningful and should not be relied upon as indications of future performance. Although the Company has experienced significant growth in total revenues in recent years, the Company does not believe that historical growth rates are sustainable. Accordingly, the rate at which the Company has grown in the past should not be considered to be indicative of future revenue growth, if any, or future operating results. There can be no assurance that the Company will remain profitable on a quarterly or annual basis. The Company's limited operating history makes the prediction of future operating results difficult, if not impossible. The Company's expense levels are based in significant part on the Company's expectations of future revenues and therefore are higher than past expense levels, and are relatively fixed in the short run. If revenue levels are below expectations, net income is likely to be disproportionately affected. There can be no assurance that the Company will be able to achieve or maintain profitability on a quarterly or annual basis in the future. In addition, it is possible that in some future quarter the Company's operating results will be below the expectations of public market analysts and investors. In such event, or in the event that adverse conditions prevail or are perceived to prevail generally or with respect to the Company's business, the price of the Company's Common Stock would likely be materially and adversely affected. Dependence Upon Comshare and Other Indirect Channel Partners. In addition to its direct sales force, the Company relies on indirect channel partners such as OEMs, VARs and distributors for licensing and support of its products in the United States and internationally. The Company's indirect channel partners generally offer 9 12 products of several different companies, including, in some cases, products that compete with Essbase. The Company's largest indirect channel partner is Comshare, a leading provider of executive information systems that currently markets a family of products that employ Essbase. Revenues from Comshare accounted for 19%, 26% and 26% of the Company's total revenues for fiscal 1997, 1996 and 1995, respectively. There can be no assurance that the Company's current indirect channel partners will elect, or be able, to market or support Essbase effectively, that the Company will be able to effectively manage channel conflicts, that economic conditions or industry demand will not adversely affect these or other indirect channel partners or that these indirect channel partners will not devote greater resources to marketing and supporting the products of other companies. No assurance can be given that revenues derived from Comshare and other indirect channel partners will not fluctuate significantly in subsequent periods or will not terminate entirely. The loss of, or a significant reduction in revenues from Comshare could have a material adverse effect on the Company's business, operating results and financial condition. The Company is currently in litigation with Comshare. The outcome of the litigation is uncertain at this time and no assurance can be given as to the outcome of the litigation. However, management does not believe that the outcome of the litigation will have a material adverse effect on the Company although it does anticipate unpredictable variations in royalty revenues and substantial legal costs during the course of the litigation. See "Business - Sales and Marketing." See also "Legal Proceedings" in Item 3 below. See also "Risk Factors - - Fluctuations in Quarterly Results; Future Operating Results Uncertain," "Dependence Upon Comshare and Other Indirect Channel Partners" and "Risks Associated with Litigation and Related Costs." Product Concentration; Dependence upon the Emerging Market for OLAP Server Software. All of the Company's revenues to date have been derived from licenses for Essbase and related products and services. The Company currently expects that Essbase-related revenues, including maintenance and support contracts, will continue to account for all or substantially all of the Company's revenues for the foreseeable future. As a result, the Company's future operating results are dependent upon continued market acceptance of Essbase and enhancements thereto. There can be no assurance that Essbase will achieve continued market acceptance or that the Company will be successful in marketing Essbase or enhancements thereto. A decline in demand for, or market acceptance of, Essbase as a result of competition, technological change or other factors would have a material adverse effect on the Company's business, operating results and financial condition. The Company intends to continue its efforts to improve and enhance Essbase by maintaining its commitment to an open architecture, extending its partnerships, integrating third party technologies, tightening its linkage with leading general-purpose database management systems, continuing to evolve the Essbase OLAP server, and developing new application development products and middleware tools. No assurance can be given that such efforts will enhance the value of the Company's product offerings to customers. Although sales of Essbase have increased in recent years, the market in which the Company competes is undergoing rapid change and there can be no assurance that sales of Essbase will continue to increase or potential customers will purchase Essbase. The Company has spent, and intends to continue to spend, considerable resources educating potential customers about Essbase and its functions and on-line analytical processing generally. However, there can be no assurance that such expenditures will enable Essbase to achieve any additional degree of market acceptance, and if the market for Essbase fails to grow or grows more slowly than the Company currently anticipates, the Company's business, operating results and financial condition would be materially adversely affected. Historically, the software industry has experienced significant periodic downturns, often in connection with, or in anticipation of, declines in general economic conditions during which MIS budgets often decrease. As a result, the Company's business, operating results and financial condition may in the future reflect substantial fluctuations from period to period as a consequence of patterns and general economic conditions in the software industry. Potential Volatility of Stock Price. The market price of the Company's Common Stock is highly volatile and may be significantly affected by factors such as actual or anticipated fluctuations in the Company's operating results, relationships with indirect channel partners, announcements relating to the Company's pending litigation with Comshare and Gentia Software, announcements of technological innovations, new products or new contracts by the Company or its competitors, developments with respect to patents, copyrights or proprietary rights, conditions and trends in the software and other technology industries, adoption of new accounting standards affecting the software industry, general market conditions and other factors. In addition, the stock market has from time to time experienced significant price and volume fluctuations that have particularly affected the market prices 10 13 for the common stocks of technology companies. These broad market fluctuations may adversely affect the market price of the Company's Common Stock. In the past, following periods of volatility in the market price of a particular company's securities, securities class action litigation has often been brought against that company. There can be no assurance that such litigation will not occur in the future with respect to the Company. Such litigation could result in substantial costs and a diversion of management's attention and resources, which could have a material adverse effect upon the Company's business, operating results and financial condition. Risks Associated with International Operations. International sales are subject to inherent risks, including the impact of possible recessionary environments in economies outside the United States, costs of localizing products for foreign countries, longer receivables collection periods and greater difficulty in accounts receivable collection, unexpected changes in regulatory requirements, difficulties and costs of staffing and managing foreign operations, reduced protection for intellectual property rights in some countries, potentially adverse tax consequences and political and economic instability. There can be no assurance that the Company or its indirect channel partners will be able to sustain or increase international revenues from international licenses and maintenance, support and other contracts, or that the foregoing factors will not have a material adverse effect on the Company's future international revenues and, consequently, on the Company's business, operating results and financial condition. The Company's direct international sales are currently denominated in either United States dollars, British pounds sterling, German deutsche marks or French francs and the Company does not currently engage in hedging activities. Although exposure to currency fluctuations to date has been insignificant, there can be no assurance that fluctuations in the currency exchange rates in the future will not have a material adverse impact on revenues from direct international sales and thus the Company's business, operating results or financial condition. Sales generated by the Company's indirect channel partners, including Comshare, currently are paid to the Company in United States dollars. If, in the future, international indirect sales are denominated in local currencies, foreign currency translations may contribute to significant fluctuations in, and could have a material adverse effect upon, the Company's business, operating results and financial condition. See "Business - Sales and Marketing." Competition. The Company has experienced and expects to continue to experience increased competition from current and potential competitors, many of whom have significantly greater financial, technical, marketing and other resources than the Company. Such competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements or devote greater resources to the development, promotion and sale of their products than the Company. Also, certain current and potential competitors have greater name recognition or more extensive customer bases that could be leveraged, thereby gaining market share to the Company's detriment. The Company expects additional competition as other established and emerging companies enter into the OLAP software market and new products and technologies are introduced. Increased competition could result in price reductions, fewer customer orders, reduced gross margins and loss of market share, any of which would materially adversely affect the Company's business, operating results and financial condition. Current and potential competitors may make strategic acquisitions or establish cooperative relationships among themselves or with third parties, thereby increasing the ability of their products to address the needs of the Company's prospective customers. Further, competitive pressures, such as those resulting from competitors discounting of their products, may require the Company to reduce the price of Essbase, which would materially adversely affect the Company's business, operating results and financial condition. There can be no assurance that the Company will be able to compete successfully against current and future competitors, and the failure to do so would have a material adverse effect upon the Company's business, operating results and financial condition. See "Business - Competition." Personnel. The effective management of the Company's business will depend, in large part, upon the Company's ability to retain its highly skilled technical, managerial and marketing personnel as well as its ability to attract and maintain additions to such personnel in the future. If the Company is unable to retain its key managerial, sales and technical personnel, or attract, assimilate and retain additional qualified personnel, particularly those in key positions, the Company's business, operating results and financial condition would be materially adversely affected. See "Business - Employees." Risks Associated with Litigation and Related Costs. The Company's ongoing litigation with Comshare and Gentia Software (formerly known as Planning Sciences, Inc.) has and will lead to increased legal costs to the 11 14 Company. There is no guarantee as to when these litigation proceedings will be resolved or that management will not be distracted from their normal duties as a result of these litigation proceedings. The Company believes that it has meritorious claims against Comshare and that it has meritorious defenses to each of Comshare's counterclaims, and intends to vigorously pursue its claims and defend itself against the counterclaims. The outcome of the litigation is uncertain at this time and no assurance can be given as to the outcome of the litigation. However, management does not believe that the outcome of the litigation will have a material adverse effect on the Company although it does anticipate unpredictable variations in royalty revenues and substantial legal costs during the course of the litigation. See "Legal Proceedings" in Item 3 below. Risk Associated with New Versions and New Products; Rapid Technological Change. The software industry, and specifically the market in which the Company competes, is characterized by rapid technological change, frequent introductions of new products, changes in customer demands and evolving industry standards. The introduction of products embodying new technologies and the emergence of new industry standards can render existing products obsolete and unmarketable. The life cycle of each version of Essbase is difficult to estimate. The Company's future success will depend upon its ability to address the increasingly sophisticated needs of its customers by developing and introducing enhancements to Essbase on a timely basis that keep pace with technological developments and emerging industry standards and customer requirements. There can be no assurance that the Company will be successful in developing and marketing enhancements to Essbase that respond to technological change, evolving industry standards or customer requirements, that the Company will not experience difficulties that could delay or prevent the successful development, introduction and sale of such enhancements or that such enhancements will adequately meet the requirements of the marketplace and achieve any significant degree of market acceptance. The Company has in the past experienced delays in the release dates of enhancements to Essbase. If release dates of any future Essbase enhancements are delayed or if when released they fail to achieve market acceptance, the Company's business, operating results and financial condition could be materially and adversely affected. There can be no assurance that the introduction or announcement of new product offerings by the Company or the Company's competitors will not cause customers to defer or forgo purchases of current versions of Essbase, which could have a material adverse effect on the Company's business, operating results and financial condition. Risk of Software Defects. Software products as internally complex as Essbase frequently contain errors or defects, especially when first introduced or when new versions or enhancements are released. Despite extensive product testing by the Company, the Company has in the past released versions of Essbase with defects and has discovered software errors in Essbase and certain enhanced versions of Essbase after their introduction. Although the Company has not experienced material adverse effects resulting from any such defects and errors to date, there can be no assurance that, despite testing by the Company and by current and potential customers, defects and errors will not be found in new versions or enhancements after commencement of commercial shipments, resulting in loss of revenues or delay in market acceptance, which could have a material adverse effect upon the Company's business, operating results and financial condition. Need to Manage Changing Business. The Company has recently experienced a period of significant expansion. In the future, the Company will be required to improve its financial and management controls, reporting systems and procedures on a timely basis and expand, train and manage its work force. There can be no assurance that the Company will be able to do so effectively, and failure to do so when necessary would have a material adverse effect upon the Company's business, operating results and financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Proprietary Rights and Risks of Infringement. The Company relies primarily on a combination of patent, copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect its proprietary rights. The Company seeks to protect its software, documentation and other written materials under trade secret and copyright laws, which afford only limited protection. The Company currently has one United States patent and corresponding patent applications pending in Europe, Canada and Australia. There can be no assurance that the Company's patent will not be invalidated, circumvented or challenged, that the rights granted thereunder will provide competitive advantages to the Company. Unauthorized parties may attempt to copy aspects of the Company's products or to obtain and use information that the Company regards as proprietary. Policing unauthorized use of the Company's products is difficult. Software piracy can be expected to be a persistent 12 15 problem. In addition, the laws of some foreign countries do not protect the Company's proprietary rights as fully as do the laws of the United States. The Company is not aware that it is infringing any proprietary rights of third parties. There can be no assurance, however, that third parties will not claim infringement by the Company with respect to Essbase or enhancements thereto. The Company relies upon certain software that it licenses from third parties, including software that is integrated with the Company's internally developed software and used in Essbase to perform key functions. There can be no assurance that these third-party software licenses will continue to be available to the Company on commercially reasonable terms. See "Business - Proprietary Rights." Product Liability. The Company's license agreements with its customers typically contain provisions designed to limit the Company's exposure to potential product liability claims. It is possible, however, that the limitation of liability provisions contained in the Company's license agreements may not be effective as a result of federal, state or local laws or ordinances enacted in the future or unfavorable judicial decisions. Although the Company has not experienced any product liability claims to date, the sale and support of Essbase by the Company may entail the risk of such claims. A successful product liability claim brought against the Company could have a material adverse effect upon the Company's business, operating results and financial condition. ITEM 2. PROPERTIES The Company's principal administrative, sales, marketing, and research and development facility occupies approximately 100,000 square feet in Sunnyvale, California pursuant to a lease which expires in December 2002. The Company is currently subleasing approximately 20,000 square feet and expects to expand into this space within the next two years. In addition, the Company also leases sales offices in the metropolitan areas of Atlanta; Boston; Chicago; Dallas; Houston; Los Angeles; Washington, D.C.; Vancouver, BC, Canada; London, England; Frankfurt, Hamburg and Munich, Germany; Paris, France; and Sydney, Australia. The Company believes that its existing facilities are adequate for its current needs but anticipates that it will need to seek additional space in the future. The Company believes that suitable additional or alternative space will be available in the future on commercially reasonable terms as needed. ITEM 3. LEGAL PROCEEDINGS PENDING AND POTENTIAL LITIGATION On September 27, 1996, the Company filed an action against Comshare in the United States District Court for the Northern District of California. The action alleges that Comshare has breached its obligations under its license agreement with the Company by underpaying royalties and that Comshare fraudulently induced the Company into entering into the agreement. The action seeks monetary and injunctive relief with respect to future distribution of Essbase. On October 21, 1996, Comshare filed its answer and counterclaim against the Company alleging interference with prospective economic advantage, unfair competition, defamation and disparagement, and breach of contract. In its counterclaim, Comshare alleged that the Company disseminated false and misleading information concerning Comshare's rights under the agreement and that the Company violated certain provisions of the agreement. On January 21, 1997, the Court entered an order denying Comshare's motion for a preliminary injunction and denying Comshare's motion to dismiss the Company's fraud claim and to strike the Company's request for exemplary damages. On January 31, 1997, the Company filed its first amended complaint for fraud and breach of written contract. On May 6, 1997, the Court entered an order denying Comshare's motion to dismiss the Company's amended fraud claim and to strike the Company's request for injunctive relief and attorney's fees, and granting Comshare's motion to strike the Company's request for exemplary damages. On May 20, 1997, Comshare filed its answer to the first amended complaint as well as its first amended counterclaim against the Company alleging fraud, breach of contract, interference with prospective economic advantage, unfair competition, and defamation and disparagement. Comshare claims that the Company fraudulently induced Comshare into entering into the agreement, has violated certain provisions of the agreement, and has disseminated false and misleading information concerning Comshare's rights under the agreement, and that Comshare has overpaid royalties to 13 16 the Company by at least $711,828 as a result of alleged improper and inaccurate information provided by the Company. Comshare seeks monetary damages, injunctive relief, a declaratory judgment regarding the parties' rights and obligations under the agreement, and attorney's fees. The parties are presently engaged in discovery and a jury trial is set for May 4, 1998. The Company believes that it has meritorious claims against Comshare and that it has meritorious defenses to each of Comshare's counterclaims, and intends to vigorously pursue its claims and defend itself against the counterclaims. The outcome of the litigation is uncertain at this time and no assurance can be given as to the outcome of the litigation. However, management does not believe that the outcome of the litigation will have a material adverse effect on the Company although it does anticipate unpredictable variations in royalty revenues and substantial legal costs during the course of the litigation. On April 16, 1996, Gentia Software filed an action against the Company in the United States District Court for the District of Massachusetts (the "Massachusetts action") seeking a declaratory judgment that U.S. Patent No. 5,359,724 (the "'724 patent"), owned by the Company, is invalid and not infringed by Gentia Software's products. On April 18, 1996, the Company filed an action against Gentia Software in the United States District Court for the Northern District of California (the "California action") alleging that Gentia Software infringes the '724 patent, and seeking a permanent injunction and monetary damages, including treble damages. On May 8, 1996, Gentia Software filed its answer in the California action, including a counterclaim seeking to declare the '724 patent invalid. Gentia Software also filed a motion to dismiss, stay or transfer the action to Massachusetts, which the California court denied on December 12, 1996. On May 13, 1996, the Company filed a motion to transfer the Massachusetts action to California, which was granted on November 18, 1996. The Company filed its answer and a counterclaim for patent infringement in the transferred case on December 12, 1996. On April 7, 1997, the Court consolidated both actions into a single case pending in the United States District Court for the Northern District of California. The parties are presently engaged in discovery and a jury trial is set for October 5, 1998. The Company believes that it has meritorious claims against Gentia Software and that it has meritorious defenses against Gentia Software's claims that the '724 patent is invalid, and intends to vigorously pursue its claims and defend itself against Gentia Software's claims. The outcome of the litigation is uncertain at this time and no assurance can be given as to the outcome of the litigation. However, management does not believe that the outcome of the litigation will have a material adverse effect on the Company. The preceding pending litigation and any future litigation against the Company or its employees, regardless of the outcome, is expected to result in substantial costs and expenses to the Company and significant diversion of attention by the Company's management personnel. See "Risk Factors - Dependence Upon Comshare and Other Indirect Channel Partners" and "Risks Associated with Litigation and Related Costs." ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of fiscal 1997. 14 17 ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below are biographical summaries of the executive officers of the Company, as of March 31, 1997:
NAME AGE POSITION ---- ------ -------- James A. Dorrian............................ 44 Chairman of the Board of Directors and Chief Executive Officer John M. Dillon.............................. 47 President, Chief Operating Officer and Director Stephen V. Imbler........................... 45 Senior Vice President and Chief Financial Officer Kirk A. Cruikshank.......................... 41 Senior Vice President of Marketing
Mr. Dorrian, the Company's co-founder, Chief Executive Officer and Chairman of the Board, is responsible for strategic issues including overall corporate vision, strategic initiatives, product direction and business alliances. Prior to co-founding the Company in 1991, Mr. Dorrian was President of Solutions Technology, Inc., a San Francisco-based software consulting firm specializing in financial software systems development. Previously, he was Western States Director at Thorn EMI Computer Software, a developer of Executive Information Systems ("EIS") software. Mr. Dorrian holds a B.A. in Economics from Indiana University. Mr. Dillon joined the Company in December 1993 as Vice President of Sales. Presently, Mr. Dillon is the Company's President and Chief Operating Officer and is responsible for worldwide field operations (sales, support, consulting and education), marketing, product development, finance and administration. In addition, Mr. Dillon has been a director of the Company since December 1996. Mr. Dillon previously served as Senior Vice President of the Company's worldwide field operations organization - Customer Advocacy (Customer Support and Education), North American Sales, EMEA (Europe, Middle East & Africa) Sales, Channel Sales and Field Marketing. Mr. Dillon also served three years as Vice President of Worldwide Sales. Before joining the Company, Mr. Dillon was a field Vice President for Interleaf, a major document management software company. He spent five years at Oracle Corporation in various sales management positions for the company's RDBMS, financial applications and tools products, and held sales management positions at GRiD Systems and Tymshare/ McDonnell Douglas. Mr. Dillon served in the U.S. Navy for five years and earned a B.S. in Engineering from the United States Naval Academy. Mr. Dillon also holds an M.B.A. from Golden Gate University, San Francisco. Mr. Imbler joined the Company in July 1995 as Vice President and Chief Financial Officer. Presently, Senior Vice President and Chief Financial Officer, Mr. Imbler is responsible for the Company's overall financial and administrative operations. Mr. Imbler joined the Company from Gupta (now known as Centura Software Corporation), where he was Senior Vice President of Finance and Operations and Chief Financial Officer, responsible for managing finance, investor relations, human resources, MIS and manufacturing facilities. Prior to Centura Software he was Vice President and Chief Financial Officer at Quick Response Services, Inc. He also held several executive positions at Oracle Corporation, including Vice President, U.S. Finance and Operations, and Vice President of Finance (Oracle Corporate). He was also a Senior Tax Manager at Peat Marwick, San Francisco. Mr. Imbler holds a master's degree in public accounting from the University of Texas at Austin and holds a bachelor's degree in Piano Performance from Wichita State University. Mr. Cruikshank joined the Company in February 1993 as Vice President of Marketing. Presently, Senior Vice President of Marketing, Mr. Cruikshank is responsible for product marketing, marketing communications and channel marketing. Prior to joining the Company, Mr. Cruikshank was Vice President of Marketing for GRiD Systems Corporation, a leading developer and retailer of mobile computer products for government and corporate organizations worldwide. Previously, he was the Director of Grid's Federal Systems Division. Mr. Cruikshank holds a B.S. in Economics from Ohio Wesleyan University and a M.B.A. from the University of Michigan. 15 18 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's Common Stock has been traded on The Nasdaq National Market under the symbol ARSW since the completion of the Company's initial public offering on November 7, 1995. According to the records of the Company's transfer agent, the Company had approximately 145 stockholders of record as of June 20, 1997. The Company believes that a significant number of beneficial owners of its Common Stock hold shares in street name. The following table sets forth the high and low sale prices as of the close of market of the Company's Common Stock in each of the Company's last two fiscal years commencing with the completion of the Company's initial public offering during the third quarter of fiscal 1996.
HIGH LOW ---- --- Fiscal 1996: - ------------ Third Quarter (from November 7, 1995)........ $48.00 $34.88 Fourth Quarter............................... 47.00 29.75 Fiscal 1997: First Quarter................................ $79.25 $43.25 Second Quarter............................... 61.63 34.00 Third Quarter................................ 42.75 21.75 Fourth Quarter............................... 36.50 24.13
The Company has not declared or paid dividends and does not anticipate declaring or paying dividends on its Common Stock in the foreseeable future. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
YEARS ENDED MARCH 31, -------------------------------------------------------------------- 1997 1996 1995 1994 1993 ---------- --------- ---------- ---------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Total revenues......................... $ 47,383 $ 25,134 $ 11,520 $ 4,268 $ 1,106 Gross profit........................... 42,799 23,519 10,847 3,933 1,047 Income (loss) from operations.......... 7,522 3,126 527 (2,128) (2,375) Net income (loss)...................... 5,826 2,878 374 (2,180) (2,402) Net income per share (1)............... $ 0.50 $ 0.27 $ 0.04 -- -- CONSOLIDATED BALANCE SHEET DATA: Total assets........................... $ 59,589 $ 45,883 $ 6,494 $ 4,289 $ 2,302 Lease obligations, long-term........... 279 1,093 833 406 307 Stockholders' equity................... 42,572 34,306 2,305 1,920 1,108
(1) For an explanation of the number of shares used to compute net income per share, see Note 1 of Notes to Consolidated Financial Statements. Net income per share prior to fiscal 1995 has not been presented since such amounts are not deemed meaningful due to the significant change in the Company's capital structure that occurred in connection with the Company's initial public offering. 16 19 QUARTERLY FINANCIAL INFORMATION:
FIRST SECOND THIRD FOURTH 1997 QUARTER QUARTER QUARTER QUARTER - --------- --------- ----------- --------- ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Total revenues.......................... $ 9,270 $ 10,795 $ 12,474 $ 14,844 Gross profit............................ 8,383 9,695 11,266 13,455 Income from operations.................. 1,461 1,836 1,898 2,327 Net income.............................. 1,194 1,417 1,503 1,712 Net income per share.................... $ 0.10 $ 0.12 $ 0.13 $ 0.15 FIRST SECOND THIRD FOURTH 1996 QUARTER QUARTER QUARTER QUARTER - --------- --------- ----------- --------- ------- Total revenues.......................... $ 4,766 $ 5,382 $ 6,759 $ 8,227 Gross profit............................ 4,476 5,080 6,356 7,607 Income from operations.................. 409 506 862 1,349 Net income.............................. 310 353 813 1,402 Net income per share.................... $ 0.03 $ 0.04 $ 0.07 $ 0.12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussion in this report on Form 10-K contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in Item 1 under the heading"Risk Factors" as well as those discussed in this section and elsewhere in this Report. OVERVIEW The Company was founded in April 1991 to develop, market and support enterprise software for management reporting, analysis and planning. The Company commenced commercial shipments of its Essbase software in April 1992. Since inception, all of the Company's revenues have been derived from licenses for Essbase and related maintenance and support, training and consulting. The Company currently expects that Essbase-related revenues will continue to account for all or substantially all of the Company's revenues for the foreseeable future. As a result, the Company's future operating results are dependent upon continued market acceptance of Essbase and enhancements thereto. 17 20 RESULTS OF OPERATIONS The following table sets forth certain items in the Company's consolidated statements of operations as a percentage of total revenues for the periods indicated:
YEARS ENDED MARCH 31, ----------------------------------------- 1997 1996 1995 ----------------------------------------- Revenues: License.......................... 82.5% 85.7% 89.1% Maintenance, support and other... 17.5 14.3 10.9 ---------- --------- ---------- Total revenues................ 100.0 100.0 100.0 ---------- --------- ---------- Cost of revenues: License.......................... 1.5 2.8 2.2 Maintenance, support and other... 8.2 3.6 3.6 ---------- --------- ---------- Total cost of revenues........ 9.7 6.4 5.8 ---------- --------- ---------- Gross profit....................... 90.3 93.6 94.2 ---------- --------- ---------- Operating expenses: Sales and marketing.............. 50.1 55.9 61.5 Research and development......... 14.6 14.7 17.3 General and administrative....... 9.7 10.6 10.8 ---------- --------- ---------- Total operating expenses...... 74.4 81.2 89.6 ---------- --------- ---------- Income from operations............. 15.9 12.4 4.6 Interest and other income.......... 3.6 3.1 .3 Interest expense................... (0.6) (1.2) (1.4) ----------- ---------- ----------- Income before income taxes......... 18.9 14.3 3.5 Provision for income taxes......... (6.6) (2.8) (0.2) ----------- ---------- ----------- Net income......................... 12.3% 11.5% (3.3)% ========== ========= ===========
REVENUES The Company's total revenues are derived from license revenues for its Essbase software as well as software maintenance and support, training and consulting revenues from Essbase licensees. Revenues for maintenance and support services, training and consulting are charged separately from the license of Essbase. License revenues are recognized upon shipment of the product if no significant vendor obligations remain and collection of the resulting receivable is probable. In instances where a significant vendor obligation exists, revenue recognition is delayed until such obligation has been satisfied. Allowances for estimated future returns, which to date have been immaterial, are provided for upon shipment. Maintenance and support revenues consist of ongoing support and product updates and are recognized ratably over the term of the contract, which is typically twelve months. Revenues from training and consulting are recognized when the services are performed. The Company has recognized revenue, for all periods presented, in accordance with Statement of Position 91-1 entitled "Software Revenue Recognition." Revenues are gross revenues less allowances for estimated future returns which are estimated and provided for at the time of shipment of the product. The Company's total revenues increased from $11.5 million in fiscal 1995 to $25.1 million in fiscal 1996 and to $47.4 million in fiscal 1997, representing increases of 118% and 89%, respectively. License revenues increased from $10.3 million in fiscal 1995 to $21.5 million in fiscal 1996 and to $39.1 million in fiscal 1997, representing increases of 110% and 82%, respectively. The increases were primarily a due to an increase in the number of licenses sold and the average transaction size, reflecting the expansion of the Company's direct sales organization and increased customer acceptance of Essbase. During fiscal 1997, the Company signed new reseller agreements with a significant number of indirect channel partners and opened international offices in Paris, France; Frankfurt, Hamburg and Munich, Germany; and Sydney, Australia. International revenues from the Company's direct sales force accounted for 11%, 9% and 5% of total revenues in fiscal 1997, 1996 and 1995, respectively. Maintenance, support and other revenues increased from $1.3 million in fiscal 1995 to $3.6 million in fiscal 1996 and to $8.3 million in fiscal 1997, primarily as a result of a larger installed base in each successive year. The percentage of the Company's total revenues attributable to software licenses decreased from 89% in fiscal 1995 to 86% in fiscal 1996 and to 83% in fiscal 1997 due to an increase in the 18 21 Company's installed base, which resulted in incremental maintenance, support and other revenues. Comshare accounted for 26%, 26% and 19% of the Company's total revenues in fiscal 1995, 1996 and 1997. See "Risk Factors -- Dependence Upon Comshare and Other Indirect Channel Partners" and "Risks Associated with International Operations." COST OF REVENUES Cost of license revenues consists primarily of product packaging, documentation, production costs and royalties paid for licensed technologies. Cost of license revenues increased as a percentage of license revenues from 2.5% in fiscal 1995 to 3.3% in fiscal 1996, and decreased to 2.0% in fiscal 1997. The increase in the cost of license revenues as a percentage of license revenues from fiscal 1995 to fiscal 1996 was primarily due to certain costs attributable to licensed technologies. The decrease in the cost of license revenues as a percentage of license revenues from fiscal 1996 to fiscal 1997 was primarily attributable to increases in sales volume and the average transaction size. Cost of maintenance, support and other revenues consists primarily of customer support costs and direct costs associated with providing other services. Customer support includes telephone question and answer services, newsletters, on-site visits and other support. Cost of maintenance, support and other revenues decreased as a percentage of maintenance, support and other revenues from 34% in fiscal 1995 to 25% in fiscal 1996 and increased to 46% in fiscal 1997. The decrease from fiscal 1995 to fiscal 1996 was primarily due to increased maintenance revenues (which have a lower cost structure than support and training) on a larger installed customer base in each successive year. The increase from fiscal 1996 to fiscal 1997 was primarily due to increased costs resulting from the establishment of the Customer Advocacy Group, which is comprised of the Technical Support, Field Services, Services Marketing and Courseware Development departments, during the first quarter of fiscal 1997. The Customer Advocacy Group's mission is to coordinate services for the Company's customers. The Company expects to continue to invest in its service organization in anticipation of supporting the increasing number of users in the customer installed base and therefore anticipates that cost of services will increase in absolute dollars in future periods. OPERATING EXPENSES Sales and Marketing. Sales and marketing expenses consist primarily of personnel costs, including sales commissions, of all personnel involved in the sales process, as well as costs of advertising, public relations, seminars and trade shows. Sales and marketing expenses increased from $7.1 million in fiscal 1995 to $14.1 million in fiscal 1996 and to $23.7 million in fiscal 1997. The increase in dollar amount was primarily due to costs associated with the expansion of the direct sales force in the U.S. and Europe, including new offices in France and Germany. Other factors included personnel increases in the marketing group, and increased costs associated with advertising, public relations, seminars and trade shows. Sales and marketing expenses represented 62%, 56% and 50% of total revenues in fiscal 1995, 1996 and 1997, respectively. The decrease as a percentage of total revenues was due to growth in the Company's total revenues. Additionally, in fiscal 1996 the Company incurred higher sales and marketing expenses to help establish the OLAP market and to build infrastructure. The Company believes that its sales and marketing expenses will increase in absolute dollar amounts in fiscal 1998 as the Company continues to hire additional sales and marketing personnel, and continues to increase promotion and advertising expenditures. Research and Development. Research and development expenses consist primarily of salaries and other personnel-related expenses, consultants, depreciation of development equipment and supplies. Research and development expenses increased from $2.0 million in fiscal 1995 to $3.7 million in fiscal 1996 and to $7.0 million in fiscal 1997. The increase from fiscal 1995 to fiscal 1996 was primarily attributable to an increase in personnel. The increase from fiscal 1996 to fiscal 1997 was primarily due to an increase in personnel as well as increased consulting fees relating to product development, joint development projects and associated support required to develop Essbase enhancements. Research and development expenses represented 17%, 15% and 15% of total revenues in fiscal 1995, 1996 and 1997, respectively. The decrease as a percentage of total revenues from fiscal 1995 to 1996 was due to growth in the Company's total revenues. The Company believes that a significant level of investment for product research and development is required to remain competitive and, accordingly, the Company anticipates that it will continue to devote substantial resources to product research and development and that 19 22 research and development expenses will increase in absolute dollars in fiscal 1998. To date, all research and development costs have been expensed as incurred. See Note 1 of Notes to Consolidated Financial Statements. General and Administrative. General and administrative expenses consist primarily of personnel costs for finance, investor relations, legal and contracts, MIS, human resources and general management, as well as bad debt, insurance and professional expenses. General and administrative expenses increased from $1.2 million in fiscal 1995 to $2.6 million in fiscal 1996 and to $4.6 million in fiscal 1997. Expenses increased in each period primarily due to increased staffing necessary to manage and support the Company's growth. General and administrative expenses represented 11%, 11% and 10% of total revenues in fiscal 1995, 1996 and 1997, respectively. The decrease as a percentage of total revenues from fiscal 1996 to fiscal 1997 was due to growth in the Company's total revenues. The Company believes that its general and administrative expenses will increase in absolute dollar amounts in fiscal 1998 as the Company expands its administrative staff, adds infrastructure and incurs additional costs related to being a public company, such as expenses related to directors' and officers' insurance, investor relations programs and increased professional fees, which include legal fees resulting from the Comshare and Gentia Software litigation. See "Legal Proceedings" in Item 3 above. See also "Risk Factors -- Risks Associated with Litigation and Related Costs." INTEREST AND OTHER INCOME AND INTEREST EXPENSE Interest and other income represents interest income earned on the Company's cash, cash equivalents and short-term investments, and other income including foreign exchange gains and losses. Interest and other income increased from $39,000 in fiscal 1995 to $772,000 in fiscal 1996 and to $1.7 million in fiscal 1997. Interest income increased in each period primarily due to the investment of the proceeds from the Company's initial public offering completed in November 1995. Foreign exchange gains and losses have been immaterial to date. Interest expense represents interest expense on capital equipment leases. PROVISION FOR INCOME TAXES The Company provided $24,000 in alternative minimum income tax for fiscal 1995. The provision for income tax was $716,000 in fiscal 1996 and $3.1 million in fiscal 1997. The Company's effective income tax rate was 20% for fiscal 1996 and 35% for fiscal 1997. The Company expects that its effective tax rate will increase to approximately 37% in fiscal 1998. The Company had gross deferred tax assets of $4.2 million at March 31, 1997. No valuation allowance has been provided since such deferred tax assets are expected to be realized through the Company's carryback capacity generated during fiscal 1997 and expected future income in the next twelve months. LIQUIDITY AND CAPITAL RESOURCES As of March 31, 1997, the Company had $28.9 million in cash, cash equivalents and short-term investments. Cash and cash equivalents are highly liquid investments with original maturities of ninety days or less. Net cash provided by operating activities was $1.1 million in fiscal 1995, $6.9 million in fiscal 1996, and $1.4 million in fiscal 1997. For fiscal 1997, net cash provided by operating activities of $1.4 million was primarily attributable to net income of $5.8 million and increases in accrued expenses and other current liabilities of $3.0 million, and deferred revenue of $2.2 million as well as depreciation and amortization of $2.4 million, offset by an increases in accounts receivable of $8.8 million and deferred income taxes of $3.3 million. The Company used $10.8 million of cash in fiscal 1997 for the acquisition of property and equipment primarily due to the relocation of the Company's headquarters which was completed in December 1996. The capital expenditures were primarily for tenant improvements for the Company's new corporate facilities, and related furniture and equipment, as well as for computer equipment used throughout the Company. The Company expects significant capital expenditures in fiscal 1998 for branch office tenant improvements, related furniture and 20 23 equipment and computer equipment. The Company also expects increases in operating expenses going forward due to increased depreciation charges and facility costs relating to the new and larger corporate headquarters. The Company's current line of credit allows for borrowings of up to $5.0 million at the bank's prime rate and expires in December 1997. As of March 31, 1997, the Company had no outstanding borrowings under its credit facility. See Note 4 of Notes to Consolidated Financial Statements. As of March 31, 1997, the Company's principal commitments consisted of obligations under operating and capital leases. As of March 31, 1997, the Company had approximately $1.0 million in outstanding borrowings under capital leases which are payable through 1998. The Company believes its current cash and short-term investment balances, its credit facility and the cash flows generated from operations, if any, will be sufficient to meet its anticipated cash needs for working capital and capital expenditures for at least the next 12 months. Capital expenditures are expected to increase significantly in fiscal 1998 in line with the expected growth rate of the Company. 21 24 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Independent Accountants................................................................... 23 Consolidated Balance Sheets as of March 31, 1997 and 1996........................................... 24 Consolidated Statements of Operations for the Years Ended March 31, 1997, 1996 and 1995............. 25 Consolidated Statements of Cash Flows for the Years Ended March 31, 1997, 1996 and 1995............. 26 Consolidated Statements of Stockholders' Equity for the Years Ended March 31, 1997, 1996 and 1995.......................................................................................... 27 Notes to Consolidated Financial Statements.......................................................... 28 The following financial statement schedule of the Registrant is filed as part of this report: Schedule II -- Valuation and Qualifying Accounts.................................................... 41
All other schedules are omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or notes thereto. 22 25 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Arbor Software Corporation In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Arbor Software Corporation and its subsidiaries at March 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP San Jose, California April 18, 1997 23 26 ARBOR SOFTWARE CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
MARCH 31, ------------------------------- 1997 1996 ------------- ------------- ASSETS Current assets: Cash and cash equivalents............................................... $ 5,647 $ 10,698 Short-term investments.................................................. 23,204 25,965 Accounts receivable, net of allowances of $783 and $388................. 12,877 4,505 Deferred tax assets..................................................... 4,203 900 Prepaid expenses and other current assets............................... 1,051 485 ------------- ------------- Total current assets................................................. 46,982 42,553 Property and equipment, net................................................. 11,424 2,923 Other assets................................................................ 1,183 407 ------------- ------------- $ 59,589 $ 45,883 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable........................................................ $ 2,183 $ 1,109 Accrued expenses and other current liabilities.......................... 7,840 4,883 Deferred revenue........................................................ 5,954 3,781 Current portion of lease obligations.................................... 761 711 ------------- ------------- Total current liabilities............................................ 16,738 10,484 ------------- ------------- Lease obligations, long-term................................................ 279 1,093 ------------- ------------- Commitments and contingencies (Note 8) Stockholders' equity: Preferred stock, $0.001 par value; 5,000,000 shares authorized; none issued and outstanding............................................... -- -- Common stock, $0.001 par value; 50,000,000 and 25,000,000 shares authorized; 11,126,000 and 10,859,000 shares issued and outstanding.......................................................... 11 11 Additional paid-in capital.............................................. 39,223 36,813 Retained earnings (deficit)............................................. 3,307 (2,519) Cumulative translation adjustment....................................... 31 1 ------------- ------------- Total stockholders' equity........................................... 42,572 34,306 ------------- ------------- $ 59,589 $ 45,883 ============= =============
See accompanying notes to consolidated financial statements. 24 27 ARBOR SOFTWARE CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED MARCH 31, ================================================ 1997 1996 1995 ------------- ------------- ------------- Revenues: License........................................... $ 39,087 $ 21,538 $ 10,268 Maintenance, support and other.................... 8,296 3,596 1,252 ------------- ------------- ------------- Total revenues................................. 47,383 25,134 11,520 ------------- ------------- ------------- Cost of revenues: License........................................... 731 706 253 Maintenance, support and other.................... 3,853 909 420 ------------- ------------- ------------- Total cost of revenues......................... 4,584 1,615 673 ------------- ------------- ------------- Gross profit.......................................... 42,799 23,519 10,847 ------------- ------------- ------------- Operating expenses: Sales and marketing............................... 23,732 14,060 7,081 Research and development.......................... 6,954 3,685 1,999 General and administrative........................ 4,591 2,648 1,240 ------------- ------------- ------------- Total operating expenses....................... 35,277 20,393 10,320 ------------- ------------- ------------- Income from operations................................ 7,522 3,126 527 Interest and other income............................. 1,683 772 39 Interest expense...................................... (242) (304) (168) ------------- ------------- ------------- Income before income taxes............................ 8,963 3,594 398 Provision for income taxes............................ (3,137) (716) (24) ------------- ------------- ------------- Net income .......................................... $ 5,826 $ 2,878 $ 374 ============= ============= ============= Net income per share.................................. $ 0.50 $ 0.27 $ 0.04 ============= ============= ============= Shares used to compute net income per share........... 11,729 10,502 9,718 ============= ============= =============
See accompanying notes to consolidated financial statements. 25 28 ARBOR SOFTWARE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED MARCH 31, ================================================ 1997 1996 1995 ------------- ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income ................................................ $ 5,826 $ 2,878 $ 374 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, amortization and other..................... 2,355 1,062 515 Loss on fixed asset disposition.......................... 26 -- -- Deferred income taxes.................................... (3,303) (900) -- Provision for doubtful accounts.......................... 397 269 106 Changes in assets and liabilities: Accounts receivable................................. (8,769) (2,945) (876) Prepaid expenses and other current assets........... (566) (264) (101) Other assets........................................ (776) (183) (60) Accounts payable.................................... 1,074 499 142 Accrued expenses and other current liabilities...... 2,957 3,925 423 Deferred revenue.................................... 2,173 2,535 573 ------------- ------------- ------------- Net cash provided by operating activities....... 1,394 6,876 1,096 ------------- ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of (proceeds from) short-term investments, net..... 2,761 (25,886) 1,001 Acquisition of property and equipment........................ (10,826) (1,333) (147) ------------- ------------- ------------- Net cash provided by (used in) investing activities (8,065) (27,219) 854 ------------- ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of common stock, including tax benefit related to stock plans........................................... 2,354 28,956 20 Proceeds from issuance of preferred stock, net............... -- 100 -- Repayment of capital lease obligations....................... (764) (763) (416) ------------- ------------- ------------- Net cash provided by (used in) financing activities 1,590 28,293 (396) ------------- ------------- -------------- Effect of exchange rate changes on cash and cash equivalents...... 30 9 (9) ------------- ------------- ------------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS.............. (5,051) 7,959 1,545 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.................... 10,698 2,739 1,194 ------------- ------------- ------------- CASH AND CASH EQUIVALENTS AT END OF YEAR.......................... $ 5,647 $ 10,698 $ 2,739 ============= ============= ============= SUPPLEMENTAL DISCLOSURES: Cash paid for interest....................................... $ 242 $ 304 $ 169 Cash paid for income taxes................................... 4,478 625 7 NON-CASH TRANSACTIONS: Acquisition of property and equipment through capital leases. -- 1,192 1,098
See accompanying notes to consolidated financial statements. 26 29 ARBOR SOFTWARE CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
CONVERTIBLE ADDITIONAL RETAINED CUMULATIVE PREFERRED STOCK COMMON STOCK PAID-IN EARNINGS TRANSLATION SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) ADJUSTMENT TOTAL ------ ------ ------ ------ ------- --------- ---------- ----- Balance at March 31, 1994 .............. 3,875 $4 2,152 $2 $ 7,684 $ (5,771) $ 1 $ 1,920 Issuance of common stock pursuant to exercise of options ................. -- -- 220 -- 20 -- -- 20 Translation adjustment ................. -- -- -- -- -- -- (9) (9) Net income ............................. -- -- -- -- -- 374 -- 374 ------- --- ------- ---- ------- ------- ------ -------- Balance at March 31, 1995 .............. 3,875 4 2,372 2 7,704 (5,397) (8) 2,305 Issuance of common stock pursuant to exercise of options and other ....... -- -- 734 1 262 -- -- 263 Issuance of Series C convertible preferred stock ..................... 16 1 -- -- 99 -- -- 100 Issuance of common stock pursuant to initial public offering, net ........ -- -- 1,880 2 28,715 -- -- 28,717 Conversion of preferred stock to common stock upon completion of initial public offering ............. (3,891) (5) 5,837 5 -- -- -- -- Exercise of preferred stock warrant and conversion to common stock upon completion of initial public offering -- -- 36 1 33 -- -- 34 Translation adjustment ................. -- -- - -- -- -- 9 9 Net income ............................. -- -- -- -- -- 2,878 -- 2,878 ------- --- ------- ---- ------- ------- ------ -------- Balance at March 31, 1996 .............. -- -- 10,859 11 36,813 (2,519) 1 34,306 Issuance of common stock pursuant to exercise of options and other ....... -- -- 210 -- 220 -- -- 220 Issuance of common stock pursuant to employee stock purchase plan ........ -- -- 57 -- 999 -- -- 999 Tax benefit related to stock options ... -- -- -- -- 1,191 -- -- 1,191 Translation adjustment ................. -- -- -- -- -- -- 30 30 Net income ............................. -- -- -- -- -- 5,826 -- 5,826 ------- --- ------- ---- ------- ------- ------ -------- Balance at March 31, 1997 .............. -- $-- 11,126 $ 11 $ 39,223 $ 3,307 $ 31 $ 42,572 ======= === ======= ==== ======= ======= ====== ========
See accompanying notes to consolidated financial statements. 27 30 ARBOR SOFTWARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- THE COMPANY AND A SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES THE COMPANY Arbor Software Corporation (the "Company") develops and markets enterprise software for management reporting, analysis and planning applications. The Company was incorporated in Delaware in April 1991 and commenced operations on that date. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries in the United Kingdom, France and Germany. All significant intercompany accounts and transactions have been eliminated. REVENUE RECOGNITION The Company's total revenues are derived from license revenues for its Essbase software as well as software maintenance and support, training and consulting revenues from Essbase licensees. Revenues for maintenance and support services, training and consulting are charged separately from the license of Essbase. License revenues are recognized upon shipment of the product if no significant vendor obligations remain and collection of the resulting receivable is probable. In instances where a significant vendor obligation exists, revenue recognition is delayed until the obligation has been satisfied. Allowances for estimated future returns, which to date have been immaterial, are provided upon shipment. Maintenance and support revenues consist of ongoing support and product updates and are recognized ratably over the term of the contract, which is typically twelve months. Revenues from training and consulting are recognized when the services are performed. The Company has recognized revenue, for all periods presented, in accordance with Statement of Position 91-1 entitled "Software Revenue Recognition." Royalty revenues from indirect channel partners are generally recorded in the month such royalties are reported to the Company, which typically occurs in the month following the resale of Essbase by the indirect channel partner. The Company entered into a license agreement in December 1993 with Comshare, Inc. ("Comshare"), which provides Comshare the right to sublicense certain of the Company's products. Under the agreement, Comshare provides the Company with a summary of royalties earned 45 days after the end of each calendar quarter. Royalty revenues generated under this agreement are recorded in that subsequent quarter due to the 45 day delay before the Company receives the summary of royalties earned and since currently such royalty revenues are not reasonably estimable. Such royalty revenues for the quarters ended March 31, June 30, September 30, and December 31, 1996 totaled approximately $2,440,000, $2,540,000, $1,390,000 and $2,570,000 respectively, and were recorded by the Company during the quarters ended June 30, September 30 and December 31, 1996 and March 31, 1997, respectively. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS The Company invests certain of its excess cash in debt instruments of financial institutions. All highly liquid investments with a maturity of three months or less when purchased are considered to be cash equivalents and those with maturities greater than three months are considered short-term investments. The Company has classified all short-term investments as available-for-sale. 28 31 ARBOR SOFTWARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, cash equivalents, short-term investments and accounts receivable. The Company invests its excess cash in accordance with its investment policy which has been approved by the Board of Directors and is reviewed periodically to minimize credit risk. Accounts receivable are derived from revenues earned from customers primarily located in the U.S. and Europe. The Company maintains reserves for potential credit losses and historically such losses have been immaterial. One indirect channel partner accounted for 19%, 26% and 26% of total revenues in fiscal 1997, 1996 and 1995, respectively. Revenues from international customers, primarily in Europe, were 11%, 9% and 5% of total revenues in fiscal 1997, 1996 and 1995, respectively. At March 31, 1997, no single customer accounted for more than 10% of outstanding accounts receivable. At March 31, 1996, outstanding accounts receivables from one customer represented 16% of gross accounts receivable. PROPERTY AND EQUIPMENT Property and equipment, including leasehold improvements, are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally three years. Amortization of leasehold improvements is computed using the straight-line method over the shorter of the estimated useful lives of the assets or the remaining lease term. SOFTWARE DEVELOPMENT COSTS Software development costs are included in research and development and are expensed as incurred. Statement of Financial Accounting Standards No. 86 ("FAS 86") requires the capitalization of certain software development costs once technological feasibility is established, which the Company defines as the completion of a working model. The capitalized cost is then amortized on a straight-line basis over the estimated product life, or on the ratio of current revenues to total projected product revenues, whichever is greater. To date, the period between achieving technological feasibility and the general availability of such software has been short and software development costs qualifying for capitalization have been insignificant. Accordingly, the Company has not capitalized any software development costs. INCOME TAXES Income taxes are computed using the asset and liability method. Under the asset and liability method, deferred income tax assets and liabilities are determined based on the differences between the financial reporting and tax basis of assets and liabilities and are measured using the currently enacted tax rates and laws. FOREIGN CURRENCY The functional currency of the Company's subsidiaries in the United Kingdom, Germany and France is the local currency. The balance sheet accounts are translated into United States dollars at the exchange rates prevailing at the balance sheet dates. Revenues, costs and expenses are translated into United States dollars at average rates for the periods. Gains and losses resulting from translation are accumulated as a component of stockholders' equity. Net gains and losses resulting from foreign exchange transactions are included in the consolidated statements of operations and were not significant during any of the periods presented. 29 32 ARBOR SOFTWARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NET INCOME PER SHARE Net income per share is computed using the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares consist of convertible preferred stock (using the if converted method) and stock options and warrants (using the treasury stock method). Common equivalent shares are excluded from the computation if their effect is antidilutive, except that, pursuant to the Securities and Exchange Commission Staff Accounting Bulletin, convertible preferred stock (using the if converted method) and common equivalent shares (using the treasury stock method and the initial public offering price) issued subsequent to March 31, 1994 through November 6, 1995 have been included in the computation as if they were outstanding for all periods through the effectiveness of the Company's initial public offering. STOCK-BASED COMPENSATION The Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. The Company provides additional pro forma disclosures as required under Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation." See Note 6. MANAGEMENT ESTIMATES AND ASSUMPTIONS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATIONS Certain reclassifications have been made to the financial statements in order to conform to the 1997 presentation. RECENT ACCOUNTING PRONOUNCEMENT In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share." This statement is effective for the Company's fiscal year ending March 31, 1998. The Statement redefines earnings per share under generally accepted accounting principles. Under the new standard, primary earnings per share is replaced by basic earnings per share and fully diluted earnings per share is replaced by diluted earnings per share. Net income per share as reported and the unaudited pro forma earnings per share based on the new standard are as follows for the year ended March 31, 1997: Net income per share as reported............... $0.50 Pro forma basic earnings per share............. $0.53 Pro forma diluted earnings per share........... $0.50
NOTE 2 -- SHORT-TERM INVESTMENTS As of March 31, 1997 and 1996, the Company's short-term investments consisted primarily of medium term notes, corporate notes and market auction preferred stocks and their cost approximated fair value. 30 33 ARBOR SOFTWARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3 -- BALANCE SHEET COMPONENTS
MARCH 31, =================================== 1997 1996 ----------- ------------- (IN THOUSANDS) Property and equipment: Computer equipment.................................... $ 7,392 $ 3,863 Furniture, fixtures and office equipment.............. 3,096 854 Leasehold improvements................................ 4,735 184 ------------- ------------- 15,223 4,901 Less: accumulated depreciation and amortization....... (3,799) (1,978) -------------- -------------- $ 11,424 $ 2,923 ============= ============= Accrued expenses and other current liabilities: Income taxes payable.................................. $ 1,754 $ 991 Accrued commissions................................... 1,290 907 Accrued benefits...................................... 1,758 963 Other................................................. 3,038 2,022 ------------- ------------- $ 7,840 $ 4,883 ============= =============
NOTE 4 -- BANK LINE OF CREDIT In September 1995, the Company entered into a line of credit agreement with a bank. The credit agreement provides for working capital advances of up to $5,000,000. Borrowings under the line of credit are limited to specified percentages of eligible accounts receivable and are collateralized by substantially all of the assets of the Company. Interest on borrowings is set at the bank's prime rate. Among other provisions, the Company is required to maintain certain financial covenants. In addition, payment of cash dividends is prohibited without the bank's consent. The line of credit agreement was renewed during fiscal 1997 and expires on December 16, 1997. As of March 31, 1997, there were no borrowings outstanding under the line of credit. NOTE 5 -- CONVERTIBLE PREFERRED STOCK AND PREFERRED STOCK WARRANT PREFERRED STOCK At March 31, 1997, the Company has authorized 5,000,000 shares of undesignated preferred stock. Prior to completion of the Company's initial public offering, the Company had authorized 4,000,000 shares of preferred stock, of which 2,065,000 shares had been designated Series A Convertible Preferred Stock ("Series A"), 960,000 shares had been designated Series B Convertible Preferred Stock ("Series B") and 904,636 shares had been designated Series C Convertible Preferred Stock ("Series C") (collectively "Preferred Shares"). Holders of Series A, B and C were entitled to receive noncumulative, preferential dividends of $0.10, $0.275 and $0.34, respectively, per annum, when and if declared by the Board of Directors. No such dividends were declared. Each outstanding share of preferred stock was converted into one and one-half shares of common stock upon the completion of the Company's initial public offering. PREFERRED STOCK WARRANT In August 1991 the Company issued a warrant to purchase 25,000 Series A Convertible Preferred Shares to a company for providing equipment lease financing (the "Warrant"). The Warrant enabled the holder to purchase 25,000 Series A Preferred Shares at $1.00 per share, subject to adjustment for dilution, and each share of preferred stock was convertible into one and one half shares of common stock. The Warrant was to expire on the earlier of August 2001 or five years following the Company's initial public offering. The Warrant had nominal value on the date of issuance. The warrant was exercised in conjunction with the Company's initial public offering. The Company issued 36,029 shares of common stock upon the net exercise and simultaneous conversion of the warrant from preferred stock to common stock. 31 34 ARBOR SOFTWARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6 -- EMPLOYEE STOCK PLANS STOCK OPTION PLAN In August 1995, the Company's Board of Directors adopted, and the stockholders subsequently approved, the 1995 Stock Option/Stock Issuance Plan (the "1995 Plan"). The 1995 Plan serves as the successor equity incentive program to the Company's 1992 Stock Option Plan (the "Predecessor Plan"). Outstanding options under the Predecessor Plan were incorporated into the 1995 Plan upon effectiveness of the initial public offering. No further option grants were made under the Predecessor Plan. The incorporated options will continue to be governed by their existing terms which are essentially the same as options granted under the Discretionary Option Grant Program described below. The 1995 Plan is divided into four separate components: (i) the Discretionary Option Grant Program; (ii) the Stock Issuance Program; (iii) the Salary Investment Option Grant Program; and (iv) the Automatic Option Grant Program. The 1995 Plan will terminate on September 30, 2005, unless terminated earlier by the Board. Options granted under the Discretionary Option Grant Program are for periods not to exceed ten years, and must be issued at prices not less than 100% and 85%, for incentive and nonqualified stock options, respectively, of the fair market value of the stock on the date of grant. Incentive stock options granted to stockholders who own greater than 10% of the outstanding stock are for periods not to exceed five years and must be issued at prices not less than 110% of the fair market value of the stock on the date of grant. Options granted under the Discretionary Option Grant Program are exercisable at the date of grant and are subject to repurchase by the Company at the option exercise price paid per share with such repurchase right lapsing with respect to 25% one year after the date of grant and ratably each month over the remaining thirty-six month period. The Discretionary Option Grant Program also provides for the grant of stock appreciation rights. Stock appreciation rights provide the holders with the election to surrender their outstanding options for an appreciation distribution from the Company equal to the excess of the fair market value of the vested shares of common stock subject to each surrendered option over the aggregate exercise price payable for those shares. Such appreciation distribution may be made in cash or in shares of common stock. No stock appreciation rights had been granted under the 1995 Plan as of March 31, 1997. Under the Stock Issuance Program individuals may be issued shares of common stock directly through the purchase of shares at a price per share not less than 85% of the fair market value at the time of issuance or as a fully paid bonus for services rendered to the Company. No shares had been issued under the Stock Issuance Program as of March 31, 1997. Under the Salary Investment Option Grant Program, each executive officer of the Company may elect, prior to the start of a calendar year, to reduce his or her base salary for that calendar year by a designated multiple of 1%, subject to a maximum dollar amount. In return the officer will automatically be granted, on the first trading day in the calendar year for which the salary reduction is in effect, a non-statutory option to purchase that number of shares of common stock determined by dividing the salary reduction amount by two-thirds of the fair market value per share of common stock on the date of grant. The option will be exercisable at a price per share equal to one-third of the fair market value of the option shares on the date of grant. As a result, the total spread on the option shares at the time of grant will be equal to the salary reduction amount. The option will vest in a series of twelve equal monthly installments over the calendar year for which the salary reduction is in effect. No executive officer of the Company had elected to participate in the Salary Investment Option Grant Program through March 31, 1997. 32 35 ARBOR SOFTWARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Under the Automatic Option Grant Program, each individual who first becomes a non-employee Board member will receive an option grant for 20,000 shares of common stock at the fair market value of the stock on the date he or she joins the Board, provided such individual has not otherwise been in the prior employ of the Company. In addition, at each Annual Stockholder Meeting, beginning with the 1997 Annual Meeting, each individual who is to continue to serve as a non-employee Board member after the meeting will receive on option grant to purchase an additional 5,000 shares of common stock at the fair market value of the stock on the date of grant, provided such individual has served on the Board for at least six months. Each automatic option will have a term of ten years, subject to earlier termination following the optionee's cessation of Board service. Each automatic option will be immediately exercisable for all option shares; however, any shares purchased upon exercise of the option will be subject to repurchase by the Company, at the option exercise price paid per share, should the optionee cease service on the Board prior to vesting in those shares. The initial 20,000 share grant will vest in a series of four successive equal annual installments over the optionee's period of Board service measured from the grant date. Each additional 5,000 share grant will vest upon the optionee's completion of one year of Board service measured from the grant date. During fiscal 1997, 20,000 options were granted under the Automatic Option Grant Program. As of March 31, 1997, a total of 20,000 shares had been granted under the Automatic Option Grant Program. During fiscal 1996, the Company granted certain options for the purchase of common stock on which the Company will amortize approximately $212,000 of compensation expense over the four-year vesting period of the options. As of March 31, 1997, the Company has recognized an aggregate $80,000 of compensation expense related to these options, with $56,000 expensed during fiscal 1997. In recognition of the decline in the fair market value of the Company's Common Stock in fiscal 1997, the Company repriced options to purchase approximately 533,000 shares of Common Stock with exercise prices ranging from $33.25 to $42.75 on December 4, 1996 to an exercise price of $26.88, which was the fair market value of the Company's Common Stock on that date. EMPLOYEE STOCK PURCHASE PLAN In August 1995, the Company's Board of Directors adopted the 1995 Employee Stock Purchase Plan (the "Purchase Plan") and reserved 150,000 shares of common stock for issuance to eligible employees. The Purchase Plan permits eligible employees to purchase common stock through periodic payroll deductions of up to 10% of their annual compensation. Each offering period will have a maximum duration of 24 months and shares of common stock will be purchased for each participant at semi-annual intervals during each offering period. The price at which the common stock is purchased under the Purchase Plan is equal to 85% of the lower of the fair market value of the Common Stock on the participant's entry date into the offering period or the fair market value on the semi-annual purchase date. No shares were issued under the Purchase Plan through March 31, 1996. During fiscal 1997, a total of 56,782 shares were issued under the Purchase Plan. At March 31, 1997, a total of 93,218 shares were reserved for future issuance under the Purchase Plan. 33 36 ARBOR SOFTWARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) A summary of the activity under the stock option plans is as follows (in thousands, except per share amounts):
OPTIONS OUTSTANDING ------------------- SHARES WEIGHTED AVAILABLE NUMBER AVERAGE FOR GRANT OUTSTANDING EXERCISE PRICE --------- ----------- -------------- Balance at March 31, 1994................................ 285 885 $ 0.14 Additional shares authorized........................... 600 -- Options granted at market price........................ (398) 398 $ 0.36 Options granted below market price..................... (276) 276 $ 0.50 Options exercised...................................... -- (220) $ 0.09 Options canceled....................................... 43 (43) $ 0.19 ---------- --------- Balance at March 31, 1995................................ 254 1,296 $ 0.30 Additional shares authorized .......................... 400 -- Options granted at market price ....................... (240) 240 $ 10.39 Options granted below market price .................... (232) 232 $ 3.07 Options exercised ..................................... -- (734) $ 0.32 Options canceled ...................................... 120 (120) $ 4.12 ---------- --------- Balance at March 31, 1996................................ 302 914 $ 3.26 Additional shares authorized .......................... 1,000 -- Options granted at market price........................ (1,358) 1,358 $ 31.18 Options exercised ..................................... -- (210) $ 0.94 Options canceled ...................................... 583 (583) $ 36.00 ---------- --------- Balance at March 31, 1997................................ 527 1,479 $ 16.09 ========== =========
A summary of outstanding and exercisable stock options as of March 31, 1997 is as follows (in thousands, except per share amounts):
Options Outstanding Options Exercisable ================================================== ========================== Weighted Average Weighted Weighted Range of Remaining Average Average Exercise Number Contractual Exercise Number Exercise Prices Outstanding Life Price Exercisable Price ------ ----------- ---- ----- ----------- ----- $ 0.07 - $ 1.07 333 7.3 $ 0.43 333 $ 0.43 $2.27 - $ 3.33 208 8.0 3.02 208 3.02 $6.00 - $ 9.00 118 8.0 7.23 118 7.23 $25.00 - $25.63 226 9.7 25.34 -- -- $26.88 - $35.13 594 9.2 27.72 16 27.68 ----------- ----------- --------- ------------ --------- 1,479 8.6 16.09 675 3.04 =========== ============
PRO FORMA DISCLOSURE The Company has elected to continue to follow the provisions of APB No. 25, "Accounting for Stock Issued to Employees," for financial reporting purposes and has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." The weighted average estimated grant date fair value, as defined by SFAS 123, for options granted at market price under the Company's stock option plans during fiscal 1997 was $9.10 per share. The weighted average estimated grant date fair value of options granted at market price and below market price under the Company's Stock option plans during fiscal 1996 was $3.57 and $1.08 per share, respectively. The 34 37 ARBOR SOFTWARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) weighted average estimated grant date fair value, as defined by SFAS 123, for purchase awards under the Company's Purchase Plan during fiscal 1997 and 1996 was $15.36 and $4.50, respectively. The estimated grant date fair value disclosed by the Company is calculated using the Black-Scholes model. The Black-Scholes model, as well as other currently accepted option valuation models, was developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require highly subjective assumptions, including future stock price volatility and expected time until exercise, which greatly affect the calculated grant date fair value. The following weighted average assumptions are included in the estimated grant date fair value calculations for the Company's stock option and purchase awards:
Fiscal Fiscal 1997 1996 ---- ---- Stock option plans: Expected dividend yield............................ 0% 0% Expected stock price volatility ................... 65% 65% Risk free interest rate............................ 6.28% 5.88% Expected life (years).............................. 2.41 2.75 Stock purchase plan: Expected dividend yield............................ 0% 0% Expected stock price volatility.................... 65% 65% Risk free interest rate............................ 5.34% 5.44% Expected life (years).............................. 0.58 0.97
PRO FORMA NET INCOME AND NET INCOME PER SHARE .........Had the Company recorded compensation based on the estimated grant date fair value, as defined by SFAS 123, for awards granted under its stock option plans and stock purchase plan, the Company's net income and net income per share would have been reduced to the pro forma amounts below for the fiscal years ended March 31, 1997 and 1996 (in thousands, except per share amounts):
Fiscal Fiscal 1997 1996 ---- ---- Net income as reported............................. $ 5,826 $ 2,878 Pro forma net income .............................. 2,160 2,547 Net income per share as reported................... $ 0.50 $ 0.27 Pro forma net income per share..................... 0.19 0.24
The pro forma effect on net income and net income per share for 1997 and 1996 is not representative of the pro forma effect on net income in future years because it does not take into consideration pro forma compensation expense related to grants made prior to fiscal year 1996. 35 38 ARBOR SOFTWARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7 -- INCOME TAXES: The tax provisions for fiscal 1997, 1996 and 1995 consist of the following:
YEARS ENDED MARCH 31, ============================================== 1997 1996 1995 ----------- --------- -------- (IN THOUSANDS) Provision (benefit) for income taxes: Current: Federal.................................. $ 4,671 $ 1,234 $ 22 State ................................... 1,438 382 2 Foreign.................................. 331 -- -- ----------- ----------- ----------- 6,440 1,616 $ 24 ----------- ----------- ----------- Deferred: Federal.................................. (2,315) (900) -- State ................................... (988) -- -- ------------ ----------- ----------- (3,303) (900) -- ------------ ------------ ----------- $ 3,137 $ 716 $ 24 =========== =========== ===========
The tax provision reconciles to the amount computed by multiplying income before taxes by the U.S. statutory rate (35%), as follows:
YEARS ENDED MARCH 31, ==================================== 1997 1996 1995 ---------- --------- -------- (IN THOUSANDS) Provision at statutory rate....................................... $ 3,137 $ 1,258 $ 135 State taxes, net of federal benefit............................... 515 247 1 Permanent differences............................................. 147 45 15 Utilization of net operating loss carryforwards................... -- (997) (127) Utilization of research and development carryforwards............. (131) (327) -- Change in deferred tax asset...................................... (691) 380 -- Foreign loss with no federal benefit.............................. -- 110 -- Other .......................................................... 160 -- -- ---------- --------- --------- $ 3,137 $ 716 $ 24 ========== ========= =========
Net deferred tax assets of $4,203,000 million at March 31, 1997 are based on the Company's carryback capacity and expected future income in the next twelve months. The Company provides a valuation allowance for deferred tax assets when it is more likely than not, based on available evidence, that some portion or all of the deferred tax assets will not be realized. Based on a reevaluation of the realizability of future tax benefits based on income earned in 1997, creating available carryback capacity and expected future income in the next twelve months, the Company released $1,600,000 of the previously established valuation allowance during fiscal 1997. Significant components of the Company's deferred tax assets were as follows (in thousands):
MARCH 31, ================================ 1997 1996 -------------- ------------ (IN THOUSANDS) Deferred revenue.............................. $ 2,902 $ 1,258 Accrued expenses and reserves................. 988 740 Depreciation.................................. 149 75 Other......................................... 164 427 ------------ ------------ 4,203 2,500 Less: deferred tax asset valuation allowance -- (1,600) ------------ ------------ Net deferred tax asset........................ $ 4,203 $ 900 ============ ============
36 39 ARBOR SOFTWARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8 -- COMMITMENTS AND CONTINGENCIES The Company leases its facilities under noncancelable operating lease agreements which expire at various dates through 2003. Certain leases provide for escalating monthly payments and are being charged to operations ratably over the lease term. In December 1996, the Company entered into a sublease agreement for a portion of its Sunnyvale, California office facility with a third party, which sublease expires in June 1998. Future rent payments under the sublease agreement total $446,000 and $111,000 in fiscal 1998 and 1999, respectively. In addition, the Company leases certain equipment under long-term lease agreements that are classified as capital leases. These capital leases terminate at various dates through 1999. Total property and equipment acquired under these capitalized leases, which secure such borrowings, are as follows:
MARCH 31, ============================== 1997 1996 ------------- ------------- (IN THOUSANDS) Computer equipment........................................ $ 2,020 $ 2,020 Furniture, fixtures, and office equipment................. 639 639 Leasehold improvements.................................... 27 27 ------------- ------------- 2,686 2,686 Less: accumulated depreciation and amortization........... (1,853) (1,013) ------------- ------------- $ 833 $ 1,673 ============= =============
Future minimum lease payments under all noncancelable operating and capital leases are as follows:
OPERATING CAPITAL LEASES LEASES ------ ------ YEAR ENDING MARCH 31, (IN THOUSANDS) 1998 ................................................... $ 1,908 $ 877 1999 ................................................... 1,505 327 2000 ................................................... 1,551 -- 2001 ................................................... 1,581 -- 2002 ................................................... 1,670 -- Thereafter................................................ 1,250 -- ------------- ------------- Total minimum payments.................................... $ 9,465 1,204 ============= Less: amount representing interest........................ (164) ------------- Present value of capital lease obligations................ 1,040 Less: current portion..................................... 761 ------------- Lease obligations, long-term.............................. $ 279 =============
Rent expense under operating leases totaled $1,301,000, $659,000 and $387,000 during fiscal 1997, 1996 and 1995, respectively. Rent expense for fiscal 1997 is net of $111,000 received under the sublease agreement. In September 1996, the Company filed an action against Comshare, an indirect channel partner. The action alleges that Comshare has breached its obligations under its license agreement with the Company by underpaying royalties and that Comshare fraudulently induced the Company into entering into the agreement. The action seeks monetary and injunctive relief with respect to future distribution of Essbase. In October 1996, Comshare filed its answer and counterclaim against the Company alleging interference with prospective economic advantage, unfair competition, defamation and disparagement, and breach of contract. In its counterclaim, Comshare claims that the Company disseminated false and misleading information concerning Comshare's rights under the agreement and that the Company violated certain provisions of the agreement, and requests monetary and injunctive relief, including punitive damages. The Company believes that it has meritorious claims against Comshare and that it has meritorious defenses to each of Comshare's counterclaims, and intends to vigorously pursue its claims and defend itself against the counterclaims. The outcome of the litigation is uncertain at this time and no assurance can be given as to the outcome of the litigation. However, 37 40 ARBOR SOFTWARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) management does not believe that the outcome of the litigation will have a material adverse effect on the Company although it does anticipate unpredictable variations in royalty revenues and substantial legal costs during the course of the litigation. In the course of its business, the Company has been named as a defendant in certain other actions and could incur an uninsured liability in one or more of them. Management does not believe that the outcome of either of these litigious matters will have a material adverse effect on the Company although it does anticipate substantial legal costs during the course of the litigation. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. 38 41 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding directors is incorporated herein by reference from the section entitled "Election of Directors" of the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, for the registrant's Annual Meeting of Stockholders to be held August 13, 1997 (the "Proxy Statement"). The Proxy Statement is anticipated to be filed within 120 days after the end of the registrant's fiscal year ended March 31, 1997. For information regarding executive officers of the Company, see the information appearing under the caption "Executive Officers of the Registrant" in Part I, Item 4a of this Report on Form 10-K. ITEM 11. EXECUTIVE COMPENSATION Information regarding executive compensation is incorporated herein by reference from the section entitled "Executive Compensation" of the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information regarding security ownership of certain beneficial owners and management is incorporated herein by reference from the section entitled "Stock Ownership of Certain Beneficial Owners and Management" of the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. 39 42 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) Financial Statements The consolidated financial statements and supplemental schedule of the registrant as set forth under Item 8 are filed as part of this Annual Report on Form 10-K (a) (2) Financial Statement Schedule Schedule II - Valuation and Qualifying Accounts is filed on page 41 of this Report on Form 10-K. Financial statement schedules other than the schedule listed in Item 8 have been omitted since they are either not required, not applicable, or the information is otherwise included. The independent accountants' report with respect to the above-listed financial statements and schedule appears on page 23 of this report on Form 10-K. (b) Reports on Form 8-K No reports on Form 8-K were filed by the registrant during the fourth quarter of fiscal year ended 1997. (c) Exhibit Listing
EXHIBIT NUMBER DESCRIPTION ------ ----------- 3.1 Registrant's Restated Certificate of Incorporation 3.2 (1) Registrant's Bylaws 4.1 (1) Specimen Certificate of the Registrant's Common Stock 4.2 (1) Amended and Restated Investor Rights Agreement between the Registrant and the Investors specified therein dated as of September 16, 1993 10.1 (1) Master Lease Agreement and Warrant Agreement between the Registrant and Phoenix Leasing. dated as of June 30, 1993 10.2 (1) 1992 Stock Option Plan 10.3 1995 Stock Option/Stock Issuance Plan 10.4 Employee Stock Purchase Plan 10.5 (1) Form of Indemnification Agreement 10.6 (1) License Agreement dated December 23, 1993, between the Company and Comshare Incorporated 10.7 Real Property Lease between the Registrant and SBC&D & Company dated as of July 16, 1996 11.1 Statement Regarding Computation of Net Income Per Share 22.1 List of subsidiaries of the Registrant 23.1 Consent of Price Waterhouse LLP 27.1 Financial Data Schedule
(1) Incorporated by reference to such exhibit as filed in the Registrant's Registration Statement on Form S-1, filed November 6, 1995 (File No. 33-97098), as amended. 40 43 SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS ALLOWANCE FOR DOUBTFUL ACCOUNTS (IN THOUSANDS)
Years Ended March 31 ----------------------------- 1997 1996 1995 ---- ---- ---- Balance at beginning of period ........................... $ 388 $ 208 $ 177 Additions charged to statement of operations ............. 397 269 106 Deductions from reserves.................................. (2) (89) (75) ------- ------ ------ Balance at end of period.................................. $ 783 $ 388 $ 208 ======= ======= ======
41 44 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Sunnyvale, State of California, on June 27, 1997. ARBOR SOFTWARE CORPORATION By /s/ JAMES A. DORRIAN ----------------------------- James A. Dorrian, Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on June 27, 1997. SIGNATURE TITLE --------- ----- /s/ JAMES A. DORRIAN Chairman of the Board of Directors, - -------------------------- Chief Executive Officer and Director James A. Dorrian /s/ JOHN M. DILLON President, Chief Operating Officer - -------------------------- and Director John M. Dillon /s/ DOUGLAS M. LEONE Director - -------------------------- Douglas M. Leone /s/ MARK W. PERRY Director - -------------------------- Mark W. Perry /s/ ANN L. WINBLAD Director - -------------------------- Ann L. Winblad /s/ STEPHEN V. IMBLER Senior Vice President and Chief Financial Officer - -------------------------- (Principal Financial and Accounting Officer) Stephen V. Imbler 42 EX-3.1 2 REGISTRANT'S RESTATED CERTIFICATE OF INCORPORATION 1 EXHIBIT 3.1 RESTATED CERTIFICATE OF INCORPORATION OF ARBOR SOFTWARE CORPORATION A Delaware corporation (Pursuant to Sections 242, 245 and 248 of the Delaware General Corporation Law) ARBOR SOFTWARE CORPORATION, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "Corporation"), hereby certifies as follows: FIRST: That the name of this corporation is Arbor Software Corporation, and that this corporation was originally incorporated on April 12, 1991 pursuant to the General Corporation Law. SECOND: The Board of Directors of the Corporation adopted a resolution at a Meeting of the Board of Directors on August 31, 1995 amending and restating the Restated Certificate of Incorporation of said Corporation and such amendment was duly adopted by the stockholders of the Corporation in accordance with the provisions of Sections 242 and 245 of the General Corporation Law by written consent of stockholders given in accordance with Section 228 of the General Corporation Law, with written notice to be given to stockholders who did not consent in writing: NOW, THEREFORE, BE IT RESOLVED, that the Restated Certificate of Incorporation of the Corporation be amended and restated in its entirety as follows: ARTICLE I The name of the corporation is Arbor Software Corporation. ARTICLE II The address of the registered office of this corporation in the State of Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of its registered agent at such address is The Corporation Trust Company. ARTICLE III The nature of the business or purposes to be conducted or promoted is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. 2 ARTICLE IV This corporation is authorized to issue two classes of stock to be designated common stock ("Common Stock") and preferred stock ("Preferred Stock"). The number of shares of Common Stock authorized to be issued is Twenty-Five Million (25,000,000), par value $.001 per share, and the number of Preferred Stock authorized to be issued is Five Million (5,000,000), par value $.001 per share. The Preferred Stock may be issued from time to time in one or more series, without further stockholder approval. The Board of Directors is hereby authorized, in the resolution or resolutions adopted by the Board of Directors providing for the issue of any wholly unissued series of Preferred Stock, within the limitations and restrictions stated in this Restated Certificate of Incorporation, to fix or alter the dividend rights, dividend rate, conversion rights, voting rights, rights and terms of redemption (including sinking fund provisions), the redemption price or prices, and the liquidation preferences of any wholly unissued series of Preferred Stock, and the number of shares constituting any such series and the designation thereof, or any of them, and to increase or decrease the number of shares of any series subsequent to the issue of shares of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status that they had prior to the adoption of the resolution originally fixing the number of shares of such series. ARTICLE V Except as otherwise provided in this Restated Certificate of Incorporation, in furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, repeal, alter, amend, and rescind any or all of the Bylaws of this Corporation. ARTICLE VI The number of directors of this corporation shall be fixed from time to time by a bylaw or amendment thereof duly adopted by the Board of Directors or by the stockholders. ARTICLE VII Elections of directors need not be by written ballot unless the Bylaws of this corporation shall so provide. ARTICLE VIII Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws may provide. The books of this corporation may be kept (subject to any provision contained in the statues) outside the State of Delaware at such place or places as may be designated from time to time by Board of Directors or in the Bylaws of this corporation. 2 3 ARTICLE IX A director of this corporation shall, to the fullest extent permitted by the Delaware General Corporation Law as it now exists or as it may hereafter be amended, not be liable to this corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. Neither any amendment nor repeal of this Article, nor the adoption of any provision of this Restated Certificate of Incorporation inconsistent with this Article, shall eliminate or reduce the effect of this Article in respect of any matter occurring, or any cause of action, suit or claim that, but for this Article, would accrue or arise, prior to such amendment, repeal or adoption of an inconsistent provision. ARTICLE X No action required to be taken or that may be taken at any annual or special meeting of the stockholders of this corporation may be taken without a meeting, and the power of stockholders to consent in writing, without a meeting, to the taking of any action is specifically denied. ARTICLE XI To the fullest extent permitted by applicable law, this corporation is also authorized to provide indemnification of (and advancement of expenses to) such agents (and any other persons to which Delaware law permits this corporation to provide indemnification) through Bylaw provisions, agreements with such agents or other persons, vote of stockholders or disinterested directors or otherwise, in excess of the indemnification and advancement otherwise permitted by Section 145 of the General Corporation Law of the State of Delaware, subject only to limits created by applicable Delaware law (statutory or non-statutory), with respect to actions for breach of duty to this corporation, its stockholders, and others. Any repeal or modification of any of the foregoing provisions of this Article shall not adversely affect any right or protection of a director, officer, agent or other person existing at the time of, or increase the liability of any director of this corporation with respect to any acts or omissions of such director, officer or agent occurring prior to such repeal or modification. ARTICLE XII This corporation reserves the right to amend, alter, change or repeal any provision contained in this Restated Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. * * * * THIRD: The Restated Certificate of Incorporation as set forth above has been duly adopted by this corporation's Board of Directors in accordance with the provisions of Section 245 of the General Corporation Law of the State of Delaware. 3 4 IN WITNESS WHEREOF, ARBOR SOFTWARE CORPORATION has caused this Restated Certificate of Incorporation to be signed by its President and attested to by its Secretary this 10th day of November, 1995. ARBOR SOFTWARE CORPORATION ------------------------------------------- James A. Dorrian, President and Chief Executive Officer ATTEST: - -------------------------- Robert V. Gunderson, Jr. Secretary 5 CERTIFICATE OF AMENDMENT OF THE RESTATED CERTIFICATE OF INCORPORATION OF ARBOR SOFTWARE CORPORATION Arbor Software Corporation, a corporation organized and existing under the laws of the State of Delaware (the "Corporation"), pursuant to the provisions of the General Corporation Law of the State of Delaware (the "DGCL"), DOES HEREBY CERTIFY as follows: FIRST: The Restated Certificate of Incorporation of the Corporation is hereby amended by deleting the first paragraph of ARTICLE IV of the Restated Certificate of Incorporation in its present form and substituting therefor a new first paragraph of ARTICLE IV in the following form: "This corporation is authorized to issue two classes of stock, to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares that this corporation is authorized to issue is Fifty-Five Million (55,000,000) shares of capital stock. Of such authorized shares, Fifty Million (50,000,000) shares shall be designated "Common Stock," and have a par value of $0.001 per share, and Five Million (5,000,000) shares shall be designated "Preferred Stock," and have a par value of $0.001 per share. SECOND: The amendment to the Restated Certificate of Incorporation of the Corporation set forth in this Certificate of Amendment has been duly adopted in accordance with the provisions of Section 242 of the DGCL by (a) the Board of Directors of the Corporation having duly adopted a resolution setting forth such amendment and declaring its advisability and submitting it to the stockholders of the Corporation for their approval, and (b) the stockholders of the Corporation having duly adopted such amendment by vote of the holders of a majority of the outstanding stock entitled to vote thereon at a regular meeting of stockholders called and held upon notice in accordance with Section 222 of the DGCL. 2 6 IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be hereunto affixed and this Certificate of Amendment to be signed by Stephen V. Imbler, its Vice President Finance and Chief Financial Officer, and attested by Robert V. Gunderson, Jr., its Secretary, this 23rd day of July, 1996. ARBOR SOFTWARE CORPORATION By: ---------------------------------- Stephen V. Imbler Vice President Finance and Chief Financial Officer ATTEST: - ---------------------------------- Robert V. Gunderson, Jr. Secretary 3 EX-10.3 3 1995 STOCK OPTION/STOCK ISSUANCE PLAN 1 EXHIBIT 10.3 ARBOR SOFTWARE CORPORATION 1995 STOCK OPTION/STOCK ISSUANCE PLAN ARTICLE I GENERAL PROVISIONS 1. PURPOSE OF THE PLAN This 1995 Stock Option/Stock Issuance Plan is intended to promote the interests of Arbor Software Corporation, a Delaware corporation, by providing eligible persons with the opportunity to acquire a proprietary interest, or otherwise increase their proprietary interest, in the Corporation as an incentive for them to remain in the service of the Corporation. Capitalized terms shall have the meanings assigned to such terms in the attached Appendix. 2. STRUCTURE OF THE PLAN A. The Plan shall be divided into four separate equity programs: (i) the Discretionary Option Grant Program under which eligible persons may, at the discretion of the Plan Administrator, be granted options to purchase shares of Common Stock, (ii) the Salary Investment Option Grant Program under which eligible employees may elect to have a portion of their base salary reduced each year in return for options to purchase shares of Common Stock, (iii) the Stock Issuance Program under which eligible persons may, at the discretion of the Plan Administrator, be issued shares of Common Stock directly, either through the immediate purchase of such shares or as a bonus for services rendered the Corporation (or any Parent or Subsidiary), and (iv) the Automatic Option Grant Program under which Eligible Directors shall automatically receive option grants at periodic intervals to purchase shares of Common Stock. B. The provisions of Articles One and Six shall apply to all equity programs under the Plan and shall accordingly govern the interests of all persons under the Plan. 2 3. ADMINISTRATION OF THE PLAN A. The Primary Committee shall have sole and exclusive authority to administer the Discretionary Option Grant, Salary Investment Option Grant and Stock Issuance Programs with respect to Section 16 Insiders. To the extent required by Rule 16b-3 under the 1934 Act, no non-employee Board member shall be eligible to serve on the Primary Committee if such individual has, during the twelve (12)-month period immediately preceding the date of his or her appointment to the Committee or (if shorter) the period commencing with the Section 12(g) Registration Date and ending with the date of his or her appointment to the Primary Committee, received an option grant or direct stock issuance under the Plan or any stock option, stock appreciation, stock bonus or other stock plan of the Corporation (or any Parent or Subsidiary), other than pursuant to the Automatic Option Grant Program. B. Administration of the Discretionary Option Grant, Salary Investment Option Grant and Stock Issuance Programs with respect to all other persons eligible to participate in those programs may, at the Board's discretion, be vested in the Primary Committee or a Secondary Committee, or the Board may retain the power to administer those programs with respect to all such persons. The members of the Secondary Committee may be Board members who are Employees eligible to receive discretionary option grants or direct stock issuances under the Plan or any stock option, stock appreciation, stock bonus or other stock plan of the Corporation (or any Parent or Subsidiary). C. Members of the Primary Committee or any Secondary Committee shall serve for such period of time as the Board may determine and may be removed by the Board at any time. The Board may also at any time terminate the functions of any Secondary Committee and reassume all powers and authority previously delegated to such committee. D. Each Plan Administrator shall, within the scope of its administrative functions under the Plan, have full power and authority to establish such rules and regulations as it may deem appropriate for proper administration of the Discretionary Option Grant, Salary Investment Option Grant and Stock Issuance Programs and to make such determinations under, and issue such interpretations of, the provisions of such programs and any outstanding options or stock issuances thereunder as it may deem necessary or advisable. Decisions of the Plan Administrator within the scope of its administrative functions under the Plan shall be final and binding on all parties who have an interest in the Discretionary Option Grant, Salary Investment Option Grant or Stock Issuance Program under its jurisdiction or any option or stock issuance thereunder. E. Service on the Primary Committee or the Secondary Committee shall constitute service as a Board member, and members of each such committee shall accordingly be entitled to full indemnification and reimbursement as Board members for their service on such committee. No member of the Primary Committee or the Secondary Committee shall be liable for any act or omission made in good faith with respect to the Plan or any option grants or stock issuances under the Plan. 2 3 F. Administration of the Automatic Option Grant Program shall be self- executing in accordance with the terms of that program, and no Plan Administrator shall exercise any discretionary functions with respect to option grants made thereunder. 4. ELIGIBILITY A. The persons eligible to participate in the Discretionary Option Grant and Stock Issuance Programs are as follows: (i) Employees, (ii) non-employee members of the Board (other than those serving as members of the Primary Committee) or the board of directors of any Parent or Subsidiary, and (iii) consultants and other independent advisors who provide services to the Corporation (or any Parent or Subsidiary). B. Only Employees shall be eligible to participate in the Salary Investment Program. C. Each Plan Administrator shall, within the scope of its administrative jurisdiction under the Plan, have full authority (subject to the provisions of the Plan) to determine, (i) with respect to the option grants under the Discretionary Option Grant and Salary Investment Option Grant Programs, which eligible persons are to receive option grants, the time or times when such option grants are to be made, the number of shares to be covered by each such grant, the status of the granted option as either an Incentive Option or a Non-Statutory Option, the time or times at which each option is to become exercisable, the vesting schedule (if any) applicable to the option shares and the maximum term for which the option is to remain outstanding and (ii) with respect to stock issuances under the Stock Issuance Program, which eligible persons are to receive stock issuances, the time or times when such issuances are to be made, the number of shares to be issued to each Participant, the vesting schedule (if any) applicable to the issued shares and the consideration to be paid for such shares. D. The Plan Administrator shall have the absolute discretion either to grant options in accordance with the Discretionary Option Grant and/or Salary Investment Program to effect stock issuances in accordance with the Stock Issuance Program. E. The individuals eligible to participate in the Automatic Option Grant Program shall be (i) those individuals who are serving as non-employee Board members on the Plan Effective Date or who are first elected or appointed as non-employee Board members after the Plan Effective Date, whether through appointment by the Board or election by the Corporation's stockholders, and (ii) those individuals who continue to serve as non-employee Board members after one or more Annual Stockholders Meetings held after the Plan Effective Date. A non-employee Board member who has previously been in the employ of the Corporation (or any Parent or Subsidiary) shall not be eligible to receive an option grant under 3 4 the Automatic Option Grant Program on the Plan Effective Date or at the time he or she first becomes a non-employee Board member, but such individual shall be eligible to receive periodic option grants under the Automatic Option Grant Program upon his or her continued service as a non-employee Board member following one or more Annual Stockholders Meetings. 5. STOCK SUBJECT TO THE PLAN A. The stock issuable under the Plan shall be shares of authorized but unissued or reacquired Common Stock, including shares repurchased by the Corporation on the open market. The maximum number of shares of Common Stock which may be issued over the term of the Plan shall not exceed 2,886,408 shares. Such authorized share reserve is comprised of (i) the number of shares which remained available for issuance, as of the Plan Effective Date, under the Predecessor Plan as last approved by the Corporation's stockholders prior to such date, including the shares subject to the outstanding options incorporated into the Plan and any other shares which would have been available for future option grants under the Predecessor Plan, and an increase of 250,000 shares authorized by the Board under the Plan, and approved by the stockholders on September 15, 1995; plus (ii) an increase of 1,000,000 shares authorized by the Board under the Plan and approved by the stockholders at the 1996 Annual Meeting; plus (iii) an additional increase of 600,000 shares authorized by the Board under the Plan and approved by the stockholders at the 1997 Annual Meeting. B. No one person participating in the Plan may receive options, separately exercisable stock appreciation rights and direct stock issuances for more than 500,000 shares of Common Stock in the aggregate per calendar year, beginning with the 1995 calendar year. C. Shares of Common Stock subject to outstanding options shall be available for subsequent issuance under the Plan to the extent (i) the options (including any options incorporated from the Predecessor Plan) expire or terminate for any reason prior to exercise in full or (ii) the options are canceled in accordance with the cancellation-regrant provisions of Article Two. All shares issued under the Plan (including shares issued upon exercise of options incorporated from the Predecessor Plan), whether or not those shares are subsequently repurchased by the Corporation pursuant to its repurchase rights under the Plan, shall reduce on a share-for-share basis the number of shares of Common Stock available for subsequent issuance under the Plan. In addition, should the exercise price of an option under the Plan (including any option incorporated from the Predecessor Plan) be paid with shares of Common Stock or should shares of Common Stock otherwise issuable under the Plan be withheld by the Corporation in satisfaction of the withholding taxes incurred in connection with the exercise of an option or the vesting of a stock issuance under the Plan, then the number of shares of Common Stock available for issuance under the Plan shall be reduced by the gross number of shares for which the option is exercised or which vest under the stock issuance, and not by the net number of shares of Common Stock issued to the holder of such option or stock issuance. D. Should any change be made to the Common Stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation's receipt of 4 5 consideration, appropriate adjustments shall be made to (i) the maximum number and/or class of securities issuable under the Plan, (ii) the maximum number and/or class of securities for which the share reserve is to increase automatically each year, (iii) the number and/or class of securities for which any one person may be granted options, separately exercisable stock appreciation rights and direct stock issuances per calendar year, (iv) the number and/or class of securities for which automatic option grants are to be subsequently made per Eligible Director under the Automatic Option Grant Program and (v) the number and/or class of securities and the exercise price per share in effect under each outstanding option (including any option incorporated from the Predecessor Plan) in order to prevent the dilution or enlargement of benefits thereunder. The adjustments determined by the Plan Administrator shall be final, binding and conclusive. ARTICLE II DISCRETIONARY OPTION GRANT PROGRAM 1. OPTION TERMS Each option shall be evidenced by one or more documents in the form approved by the Plan Administrator; provided, however, that each such document shall comply with the terms specified below. Each document evidencing an Incentive Option shall, in addition, be subject to the provisions of the Plan applicable to such options. A. Exercise Price. 1. The exercise price per share shall be fixed by the Plan Administrator but shall not be less than eighty-five percent (85%) of the Fair Market Value per share of Common Stock on the option grant date. 2. The exercise price shall become immediately due upon exercise of the option and shall, subject to the provisions of Section I of Article Six and the documents evidencing the option, be payable in one or more of the forms specified below: (i) cash or check made payable to the Corporation, (ii) shares of Common Stock held for the requisite period necessary to avoid a charge to the Corporation's earnings for financial reporting purposes and valued at Fair Market Value on the Exercise Date, or (iii) to the extent the option is exercised for vested shares, through a special sale and remittance procedure pursuant to which the Optionee shall concurrently provide irrevocable written instructions to (a) a Corporation-designated brokerage firm to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for the purchased shares plus all applicable Federal, state and local income and employment taxes required to be withheld by the Corporation by reason of such exercise and 5 6 (b) the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale transaction. Except to the extent such sale and remittance procedure is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date. B. Exercise and Term of Options. Each option shall be exercisable at such time or times, during such period and for such number of shares as shall be determined by the Plan Administrator and set forth in the documents evidencing the option. However, no option shall have a term in excess of ten (10) years measured from the option grant date. C. Effect of Termination of Service. 1. The following provisions shall govern the exercise of any options held by the Optionee at the time of cessation of Service or death: (i) Any option outstanding at the time of the Optionee's cessation of Service for any reason shall remain exercisable for such period of time thereafter as shall be determined by the Plan Administrator and set forth in the documents evidencing the option, but no such option shall be exercisable after the expiration of the option term. (ii) Any option exercisable in whole or in part by the Optionee at the time of death may be subsequently exercised by the personal representative of the Optionee's estate or by the person or persons to whom the option is transferred pursuant to the Optionee's will or in accordance with the laws of descent and distribution. (iii) During the applicable post-Service exercise period, the option may not be exercised in the aggregate for more than the number of vested shares for which the option is exercisable on the date of the Optionee's cessation of Service. Upon the expiration of the applicable exercise period or (if earlier) upon the expiration of the option term, the option shall terminate and cease to be outstanding for any vested shares for which the option has not been exercised. However, the option shall, immediately upon the Optionee's cessation of Service, terminate and cease to be outstanding to the extent it is not exercisable for vested shares on the date of such cessation of Service. (iv) Should the Optionee's Service be terminated for Misconduct, then all outstanding options held by the Optionee shall terminate immediately and cease to be outstanding. (v) In the event of an Involuntary Termination following a Corporate Transaction, the provisions of Section III of this Article Two shall govern the period for which the outstanding options are to remain exercisable following the Optionee's cessation of Service and shall supersede any provisions to the contrary in this section. 2. The Plan Administrator shall have the discretion, exercisable either at the time an option is granted or at any time while the option remains outstanding, to: 6 7 (i) extend the period of time for which the option is to remain exercisable following the Optionee's cessation of Service from the period otherwise in effect for that option to such greater period of time as the Plan Administrator shall deem appropriate, but in no event beyond the expiration of the option term, and/or (ii) permit the option to be exercised, during the applicable post-Service exercise period, not only with respect to the number of vested shares of Common Stock for which such option is exercisable at the time of the Optionee's cessation of Service but also with respect to one or more additional installments in which the Optionee would have vested under the option had the Optionee continued in Service. D. Stockholder Rights. The holder of an option shall have no stockholder rights with respect to the shares subject to the option until such person shall have exercised the option, paid the exercise price and become a holder of record of the purchased shares. E. Repurchase Rights. The Plan Administrator shall have the discretion to grant options which are exercisable for unvested shares of Common Stock. Should the Optionee cease Service while holding such unvested shares, the Corporation shall have the right to repurchase, at the exercise price paid per share, any or all of those unvested shares. The terms upon which such repurchase right shall be exercisable (including the period and procedure for exercise and the appropriate vesting schedule for the purchased shares) shall be established by the Plan Administrator and set forth in the document evidencing such repurchase right. F. Limited Transferability of Options. During the lifetime of the Optionee, the option shall be exercisable only by the Optionee and shall not be assignable or transferable other than by will or by the laws of descent and distribution following the Optionee's death. However, a Non-Statutory Option may be assigned in whole or in part during Optionee's lifetime in accordance with the terms of a Qualified Domestic Relations Order. The assigned portion may only be exercised by the person or persons who acquire a proprietary interest in the option pursuant to such Qualified Domestic Relations Order. The terms applicable to the assigned portion shall be the same as those in effect for the option immediately prior to such assignment and shall be set forth in such documents issued to the assignee as the Plan Administrator may deem appropriate. 2. INCENTIVE OPTIONS The terms specified below shall be applicable to all Incentive Options. Except as modified by the provisions of this Section II, all the provisions of Articles One, Two and Six shall be applicable to Incentive Options. Options which are specifically designated as Non-Statutory Options when issued under the Plan shall not be subject to the terms of this Section II. A. Eligibility. Incentive Options may only be granted to Employees. B. Exercise Price. The exercise price per share shall not be less than one hundred percent (100%) of the Fair Market Value per share of Common Stock on the option grant date. 7 8 C. Dollar Limitation. The aggregate Fair Market Value of the shares of Common Stock (determined as of the respective date or dates of grant) for which one or more options granted to any Employee under the Plan (or any other option plan of the Corporation or any Parent or Subsidiary) may for the first time become exercisable as Incentive Options during any one (1) calendar year shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the Employee holds two (2) or more such options which become exercisable for the first time in the same calendar year, the foregoing limitation on the exercisability of such options as Incentive Options shall be applied on the basis of the order in which such options are granted. D. 10% Stockholder. If any Employee to whom an Incentive Option is granted is a 10% Stockholder, then the exercise price per share shall not be less than one hundred ten percent (110%) of the Fair Market Value per share of Common Stock on the option grant date, and the option term shall not exceed five (5) years measured from the option grant date. 3. CORPORATE TRANSACTION/CHANGE IN CONTROL A. In the event of any Corporate Transaction, each outstanding option shall automatically accelerate so that each such option shall, immediately prior to the effective date of the Corporate Transaction, become fully exercisable for all of the shares of Common Stock at the time subject to such option and may be exercised for any or all of those shares as fully-vested shares of Common Stock. However, an outstanding option shall NOT so accelerate if and to the extent: (i) such option is, in connection with the Corporate Transaction, either to be assumed by the successor corporation (or parent thereof) or to be replaced with a comparable option to purchase shares of the capital stock of the successor corporation (or parent thereof), (ii) such option is to be replaced with a cash incentive program of the successor corporation which preserves the spread existing on the unvested option shares at the time of the Corporate Transaction and provides for subsequent payout in accordance with the same vesting schedule applicable to such option or (iii) the acceleration of such option is subject to other limitations imposed by the Plan Administrator at the time of the option grant. The determination of option comparability under clause (i) above shall be made by the Plan Administrator, and its determination shall be final, binding and conclusive. B. All outstanding repurchase rights shall also terminate automatically, and the shares of Common Stock subject to those terminated rights shall immediately vest in full, in the event of any Corporate Transaction, except to the extent: (i) those repurchase rights are to be assigned to the successor corporation (or parent thereof) in connection with such Corporate Transaction or (ii) such accelerated vesting is precluded by other limitations imposed by the Plan Administrator at the time the repurchase right is issued. C. Immediately following the consummation of the Corporate Transaction, all outstanding options shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation (or parent thereof). D. Each option which is assumed in connection with a Corporate Transaction shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the 8 9 number and class of securities which would have been issuable to the Optionee in consummation of such Corporate Transaction had the option been exercised immediately prior to such Corporate Transaction. Appropriate adjustments shall also be made to (i) the number and class of securities available for issuance under the Plan on both an aggregate and per Optionee basis following the consummation of such Corporate Transaction and (ii) the exercise price payable per share under each outstanding option, provided the aggregate exercise price payable for such securities shall remain the same. E. Any options which are assumed or replaced in the Corporate Transaction and do not otherwise accelerate at that time shall automatically accelerate (and any of the Corporation's outstanding repurchase rights which do not otherwise terminate at the time of the Corporate Transaction shall automatically terminate and the shares of Common Stock subject to those terminated rights shall immediately vest in full) in the event the Optionee's Service should subsequently terminate by reason of an Involuntary Termination within eighteen (18) months following the effective date of such Corporate Transaction. Any options so accelerated shall remain exercisable for fully-vested shares until the earlier of (i) the expiration of the option term or (ii) the expiration of the one (1)-year period measured from the effective date of the Involuntary Termination. F. The Plan Administrator shall have the discretion, exercisable either at the time the option is granted or at any time while the option remains outstanding, to (i) provide for the automatic acceleration of one or more outstanding options (and the automatic termination of one or more outstanding repurchase rights with the immediate vesting of the shares of Common Stock subject to those rights) upon the occurrence of a Change in Control or (ii) condition any such option acceleration (and the termination of any outstanding repurchase rights) upon the subsequent Involuntary Termination of the Optionee's Service within a specified period following the effective date of such Change in Control. Any options accelerated in connection with a Change in Control shall remain fully exercisable until the expiration or sooner termination of the option term. G. The portion of any Incentive Option accelerated in connection with a Corporate Transaction or Change in Control shall remain exercisable as an Incentive Option only to the extent the applicable One Hundred Thousand Dollar limitation is not exceeded. To the extent such dollar limitation is exceeded, the accelerated portion of such option shall be exercisable as a Non-Statutory Option under the Federal tax laws. H. The grant of options under the Discretionary Option Grant Program shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. 4. CANCELLATION AND REGRANT OF OPTIONS The Plan Administrator shall have the authority to effect, at any time and from time to time, with the consent of the affected option holders, the cancellation of any or all outstanding options under the Discretionary Option Grant Program (including outstanding 9 10 options incorporated from the Predecessor Plan) and to grant in substitution new options covering the same or different number of shares of Common Stock but with an exercise price per share based on the Fair Market Value per share of Common Stock on the new option grant date. 5. STOCK APPRECIATION RIGHTS A. The Plan Administrator shall have full power and authority to grant to selected Optionees tandem stock appreciation rights and/or limited stock appreciation rights. B. The following terms shall govern the grant and exercise of tandem stock appreciation rights: (i) One or more Optionees may be granted the right, exercisable upon such terms as the Plan Administrator may establish, to elect between the exercise of the underlying option for shares of Common Stock and the surrender of that option in exchange for a distribution from the Corporation in an amount equal to the excess of (a) the Fair Market Value (on the option surrender date) of the number of shares in which the Optionee is at the time vested under the surrendered option (or surrendered portion thereof) over (b) the aggregate exercise price payable for such shares. (ii) No such option surrender shall be effective unless it is approved by the Plan Administrator. If the surrender is so approved, then the distribution to which the Optionee shall be entitled may be made in shares of Common Stock valued at Fair Market Value on the option surrender date, in cash, or partly in shares and partly in cash, as the Plan Administrator shall in its sole discretion deem appropriate. (iii) If the surrender of an option is rejected by the Plan Administrator, then the Optionee shall retain whatever rights the Optionee had under the surrendered option (or surrendered portion thereof) on the option surrender date and may exercise such rights at any time prior to the later of (a) five (5) business days after the receipt of the rejection notice or (b) the last day on which the option is otherwise exercisable in accordance with the terms of the documents evidencing such option, but in no event may such rights be exercised more than ten (10) years after the option grant date. C. The following terms shall govern the grant and exercise of limited stock appreciation rights: (i) One or more Section 16 Insiders may be granted limited stock appreciation rights with respect to their outstanding options. (ii) Upon the occurrence of a Hostile Take-Over, each such individual holding one or more options with such a limited stock appreciation right in effect for at least six (6) months shall have the unconditional right (exercisable for a thirty (30)-day period following such Hostile Take-Over) to surrender each such option to the Corporation, to the extent the option is at the time exercisable for vested shares of Common Stock. In return for the surrendered option, the Optionee shall receive a cash distribution from the Corporation in an 10 11 amount equal to the excess of (A) the Take-Over Price of the shares of Common Stock which are at the time vested under each surrendered option (or surrendered portion thereof) over (B) the aggregate exercise price payable for such shares. Such cash distribution shall be paid within five (5) days following the option surrender date. (iii) Neither the approval of the Plan Administrator nor the consent of the Board shall be required in connection with such option surrender and cash distribution. (iv) The balance of the option (if any) shall continue in full force and effect in accordance with the documents evidencing such option. ARTICLE III SALARY INVESTMENT OPTION GRANT PROGRAM 1. OPTION GRANTS Each Employee selected by the Plan Administrator to participate in the Salary Investment Program for any calendar year must, prior to the start of that calendar year, file with the Plan Administrator (or its designate) an irrevocable authorization directing the Corporation to reduce his or her base salary for that calendar year by a designated multiple of one percent (1%), but in no event less than five percent (5%). The Plan Administrator shall determine whether to approve, in whole or in part, such authorization. To the extent the Plan Administrator approves the authorization, the individual who filed that authorization shall be granted an option under this Salary Investment Program. 2. OPTION TERMS Each option shall be a Non-Statutory Option evidenced by one or more documents in the form approved by the Plan Administrator; provided, however, that each such document shall comply with the terms specified below. A. Exercise Price. 1. The exercise price per share shall be thirty-three and one-third percent (33-1/3%) of the Fair Market Value per share of Common Stock on the option grant date. 2. The exercise price shall become immediately due upon exercise of the option and shall be payable in one or more of the alternative forms authorized under the Discretionary Option Grant Program. Except to the extent the sale and remittance procedure specified thereunder is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date. 11 12 B. Number of Option Shares. The number of shares of Common Stock subject to the option shall be determined pursuant to the following formula (rounded down to the nearest whole number): X = A / (B x 66-2/3%), where X is the number of option shares, A is the dollar amount of the approved reduction in the Optionee's base salary for the calendar year, and B is the Fair Market Value per share of Common Stock on the option grant date. C. Exercise and Term of Options. Provided the Optionee continues in Service, the option shall become exercisable for the option shares in a series of twelve (12) successive equal monthly installments on the last day of each of the twelve (12) calendar months in the calendar year for which the option is granted. Each option shall have a maximum term of ten (10) years measured from the option grant date. D. Effect of Termination of Service. 1. Should the Optionee cease Service for any reason AFTER his or her outstanding option has become exercisable in whole or in part, then that option shall remain exercisable, for any or all of the shares for which the option is exercisable on the date of such cessation of Service, until the expiration of the option term. After the Optionee's death, such option may be exercised, for any or all of the shares for which the option is exercisable at the time of the Optionee's death, by the personal representative of the Optionee's estate or by the person or persons to whom the option is transferred pursuant to the Optionee's will or in accordance with the laws of descent and distribution. Such right of exercise shall lapse, and the option shall terminate, upon the expiration of the option term. However, the option shall, immediately upon the Optionee's cessation of Service, terminate and cease to be outstanding to the extent it is not exercisable on the date of such cessation of Service. 2. Should the Optionee die BEFORE his or her outstanding option becomes exercisable for any of the option shares, then the personal representative of the Optionee's estate or the person or persons to whom the option is transferred pursuant to the Optionee's will or in accordance with the laws of descent and distribution shall have the right to exercise such option for up to that number of option shares equal to (i) one-twelfth (1/12) of the total number of option shares multiplied by (ii) the number of full calendar months which have elapsed between the first day of the calendar year for which the option is granted and the last day of the calendar month during which the Optionee ceases Service. Such right of exercise shall lapse, and the option shall terminate, upon the earlier of the expiration of the option term or the third anniversary of the date of the Optionee's death. However, the option shall, immediately upon the Optionee's death, terminate and cease to be outstanding with respect to the balance of the shares subject to that option. 12 13 3. Should the Optionee become Permanently Disabled and cease by reason thereof to remain in Service BEFORE his or her outstanding option becomes exercisable for any of the option shares, then the Optionee shall have the right to exercise such option for up to that number of option shares equal to (i) one-twelfth (1/12) of the total number of option shares multiplied by (ii) the number of full calendar months which have elapsed between the first day of the calendar year for which the option is granted and the last day of the calendar month during which the Optionee ceases Service. Such right of exercise shall lapse, and the option shall terminate, upon the expiration of the option term. However, the option shall, immediately at the time Optionee becomes Permanently Disabled, terminate and cease to be outstanding with respect to the balance of the shares subject to that option. 3. CORPORATE TRANSACTION/CHANGE IN CONTROL A. In the event of any Corporate Transaction while the Optionee remains in Service, each outstanding option held by such Optionee under this Salary Investment Program shall automatically accelerate so that each such option shall, immediately prior to the effective date of the Corporate Transaction, become fully exercisable for all of the shares of Common Stock at the time subject to such option and may be exercised for any or all of those shares as fully-vested shares of Common Stock. Immediately following the consummation of the Corporate Transaction, each such option shall terminate, unless assumed by the successor corporation (or parent thereof). B. In the event of a Change in Control while the Optionee remains in Service, each outstanding option held by such Optionee under this Salary Investment Program shall automatically accelerate so that each such option shall immediately become fully exercisable for all of the shares of Common Stock at the time subject to such option and may be exercised for any or all of such shares as fully-vested shares of Common Stock. The option shall remain so exercisable until the expiration of the option term. C. The grant of options under the Salary Investment Program shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. 4. REMAINING TERMS The remaining terms of each option granted under the Salary Investment Program shall be the same as the terms in effect for option grants made under the Discretionary Option Grant Program. 13 14 ARTICLE IV STOCK ISSUANCE PROGRAM 1. STOCK ISSUANCE TERMS Shares of Common Stock may be issued under the Stock Issuance Program through direct and immediate issuances without any intervening option grants. Each such stock issuance shall be evidenced by a Stock Issuance Agreement which complies with the terms specified below. A. Purchase Price. 1. The purchase price per share shall be fixed by the Plan Administrator, but shall not be less than eighty-five percent (85%) of the Fair Market Value per share of Common Stock on the issuance date. 2. Subject to the provisions of Section I of Article Six, shares of Common Stock may be issued under the Stock Issuance Program for any of the following items of consideration which the Plan Administrator may deem appropriate in each individual instance: (i) cash or check made payable to the Corporation, or (ii) past services rendered to the Corporation (or any Parent or Subsidiary). B. Vesting Provisions. 1. Shares of Common Stock issued under the Stock Issuance Program may, in the discretion of the Plan Administrator, be fully and immediately vested upon issuance or may vest in one or more installments over the Participant's period of Service or upon attainment of specified performance objectives. The elements of the vesting schedule applicable to any unvested shares of Common Stock issued under the Stock Issuance Program, namely: (i) the Service period to be completed by the Participant or the performance objectives to be attained, (ii) the number of installments in which the shares are to vest, (iii) the interval or intervals (if any) which are to lapse between installments, and (iv) the effect which death, Permanent Disability or other event designated by the Plan Administrator is to have upon the vesting schedule, 14 15 shall be determined by the Plan Administrator and incorporated into the Stock Issuance Agreement. 2. Any new, substituted or additional securities or other property (including money paid other than as a regular cash dividend) which the Participant may have the right to receive with respect to the Participant's unvested shares of Common Stock by reason of any stock dividend, stock split, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation's receipt of consideration shall be issued subject to (i) the same vesting requirements applicable to the Participant's unvested shares of Common Stock and (ii) such escrow arrangements as the Plan Administrator shall deem appropriate. 3. The Participant shall have full stockholder rights with respect to any shares of Common Stock issued to the Participant under the Stock Issuance Program, whether or not the Participant's interest in those shares is vested. Accordingly, the Participant shall have the right to vote such shares and to receive any regular cash dividends paid on such shares. 4. Should the Participant cease to remain in Service while holding one or more unvested shares of Common Stock issued under the Stock Issuance Program or should the performance objectives not be attained with respect to one or more such unvested shares of Common Stock, then those shares shall be immediately surrendered to the Corporation for cancellation, and the Participant shall have no further stockholder rights with respect to those shares. To the extent the surrendered shares were previously issued to the Participant for consideration paid in cash or cash equivalent (including the Participant's purchase-money indebtedness), the Corporation shall repay to the Participant the cash consideration paid for the surrendered shares and shall cancel the unpaid principal balance of any outstanding purchase-money note of the Participant attributable to such surrendered shares. 5. The Plan Administrator may in its discretion waive the surrender and cancellation of one or more unvested shares of Common Stock (or other assets attributable thereto) which would otherwise occur upon the cessation of the Participant's Service or the non-completion of the vesting schedule applicable to such shares. Such waiver shall result in the immediate vesting of the Participant's interest in the shares of Common Stock as to which the waiver applies. Such waiver may be effected at any time, whether before or after the Participant's cessation of Service or the attainment or non-attainment of the applicable performance objectives. 2. CORPORATE TRANSACTION/CHANGE IN CONTROL A. All of the outstanding repurchase rights under the Stock Issuance Program shall terminate automatically, and all the shares of Common Stock subject to those terminated rights shall immediately vest in full, in the event of any Corporate Transaction, except to the extent (i) those repurchase rights are assigned to the successor corporation (or parent thereof) in connection with such Corporate Transaction or (ii) such accelerated vesting is precluded by other limitations imposed in the Stock Issuance Agreement. 15 16 B. Any repurchase rights that are assigned in the Corporate Transaction shall automatically terminate, and all the shares of Common Stock subject to those terminated rights shall immediately vest in full, in the event the Participant's Service should subsequently terminate by reason of an Involuntary Termination within eighteen (18) months following the effective date of such Corporate Transaction. C. The Plan Administrator shall have the discretion, exercisable either at the time the unvested shares are issued or at any time while the Corporation's repurchase right remains outstanding, to (i) provide for the automatic termination of one or more outstanding repurchase rights and the immediate vesting of the shares of Common Stock subject to those rights upon the occurrence of a Change in Control or (ii) condition any such accelerated vesting upon the subsequent Involuntary Termination of the Participant's Service within a specified period following the effective date of such Change in Control. 3. SHARE ESCROW/LEGENDS Unvested shares may, in the Plan Administrator's discretion, be held in escrow by the Corporation until the Participant's interest in such shares vests or may be issued directly to the Participant with restrictive legends on the certificates evidencing those unvested shares. ARTICLE V AUTOMATIC OPTION GRANT PROGRAM 1. OPTION TERMS A. Grant Dates. Option grants shall be made on the dates specified below: 1. Each Eligible Director who is first elected or appointed as a non-employee Board member after the Plan Effective Date shall automatically be granted, on the date of such initial election or appointment, a Non-Statutory Option to purchase 20,000 shares of Common Stock. 2. On the date of each Annual Stockholders Meeting, beginning with the 1996 Annual Meeting, each individual who is to continue to serve as an Eligible Director after such meeting, shall automatically be granted, whether or not such individual is standing for re-election as a Board member at that Annual Meeting, a Non-Statutory Option to purchase an additional 5,000 shares of Common Stock, provided such individual has served as a non-employee Board member for at least six (6) months prior to the date of such Annual Meeting. There shall be no limit on the number of such 5,000-share option grants any one Eligible Director may receive over his or her period of Board service. 16 17 B. Exercise Price. 1. The exercise price per share shall be equal to one hundred percent (100%) of the Fair Market Value per share of Common Stock on the option grant date. 2. The exercise price shall be payable in one or more of the alternative forms authorized under the Discretionary Option Grant Program. Except to the extent the sale and remittance procedure specified thereunder is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date. C. Option Term. Each option shall have a term of ten (10) years measured from the option grant date. D. Exercise and Vesting of Options. Each option shall be immediately exercisable for any or all of the option shares. However, any shares purchased under the option shall be subject to repurchase by the Corporation, at the exercise price paid per share, upon the Optionee's cessation of Board service prior to vesting in those shares. Each initial grant shall vest, and the Corporation's repurchase right shall lapse, in two (2) equal and successive annual installments over the Optionee's period of continued service as a Board member, with the first such installment to vest upon the Optionee's completion of one (1) year of Board service measured from the option grant date. Each annual grant shall vest, and the Corporation's repurchase right shall lapse, upon the Optionee's completion of one (1) year of Board service measured from the option grant date. E. Effect of Termination of Board Service. The following provisions shall govern the exercise of any options held by the Optionee at the time the Optionee ceases to serve as a Board member: (i) The Optionee (or, in the event of Optionee's death, the personal representative of the Optionee's estate or the person or persons to whom the option is transferred pursuant to the Optionee's will or in accordance with the laws of descent and distribution) shall have a twelve (12)-month period following the date of such cessation of Board service in which to exercise each such option. (ii) During the twelve (12)-month exercise period, the option may not be exercised in the aggregate for more than the number of vested shares of Common Stock for which the option is exercisable at the time of the Optionee's cessation of Board service. (iii) Should the Optionee cease to serve as a Board member by reason of death or Permanent Disability, then all shares at the time subject to the option shall immediately vest so that such option may, during the twelve (12)-month exercise period following such cessation of Board service, be exercised for all or any portion of such shares as fully-vested shares of Common Stock. (iv) In no event shall the option remain exercisable after the expiration of the option term. Upon the expiration of the twelve (12)-month exercise period or 17 18 (if earlier) upon the expiration of the option term, the option shall terminate and cease to be outstanding for any vested shares for which the option has not been exercised. However, the option shall, immediately upon the Optionee's cessation of Board service, terminate and cease to be outstanding to the extent it is not exercisable for vested shares on the date of such cessation of Board service. 2. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER A. In the event of any Corporate Transaction, the shares of Common Stock at the time subject to each outstanding option but not otherwise vested shall automatically vest in full so that each such option shall, immediately prior to the effective date of the Corporate Transaction, become fully exercisable for all of the shares of Common Stock at the time subject to such option and may be exercised for all or any portion of such shares as fully-vested shares of Common Stock. Immediately following the consummation of the Corporate Transaction, each automatic option grant shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation (or parent thereof). B. In connection with any Change in Control, the shares of Common Stock at the time subject to each outstanding option but not otherwise vested shall automatically vest in full so that each such option shall, immediately prior to the effective date of the Change in Control, become fully exercisable for all of the shares of Common Stock at the time subject to such option and may be exercised for all or any portion of such shares as fully-vested shares of Common Stock. Each such option shall remain exercisable for such fully-vested option shares until the expiration or sooner termination of the option term or the surrender of the option in connection with a Hostile Take-Over. C. Upon the occurrence of a Hostile Take-Over, the Optionee shall have a thirty (30)-day period in which to surrender to the Corporation each automatic option held by him or her for a period of at least six (6) months. The Optionee shall in return be entitled to a cash distribution from the Corporation in an amount equal to the excess of (i) the Take-Over Price of the shares of Common Stock at the time subject to the surrendered option (whether or not the Optionee is otherwise at the time vested in those shares) over (ii) the aggregate exercise price payable for such shares. Such cash distribution shall be paid within five (5) days following the surrender of the option to the Corporation. No approval or consent of the Board shall be required in connection with such option surrender and cash distribution. D. The grant of options under the Automatic Option Grant Program shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. 3. AMENDMENT OF THE AUTOMATIC OPTION GRANT PROGRAM To the extent required by Rule 16b-3 under the 1934 Act, the provisions of this Automatic Option Grant Program, together with the option grants outstanding thereunder, may 18 19 not be amended at intervals more frequently than once every six (6) months, other than to the extent necessary to comply with applicable Federal income tax laws and regulations. 4. REMAINING TERMS The remaining terms of each option granted under the Automatic Option Grant Program shall be the same as the terms in effect for option grants made under the Discretionary Option Grant Program. ARTICLE VI MISCELLANEOUS 1. FINANCING A. The Plan Administrator may permit any Optionee or Participant to pay the option exercise price under the Discretionary Option Grant Program or the purchase price for shares issued under the Stock Issuance Program by delivering a promissory note payable in one or more installments. The terms of any such promissory note (including the interest rate and the terms of repayment) shall be established by the Plan Administrator in its sole discretion. Promissory notes may be authorized with or without security or collateral. In all events, the maximum credit available to the Optionee or Participant may not exceed the sum of (i) the aggregate option exercise price or purchase price payable for the purchased shares plus (ii) any Federal, state and local income and employment tax liability incurred by the Optionee or the Participant in connection with the option exercise or share purchase. B. The Plan Administrator may, in its discretion, determine that one or more such promissory notes shall be subject to forgiveness by the Corporation in whole or in part upon such terms as the Plan Administrator may deem appropriate. 2. TAX WITHHOLDING A. The Corporation's obligation to deliver shares of Common Stock upon the exercise of options or stock appreciation rights or upon the issuance or vesting of such shares under the Plan shall be subject to the satisfaction of all applicable Federal, state and local income and employment tax withholding requirements. B. The Plan Administrator may, in its discretion, provide any or all holders of Non-Statutory Options or unvested shares of Common Stock under the Plan (other than the options granted or the shares issued under the Automatic Option Grant Program) with the right to use shares of Common Stock in satisfaction of all or part of the Taxes incurred by such holders in connection with the exercise of their options or the vesting of their shares. Such right may be provided to any such holder in either or both of the following formats: 19 20 (i) Stock Withholding: The election to have the Corporation withhold, from the shares of Common Stock otherwise issuable upon the exercise of such Non-Statutory Option or the vesting of such shares, a portion of those shares with an aggregate Fair Market Value equal to the percentage of the Taxes (not to exceed one hundred percent (100%)) designated by the holder. (ii) Stock Delivery: The election to deliver to the Corporation, at the time the Non-Statutory Option is exercised or the shares vest, one or more shares of Common Stock previously acquired by such holder (other than in connection with the option exercise or share vesting triggering the Taxes) with an aggregate Fair Market Value equal to the percentage of the Taxes (not to exceed one hundred percent (100%)) designated by the holder. 3. EFFECTIVE DATE AND TERM OF THE PLAN A. The Discretionary Option Grant, Salary Investment and Stock Issuance Programs shall become effective on the Plan Effective Date and options may be granted under the Discretionary Option Grant Program from and after the Plan Effective Date. The Automatic Option Grant Program shall also become effective on the Plan Effective Date and the initial options under the Automatic Option Grant Program shall be made to the Eligible Directors at that time. B. The Plan shall serve as the successor to the Predecessor Plan, and no further option grants shall be made under the Predecessor Plan after the Plan Effective Date. All options outstanding under the Predecessor Plan as of such date shall, immediately upon the Plan Effective Date, be incorporated into the Plan and treated as outstanding options under the Plan. However, each outstanding option so incorporated shall continue to be governed solely by the terms of the documents evidencing such option, and no provision of the Plan shall be deemed to affect or otherwise modify the rights or obligations of the holders of such incorporated options with respect to their acquisition of shares of Common Stock. C. One or more provisions of the Plan, including (without limitation) the option/vesting acceleration provisions of Article Two relating to Corporate Transactions and Changes in Control, may, in the Plan Administrator's discretion, be extended to one or more options incorporated from the Predecessor Plan which do not otherwise contain such provisions. D. On June 6, 1996, the Board approved an increase in the number of shares issuable under the Plan by 1,000,000 shares to 2,286,408 shares, and the Corporation's stockholders approved such share increase at the 1996 Annual Stockholders Meeting. On ____ __, 1997, the Board approved an increase in the number of shares issuable under the Plan by 600,000 shares to 2,886,408 shares, and the Corporation's stockholders approved such share increase at the 1997 Annual Stockholders Meeting. E. The Plan shall terminate upon the earliest of (i) September 30, 2005, (ii) the date on which all shares available for issuance under the Plan shall have been issued pursuant to the exercise of the options or the issuance of shares (whether vested or unvested) under the Plan or (iii) the termination of all outstanding options in connection with a Corporate 20 21 Transaction. Upon such Plan termination, all options and unvested stock issuances outstanding on such date shall thereafter continue to have force and effect in accordance with the provisions of the documents evidencing such options or issuances. 4. AMENDMENT OF THE PLAN A. The Board shall have complete and exclusive power and authority to amend or modify the Plan in any or all respects. However, (i) no such amendment or modification shall adversely affect the rights and obligations with respect to options, stock appreciation rights or unvested stock issuances at the time outstanding under the Plan unless the Optionee or the Participant consents to such amendment or modification, and (ii) any amendment made to the Automatic Option Grant Program (or any options outstanding thereunder) shall be in compliance with the limitations of that program. In addition, the Board shall not, without the approval of the Corporation's stockholders, (i) materially increase the maximum number of shares issuable under the Plan, the number of shares for which options may be granted under the Automatic Option Grant Program or the maximum number of shares for which any one person may be granted options, separately exercisable stock appreciation rights and direct stock issuances per calendar year, except for permissible adjustments in the event of certain changes in the Corporation's capitalization, (ii) materially modify the eligibility requirements for Plan participation or (iii) materially increase the benefits accruing to Plan participants. B. Options to purchase shares of Common Stock may be granted under the Discretionary Option Grant and Salary Investment Option Grant Programs and shares of Common Stock may be issued under the Stock Issuance Program that are in each instance in excess of the number of shares then available for issuance under the Plan, provided any excess shares actually issued under those programs are held in escrow until there is obtained stockholder approval of an amendment sufficiently increasing the number of shares of Common Stock available for issuance under the Plan. If such stockholder approval is not obtained within twelve (12) months after the date the first such excess issuances are made, then (i) any unexercised options granted on the basis of such excess shares shall terminate and cease to be outstanding and (ii) the Corporation shall promptly refund to the Optionees and the Participants the exercise or purchase price paid for any excess shares issued under the Plan and held in escrow, together with interest (at the applicable Short Term Federal Rate) for the period the shares were held in escrow, and such shares shall thereupon be automatically canceled and cease to be outstanding. 5. USE OF PROCEEDS Any cash proceeds received by the Corporation from the sale of shares of Common Stock under the Plan shall be used for general corporate purposes. 6. REGULATORY APPROVALS A. The implementation of the Plan, the granting of any option or stock appreciation right under the Plan and the issuance of any shares of Common Stock (i) upon the exercise of any option or stock appreciation right or (ii) under the Stock Issuance Program shall be subject to the Corporation's procurement of all approvals and permits required by regulatory 21 22 authorities having jurisdiction over the Plan, the options and stock appreciation rights granted under it and the shares of Common Stock issued pursuant to it. B. No shares of Common Stock or other assets shall be issued or delivered under the Plan unless and until there shall have been compliance with all applicable requirements of Federal and state securities laws, including the filing and effectiveness of the Form S-8 registration statement for the shares of Common Stock issuable under the Plan, and all applicable listing requirements of any stock exchange (or the Nasdaq National Market, if applicable) on which Common Stock is then listed for trading. 7. NO EMPLOYMENT/SERVICE RIGHTS Nothing in the Plan shall confer upon the Optionee or the Participant any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Parent or Subsidiary employing or retaining such person) or of the Optionee or the Participant, which rights are hereby expressly reserved by each, to terminate such person's Service at any time for any reason, with or without cause. 22 23 APPENDIX The following definitions shall be in effect under the Plan: A. AUTOMATIC OPTION GRANT PROGRAM shall mean the automatic option grant program in effect under the Plan. B. BOARD shall mean the Corporation's Board of Directors. C. CHANGE IN CONTROL shall mean a change in ownership or control of the Corporation effected through either of the following transactions: (i) the acquisition, directly or indirectly, by any person or related group of persons (other than the Corporation or a person that directly or indirectly controls, is controlled by, or is under common control with, the Corporation), of beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities pursuant to a tender or exchange offer made directly to the Corporation's stockholders which the Board does not recommend such stockholders to accept, or (ii) a change in the composition of the Board over a period of thirty-six (36) consecutive months or less such that a majority of the Board members ceases, by reason of one or more contested elections for Board membership, to be comprised of individuals who either (A) have been Board members continuously since the beginning of such period or (B) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (A) who were still in office at the time the Board approved such election or nomination. D. CODE shall mean the Internal Revenue Code of 1986, as amended. E. COMMON STOCK shall mean the Corporation's common stock. F. CORPORATE TRANSACTION shall mean either of the following stockholder-approved transactions to which the Corporation is a party: (i) a merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction; or (ii) the sale, transfer or other disposition of all or substantially all of the Corporation's assets in complete liquidation or dissolution of the Corporation. G. CORPORATION shall mean Arbor Software Corporation, a Delaware corporation. 24 H. DISCRETIONARY OPTION GRANT PROGRAM shall mean the discretionary option grant program in effect under the Plan. I. DOMESTIC RELATIONS ORDER shall mean any judgment, decree or order (including approval of a property settlement agreement) which provides or otherwise conveys, pursuant to applicable State domestic relations laws (including community property laws), marital property rights to any spouse or former spouse of the Optionee. J. ELIGIBLE DIRECTOR shall mean a non-employee Board member eligible to participate in the Automatic Option Grant Program in accordance with the eligibility provisions of Article One. K. EMPLOYEE shall mean an individual who is in the employ of the Corporation (or any Parent or Subsidiary), subject to the control and direction of the employer entity as to both the work to be performed and the manner and method of performance. L. EXERCISE DATE shall mean the date on which the Corporation shall have received written notice of the option exercise. M. FAIR MARKET VALUE per share of Common Stock on any relevant date shall be determined in accordance with the following provisions: (i) If the Common Stock is at the time traded on the Nasdaq National Market, then the Fair Market Value shall be the closing price per share of Common Stock on the date in question, as such price is reported by the National Association of Securities Dealers on the Nasdaq National Market or any successor system. If there is no closing price for the Common Stock on the date in question, then the Fair Market Value shall be the closing price on the last preceding date for which such quotation exists. (ii) If the Common Stock is at the time listed on any Stock Exchange, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question on the Stock Exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (iii) For purposes of option grants made on the date the Underwriting Agreement is executed and the initial public offering price of the Common Stock is established, the Fair Market Value shall be deemed to be equal to the established initial offering price per share. N. HOSTILE TAKE-OVER shall mean a change in ownership of the Corporation effected through the following transaction: 25 (i) the acquisition, directly or indirectly, by any person or related group of persons (other than the Corporation or a person that directly or indirectly controls, is controlled by, or is under common control with, the Corporation) of beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities pursuant to a tender or exchange offer made directly to the Corporation's stockholders which the Board does not recommend such stockholders to accept, and (ii) more than fifty percent (50%) of the securities so acquired are accepted from persons other than Section 16 Insiders. O. INCENTIVE OPTION shall mean an option which satisfies the requirements of Code Section 422. P. INVOLUNTARY TERMINATION shall mean the termination of the Service of any individual which occurs by reason of: (i) such individual's involuntary dismissal or discharge by the Corporation for reasons other than Misconduct, or (ii) such individual's voluntary resignation following (A) a change in his or her position with the Corporation which materially reduces his or her level of responsibility, (B) a reduction in his or her level of compensation (including base salary, fringe benefits and participation in corporate-performance based bonus or incentive programs) by more than fifteen percent (15%) or (C) a relocation of such individual's place of employment by more than fifty (50) miles, provided and only if such change, reduction or relocation is effected by the Corporation without the individual's consent. Q. MISCONDUCT shall mean the commission of any act of fraud, embezzlement or dishonesty by the Optionee or Participant, any unauthorized use or disclosure by such person of confidential information or trade secrets of the Corporation (or any Parent or Subsidiary), or any other intentional misconduct by such person adversely affecting the business or affairs of the Corporation (or any Parent or Subsidiary) in a material manner. The foregoing definition shall not be deemed to be inclusive of all the acts or omissions which the Corporation (or any Parent or Subsidiary) may consider as grounds for the dismissal or discharge of any Optionee, Participant or other person in the Service of the Corporation (or any Parent or Subsidiary). R. 1934 ACT shall mean the Securities Exchange Act of 1934, as amended. S. NON-STATUTORY OPTION shall mean an option not intended to satisfy the requirements of Code Section 422. T. OPTIONEE shall mean any person to whom an option is granted under the Discretionary Option Grant, Salary Investment Option Grant or Automatic Option Grant Program. 26 U. PARENT shall mean any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation, provided each corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. V. PARTICIPANT shall mean any person who is issued shares of Common Stock under the Stock Issuance Program. W. PERMANENT DISABILITY OR PERMANENTLY DISABLED shall mean the inability of the Optionee or the Participant to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment expected to result in death or to be of continuous duration of twelve (12) months or more. However, solely for the purposes of the Automatic Option Grant Program, Permanent Disability or Permanently Disabled shall mean the inability of the non-employee Board member to perform his or her usual duties as a Board member by reason of any medically determinable physical or mental impairment expected to result in death or to be of continuous duration of twelve (12) months or more. X. PLAN shall mean the Corporation's 1995 Stock Option/Stock Issuance Plan, as set forth in this document. Y. PLAN ADMINISTRATOR shall mean the particular entity, whether the Primary Committee, the Board or the Secondary Committee, which is authorized to administer the Discretionary Option Grant, Salary Investment Option Grant and Stock Issuance Programs with respect to one or more classes of eligible persons, to the extent such entity is carrying out its administrative functions under those programs with respect to the persons under its jurisdiction. Z. PLAN EFFECTIVE DATE shall mean the date on which the Underwriting Agreement is executed and the initial public offering price of the Common Stock is established. AA. PREDECESSOR PLAN shall mean the Corporation's existing 1992 Stock Option Plan. BB. PRIMARY COMMITTEE shall mean the committee of two (2) or more non-employee Board members appointed by the Board to administer the Discretionary Option Grant, Salary Investment Option Grant and Stock Issuance Programs with respect to Section 16 Insiders. CC. QUALIFIED DOMESTIC RELATIONS ORDER shall mean a Domestic Relations Order which substantially complies with the requirements of Code Section 414(p). The Plan Administrator shall have the sole discretion to determine whether a Domestic Relations Order is a Qualified Domestic Relations Order. DD. SALARY INVESTMENT PROGRAM shall mean the salary reduction grant program in effect under the Plan. 27 EE. SECONDARY COMMITTEE shall mean a committee of two (2) or more Board members appointed by the Board to administer the Discretionary Option Grant, Salary Investment Option Grant and Stock Issuance Programs with respect to eligible persons other than Section 16 Insiders. FF. SECTION 16 INSIDER shall mean an officer or director of the Corporation subject to the short-swing profit liabilities of Section 16 of the 1934 Act. GG. SECTION 12(g) REGISTRATION DATE shall mean the first date on which the Common Stock is registered under Section 12(g) of the 1934 Act. HH. SERVICE shall mean the provision of services to the Corporation (or any Parent or Subsidiary) by a person in the capacity of an Employee, a non-employee member of the board of directors or a consultant or independent advisor, except to the extent otherwise specifically provided in the documents evidencing the option grant or stock issuance. II. STOCK EXCHANGE shall mean either the American Stock Exchange or the New York Stock Exchange. JJ. STOCK ISSUANCE AGREEMENT shall mean the agreement entered into by the Corporation and the Participant at the time of issuance of shares of Common Stock under the Stock Issuance Program. KK. STOCK ISSUANCE PROGRAM shall mean the stock issuance program in effect under the Plan. LL. SUBSIDIARY shall mean any corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation, provided each corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. MM. TAKE-OVER PRICE shall mean the greater of (i) the Fair Market Value per share of Common Stock on the date the option is surrendered to the Corporation in connection with a Hostile Take-Over or (ii) the highest reported price per share of Common Stock paid by the tender offeror in effecting such Hostile Take-Over. However, if the surrendered option is an Incentive Option, the Take-Over Price shall not exceed the clause (i) price per share. NN. TAXES shall mean the Federal, state and local income and employment tax liabilities incurred by the holder of Non-Statutory Options or unvested shares of Common Stock in connection with the exercise of those options or the vesting of those shares. OO. 10% STOCKHOLDER shall mean the owner of stock (as determined under Code Section 424(d)) possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Corporation (or any Parent or Subsidiary). 28 PP. UNDERWRITING AGREEMENT shall mean the agreement between the Corporation and the underwriter or underwriters managing the initial public offering of the Common Stock. EX-10.4 4 EMPLOYEE STOCK PURCHASE PLAN 1 EXHIBIT 10.4 ARBOR SOFTWARE CORPORATION EMPLOYEE STOCK PURCHASE PLAN I. PURPOSE OF THE PLAN This Employee Stock Purchase Plan is intended to promote the interests of Arbor Software Corporation by providing eligible employees with the opportunity to acquire a proprietary interest in the Corporation through participation in a payroll-deduction based employee stock purchase plan designed to qualify under Section 423 of the Code. Capitalized terms herein shall have the meanings assigned to such terms in the attached Appendix. II. ADMINISTRATION OF THE PLAN The Plan Administrator shall have full authority to interpret and construe any provision of the Plan and to adopt such rules and regulations for administering the Plan as it may deem necessary in order to comply with the requirements of Code Section 423. Decisions of the Plan Administrator shall be final and binding on all parties having an interest in the Plan. III. STOCK SUBJECT TO PLAN A. The stock purchasable under the Plan shall be shares of authorized but unissued or reacquired Common Stock, including shares of Common Stock purchased on the open market. The maximum number of shares of Common Stock which may be issued over the term of the Plan shall not exceed Three Hundred Fifty Thousand (350,000) shares. B. Should any change be made to the Common Stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation's receipt of consideration, appropriate adjustments shall be made to (i) the maximum number and class of securities issuable under the Plan, (ii) the maximum number and class of securities purchasable per Participant on any one Purchase Date and (iii) the number and class of securities and the price per share in effect under each outstanding purchase right in order to prevent the dilution or enlargement of benefits thereunder. IV. OFFERING PERIODS A. Shares of Common Stock shall be offered for purchase under the Plan through a series of successive offering periods until such time as (i) the maximum number of shares of Common Stock available for issuance under the Plan shall have been purchased or (ii) the Plan shall have been sooner terminated. 1 2 B. Each offering period shall be of such duration (not to exceed twenty-four (24) months) as determined by the Plan Administrator prior to the start date. The initial offering period shall commence at the Effective Time and terminate on the last business day in October 1997. The next offering period shall commence on the first business day in November 1997, and subsequent offering periods shall commence as designated by the Plan Administrator. C. Each offering period shall be comprised of a series of one or more successive Purchase Periods. Purchase Periods shall begin on the first business day in May and November each year and terminate on the last business day in the following April and October, respectively, each year. However, the first Purchase Period under the initial offering period shall commence at the Effective Time and terminate on the last business day in April 1996. V. ELIGIBILITY A. Each Eligible Employee shall be eligible to enter an offering period under the Plan on the start date of any Purchase Period within that offering period, provided he or she remains an Eligible Employee on such start date. The date such individual enters the offering period shall be designated his or her Entry Date for purposes of that offering period. B. To participate in the Plan for a particular offering period, the Eligible Employee must complete the enrollment forms prescribed by the Plan Administrator (including a stock purchase agreement and a payroll deduction authorization form) and file such forms with the Plan Administrator (or its designate) on or before his or her scheduled Entry Date. VI. PAYROLL DEDUCTIONS A. The payroll deduction authorized by the Participant for purposes of acquiring shares of Common Stock under the Plan may be any multiple of one percent (1%) of the Cash Compensation paid to the Participant during each Purchase Period within that offering period, up to a maximum of ten percent (10%). The deduction rate so authorized shall continue in effect for the remainder of the offering period, except to the extent such rate is changed in accordance with the following guidelines: (i) The Participant may, at any time during the offering period, reduce his or her rate of payroll deduction to become effective as soon as possible after filing the appropriate form with the Plan Administrator. The Participant may not, however, effect more than one (1) such reduction per Purchase Period. (ii) The Participant may, prior to the commencement of any new Purchase Period within the offering period, increase the rate of his or her payroll deduction by filing the appropriate form with the Plan Administrator. The new rate (which may not exceed the ten percent (10%) maximum) shall become effective as of the start date of the Purchase Period following the filing of such form. 2 3 B. Payroll deductions shall begin on the first pay day following the Participant's Entry Date into the offering period and shall (unless sooner terminated by the Participant) continue through the pay day ending with or immediately prior to the last day of that offering period. The amounts so collected shall be credited to the Participant's book account under the Plan, but no interest shall be paid on the balance from time to time outstanding in such account. The amounts collected from the Participant shall not be held in any segregated account or trust fund and may be commingled with the general assets of the Corporation and used for general corporate purposes. C. Payroll deductions shall automatically cease upon the termination of the Participant's purchase right in accordance with the provisions of the Plan. D. The Participant's acquisition of Common Stock under the Plan on any Purchase Date shall neither limit nor require the Participant's acquisition of Common Stock on any subsequent Purchase Date, whether within the same or a different offering period. VII. PURCHASE RIGHTS A. Grant of Purchase Right. A Participant shall be granted a separate purchase right for each offering period in which he or she participates. The purchase right shall be granted on the Participant's Entry Date into the offering period and shall provide the Participant with the right to purchase shares of Common Stock, in a series of successive installments over the remainder of such offering period, upon the terms set forth below. The Participant shall execute a stock purchase agreement embodying such terms and such other provisions (not inconsistent with the Plan) as the Plan Administrator may deem advisable. Under no circumstances shall purchase rights be granted under the Plan to any Eligible Employee if such individual would, immediately after the grant, own (within the meaning of Code Section 424(d)) or hold outstanding options or other rights to purchase, stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Corporation or any Corporate Affiliate. B. Exercise of the Purchase Right. Each purchase right shall be automatically exercised in installments on each successive Purchase Date within the offering period, and shares of Common Stock shall accordingly be purchased on behalf of each Participant (other than any Participant whose payroll deductions have previously been refunded in accordance with the Termination of Purchase Right provisions below) on each such Purchase Date. The purchase shall be effected by applying the Participant's payroll deductions for the Purchase Period ending on such Purchase Date (together with any carryover deductions from the preceding Purchase Period) to the purchase of whole shares of Common Stock (subject to the limitation on the maximum number of shares purchasable per Participant on any one Purchase Date) at the purchase price in effect for the Participant for that Purchase Date. C. Purchase Price. The purchase price per share at which Common Stock will be purchased on the Participant's behalf on each Purchase Date within the offering period shall be 3 4 equal to eighty-five percent (85%) of the lower of (i) the Fair Market Value per share of Common Stock on the Participant's Entry Date into that offering period or (ii) the Fair Market Value per share of Common Stock on that Purchase Date. However, for each Participant whose Entry Date is other than the start date of the offering period, the clause (i) amount shall in no event be less than the Fair Market Value per share of Common Stock on the start date of that offering period. D. Number of Purchasable Shares. The number of shares of Common Stock purchasable by a Participant on each Purchase Date during the offering period shall be the number of whole shares obtained by dividing the amount collected from the Participant through payroll deductions during the Purchase Period ending with that Purchase Date (together with any carryover deductions from the preceding Purchase Period) by the purchase price in effect for the Participant for that Purchase Date. However, the maximum number of shares of Common Stock purchasable per Participant on any one Purchase Date shall not exceed Five Hundred (500) shares, subject to periodic adjustments in the event of certain changes in the Corporation's capitalization. E. Excess Payroll Deductions. Any payroll deductions not applied to the purchase of shares of Common Stock on any Purchase Date because they are not sufficient to purchase a whole share of Common Stock shall be held for the purchase of Common Stock on the next Purchase Date. However, any payroll deductions not applied to the purchase of Common Stock by reason of the limitation on the maximum number of shares purchasable by the Participant on the Purchase Date shall be promptly refunded. F. Termination of Purchase Right. The following provisions shall govern the termination of outstanding purchase rights: (i) A Participant may, at any time prior to the next Purchase Date in the offering period, terminate his or her outstanding purchase right by filing the appropriate form with the Plan Administrator (or its designate), and no further payroll deductions shall be collected from the Participant with respect to the terminated purchase right. Any payroll deductions collected during the Purchase Period in which such termination occurs shall, at the Participant's election, be immediately refunded or held for the purchase of shares on the next Purchase Date. If no such election is made at the time such purchase right is terminated, then the payroll deductions collected with respect to the terminated right shall be refunded as soon as possible. (ii) The termination of such purchase right shall be irrevocable, and the Participant may not subsequently rejoin the offering period for which the terminated purchase right was granted. In order to resume participation in any subsequent offering period, such individual must re-enroll in the Plan (by making a timely filing of the prescribed enrollment forms) on or before his or her scheduled Entry Date into that offering period. 4 5 (iii) Should the Participant cease to remain an Eligible Employee for any reason (including death, disability or change in status) while his or her purchase right remains outstanding, then that purchase right shall immediately terminate, and all of the Participant's payroll deductions for the Purchase Period in which the purchase right so terminates shall be immediately refunded. However, should the Participant cease to remain in active service by reason of an approved unpaid leave of absence, then the Participant shall have the election, exercisable up until the last business day of the Purchase Period in which such leave commences, to (a) withdraw all the funds in the Participant's payroll account at the time of the commencement of such leave or (b) have such funds held for the purchase of shares at the end of such Purchase Period. In no event, however, shall any further payroll deductions be added to the Participant's account during such leave. Upon the Participant's return to active service, his or her payroll deductions under the Plan shall automatically resume at the rate in effect at the time the leave began, provided the Participant returns to service prior to the expiration date of the offering period in which such leave began. G. Corporate Transaction. Each outstanding purchase right shall automatically be exercised, immediately prior to the effective date of any Corporate Transaction, by applying the payroll deductions of each Participant for the Purchase Period in which such Corporate Transaction occurs to the purchase of whole shares of Common Stock at a purchase price per share equal to eighty-five percent (85%) of the lower of (i) the Fair Market Value per share of Common Stock on the Participant's Entry Date into the offering period in which such Corporate Transaction occurs or (ii) the Fair Market Value per share of Common Stock immediately prior to the effective date of such Corporate Transaction. However, the applicable limitation on the number of shares of Common Stock purchasable per Participant shall continue to apply to any such purchase, and the clause (i) amount above shall not, for any Participant whose Entry Date for the offering period is other than the start date of that offering period, be less than the Fair Market Value per share of Common Stock on such start date. The Corporation shall use its best efforts to provide at least ten (10)-days prior written notice of the occurrence of any Corporate Transaction, and Participants shall, following the receipt of such notice, have the right to terminate their outstanding purchase rights prior to the effective date of the Corporate Transaction. H. Proration of Purchase Rights. Should the total number of shares of Common Stock which are to be purchased pursuant to outstanding purchase rights on any particular date exceed the number of shares then available for issuance under the Plan, the Plan Administrator shall make a pro-rata allocation of the available shares on a uniform and nondiscriminatory basis, and the payroll deductions of each Participant, to the extent in excess of the aggregate purchase price payable for the Common Stock pro-rated to such individual, shall be refunded. I. Assignability. During the Participant's lifetime, the purchase right shall be exercisable only by the Participant and shall not be assignable or transferable by the Participant. 5 6 J. Stockholder Rights. A Participant shall have no stockholder rights with respect to the shares subject to his or her outstanding purchase right until the shares are purchased on the Participant's behalf in accordance with the provisions of the Plan and the Participant has become a holder of record of the purchased shares. VIII. ACCRUAL LIMITATIONS A. No Participant shall be entitled to accrue rights to acquire Common Stock pursuant to any purchase right outstanding under this Plan if and to the extent such accrual, when aggregated with (i) rights to purchase Common Stock accrued under any other purchase right granted under this Plan and (ii) similar rights accrued under other employee stock purchase plans (within the meaning of Code Section 423) of the Corporation or any Corporate Affiliate, would otherwise permit such Participant to purchase more than Twenty-Five Thousand Dollars ($25,000) worth of stock of the Corporation or any Corporate Affiliate (determined on the basis of the Fair Market Value of such stock on the date or dates such rights are granted) for each calendar year such rights are at any time outstanding. B. For purposes of applying such accrual limitations, the following provisions shall be in effect: (i) The right to acquire Common Stock under each outstanding purchase right shall accrue in a series of installments on each successive Purchase Date during the offering period on which such right remains outstanding. (ii) No right to acquire Common Stock under any outstanding purchase right shall accrue to the extent the Participant has already accrued in the same calendar year the right to acquire Common Stock under one (1) or more other purchase rights at a rate equal to Twenty-Five Thousand Dollars ($25,000) worth of Common Stock (determined on the basis of the Fair Market Value of such stock on the date or dates of grant) for each calendar year such rights were at any time outstanding. C. If by reason of such accrual limitations, any purchase right of a Participant does not accrue for a particular Purchase Period, then the payroll deductions which the Participant made during that Purchase Period with respect to such purchase right shall be promptly refunded. D. In the event there is any conflict between the provisions of this Article and one or more provisions of the Plan or any instrument issued thereunder, the provisions of this Article shall be controlling. IX. EFFECTIVE DATE AND TERM OF THE PLAN A. The Plan was adopted by the Board on August 31, 1995 and approved by the stockholders on September 15, 1995. The Plan shall become effective at the Effective Time, provided no purchase rights granted under the Plan shall be exercised, and no shares of Common 6 7 Stock shall be issued hereunder, until the Corporation shall have complied with all applicable requirements of the 1933 Act (including the registration of the shares of Common Stock issuable under the Plan on a Form S-8 registration statement filed with the Securities and Exchange Commission), all applicable listing requirements of any stock exchange (or the Nasdaq National Market, if applicable) on which the Common Stock is listed for trading and all other applicable requirements established by law or regulation. B. Unless sooner terminated by the Board, the Plan shall terminate upon the earliest of (i) the last business day in October 2005, (ii) the date on which all shares available for issuance under the Plan shall have been sold pursuant to purchase rights exercised under the Plan or (iii) the date on which all purchase rights are exercised in connection with a Corporate Transaction. No further purchase rights shall be granted or exercised, and no further payroll deductions shall be collected, under the Plan following its termination. X. AMENDMENT OF THE PLAN The Board may alter, amend, suspend or discontinue the Plan at any time to become effective immediately following the close of any Purchase Period. However, the Board may not, without the approval of the Corporation's stockholders, (i) materially increase the number of shares of Common Stock issuable under the Plan or the maximum number of shares purchasable per Participant on any one Purchase Date, except for permissible adjustments in the event of certain changes in the Corporation's capitalization, (ii) alter the purchase price formula so as to reduce the purchase price payable for the shares of Common Stock purchasable under the Plan, or (iii) materially increase the benefits accruing to Participants under the Plan or materially modify the requirements for eligibility to participate in the Plan. XI. GENERAL PROVISIONS A. All costs and expenses incurred in the administration of the Plan shall be paid by the Corporation. B. Nothing in the Plan shall confer upon the Participant any right to continue in the employ of the Corporation or any Corporate Affiliate for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Corporate Affiliate employing such person) or of the Participant, which rights are hereby expressly reserved by each, to terminate such person's employment at any time for any reason, with or without cause. C. The provisions of the Plan shall be governed by the laws of the State of California without resort to that State's conflict-of-laws rules. 7 8 Schedule A Corporations Participating in Employee Stock Purchase Plan As of the Effective Time Arbor Software Corporation 9 APPENDIX The following definitions shall be in effect under the Plan: A. Board shall mean the Corporation's Board of Directors. B. Cash Compensation shall mean the (i) regular base salary paid to a Participant by one or more Participating Companies during such individual's period of participation in the Plan, plus (ii) any pre-tax contributions made by the Participant to any Code Section 401(k) salary deferral plan or any Code Section 125 cafeteria benefit program now or hereafter established by the Corporation or any Corporate Affiliate, plus (iii) all of the following amounts to the extent paid in cash: overtime payments, bonuses, commissions, profit-sharing distributions and other incentive-type payments. However, Cash Compensation shall not include any contributions (other than Code Section 401(k) or Code Section 125 contributions) made on the Participant's behalf by the Corporation or any Corporate Affiliate to any deferred compensation plan or welfare benefit program now or hereafter established. C. Code shall mean the Internal Revenue Code of 1986, as amended. D. Common Stock shall mean the Corporation's common stock. E. Corporate Affiliate shall mean any parent or subsidiary corporation of the Corporation (as determined in accordance with Code Section 424), whether now existing or subsequently established. F. Corporate Transaction shall mean either of the following stockholder- approved transactions to which the Corporation is a party: (i) a merger or consolidation in which securities possessing more than fifty. percent (50%) of the total combined voting power of the Corporation's outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction, or (ii) the sale, transfer or other disposition of all or substantially all of the assets of the Corporation in complete liquidation or dissolution of the Corporation. G. Corporation shall mean Arbor Software Corporation, a Delaware corporation, and any corporate successor to all or substantially all of the assets or voting stock of Arbor Software Corporation which shall by appropriate action adopt the Plan. A-1 10 H. Effective Time shall mean the time at which the Underwriting Agreement is executed and finally priced. Any Corporate Affiliate which becomes a Participating Corporation after such Effective Time shall designate a subsequent Effective Time with respect to its employee-Participants. I. Eligible Employee shall mean any person who is engaged, on a regularlyscheduled basis of more than twenty (20) hours per week for more than five (5) months per calendar year, in the rendition of personal services to any Participating Corporation as an employee for earnings considered wages under Code Section 3401(a). J. Entry Date shall mean the date an Eligible Employee first commences participation in the offering period in effect under the Plan. The earliest Entry Date under the Plan shall be the Effective Time. K. Fair Market Value per share of Common Stock on any relevant date shall be determined in accordance with the following provisions: (i) If the Common Stock is at the time traded on the Nasdaq National Market, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question, as such price is reported by the National Association of Securities Dealers on the Nasdaq National Market or any successor system. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (ii) If the Common Stock is at the time listed on any Stock Exchange, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question on the Stock Exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (iii) For purposes of the initial offering period which begins at the Effective Time, the Fair Market Value shall be deemed to be equal to the price per share at which the Common Stock is sold in the initial public offering pursuant to the Underwriting Agreement. L. 1933 Act shall mean the Securities Act of 1933, as amended. M. Participant shall mean any Eligible Employee of a Participating Corporation who is actively participating in the Plan. A-2 11 N. Participating Corporation shall mean the Corporation and such Corporate Affiliate or Affiliates as may be authorized from time to time by the Board to extend the benefits of the Plan to their Eligible Employees. The Participating Corporations in the Plan as of the Effective Time are listed in attached Schedule A. O. Plan shall mean the Corporation's Employee Stock Purchase Plan, as set forth in this document. P. Plan Administrator shall mean the committee of two (2) or more Board members appointed by the Board to administer the Plan. Q. Purchase Date shall mean the last business day of each Purchase Period. The initial Purchase Date shall be April 30, 1996. R. Purchase Period shall mean each successive period within the offering period at the end of which there shall be purchased shares of Common Stock on behalf of each Participant. S. Stock Exchange shall mean either the American Stock Exchange or the New York Stock Exchange. T. Underwriting Agreement shall mean the agreement between the Corporation and the underwriter or underwriters managing the initial public offering of the Common Stock. EX-10.7 5 REAL PROPERTY LEASE 1 EXHIBIT 10.7 LEASE AGREEMENT 1. Parties. This Lease, is made by and between SBC&D Co., Inc., a California corporation or nominee ('landlord"), and Arbor Software Corporation, a California corporation ("Tenant:"). 2. Premises. Landlord hereby leases to Tenant and Tenant hereby leases from Landlord, upon the terms and conditions hereinafter set forth, those certain premises (the "Premises") Situated in the City of Sunnyvale, County of Santa Clara, State of California, shall be deemed to be approximately ninety eight thousand eight hundred thirty six (98,836) square feet of floor space in the building (the "Building"), and the land as described on Exhibit "A" and known as 1344 Crossrnan Avenue. Landlord shall not be required to make any alterations, additions or improvements to the Premises and the Premises shall be leased to Tenant in an "As is" condition. Tenant and its representatives, have, prior to executing this Lease, made such inspections of the Premises and matters related thereto as Tenant and its representatives desire, including, without limitation, governmental laws and regulations to which the Premises is subject and Tenant shall accept the Premises upon the basis of its review and determination of the applicability and effect of such laws and regulations. Tenant further acknowledges and agrees that, the Premises is to be leased and delivered to and accepted by Tenant in an "As Is" condition as of the Commencement Date with all faults and defects and without any covenant (whether express, implied or otherwise) made by Landlord to remedy any then existing fault or defect, whether known or unknown, suspected or unsuspected subject to the condition set forth in Paragraph 40 below. Tenant still further acknowledges that Tenant has received, has reviewed and is knowledgeable of the disclosures and information contained in the environmental assessments, investigations and reports listed in Exhibit "B" attached hereto. Landlord makes no representation or warranty as to the accuracy or completeness of the disclosures or information contained in said engineering and environmental assessments and reports. Landlord does not make any representations or warranties of any kind whatsoever, either express or implied, with respect to the Premises or any of such related matters; in particular, but without limitation, Landlord makes no representation or warranties with respect to the use, condition, size, dimensions, boundaries, title, occupation, management or value of the Premises or the building and improvements thereon, presence or absence of hazardous materials in, on, under or about the Premises or surrounding properties, compliance with applicable statutes, laws, codes, ordinances, regulations or requirements relating to leasing, zoning, subdivision, planning, building, fire, safety, health or environmental matters, compliance with covenants, conditions and restrictions (whether or not of record), other local, municipal, regional, state or federal requirements, or other statutes, laws, codes, ordinances, regulations or requirements (including, without limitation, The Americans With Disabilities Act). Tenant acknowledges that it Is entering into this Agreement on the basis of Tenant's own investigation of the physical and environmental conditions of the Premises. Tenant waives and releases its right to recover from Landlord and its partners, employees and agents any and all damages, losses, liabilities, costs or expenses whatsoever (including, without limitation, reasonable attorneys' fees and costs), and claims therefor, whether direct or indirect, known or unknown, foreseen or unforeseen, which may arise on account of or in any way growing out of or connected with the physical condition of the Premises or any federal, state or local law, statute, ordinance or regulation applicable thereto (including, without limitation, the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended, 42 U.S.C. Sections 9601 et seq. and The Resources Conservation and Recovery Act of 1976,42 U.S.C. Sections 6901 et seq. Tenant expressly waives the benefits of Section 1542 of the 1 2 California Civil Code, which provides as follows: A general release does not extend to claims which the creditor does not know or expect to exist in his favor at the time of executing the release, which if known to him must have materially affected the settlement with the debtor. Tenant acknowledges that, notwithstanding any prior or contemporaneous oral or written representations, statements, documents or understandings, this Lease constitutes the entire understanding of the parties with respect to the subject matter hereof and supersedes any such prior or contemporaneous oral or written representations, statements, documents or understandings. As a material consideration for this Lease, Tenant agrees to make certain improvements to the Premises. These improvements shall include retrofit of the existing building exterior shell and interior Improvements ("Tenant Improvements"). Tenant agrees that it will spend a minimum of Three Million Dollars ($3,000,000.00) on these improvements (Tenant Improvement Costs'). Landlord shall reimburse Tenant a total of Seven Hundred Thousand Dollars ($700,000.00) of the total Improvement dollars within twenty (20) days of completion to be evidenced by a final building inspection and issuance of a Certificate of Occupancy by the Building Department of the City of Sunnyvale. Landlord shall remove all furniture, cubicles and office equipment prior to commencement of demolition. 2.1 Reimbursement If No Lease Commencement. Inasmuch as Tenant will he commencing Tenant Improvements before Commencement Date and before Landlord has purchased the Premises, if Landlord is unable to close escrow and take tide to the Premises, Landlord shall reimburse Tenant for all of Tenant's expenses incurred regarding the Tenant Improvements up to the maximum reimbursable amount of $200,000.00. Tenant shall furnish to Landlord evidence of costs incurred with its request for reimbursement. 3. Term. The term of this Lease ("Lease Term") shall be for six (6) years, commencing on the earlier of (1) ninety (90) days from the date Tenant procures a building permit from the City of Sunnyvale; (ii) the date Tenant moves substantial furniture or, trade fixtures, or any personnel into the Building; or (iii) December 15, 1996, (the "Commencement Date") and ending six (6) years thereafter unless sooner terminated or extended pursuant to any provision hereof. Notwithstanding said scheduled Commencement Date, if for any reason Landlord cannot deliver possession of the Premises to Tenant, Landlord shall not be subject to any liability therefor, beyond that in Paragraph 2.1 above. 3.1 Early Access. Tenant and/or its contractors are hereby authorized to enter the Premises prior to the Commencement Date for purposes of demolition and construction of Tenant Improvements, and such early occupancy shall be upon all of the terms of this Lease (including obligations regarding indemnity and insurance) except those regarding the obligation to pay rent which shall commence on the Commencement Date. 4. Rent. 2 3 A. Time of Payment. Tenant shall pay to Landlord as rent for the Premises the sum specified in Paragraph 4.B below (the "Monthly Installment") each month in advance on the first day of each calendar month, without deduction or offset, prior notice or demand, commencing on the Commencement Date and continuing through the Lease Term, together with such additional rents as are payable by Tenant to Landlord under the terms of this Lease. The Monthly Installment for any period during the Lease Term which period is less than one (1) full month shall be a prorata portion of the Monthly Installment based upon a thirty (30) day month. B. Monthly Installment. The Monthly Installment of rent payable each month during the Term shall be as follows: Months 1-24 $ 84,011 Months 25-48 $ 93,894 Months 49-72 $103,778 C. Absolute Rent. It is the intention of Landlord and Tenant that (i) the rent herein specified shall be absolute to Landlord in each month during the Lease Term, without abatement, deduction, offset, cost or expenses, and (ii) all costs, expenses and obligations of every kind relating to the Premises shall be paid by Tenant. D. Late Charge. Tenant acknowledges that late payment by Tenant to Landlord of rent and other sums due hereunder will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed on Landlord by the terms of any mortgage or deed of trust covering the Premises. Accordingly, if any installment of rent or any other sum due from Tenant shall not be received by Landlord within ten (10) days after such amount shall be due, Tenant shall pay to Landlord, as additional rent, a late charge equal to six percent (6%) of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Landlord will incur by reason of late payment by Tenant. Acceptance of such late charge by Landlord shall in no event constitute a waiver of Tenants default with respect to such overdue amount, nor prevent Landlord from exercising any of its other rights and remedies granted hereunder. E. Additional Rent. All taxes, insurance premiums, late charges, costs and expenses which Tenant is required to pay thereunder, together with all interest and penalties that may accrue thereon in the event of Tenant's failure to pay such amounts, and all reasonable damages, costs and attorneys' fees and expenses which Landlord may incur by reason of any default of Tenant or failure on Tenant's part comply with the terms of this Lease, shall be deemed to be additional rent ("Additional Rent") and shall be paid in addition to the Monthly Installment of rent, and, in the event of nonpayment of the Monthly Installment of rent. F. Place of Payment. Rent shall be payable in lawful money of the United States of America to Landlord at 511 Division Street, Campbell CA, or to such other person (s) or at such other place (s) as Landlord may designate in writing. G. Advance Payment. Concurrently with the execution of this Lease, Tenant shall pay to 3 4 Landlord the sum of Eighty-Four Thousand and Eleven Dollars ($84,011) to be applied to the Monthly Installment of rent first accruing under this Lease 5. Security Deposit. Tenant shall deposit the sum of eighty-four Thousand Eleven Dollars ($84,011.00) (the "Security Deposit") upon execution of this Lease, to secure the faithful performance by Tenant of each term, covenant and condition of this Lease. If Tenant shall at any time fail to make any payment or fail to keep or perform any term, covenant or condition on its part to be made or performed or kept under this Lease, Landlord may, but shall not be obligated to and without waiving or releasing Tenant from any obligation under this Lease, use, apply or retain the whole or any part of the Security Deposit (A) to the extent of any sum due to Landlord; (B) to make any required payment on Tenant's behalf or (C) to compensate Landlord for any loss, damages, attorneys' fees or expense sustained by Landlord due to Tenant's default. In such event, Tenant shall, within five (5) days of written demand by Landlord, remit to Landlord sufficient funds to restore the Security Deposit to its original sum. No interest shall accrue on the Security Deposit. Landlord shall not be required to keep the Security Deposit separate from its general funds. Should Tenant comply with all the terms, covenants, and conditions of this Lease and at the end of the term of this Lease leave the Premises in the condition required by this Lease, then said Security Deposit, less any sums owing to Landlord, shall be returned to Tenant within thirty (30) days after the termination of this Lease and vacancy of the Premises by Tenant. At any time the Monthly Installment is increased pursuant to this Lease, the Security Deposit shall be increased by the same amount. 6. Use of Premises. Tenant shall use the Premises only in conformance with applicable governmental laws, regulations, rules and ordinances for the purpose of general office and manufacturing, packaging and storage of non hazardous material products or any other related purpose and for no other purpose without the prior written consent of Landlord. Tenant shall indemnify, protect, defend, and hold Landlord harmless against any loss, expense, damage, attorneys' fees or liability arising out of the failure of Tenant to comply with any applicable law. Tenant shall not commit or suffer to be committed, any waste upon the Premises, or any nuisance, or other acts or things which may disturb the quiet enjoyment of any other tenant in the buildings adjacent to the Premises, or allow any sale by auction upon the Premises, or allow the Premises to be used for any unlawful purpose, or place any loads upon the floor, walls or ceiling which endanger the structure, or place any harmful liquids in the drainage system of the Building. No waste materials or refuse shall be dumped upon or permitted to remain upon any part of the Premises outside of the Building proper, except in trash containers placed inside exterior enclosures designated for that purpose by Landlord. No materials, supplies, equipment, finished products or semi-finished products, raw materials or articles of any nature shall be stored upon or permitted to remain on any portion of the Premises outside of the Building proper. Tenant shall strictly comply with the provisions of Paragraph 39 below. 7. Taxes and Assessments. A. Tenant's property. Tenant shall pay before delinquency any and all taxes and assessments, license fees and public charges levied, assessed or imposed upon or against Tenant's fixtures, equipment, furnishings, furniture appliances and personal property installed or located on or within the Premises. Tenant shall cause said fixtures, equipment, furnishings, furniture appliances and personal property to be assessed and billed separately from the real property of Landlord. If any of Tenant's said personal property shall be assessed with Landlord's real property, Tenant shall pay Landlord the 4 5 taxes attributable to Tenant within ten (10) days after receipt of a written statement from Landlord setting forth the taxes applicable to Tenant's property. B. Property Taxes. Tenant shall pay, as additional rent, all Property Taxes levied or assessed with respect to the land comprising the Parcel and with respect to all buildings and Improvements located on the Parcel which become due or accrue during the term of this Lease. Tenant shall pay such Property Taxes to Landlord within twenty (20) days after receipt of billing. Provided that Landlord bills Tenant at least thirty (30) days prior to the delinquency date of such Property Taxes, Tenant shall pay such Property Taxes to Landlord at least ten (10) days prior to the delinquency date, and if Tenant fails to do so, Tenant shall reimburse Landlord, on demand, for all interest, late fees and penalties that the taxing authority charges Landlord. In the event Landlord's mortgage requires an impound for Property Taxes, then on the first day of each month during the Lease Term, Tenant shall pay Landlord one twelfth (1/12) of its annual share of such Property Taxes. Tenant's liability thereunder shall be prorated to reflect the Commencement and termination dates of this Lease For the purpose of this Lease, "Property Taxes" means and includes all taxes, assessments (including, but not limited to, assessments for public improvements or benefits), taxes based on vehicles, utilizing parking areas, taxes based or measured by the rent paid, payable or received under this Lease, taxes on the value, use, or occupancy of the Premises, the Buildings and/or the Parcel, Environmental Surcharges, and all other governmental impositions and charges of every kind and nature whatsoever, whether or not customary or within the contemplation of the parties hereto and regardless of whether the same shall be extraordinary or ordinary, general or special, unforeseen or foreseen, or similar or dissimilar to any of the foregoing which, at any time during the Lease Term, shall be applicable to the Premises, the Building and/or the Parcel or assessed, levied or imposed upon the Premises, the Building and/or the Parcel, or become due and payable and a lien or charge upon the Premises, the Building and/or the Parcel, or any part thereof, under or by virtue of any present or future laws, statutes, ordinances, regulations or other requirements of any governmental authority whatsoever. The term "Environmental Surcharges" shall mean and include any and all expenses, taxes, charges or penalties imposed by the Federal Department of Energy, the Federal Environmental protection Agency, the Federal Clean Air Act, or any regulations promulgated thereunder or any other local, state or federal governmental agency or entity now or hereafter vested with the power to impose taxes, assessments, or other types of surcharges as a means of controlling or abating environmental pollution or the use of energy. The term "Property Taxes" shall not include any federal, state or local net income, estate, or inheritance tax imposed on Landlord. C. Other Taxes: Tenant shall, as additional rent, pay or reimburse Landlord for any tax based upon, allocable to, or measured by the area of the Premises or the Buildings or the Parcel; or by the rent paid, payable or received under this Lease; any tax upon or with respect to the possession, leasing, operation, any tax upon or with respect to the possession, leasing, operation, management, maintenance, alteration, repair, use or occupancy of the Premises or any portion thereof; any privilege tax, excise tax, business and occupation tax, gross receipts tax, sales and/or use tax, water tax, sewer tax, employee tax, occupational license tax imposed upon Landlord or Tenant with respect to the Premises; any tax upon this transaction or any document to which Tenant is a party creating or transferring an interest or an estate in the Premises. 5 6 8. Insurance. A. Indemnity. Tenant agrees to indemnify, protect and defend Landlord against and hold Landlord harmless from any and all claims, causes of action, judgments, obligations or liabilities, and all reasonable expenses incurred in investigating or resisting the same (including reasonable attorneys' fees), on account to, or arising out to, the operation, maintenance, use or occupancy of the Premises and all areas appurtenant thereto. This Lease is made on the express understanding that Landlord shall not be liable for, or suffer loss by reason to, injury to person or property, from whatever cause (except for active negligence or willful misconduct of Landlord), which in any way may be connected with the operation, use or occupancy of the Premises specifically including, without limitation, any liability for injury to the person or property of Tenant, its agents, officers, employees, licensees and invitees. B. Liability Insurance. Tenant shall, at Tenant's expense, obtain and keep in force during the term of this Lease a policy of comprehensive public liability insurance insuring Landlord and Tenant against claims and liabilities arising out of the operation, use, or occupancy of the Premises and all areas appurtenant thereto, including parking areas. Such insurance shall be in an amount of not less than Two Million Dollars ($2,000,000.00) for bodily injury or death as a result of any one occurrence and Five Hundred Thousand Dollars ($500,000.00) for damage to property as a result of any one occurrence. The insurance shall be with companies approved by Landlord, which approval Landlord agrees not to withhold unreasonably. Tenant shall deliver to Landlord, prior to possession, and at least thirty (30) days prior to the expiration thereof, a certificate of insurance evidencing the existence of the policy required hereunder and such certificate shall certify that the policy (1) names Landlord as an additional insured, (2) shall not be canceled or altered without thirty (30) days prior written notice to Landlord, (3) insures performance of the indemnity set forth in Paragraph 8.A above, (4) the coverage is primary and any coverage by Landlord is in excess thereto and (5) contains a cross-liability endorsement. Landlord may maintain a policy or policies of comprehensive general liability insurance insuring Landlord (and such others as are designated by Landlord), against liability for personal injury, bodily injury, death and damage to property occurring or resulting from an occurrence in, on or about the Premises or the Common Area, with such limits of coverage as Landlord may from time to time determine are reasonably necessary for its protection. The cost of any such liability insurance maintained by Landlord shall be a Common Area Charge and Tenant shall pay, as additional rent, its share of such cost to Landlord as provided in Paragraph 12 below C. Property Insurance. Landlord shall obtain and keep in force during the term of this Lease a policy or policies of insurance covering loss or damage to the Premises and the Building, in the amount of the full replacement value thereof, providing protection against those perils included within the classification of "all risk" insurance, plus a policy of rental income insurance in the amount of one hundred percent (100%) of twelve (12) months rent (including, without limitation, sums payable as Additional Rent), plus, at Landlord's option, flood insurance and earthquake insurance, and any other coverage which may be required from time to time by Landlord's mortgagee. Tenant shall have no interest in nor any right to the proceeds of any insurance procured by Landlord on the Premises. Tenant shall, within twenty (20) days after receipt of billing, pay to Landlord as additional rent, the full cost of such insurance procured and maintained by Landlord. Tenant acknowledges that such insurance procured by Landlord shall contain a deductible which reduces Tenant's cost for such insurance and, in the event of loss or damage, Tenant shall be required to pay to Landlord the amount of such deductible. Notwithstanding the above, Tenant shall only be responsible for the payment of Earthquake 6 7 Insurance if it is reasonable or if Landlord's lender requires it. D. Tenant's Option to Maintain Property Insurance. Tenant shall have the right to obtain and keep in force all of the insurance described in Subparagraph 8.C above in lieu of Landlord obtaining such insurance. If Tenant desires to exercise such right to obtain such insurance, Tenant may do so only on the renewal date of Landlord's then current insurance policy and Tenant must exercise such right by giving Landlord written notice of Tenant's election to obtain such insurance not later than thirty (30) days prior to the renewal date of Landlord's then current insurance policy. If Tenant so elects to obtain the insurance described in Subparagraph 8.C above, such insurance shall be provided by companies approved by Landlord which approval shall not be unreasonably withheld. Tenant shall deliver to Landlord, at least fifteen (15) days prior to the expiration of Landlord's then current insurance policy or Tenant's then current insurance policy, as the case may be, a duplicate original of or a certificate evidencing the policy required hereunder. Such policy and/or certificate shall certify that the policy: (i) names Landlord and Landlord's Lender as additional insureds; (ii) shall not be canceled or altered without thirty (30) days prior written notice to Landlord and to Landlord's Lender; (iii) is primary and any coverage by Landlord is in excess thereto; and (iv) contains a standard lender's loss payable endorsement in favor of Landlord's Lender. If any such policy obtained by Tenant contains a deductible, Tenant shall be responsible for the amount of such deductible, or a portion thereof, as specified in Subparagraph 8.C above. Any deductible must be approved by Landlord and Landlord's Lender, which approval shall not be unreasonably withheld. If Tenant makes the election to maintain all of the insurance described in Subparagraph 8.C above, Landlord shall be relived of its obligation to obtain and maintain such insurance. E Tenant's Insurance: Release of Landlord. Tenant acknowledges that the insurance to be maintained by Landlord on the Premises pursuant to Subparagraph C above will not insure any of Tenants property. Accordingly, Tenant, at Tenant's own expense, shall maintain in full force and effect on all of its fixtures, equipment, leasehold improvements and personal property in the Premises, a policy of "All Risk' coverage insurance to the extent of at least ninety percent (90%) of their insurable value. Tenant hereby releases Landlord, and its partners, officers, agents employees and servants from any and all claims, demands, losses, expenses or injuries to the Premises or to the furnishings, fixtures, equipment, inventory or other personal property of Tenant in, about, or upon the Premises, which are caused by perils, events or happenings where the same are covered by the insurance required by this Lease or which are the subject of insurance carried by Tenant and in force at the time of such loss. 9. Utilities. Tenant shall' pay for all water, gas, light, heat, power, electricity, telephone, trash pickup, sewer charges and all other services supplied to or consumed on the Premises, and all taxes and surcharges thereon. 10. Repairs and Maintenance. A. Tenant's Repairs. Tenant shall, during the term of this Lease, at Tenant's sole cost and expense, keep and maintain in good order, condition and repair the entire Premises and every part thereof structural and non-structural, including, without limitation, the roof including structural roof), roofing, roof membrane 7 8 and roof screens, gutters and down spouts, foundation, footings, floor slab, floor coverings, windows, window frames, plate glass, glazing, skylights, truck doors, doors and all door hardware, walls (exterior and interior, structural and non-structural), partitions, sidewalks, landscaping, irrigation systems, parking areas, driveways, paving, fences, signs and all other areas or facilities located outside the Building and all plumbing, electrical, lighting, , heating, air conditioning and ventilation facilities, equipment and Systems within the Premises The term "repair" shall include replacements, restorations and/or renewals when necessary, as well as painting. Tenant's obligation shall extend to all alterations, additions and improvements to the Premises, and all fixtures and appurtenances therein and thereto. Tenant shall, at all times during the Lease Term, have in effect a service contract for the maintenance of the heating, ventilating and air conditioning ("HVAC") equipment with an HVAC repair maintenance contractor approved by Landlord which provides for periodic inspection and servicing at least once every ninety (90) days during the Lease Term and shall provide Landlord with a copy of such contract. Tenant shall indemnify and save Landlord harmless against and from all costs, expenses liabilities, losses, injuries, damages, suits, fines, penalties, claims and demands, including attorneys' fees, resulting from Tenant's failure to comply with the foregoing; and Tenant hereby expressly releases and discharges Landlord of and from any liability therefor. B. No Landlord Obligations. Landlord shall have no maintenance or repair obligations whatsoever with respect to the Premises Tenant hereby waives the provision of any law now or hereafter in effect requiring that Landlord make repairs, and further waives the provisions of any Law now or hereafter in effect allowing Tenant to make repairs at the expense of Landlord or to terminate this Lease because of Landlord's failure to keep the Premises in good order, condition and repair. Tenant specifically waives the provisions of Subsection (1) of Section 1932 and Sections 1941 and 1942 of the Civil Code of California Landlord shall not he liable for damage to the goods, wares, merchandise or other property of Tenant, Tenant's employees, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether the said damage or injury results from conditions arising upon the Premises or upon other portions of the building of which the Premises are a part, or from other sources or places and regardless of whether the cause of such damage or injury or the means of repairing the same is inaccessible to Tenant. Notwithstanding Landlord's negligence or breach of this Lease, Landlord shall, under no circumstances, be liable for injury to Tenant's business or for any loss of income or profit therefrom or for any consequential damages whatsoever. C. Tenant's Failure. Should Tenant fail to make the repairs and maintenance required of Tenant hereunder within ten (10) days after notice from Landlord, in addition to all its other rights and remedies hereunder or by law and without waiving any alternative remedies, Landlord may make the same, and in that event, Tenant shall reimburse Landlord as Additional Rent for the cost of such maintenance or repairs within five (5) days of written demand by Landlord. 8 9 11. Alterations. Except for non-structural alterations costing less than Twenty-Five Thousand Dollars ($25,000.00), Tenant shall not make, or suffer to be made, any alterations, improvements or additions in, on, about or to the Premises or any part thereof, without the prior written consent of Landlord. Any alterations, improvements, or additions shall be made by licensed contractors holding valid building permits issued by the appropriate governmental authority. Copies of all plans and permits for any alterations, improvements or additions shall be delivered to Landlord prior to the commencement of work. As a condition to giving such consent, Landlord may request that Tenant agree to remove any such alterations, improvements or additions at the termination of this Lease, and to restore the Premises to their prior condition. Unless Landlord requires that Tenant remove any such alterations, improvement or addition, any alteration, addition or improvement to the Premises, except movable furniture and trade fixtures not affixed to the Premises, shall become the property of Landlord upon termination of the Lease and shall remain upon and be surrendered with the Premises at the termination of this Lease. Without limiting the generality of the foregoing, all heating, lighting, electrical (including all wiring, conduit, outlets, drops, buss ducts, main and subpanels), air conditioning, partitioning, window coverings, and carpet installations made by Tenant regardless of how affixed to the Premises, together with all other additions, alterations and improvements that have become an integral part of the Building, shall be and become the property of the Landlord upon termination of the Lease, and shall not be deemed trade fixtures, and shall remain upon and be surrendered with the Premises at the termination of this Lease. If, during the Lease Term hereof, any alteration, addition or change of any sort to all or any portion of the Premises is required by law, regulation, ordinance or order of any public agency, due to Tenant's use, occupancy, or alterations, Tenant shall promptly make the same at its sole cost and expense. 12. Acceptance of the Premises. By entry and taking possession of the Premises pursuant to this Lease, Tenant accepts the Premises in their condition existing as of the date of such entry. Tenant acknowledges that neither the Landlord nor Landlord's agents has made any representation or warranty as to the suitability of the Premises to the conduct of Tenant's business. Any agreements, warranties or representations not expressly contained herein shall in no way bind either Landlord or Tenant, and Landlord and Tenant expressly waive all claims for damages by reason of any statement, representation, warranty, promise or agreement, if any, not contained in this Lease. This Lease constitutes the entire understanding between the parties hereto and no addition to, or modification of, any term or provision of this Lease shall be effective until set forth in a writing signed by both Landlord and Tenant. 13. Default. A. Events of Default. A breach of this Lease shall exist if any of the following events (hereinafter referred to as "Event of Default) shall occur: 1. Default in the payment when due of any Monthly Installment or other payment required to be made by Tenant hereunder, where such default shall not have been cured within five (5) days after written notice of such default is given to Tenant; 2. Tenant's failure to perform any other term, covenant or condition contained in this Lease where such failure shall have continued for thirty (30) days after written notice of such failure is given to Tenant; provided that Tenant shall not 9 10 be deemed to be in default if such default is incapable of cure within said period and Tenant has commenced to complete the cure of such default within said thirty (30) day period and is proceeding diligently; 3. Tenant's vacating or abandonment of the Premises without the payment of rent; 4. Tenant's assignment of its assets for the benefit of its creditors: 5. The sequestration of, attachment of or execution on, any substantial part of the property of Tenant or on any property essential to the conduct of Tenant's business shall have occurred and Tenant shall have failed to obtain a return or release of such property within thirty (30) days thereafter, or prior to sale pursuant to such sequestration, attachment or levy, whichever is earlier; 6 Tenant or any guarantor of Tenant's obligations hereunder shall commence any case, proceeding or other action seeking reorganization, arrangement, adjustment, liquidation, dissolution or composition of it or its debts under any law relating to bankruptcy, insolvency, reorganization or relief of debtors, or seek appointment of a receiver, trustee, custodian, or other similar official for it or for all or any substantial part of its property and such proceeding is not terminated within sixty (60) days; 7. Tenant or any such guarantor shall take any corporate action to authorize any of the actions set forth in Clause 6 above; or 8. Any case, proceeding or other action against Tenant or any guarantor of Tenant's obligations hereunder shall be commenced seeking to have an order for relief entered against it as debtor, or seeking reorganization, arrangement, adjustment, liquidation, dissolution or composition of it or its debts under any law relating to bankruptcy, insolvency, reorganization or relief of debtors, or seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its property, and such case, proceeding or other action (i) results in the entry of an order for relief against it which is not fully stayed within seven (7) business days after the entry thereof or (ii) remains undismissed for a period of sixty (60) days. B. Remedies. Upon any Event of Default, Landlord shall have the following remedies, in addition to all other rights and remedies provided by law, to which Landlord may resort cumulatively, or in the alternative: 1. Recovery of Rent. Landlord shall be entitled to keep this Lease in full force and effect (whether or not Tenant shall have abandoned the Premises) and to enforce all of its rights and remedies under this Lease, including the right to recover rent and other sums as they become due, plus interest at the Permitted Rate (as defined in Paragraph 31 below) from the due date of each installment of rent or other sum until paid. 2. Termination. Landlord may terminate this Lease by giving Tenant written notice of termination. On the giving of the notice all of Tenant's rights in the Premises and the Building and Parcel shall terminate. Upon the giving of the notice of 10 11 termination, Tenant shall surrender and vacate the Premises in the condition required by Paragraph 32, and Landlord may re-enter and take possession of the Premises and all the remaining improvements or property and eject Tenant or any of Tenant's subtenants, assignees or other person or persons claiming any right under or through Tenant or eject some and not others or eject none. This Lease may also be terminated by a judgment specifically providing for termination. Any termination under this paragraph shall not release Tenant from the payment of any sum then due Landlord or from any claim for damages or rent previously accrued or then accruing against Tenant. In no event shall any one or more of the following actions by Landlord constitute a termination of this Lease: a. maintenance and preservation of the Premises; b efforts to relet the Premises; c appointment of a receiver in order to protect Landlord's interest hereunder; d consent to any subletting of the Premises or assignment of this Lease by Tenant, whether pursuant to provisions hereof concerning subletting and assignment or otherwise; or e. any other action by Landlord or Landlord's agents intended to mitigate the adverse effects from any breach of this Lease by Tenant. 3. Damages. In the event this Lease is terminated pursuant to Subparagraph 13.B.2 above, or otherwise, Landlord shall be entitled to damages in the following sums: a. the worth at the time of award of the unpaid rent which has been earned at the time of termination; plus b. the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; plus c. the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided; and d. any other amount necessary to compensate Landlord for all detriment proximately caused by Tenant's failure to perform Tenant's obligations under this Lease, or which in the ordinary course of things would be likely to result therefrom including, without limitation, the following: (i) expenses for cleaning, repairing or restoring the Premises; (ii) expenses for altering, remodeling or otherwise improving the Premises for the purpose of reletting, including installation of leasehold improvements (whether such installation be funded by a 11 12 reduction of rent, direct payment or allowance to the succeeding lessee, or otherwise); (iii) real estate broker's fees, advertising costs and other expenses of reletting the Premises; (iv) costs of carrying the Premises such as taxes and insurance premiums thereon, utilities and security precautions; (v) expenses in retaking possession of the Premises; and (vi) attorneys' fees and court costs.; e. The "worth at the time of award" of the amounts referred to in Subparagraphs (a) and (b) of this paragraph, is computed by allowing interest at the Permitted Rate. The worth at the time of award" of the amounts referred to in Subparagraph (c) of this Paragraph is computed by discounting such amount at the discount rate of the Federal Reserve Board of San Francisco at the time of award plus one percent (1%). The term "rent" as used in this Paragraph shall include all sums required to be paid by Tenant to Landlord pursuant to the terms of this Lease. 14. Destruction. In the event that any portion of the Premises are destroyed or damaged by an uninsured peril, Landlord or Tenant may, upon written notice to the other, given within thirty (30) days after the occurrence of such damage or destruction, elect to terminate this Lease; provided, however, that either party may, within thirty (30) days after receipt of such notice, elect to make any required repairs and/or restoration at such party's sole cost and expenses, in which event this Lease shall remain in full force and effect, and the party having made such election to restore or repair shall thereafter diligently proceed with such repairs and/or restoration. In the event the Premises are damaged or destroyed from any insured peril to the extent of ninety percent (90%) or more of the then replacement cost of the Premises, Landlord may, upon written notice to Tenant, given within thirty (30) days after the occurrence of such damage or destruction, elect to terminate this Lease. If Landlord does not give such notice in writing within such period, Landlord shall be deemed to have elected to rebuild or restore the Premises, in which event Landlord shall, at its expense promptly rebuild or restore the Premises to their condition prior to the damage or destruction and Tenant shall pay to Landlord upon commencement of reconstruction the amount of any deductible from the insurance policy. In the event the Premises are damaged or destroyed from any insured peril to the extent of less than ninety percent (90%) of the then replacement cost of the Premises, Landlord shall, at Landlord's expense, promptly rebuild or restore the Premises to their condition prior to the damage or destruction and Tenant shall pay to Landlord upon commencement of reconstruction the amount of any deductible from the insurance policy. In the event that, pursuant to the foregoing provisions, Landlord is to rebuild or restore the Premises, Landlord shall, within thirty (30) days after the occurrence of such damage or destruction, provide Tenant with written notice of the time required for such repair or restoration. If such period is longer than one hundred eighty (180) days from the issuance of a building permit, Tenant may, within thirty (30) days after receipt of Landlord's notice, elect to terminate the Lease by giving written notice to Landlord of such election, whereupon the Lease shall immediately terminate. The period of time for Landlord to complete the repair or restoration shall be extended for delays caused by the fault or neglect of Tenant or because of acts of God, acts of publication, labor disputes, strikes, fires, freight embargoes, rainy or stormy weather, inability to obtain materials, supplies or fuels, acts of contractors or subcontractors, or delay of contractors or subcontractors due to such causes, or other contingencies beyond the 12 13 control of Landlord. Landlord's obligation to repair or restore the Premises shall not include restoration of Tenant's trade fixtures, equipment, merchandise, or any improvements, alterations or additions made by Tenant to the Premises. Unless this Lease is terminated pursuant to the foregoing provisions, this Lease shall remain in full force and effect; provided, however, that during any period of repairs or restoration, rent and all other amounts to be paid by Tenant on account of the Premises and this Lease shall be abated in proportion to the area of the Premises rendered not reasonably suitable for the conduct of Tenant's business thereon. Tenant hereby expressly waives the provisions of Section 1932, Subdivision 2 and Section 1933, Subdivision 4 of the California Civil Code. 15. Condemnation. A. Definition of Terms. For the purposes of this Lease, the term (1) "Taking" means a taking of the Premises or damage to the Premises related to the exercise of the power of eminent domain and includes a voluntary conveyance, in lieu of court proceedings, to any agency, authority, public utility, person or corporate entity empowered to condemn property; (2) "Total Taking" means the taking of the entire Premises or so much of the Premises as to prevent or substantially impair the use thereof by Tenant for the uses herein specified; provided, however, in no event shall a Taking of less than ten percent (10%) of the Premises be deemed a Total Taking; (3) "Partial Taking" means the taking of only a portion of the Premises which does not constitute a Total Taking; (4) "Date of Taking" means the date upon which the title to the Premises, or a portion thereby, passes to and vests in the condemnor or the effective date of any order for possession if issued prior to the date title vests in the condemnor; and (5) "Award" means the amount of any award made, consideration paid, or damages ordered as a remit of a Taking. B. Rights. The parties agree that in the event of a Taking all rights between them or in and to an Award shall be as set forth herein and Tenant shall have no right to any Award except as set forth herein. C. Total Taking. In the event of a Total Taking during the term hereof (1) the rights of Tenant under the Lease and the leasehold estate of Tenant in and to the Premises shall cease and terminate as of the Date of Taking; (2) Landlord shall refund to Tenant any prepaid rent; (3) Tenant shall pay Landlord any rent or charges due Landlord under the Lease, each prorated as of the Date of Taking; (4) Tenant shall receive from Landlord those portions of the Award attributable to trade fixtures of Tenant and for moving expenses of Tenant; and(S) the remainder of the Award shall be paid to and be the property of Landlord. D. Partial Taking. In the event of a Partial Taking during the term hereof (1) the rights of Tenant under the Lease and leasehold estate of Tenant in and to the portion of the Premises taken shall cease and terminate as of the Date of Taking; (2) from and after the Date of Taking the Monthly installment of rent shall be an amount equal to the product obtained by multiplying the Monthly Installment of rent immediately prior to the Taking by a fraction, the numerator of which is the number of square feet contained in the Premises after the Taking and the denominator of which is the number of square feet contained in the Premises prior to the Taking; (3) Tenant shall receive from the Award the portions of the Award attributable to trade fixtures of Tenant; and (4) the remainder of the Award shall be paid to and be the property of Landlord. 13 14 16. Mechanics' Lien. Tenant shall (A) pay for all labor and services performed for, materials used by or furnished to, Tenant or any contractor employed by Tenant with respect to the Premises; (B) indemnify, defend, protect and hold Landlord and the Premises harmless and free from any liens, claims, liabilities, demands, encumbrances, or judgments created or suffered by reason of any labor or services performed for, materials used by or furnished to, Tenant or any contractor employed by Tenant with respect to the Premises; (C) give notice to Landlord in writing five (5) days prior to employing any laborer or contractor to perform services related to, or receiving materials for use upon the Premises; and ([)) permit Landlord to post a notice of no responsibility in accordance with the statutory requirements of California Civil Code Section 3094 or any amendment thereof. In the event Tenant is required to post an improvement bond with a public agency in connection with the above, Tenant agrees to include Landlord as an additional obligee. 17. Inspection of the Premises. Tenant shall permit Landlord and its agents to enter the Premises upon written notice thereof at least twenty-four (24) hours in advance (except in case of emergency) at any reasonable time for the purpose of inspecting the same, posting a notice of non-responsibility for alterations, additions or repairs; and at any time within one hundred eighty (180) days prior to expiration of this Lease, to place upon the Premises, ordinary "For Lease" or "For Sale" signs. 18. Compliance with Laws. Tenant shall, at its own cost, comply with all of the requirements of all municipal, county, state and federal authorities now in force, or which may hereafter be in force, pertaining to Tenant's use and occupancy of the Premises, and shall faithfully observe all municipal, county, state and federal law, statutes or ordinances now in force or which may hereafter be in force. The judgment of any court of competent jurisdiction or the admission of Tenant in any action or proceeding against Tenant, whether Landlord be a party thereto or not, that Tenant has violated any such ordinance or statute in the use and occupancy of the Premises shall be conclusive of the fact that such violation by Tenant has occurred. 19. Subordination. The following provisions shall govern the relationship of this Lease to any, underlying lease, mortgage or deed of trust which now or hereafter affects the Premises, the Building and/or the Parcel, or Landlord's interest or estate therein (the "Project") and any renewal, modification, consolidation, replacement, or extension thereof (a "Security instrument"). A. Priority. This Lease is subject and subordinate to Security Instruments existing as of the Commencement Date. However, if any Lender so requires, this Lease shall become prior and superior to any such Security instrument. B. Subsequent Security Instruments. At Landlord's election, this Lease shall become subject and subordinate to any Security Instrument created after the Commencement Date. Notwithstanding such subordination, Tenant's right to quiet possession of the Premises shall not be disturbed so long as Tenant is not in default and performs all of its obligations under this Lease, unless this Lease is otherwise terminated pursuant to its terms. C. Documents. Tenant shall execute any document or instrument reasonably required by Landlord or any Lender to make this Lease either prior or subordinate to a Security Instrument, which may include such other matters as the Lender customarily requires in connection with such agreements, including provisions that the Lender not be liable for 14 15 (1) the return of the Security Deposit unless the Lender receives it from Landlord, and (2) any defaults on the part of Landlord occurring prior to the time that the Lender takes possession of the Project in connection with the enforcement of its Security Instrument. Tenant's failure to execute any such document or instrument within ten (10) days after written demand therefor shall constitute a default by Tenant or, at Landlord's option, Landlord may execute such documents on behalf of Tenant as Tenant's attorney-in-fact. Tenant does hereby make, constitute and irrevocably appoint Landlord as Tenant's attorney-in-fact to execute such documents in accordance with this Paragraph. D. Tenant's Attornment. Tenant shall attorn (1) to any purchaser of the Premises at any foreclosure sale or private sale conducted pursuant to any Security Instrument encumbering the Project; (2) to grantee or transferee designated in any deed given in lieu of foreclosure; or (3) to the lessor under any underlying ground lease should such ground lease be terminated. E. Lender. The term "Lender" shall mean (1) any beneficiary, mortgagee, secured party, or other holder of any deed of trust, mortgage, or other written security device or agreement affecting the Project; and (2) any lessor under any underlying lease under which Landlord holds its interest in the Project. 20. Holding Over. This Lease shall terminate without further notice at the expiration of the Lease Term. Any holding over by Tenant after expiration shall not constitute a renewal or extension or give Tenant any rights in or to the Premises except as expressly provided in this Lease. Any holding over after the expiration with the consent of Landlord shall be construed to be a tenancy from month to month, at one hundred fifty percent (150%) of the monthly rent for the last month of the Lease Term, and shall otherwise be on the terms and conditions herein specified insofar as applicable. 21. Notices. Any notice required or desired to be given under this Lease shall be in writing with copies directed as indicated below and shall be personally served or given by mail. Any notice given by mail shall be deemed to have been given when forty eight (48) hours have elapsed from the time such notice was deposited in the United States mails, certified and postage prepaid, addressed to the party to be served with a copy as indicated herein at the last address given by that party to the other party under the provisions of this Paragraph. At this date of execution of this Lease, the address of Landlord is: 511 Division Street Campbell, CA 95008 and the address of Tenant is: 1325 Chesapeake Terrace Sunnyvale, CA 94089 After the Commencement Date, the address of Tenant will be at the Premises. 22. Attorneys' Fees. In the event either party shall bring any action or legal proceeding for damages for any alleged breach of any provision of this Lease, to recover rent or possession of the Premises, to terminate this Lease, or to enforce, protect or establish any term or covenant of this Lease or right or remedy of either party, the prevailing party shall be entitled to recover as a part 15 16 of such action or proceeding, reasonable attorneys' fees and court costs, including attorneys' fees and costs for appeal, as may be fixed by the court or jury. The term "prevailing party" shall mean the party who received substantially the relief requested, whether by settlement, dismissal, summary judgment, judgment, or otherwise. 23. Nonassignment. A. Landlord's Consent Required. Except for "Permitted Transfers" as defined below, Tenant's interest in this Lease is not assignable, by operation of law or otherwise, nor shall Tenant have the right to sublet the Premises, transfer any interest of Tenant therein or permit any use of the Premises by another party, without the prior written consent of Landlord to such assignment, subletting, transfer or use, which consent Landlord agrees not to withhold unreasonably subject to the provisions of Subparagraph B below. A consent to one assignment, subletting, occupancy or use by another party shall not be deemed to be a consent to any subsequent assignment, subletting, occupancy or use by another party. Any assignment or subletting without such consent shall be void and shall, at the option of Landlord, terminate this Lease. Landlord's waiver or consent to any assignment or subletting hereunder shall not relieve Tenant from any obligation under this Lease unless the consent shall so provide. A Permitted Transfer is any merger, consolidation, reorganization or acquistion, so long as the surviving entity tenant's net worth is equal to or greater than Tenant's at the time of the merger, consolidation, reorganization or acquistion. B. Transferee Information Required. If Tenant desires to assign its interest in this Lease or sublet the Premises, or transfer any interest of Tenant therein, or permit the use of the Premises by another party hereinafter collectively referred to as a "Transfer"), Tenant shall give Landlord at least ten (10) days prior written notice of the proposed Transfer and of the terms of such proposed Transfer, including, but not limited to, the name and legal composition of the proposed transferee, a financial statement of the proposed transferee, the nature of the proposed transferee's business to be carried on in the Premises, the payment to be made or other consideration to be given to Tenant on account of the Transfer, and such other pertinent information as may be requested by Landlord, all in sufficient detail to enable Landlord to evaluate the proposed Transfer and the prospective transferee. It is the intent of the parties hereto that this Lease shall confer upon Tenant only the right to use and occupy the Premises, and to exercise such other rights as are conferred upon Tenant by this Lease. The parties agree that this Lease is not intended to have a bonus value nor to serve as a vehicle whereby Tenant may profit by a future Transfer of this Lease or the right to use or occupy the Premises as a result of any favorable terms contained herein, or future changes in the market for leased space. It is the intent of the parties that any such bonus value that may attach to this Lease shall be and remain the exclusive property of Landlord, to the extent as set forth in Paragraph 23.B(2) below. Accordingly, in the event Tenant seeks to Transfer its interest in this Lease or the Premises, Landlord shall have the following options, which may be exercised at its sole choice without limiting Landlord in the exercise of any other right or remedy which Landlord may have by reason of such proposed Transfer: (1) Should Tenant assign or sublease all of the Premises during the Option Term, as defined in Paragraph 38 below, Landlord may elect to terminate this Lease effective as of the proposed effective date of the proposed Transfer and release Tenant from any further 16 17 liability hereunder accruing after such termination date by giving Tenant written notice of such termination within twenty (20) days after receipt by Landlord of Tenant's notice of intent to transfer as provided above. If Landlord makes such election to terminate this Lease, Tenant shall surrender the Premises, in accordance with Paragraph 34, on or before the effective termination date; or (2) Landlord may consent to the proposed Transfer on the condition that Tenant agrees to pay to Landlord, as additional rent, seventy-five percent (75%) of any and all rents or other consideration for the Premises (including key money) received by Tenant from the transferee by reason of such Transfer in excess of the rent payable by Tenant to Landlord under this Lease "Transfer Rent" (less any reasonable and documented brokerage commissions or advertising expenses incurred by Tenant in connection with the Transfer and, during the initial six (6) year lease Term only, less an amount to cover Tenant's Tenant Improvement Costs set forth in Paragraph 2 above, and which shall be calculated as follows:. Seven Hundred Thousand Dollars ($700,000.00) shall be deducted from the total cost of the Tenant Improvements, including soft costs, and the remainder shall be divided by 98,836 (square feet). The resulting quotient shall be divided by seventy-two (72) (months). The end result of this calculation is the amount per square foot to be deducted from the Transfer Rent from the effective date of a Transfer through the last month of said initial Lease Term. Upon completion of the Tenant Improvements, this Lease shall be amended to establish the exact amount which may be deducted) Tenant expressly agrees that the foregoing is a reasonable condition for obtaining Landlord's consent to any Transfer; or (3) Landlord may reasonably withhold its consent to the proposed Transfer. 24. Successors The covenants and agreements contained in this Lease shall be binding on the parties here to and on their respective heirs, successors and assigns (to the extent the Lease is assignable). 25. Mortgagee Protection. In the event of any default on the part of Landlord, Tenant will give notice by registered or certified mail to any beneficiary of a deed of trust or mortgagee of a mortgage encumbering the Premises, whose address shall have been furnished to Tenant, and shall offer such beneficiary or mortgagee a reasonable opportunity to cure the default, including time to obtain possession of the Premises by power of sale or judicial foreclosure, if such should prove necessary to effect a cure. 26. Landlord Loan or Sale. Tenant agrees promptly following request by Landlord to (A) execute and deliver to Landlord any documents, including estoppel certificates presented to Tenant by Landlord, (i) certifying that this Lease is unmodified and in full force and effect and the date to which the rent and other charges are paid in advance, if any, and (ii) acknowledging that there are not, to Tenant's knowledge, any uncured defaults on the part of Landlord hereunder, and (iii) evidencing the status of the Lease as may be required either by a lender making a loan to Landlord to be secured by a deed of trust or mortgage covering the Premises or a purchaser of the Premises from Landlord and (B) to deliver to Landlord the financial statement of Tenant with an opinion of a certified public accountant, including a balance sheet and profit and loss statement, for the last completed fiscal year all prepared in accordance with generally accepted accounting principles consistently applied. If Tenant fails to deliver an estoppel certificate within five (5) business days following such request from Landlord, Tenant shall be deemed to have appointed 17 18 Landlord as Tenant's attorney-in-fact, in Tenant's name, place and stead, to execute such estoppel certificate. At the time of executing this Lease, it is understood that Landlord is finalizing a loan secured by the Premises and upon the request of lender, Tenant agrees to execute a Tenant Estoppel and Subordination, Attournment and Non-Disturbance Agreement in the forms as attached hereto as Exhibit "C" and made a part hereof 27. Surrender of Lease Not Merger. The voluntary or other surrender of this Lease by Tenant, or a mutual cancellation thereof, shall not work a merger and shall' at the option of Landlord, terminate all or any existing subleases or subtenants, or operate as an assignment to Landlord of any or all such subleases or subtenants. 28. Waiver. The waiver by Landlord or Tenant of any breach of any term' covenant or condition herein contained shall not be deemed to be a waiver of any preceding or succeeding breach of the same or any other covenant or condition herein contained. 29. General. A. Captions. The captions and paragraph headings used in this Lease are for the purposes of convenience only. They shall not be construed to limit or extend the meaning of any part of this Lease, or be used to interpret specific sections. The word (s) enclosed in quotation marks shall be construed as defined terms for purposes of the Lease. As used in this Lease, the masculine, feminine and neuter and the singular or plural number shall each be deemed to include the other whenever the context so requires. B. Definition of Landlord. The term "Landlord" as used in this Lease, so far as the covenants or obligations on the part of Landlord are concerned, shall be limited to mean and include only the owner at the time in question of the fee title of the Premises, and in the event of any transfer or transfers of the title of such fee, the Landlord herein named (and in case of any subsequent transfers or conveyances, the then grantor) shall after the date of such transfer or conveyance be automatically freed and relieved of all liability with respect to performance. of any covenants or obligations on the part of Landlord contained in this Lease, thereafter to be performed; provided that any fluids in the hands of Landlord or the then grantor at the time of such transfer, in which Tenant has an interest, shall be turned over to the grantee. It is intended that the covenants and obligations contained in this Lease on the part of Landlord shall, subject as aforesaid, be binding upon each Landlord, its heirs, personal representatives, successors and assigns only during its respective period of ownership. C. Time of Essence. Time is of the essence for the performance of each term, covenant and condition of this Lease. D. Serverability. In case any one or more of the provisions contained herein, except for the payment of rent, shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Lease, but this Lease shall be construed as if such invalid, illegal or unenforceable provision had not been contained herein. This Lease shall be construed and enforced in accordance with the laws of the State of California. 18 19 E Joint and Several Liability. If Tenant is more than one person or entity, each such person or entity shall be jointly and severally liable for the obligations of Tenant hereunder. F. Law. The term "law" shall mean any judicial decision, statute, constitution, ordinance, resolution, regulation, rule, administrative order, or other requirement of any government agency or authority having jurisdiction over the parties to this Lease or the Premises or both, in effect at the Commencement Date of this Lease or any time during the Lease Term, including, without limitation, any regulation, order, or policy of any quasi-official entity or body (e.g., board of fire examiners, public utility or special district). 30. Sign. Tenant shall not place or permit to be placed any sign or decoration on the land or the exterior of the Building without the prior written consent of Landlord, which consent shall not be unreasonably withheld, provided such sign or decoration has been approved by the appropriate agency of the City of Sunnyvale. Tenant, upon written notice by Landlord, shall immediately remove any sign or decoration that Tenant has placed or permitted to be placed on the land or the exterior of the Building without such prior written consent of Landlord, and if Tenant fails to so remove such sign or decoration within five (5) days after Landlord's written notice, Landlord may enter upon the Premises and remove said sign or decoration and Tenant agrees to pay Landlord, as additional rent upon demand, the cost of such removal. At the termination of this Lease, Tenant shall remove any sign which it has placed on the Parcel or Building and shall repair any damage caused by the installation or removal of such sign. 31. Interest on Past Due Obligations. Any Monthly Installment of rent or any other sum due from Tenant under this Lease (except for any late charge) which is received by Landlord after the date the same is due shall bear interest from said due date until paid, at an annual rate equal to the prime rate then being charged by Bank of America, N.T.S.A., plus one percent (1%). Payment of such interest shall not excuse or cure any default by Tenant. In addition, Tenant shall pay all costs and attorneys' fees incurred by Landlord in collection of such amounts. 32. Surrender of the Premises. On the last day of the term hereof, or on the sooner termination of this Lease, Tenant shall surrender the Premises to Landlord in their condition existing as of the Commencement Date of this Lease, subject to Paragraph 11 above, ordinary wear and tear excepted, with all originally painted interior walls washed, and other interior walls cleaned, and repaired or replaced, all carpets shampooed and cleaned, the air conditioning and heating equipment serviced and repaired by a reputable and licensed service firm, all floors cleaned and waxed, all to the reasonable satisfaction of Landlord. Tenant shall remove all of Tenant's personal property and trade fixtures from the Premises, and all property not so removed shall be deemed abandoned by Tenant. Tenant, at its sole cost shall repair any damage to the Premises caused by the removal of Tenant's personal property, machinery and equipment, which repair shall include, without limitation, the patching and filling of holes and repair of structural damage. Notwithstanding the above, Tenant shall not be obligated to replace the Building roof upon surrender of the Premises, provided Tenant has maintained the roof pursuant to Paragraph 10.A above, and the roof is watertight upon said surrender. If the Premises are not so surrendered at the termination of this Lease, and Landlord has given Tenant thirty (30) days' written notice that it is in negotiations or has negotiated a lease with a third party, Tenant shall indemnify, defend, protect and hold Landlord harmless from and against loss or liability resulting from delay by Tenant in so surrendering the Premises including without limitation, any claims made by any succeeding tenant or losses to Landlord due to lost opportunities to lease to succeeding tenants. No third party shall be a beneficiary with respect to the obligations of Tenant under the preceding sentence. 19 20 33. Authority. The undersigned parties hereby warrant that they have proper authority and are empowered to execute this Lease on behalf of Landlord and Tenant, respectively. 34. Public Record. This Lease is made subject to all matters of public record affecting title to the property of which the Premises are a part Tenant shall abide by and comply with all such matters of public record now or hereafter affecting the Premises and any amendment thereof 35. Brokers. Tenant represents and warrants to Landlord that it has not dealt with any broker respecting this transaction other than Cornish & Carey Oncor International and Park Place and hereby agrees to indemnify and hold Landlord harmless from and against any brokerage commission or fee, obligation, claim or damage (including attorneys' fees) paid or incurred respecting any broker claiming through Tenant or with which/whom Tenant has dealt. Landlord's exclusive broker for this transaction is Colliers Parrish International, Inc. The broker commission to be paid by Landlord shall be paid one-fourth (1/4th) to Cornish & Carey Oncor International, one-forth (1/4th) to Park Place, and one-half (1/2) to Colliers Parrish International, Inc. per separate agreement. 36. Limitation on Landlord's Liability Tenant, for itself and its successors and assigns (to the extent this Lease is assignable), hereby agrees that in the event of any actual, or alleged, breach or default by Landlord under this Lease that: A. Tenant's sole and exclusive remedy against Landlord shall be as against Landlord's interest in the Building; B. No partner or officer of any partner of Landlord shall be sued or named as a party in a suit or action (except as may be necessary to secure jurisdiction of the partnership); C. No service of process shall be made against any partner of Landlord (except as may be necessary to secure jurisdiction of the partnership); D. No partner of Landlord shall be required to answer or otherwise plead to any service of process; E. No judgment will be taken against any partner of Landlord beyond its interest in the Premises; F. Any judgment taken against any partner of Landlord, except as to its interest in the Premises, may be vacated and set aside at any time nunc pro tunc; G. No writ of execution will ever be levied against the assets of any partner of Landlord beyond its interest in the Premises; H. The covenants and agreements of Tenant set forth in this Section 36 shall be enforceable by Landlord and any partner of Landlord. 37. Hazardous Material. A. Definitions. As used herein, the term "Hazardous Material" shall mean any substance or material which has been determined by any state, federal or local government authority 20 21 to be capable of posing a risk of injury to health, safety or property including all of those materials and substances designated as hazardous or toxic by the Environmental Protection Agency, the California Water Quality Control Board, the Department of Labor, the California Department of Industrial Relations, the Department of Transportation, the Department of Agriculture, the Consumer Product Safety Commission, the Department of Health and Human Services, the Food and Drug Agency or any other governmental agency now or hereafter authorized to regulate materials and substances in the environment. Without limiting the generality of the foregoing, the term "Hazardous Material" shall include all of those materials and substances defined as ."Toxic Materials" in Sections. 66680 through 66685 of Title 22 of the California Code of regulations, Division 4, Chapter 30, as the same shall be amended from time to time. B. Use Restriction. Subject to the terms and conditions set forth herein, Landlord acknowledges that so long as Tenant is under this Lease, Tenant shall be permitted to use and store in the Premises those materials described in Paragraph G below, in the quantities set forth in said Paragraph. Except as specifically allowed in this Lease, Tenant shall not cause or permit and Hazardous Material to be used, stored, generated, discharged, transported to or from, or disposed of in or about the Premises, or any other land or improvements in the vicinity of the Premises. The appearance of any Hazardous Material that is not permitted by this Lease in or about the Premises shall be deemed an Event of Default under Paragraph 13 above. Without limiting the generality of the foregoing, Tenant, at its sole cost' shall comply with all laws relating to the storage, use, generation, transport, discharge and disposal of Hazardous Materials. If the presence of Hazardous Materials on the Premises caused or permitted by Tenant results in contamination of the Premises or any soil, air, ground or surface waters under, through, over, on, in or about the Premises, Tenant, at its expense, shall promptly take all actions necessary to return the Premises and/or the surrounding real and personal property to the condition existing prior to the appearance of such Hazardous Material. Tenant shall defend, protect, hold harmless and indemnify Landlord and its Agents and Lenders with respect to all actions, claims, losses (including, diminution in value of the Premises), fines, penalties, fees, (including, but not limited to, reasonable attorneys' and consultants' fees and costs) costs, damages, liabilities, remediation costs, investigation costs, response costs and other expenses arising out of, resulting from, or caused by any Hazardous Material used, generated discharged, transported to or from, stored, or disposed of by Tenant or its Agents in, on, under, over, through or about the Premises and/or the surrounding real property. Tenant shall not suffer any lien to be recorded against the Premises as a consequence for the disposal of any Hazardous Material on the Premises by Tenant or its Agents, including any so called state, federal or local "super fund" lien related to the "clean up" of any Hazardous Material in, over, on, under through, or about the Premises. C. Compliance. Tenant shall immediately notify Landlord of any inquiry, test, investigation, enforcement proceeding by or against Tenant or the Premises concerning any Hazardous Material. Any remediation plan prepared by or on behalf of Tenant must be submitted to landlord prior to conducting any work pursuant to such plan and prior to submittal to any applicable government authority and shall be subject to Landlord's consent. Tenant acknowledges that Landlord, as the owner of the Property, at its election, shall have the sole right to negotiate, at Tenant's expense, to negotiate, defend, approve and appeal any action taken or order issued with 21 22 regard to any Hazardous Material(s) by any applicable governmental authority. Landlord shall have the right to appoint a consultant, at Tenant's expense, to conduct an investigation to determine whether Hazardous Material(s) are being used, generated, discharged, transported to or from, stored or disposed of in, on, over, through, or about the Premises, in an appropriate and lawful manner. Tenant, at its expense, shall comply with all recommendations of the consultant. Such investigation, negotiation, defense or appeal shall be performed at the sole expense of Landlord, unless such investigation shows that the contamination of the Premises has been caused directly by Tenant or Tenant's agent, employees or invitees D. Assignment and Subletting. It shall not be unreasonable for Landlord to withhold its consent to any proposed assignment or subletting if the proposed assignee's or subtenant's anticipated use of the Premises involves the storage, generation, discharge, transport, use or disposal of any Hazardous Material. E. Surrender. Upon the expiration or earlier termination of the Lease, Tenant, at its sole cost, shall remove all hazardous Materials from the Premises and the surrounding real and personal property caused by Tenant, its agents, employees, or invitees. If Tenant fails to so surrender the Premises, Tenant shall indemnify, protect, defend and hold Landlord harmless from and against all damages resulting from Tenant's failure to surrender the Premises as required by this Paragraph, including, without limitation, any actions, claims, losses, liabilities, fees (including, but not limited to, reasonable attorneys' fees and consultants' fees and costs), fines, costs, penalties, or damages in connection with the condition of the Premises including, without limitation, damages occasioned by the inability to relet the Premises or a reduction in the fair market and/or rental value of the Premises by reason of the existence of any Hazardous Materials in, on, over, under, through or around the Premises. F. Holding Over. If any action of any kind is required to be taken by any governmental authority to clean up, remove, remediate or monitor Hazardous Material (the presence of which is the result of the acts or omissions of Tenant or its Agents) and such action is not completed prior to the expiration or earlier termination of the Lease, Tenant shall be deemed to have impermissibly held over until such time as such required action is completed, and Landlord shall be entitled to all damages directly or indirectly incurred in connection with such holding over, including without limitation, damages occasioned by the inability to relet the Premises or a reduction of the fair market and/or rental value of the Premises. G. Materials. Landlord has provided to Tenant prior to the date of this Lease copies of all reports in Landlord's possession concerning the environmental condition of the Center and the soil and groundwater in on, and about the Premises, which reports are described in Exhibit "B" attached hereto and are herinafter collectively referred to as the "Project Environmental Reports". Tenant may use and store in Premises the following: Write "none" if applicable: "none" ------------------ Materials: Quantity: __________________ ________________________ __________________ ________________________ 22 23 H. Provisions Survive Termination. The provisions of this Paragraph 39 shall survive the expiration or termination of this Lease. I. The provisions of this Paragraph 37 are intended to govern the rights and liabilities of the Landlord and Tenant hereunder respecting Hazardous Materials to the exclusion of any other provisions in this Lease that might otherwise be deemed applicable. The provisions of this Paragraph 37 shall be controlling with respect to any provisions in this Lease that are inconsistent with this Paragaph 37. 38. Option to Extend. Provided that Tenant is not in default under this Lease at the time of exercise of this option or at the time of termination of the then existing term of this Lease, as the case may be, Tenant shall have one (1) option to extend the term of this Lease for a period of four (4) years (the "Option Term"). Said option shall be exercised only by written notice delivered to Landlord not later than six (6) months prior to the expiration date of the then existing term of this Lease. In all respects, the terms, covenants and conditions of this Lease shall remain unchanged during the Option Term, except that the Monthly Installment of rent payable during the Option Term shall be as follows: Months 1-24 $113,662.00 Months 25-48 $123,545.00 There shall be no further options at the expiration of the above four (4) year Option Term. 39. Early Termination. Tenant shall have the right to terminate this Lease at the end of the fifth (5th) year of the Lease Term by doing all of the following on or before the end of the fifty-fourth (54th) month of the Lease Term: (a) Giving Landlord written notice of Tenant's election to terminate this Lease on the last day of the fifth (5th) year of the Lease Term (the "Early Termination Date"); and (b) Paying to Landlord, as a lease termination payment, a sum equal to the total Monthly Installments of rent and Additional Rent that would have been payable under the Lease during the first six (6) months of the sixth (6th) year of the Lease Term had the Lease not been terminated. If Tenant so elects to terminate the Lease, Tenant shall pay all Monthly Installments of rent and Additional Rent accruing under the Lease through the Early Termination Date and shall surrender the Premises to Landlord on the Early Termination Date. 40. Condition Precedent. Tenant understands Landlord is under contract to purchase the Premises, but does not currently own the Premises. Accordingly, this Lease and the obligations of Landlord and Tenant hereunder are conditioned upon Landlord acquiring fee title to the Premises. Furthermore, Tenant shall have until 3:00 p.m., August 2, 1996, to do a structural inspection of the Premises and any reasonable testing to determine the structural integrity and latent defects, if any, of the Premises and if Tenant discovers defects that will cost more than One Hundred Thousand and No/100ths Dollars ($100,000.00) to correct, Tenant may cancel this Lease 23 24 anytime before 3:00 p.m., August 2, 1996, by giving Landlord written notice of such cancellation, unless Landlord elects to correct the defects at its expense. IN WITNESS WHEREOF, the parties have executed this Agreement on the dates set forth below. TENANT: LANDLORD: SBC&D CO., INC. ARBOR SOFTWARE CORPORATION, A CALIFORNIA CORPORATION By: /s/ By: /S/ STEPHEN IMBLER DATED: 7/14/96 DATED: 7/16/96 24 25 EXHIBIT "A" LEGAL DESCRIPTION All that certain property situate in the City of Sunnyvale, County of Santa Clara State of California described as follows: Parcel 8, as shown on that Parcel Map filed for record in the office of the Recorder of the County of Santa Clara, State of California on July 18, 1978, in Book 423 of Maps, page(s) 13. ARB No: 1104-23.02.03 25 26 EXHIBIT "B" PROJECT ENVIRONMENTAL REPORTS 1. PHASE I Environmental Site Assessment and Limited Asbestos Survey dated October 1993, performed by Fugro-McClelland (West), Inc. 2. Letter dated June 26, 1996, regarding Phase I Environmental Site Assessment, performed by E2C, Inc. 3. Phase I Environmental Site Assessment dated July 2, 1996, by E2C, Inc. 26 27 FIRST AMENDMENT This First Amendment to Lease ("First Amendment") is made by and between ARBOR SOFTWARE CORPORATION, a California Corporation ("Tenant"), and SBC&D CO., INC., a California corporation or nominee ("Landlord"), as of the date set forth below with reference to the following facts: A. By Lease Agreement dated July 16, 1996 (the "Lease"), Landlord has leased to Tenant certain property commonly known as 1344 Crossman Avenue, Sunnyvale, California. B. Landlord and Tenant desire to amend the Lease to acknowledge their mutual understanding as provided below. NOW THEREFORE, for good and valuable consideration, receipt of which is hereby acknowledged, Landlord and Tenant hereby agree as follows: I. The correct name of Tenant is Arbor Software Corporation, a Delaware Corporation. 2. SBC&D CO., Inc. has assigned its interest in the Lease to TD Drive Associates, a California general partnership. MI other terms and conditions of the Lease shall remain the same and in full force and effect. AS entered into this 25th day of October 1996. LANDLORD: TENANT: SBC&D CO., INC., ARBOR SOFTWARE CORPORATION, a California Corporation or nominee a Delaware Coroporation By: /s/ By: /s/ Stephen Imbler Title: RVP Title: Chief Financial Officer --- Dated 10/25/96 Dated: 10/24/96 -------- TD DRIVE ASSOCIATES, a California general partnership BY: Scott Trobbe Title: General Partner Dated: 10/15/96 27 EX-11.1 6 STATEMENT RE: COMPUTATION OF NET INCOME PER SHARE 1 Exhibit 11.1 STATEMENT REGARDING COMPUTATION OF NET INCOME PER SHARE (1) (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED MARCH 31, ======================================= 1997 1996 1995 ---------- ---------- ---------- Net income...................................................... $ 5,826 $ 2,878 $ 374 ========== ========== ========== Weighted average shares outstanding: Common stock.................................................... 10,997 5,933 2,190 Common stock issuable upon exercise of stock options............ 732 505 762 Convertible Preferred Stock (2)................................. -- 3,506 5,837 Common stock issuable upon exercise of stock options granted.... subsequent to March 31, 1994 through November 6, 1995 (2).... -- 536 893 Warrants........................................................ -- 22 36 ---------- ---------- ---------- Weighted average common shares and equivalents.................. 11,729 10,502 9,718 ---------- ---------- ---------- Net income per share............................................ $ 0.50 $ 0.27 $ 0.04 ========= ========== ==========
(1) This exhibit should be read in conjunction with Note 1 of Notes to Consolidated Financial Statements. (2) Stock options granted (using the treasury stock method and the initial public offering price of $17 per share) and Convertible Preferred Stock (using the if-converted method) have been included in the calculation of common and common equivalent shares as if they were outstanding for all periods presented through November 6, 1995, the effective date of the Company's initial public offering. EX-22.1 7 LIST OF SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 22.1 SUBSIDIARIES OF THE REGISTRANT 1. Arbor Software International Corporation, incorporated in Delaware. 2. Arbor Software, LTD, UK 3. Arbor Software, SARL, France 4. Arbor Software, GmbH, Germany EX-23.1 8 CONSENT OF PRICE WATERHOUSE LLP 1 Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 33-99072) of Arbor Software Corporation of our report dated April 18, 1997 appearing on page 23 of this Annual Report on Form 10-K. PRICE WATERHOUSE LLP San Jose, California June 26, 1997 EX-27.1 9 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ARBOR SOFTWARE CORPORATION CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR MAR-31-1997 APR-01-1996 MAR-31-1997 5,647 23,204 13,660 (783) 0 46,982 15,423 3,999 59,589 16,738 0 0 0 11 42,561 59,589 47,383 47,383 0 4,584 35,277 0 (242) 8,963 (3,137) 7,522 0 0 0 5,826 0.50 0
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