e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Fiscal Year Ended
April 30, 2008
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission file number:
001-33923
ArcSight, Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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52-2241535
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(State or Other Jurisdiction
of
Incorporation or Organization)
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(I.R.S. Employer
Identification No.)
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5 Results
Way
Cupertino, California 95014
(Address
of Principal Executive Offices, including Zip
Code)
(408) 864-2600
(Registrants Telephone
Number, including Area Code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, par value $0.00001 per share
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NASDAQ Global Market
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Securities
registered pursuant to Section 12(g) of the Act:
None
(Title
of Class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405) is not contained herein, and will not be
contained, to the best of registrants 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. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer þ
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of October 31, 2007, the last business day of the
registrants most recently completed second fiscal quarter,
the registrants common stock was not listed on any
exchange or over-the-counter market. The registrants
common stock began trading on The NASDAQ Global Market on
February 14, 2008.
The number of outstanding shares of the registrants common
stock as of July 15, 2008 was 31,050,806.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for registrants
2008 Annual Meeting of Stockholders to be held on
September 25, 2008 and to be filed pursuant to
Regulation 14A within 120 days after registrants
fiscal year ended April 30, 2008 are incorporated by
reference into Part III of this Annual Report on
Form 10-K.
FISCAL
2008 ANNUAL REPORT ON
FORM 10-K
TABLE OF
CONTENTS
Forward
Looking Statements
The information in this Annual Report on
Form 10-K
contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended
(Securities Act), and Section 21E of the
Securities Exchange Act of 1934, as amended (Exchange
Act). Such statements are based upon current expectations
that involve risks and uncertainties. Any statements contained
herein that are not statements of historical facts may be deemed
to be forward-looking statements. For example, words such as
may, will, should,
estimates, predicts,
potential, continue,
strategy, believes,
anticipates, plans, expects,
intends and similar expressions are intended to
identify forward-looking statements. Our actual results and the
timing of certain events may differ significantly from the
results discussed in the forward-looking statements. Factors
that might cause or contribute to such differences include, but
are not limited to, those discussed elsewhere in this Annual
Report on
Form 10-K
in the section titled Risk Factors and the risks
discussed in our other filings with the Securities and Exchange
Commission (SEC). We undertake no obligation to
publicly release any revisions to the forward-looking statements
after the date of this Annual Report on
Form 10-K.
PART I
Overview
We are a leading provider of compliance and security management
solutions that protect enterprises and government agencies. Our
products help customers comply with corporate and regulatory
policy, safeguard their assets and processes and control risk.
Our platform collects and correlates user activity and event
data across the enterprise so that businesses can rapidly
identify, prioritize and respond to compliance violations,
policy breaches, cybersecurity attacks and insider threats.
Much like a mission control center, our ESM platform
delivers a centralized, real-time view of disparate digital
alarms, alerts and status messages, which we refer to as events,
across geographically dispersed and heterogeneous business and
technology infrastructures. Our ESM products correlate massive
numbers of events from thousands of security point solutions,
network and computing devices and applications, enabling
intelligent identification, prioritization and response to
external threats, insider threats and compliance and corporate
policy violations. We also provide complementary software that
delivers pre-packaged analytics and reports tailored to specific
compliance and security initiatives, as well as appliances that
streamline event log archiving.
We have designed our platform to support the increasingly
complex business and technology infrastructure of our customers.
Our platform ships with over 275 pre-built software connectors
for products from approximately 100 vendors. It also
integrates easily with products for which we do not provide
pre-built connectors and with proprietary enterprise
applications to ensure that event logs from these products are
seamlessly integrated into our platform for intelligent
correlation and analysis. As of April 30, 2008, we have
sold our products to more than 500 customers across a
number of industries and government agencies in the United
States and internationally, including companies in the Fortune
Top 5 of the aerospace and defense, energy and utilities,
financial services, food production and services, healthcare,
high technology, insurance, media and entertainment, retail and
telecommunications industries, and more than 20 major
U.S. government agencies.
No customer accounted for more than 10% of our revenues in
fiscal 2008, 2007 or 2006. Our top ten customers accounted for
26%, 31% and 32% of our product revenues during fiscal 2008,
2007 and 2006, respectively. See Note 10 of the notes to
our Consolidated Financial Statements for a discussion of total
revenues by geographical region for fiscal 2008, 2007 and 2006.
Our
Strategy
Our objective is to be the leading provider of compliance and
security management solutions that protect enterprises and
government agencies. To achieve this goal, we plan to:
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grow our customer base;
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deepen our penetration of existing customers;
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extend our partner network;
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extend our expertise in security best practices; and
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extend our value proposition to additional event sources and
business use cases beyond traditional IT security.
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Our
Solutions and Products
Our ESM platform collects streaming data from the devices and
applications in an organizations architecture, which we
refer to as event sources, translates the streaming data into a
common format, and then processes the data with our correlation
engine in which complex algorithms determine if events taking
place conform to normal patterns of behavior, established
security policies and compliance regulations. A single device or
application can generate thousands of events in a single day,
most of which are low priority and typically provides
information about a narrow aspect of the infrastructure or only
a portion of the threat or compliance risk involved. Our ESM
platform identifies and prioritizes high-risk activity and
presents a consolidated view of threats to the business and
technology infrastructure in rich, graphical displays. In
addition, through our Logger appliance we enable efficient and
scalable storage, preservation, management and reporting of
terabytes of enterprise log data for compliance requirements or
forensic analysis. Our customers enhance the value of other
compliance and security products in their business and
technology infrastructure by integrating them with our platform.
Key benefits of our solutions include:
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Enterprise-Class Technology and
Architecture. We design our solutions to serve
the needs of even the largest organizations, which typically
have highly complex, geographically dispersed and heterogeneous
business and technology infrastructures. We deliver
enterprise-class solutions by providing interoperability,
flexibility, scalability and efficient archiving.
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Intelligent Correlation. Our correlation
engine intelligently distills millions of events occurring daily
into information that allows customers to identify, prioritize
and respond to specific threats or compliance violations.
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Reporting and Visualization. We present threat
information through a rich and intuitive graphical user
interface, through which customers can view risk across their
organization in a variety of ways, address internal and external
compliance requirements and communicate the value and
effectiveness of the organizations security operations.
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Customers realize these key benefits of our solutions through
deployment of one or more our family of leading compliance and
security management products:
ArcSight ESM. ArcSight ESM, our flagship
product, is designed specifically to address the compliance,
security and business risk concerns of large,
geographically-distributed organizations with complex,
heterogeneous IT environments. ArcSight ESM serves as the
mission control center for managing risks across an
organizations entire business and technology
infrastructure. The key elements within ArcSight ESM include:
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ArcSight Connectors. Connectors are software
that collect event data streams from sources across an
organizations business and technology infrastructure. Our
connector software products are also available as an appliance.
These connectors implement extensive normalization capabilities
to restructure event data into a common taxonomy so events from
hundreds of different sources can be compared meaningfully and
queried systematically irrespective of which device is reporting
the information. The normalized event data stream is then
intelligently aggregated and compressed to eliminate irrelevant
and duplicate messages and reduce bandwidth and storage
consumption. Our SmartConnectors receive and translate event
data streams from over 275 different devices and applications
from approximately 100 vendors and in more than
30 different solution categories. Further, using our
FlexConnector toolkit, our customers can create custom
connectors tailored to their environment, such as for new
products, proprietary applications and mainframe and other
legacy systems. Our connectors can be deployed on intermediate
collection points, such as third-party management consoles,
where available, avoiding the requirement to provision our
connectors directly onto end devices.
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ArcSight Manager. ArcSight Manager is
server-based software that manages event aggregation and
storage, controls the various elements of our platform and
provides the engine for high-speed real-time correlation and
incident response workflow. We recently made ArcSight Manager
available as an appliance, to facilitate turnkey deployment to
address the needs of some mid-market customers. ArcSight Manager
comes with standard rules that address common compliance and
security issues and business risks. It also provides an
intuitive system that enables customers to write customized
rules that apply an organizations compliance and security
policies into the real-time analytics of the correlation engine
as well as seamless integration with rules generated by our
Pattern Discovery product. ArcSight Manager enables real-time
collaboration and case management among security analysts, to
track risk-prioritized response and remediation. In addition, it
provides case resolution metrics to demonstrate compliance and
security process and control effectiveness. Our case management
system also can integrate with third-party trouble ticketing
systems, such as BMC Software. Our architecture was designed to
allow customers to scale from a single centralized deployment to
a distributed, global deployment by deploying additional
Managers that work in concert.
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ArcSight Console, ArcSight Web and ArcSight
Viewer. ArcSight Console is the primary user
interface to interact with and control the ArcSight ESM
platform. Through its intuitive interface, the Console provides
administrators, analysts and operators with graphical data
summaries and an intuitive interface to perform tasks ranging
from real-time monitoring and analysis to incident investigation
and response to system administration and authoring of new
content. The Console is highly configurable to reflect
individual customer environments and can display threat and risk
information in a wide variety of formats including by geography,
by division or line of business, by type of threat, and by
compliance or policy initiative. With ArcSight Console,
customers can run a wide variety of reports to answer internal
and external compliance audits and communicate the value and
effectiveness of the organizations security operations. We
also provide an authoring system that customers can use to
create new reports to meet their specific business needs. Our
ESM platform contains hundreds of standard report templates that
immediately address common compliance, security and business
risk reporting requirements. To facilitate remote access for IT
administrators as well as provide a portal for line-of-business
viewing of status summaries and scheduled reports, our ArcSight
Web product provides browser-based access to all Console
functions and content, except administration and authoring, and
our ArcSight Viewer product provides browser-based read-only
access to all Console content.
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ArcSight Compliance Insight and Insider Threat
Packages. We offer pre-packaged software
solutions that enable our ESM platform and our Logger product to
provide technical-and business-level checks on corporate
compliance with regulatory and policy requirements for perimeter
security, protection of key business processes, threat
management and incident response. These packages comprise
relevant rules and reports to accelerate implementation by our
customers and can be customized or extended by the customer, and
include tailored monitoring, assessing and reporting to address
specific security, regulatory or policy concerns, as with our IT
governance, Sarbanes-Oxley and the Japanese analogue of
Sarbanes-Oxley (J-SOX), Federal Information Security Management
and Payment Card Industry (PCI) compliance, and Insider Threat
packages. In addition, we plan to develop an Identity View
package, as well as packages that address the Basel II
Framework, the Gramm-Leach-Bliley Act and the Health Insurance
Portability and Accountability Act.
ArcSight Discovery Modules. Our ArcSight
Discovery modules, which provide additional advanced analytics
and visualization on our ESM platform, include:
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Our ArcSight Pattern Discovery software is a powerful
complement to our correlation engine. It is an advanced pattern
identification engine that retrospectively examines large
amounts of security events previously collected and processed by
ArcSight ESM to discover patterns of activity that may be
characteristic of threats, such as emerging worms, new worm
variants, self-concealing malware, and low profile, slowly
developing attacks. Pattern Discovery proactively alerts the
security operations analyst about existing or emerging patterns
that are not comprehended by any rules in our correlation
engine, and provides the customer the option to classify the
patterns and also to optionally or automatically generate new
rules for our ESM platform that will detect and respond to
similar threatening patterns in the future.
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Our ArcSight Interactive Discovery visualization software
helps IT security professionals pan, zoom and switch
perspectives across complex technical data to perform in-depth
analysis of security data as well as featuring visuals and
drill-down capabilities that enable non-technical employees to
see relevant threat information in a non-technical format.
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ArcSight Logger. ArcSight Logger, which is an
appliance available in a variety of feature sets and capacities,
enables organizations to collect and store event data in support
of compliance and security requirements. Logger provides
customers with an easily searchable log data repository,
together with reporting capabilities, that can be leveraged
across networking, security and IT operations teams. Access
controls and intelligent search technology enable customers to
interact with historical raw event data for insight into
specific events. ArcSight Logger currently provides
approximately 10:1 compression capability of event data.
Multiple ArcSight Loggers can be deployed to linearly scale both
storage and performance. Logger can flexibly and selectively
forward security events to ESM for real-time, cross-device
correlation, visualization and threat detection. In turn, ESM
can send correlated alerts back to Logger for archival and
subsequent retrieval. As with our ESM platform, Logger is also
the basis for its own add-on Compliance Insight Packages, such
as our Logger Compliance Insight Packages for Sarbanes-Oxley and
Payment Card Industry (PCI) compliance, and we are developing
Logger Compliance Insight Packages for IT governance and the
Federal Information Security Management Act.
We also offer appliances that enable automated network response
and network configuration capabilities.
ArcSight TRM (Threat Response
Manager). ArcSight TRM enables customers to
quickly and precisely reconfigure network control devices to
remediate compliance, security and business risks, consistent
with an organizations policy directives. TRM profiles a
networks topology through communication with devices
without the need to install a software agent on the device.
Through advanced algorithms, it can identify the exact location
of any node (wireless, wired or VPN) on the network, analyze,
recommend and, at the customers option, execute specific,
policy-based actions in response to a threat, attack or other
out-of-policy situation. TRM can block, quarantine or filter
undesirable users and systems at the individual port level.
ArcSight TRM integrates seamlessly with ArcSight ESM to
accelerate incident response by facilitating the coordination
between the security and networking groups, thus improving the
effectiveness of the response and acute remediation function.
ArcSight NCM (Network Configuration
Manager). ArcSight NCM automates the audit of
network topology, maintaining protected records of all prior
configurations for purposes of rollback, audit and compliance
reporting. NCM presents network topology in a visual format,
allowing organizations to identify mis-configurations, redundant
links and multiple wide area network (WAN) access routes. NCM
dynamically compares existing device configuration and
highlights discrepancies from desired configuration policies
that generally map to regulatory requirements, operational
guidelines and business rules.
Maintenance
and Professional Services
We offer a range of services after a sale occurs, principally
installation and implementation, project planning, advice on
business use cases and training services that complement our
product offerings. Initial implementation of our ESM platform
typically is accomplished within two to four weeks. On an
ongoing basis, we offer consulting services and training related
to application of our ESM platform and associated complementary
products to address additional or customer-specific compliance
and security issues and business risks. Following deployment,
our technical support organization provides ongoing maintenance
for our products. We provide standard and, for customers that
require
24-hour
coverage seven days a week, premium tiers of maintenance and
support, which cover telephone- and web-based technical support
and updates to our software during the period of coverage. Our
three major support centers are located in Hong Kong, London and
Cupertino, California. In addition, we sell an enhanced
maintenance service that provides regular security content
updates for our software. These content updates reflect emerging
threats and risks in the form of signature categorization,
vulnerability mapping and knowledge base articles on an ongoing
basis.
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Product
Development and Technology
We have developed and continue to enhance technologies that
underlie three core features incorporated into one or more of
our products. These technologies include:
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Multi-Vector Correlation. The strengths of our
correlation engine are its contextual analysis, mathematical
correlation, identity correlation and timestamp and time window
analysis techniques, which together lead to meaning and
significance in addition to identification of threats and
compliance violations.
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Scalable Architecture. We designed the
architecture of our ESM platform so that it can scale and adjust
to the ongoing needs of an organization by offering
cross-platform compatibility, utilizing a modular connector
design, allowing for multi-Manager scaling and by including
in-memory correlation and concurrent, flexible storage.
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Vendor Agnostic. We have developed proprietary
technologies that are designed to enable deployment of our
products in business and technology infrastructures with a wide
range of event sources, including the creation and promotion of
a common format for event sources to output their log data. Our
architecture handles the complex tasks of translation,
categorization and normalization of event data produced in
highly heterogeneous formats and taxonomies. To further
facilitate interoperability, we publish and promote an open
event data format standard called Common Event Format, or CEF,
including for products beyond traditional network security
compliance-related devices and applications. As the adoption of
CEF increases, the value of this standard increases and drives
additional sales opportunities by accelerating event source
compatibility and expanding the range of risks that our platform
can address.
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Research
and Development
Building on our history of innovation, we believe that continued
and timely development of new products and enhancements to our
existing products are necessary to maintain our competitive
position. Accordingly, we have invested, and intend to continue
to invest, significant time and resources in our research and
development activities to extend our technology leadership. At
present, our research and development efforts are focused on
improving and broadening the capabilities of each of our major
product lines and developing additional products. We work
closely with our customers as well as technology partners to
understand their emerging requirements and use cases for our
products. As of April 30, 2008, our research and
development team had 101 employees. Our research and
development expenses were $19.8 million, $14.5 million
and $12.2 million during fiscal 2008, 2007 and 2006,
respectively.
Sales and
Marketing
We market and sell our software through our direct sales
organization and indirectly through value added resellers and
systems integrators. Historically, the majority of our sales are
made through our direct sales organization. We structure our
sales organization by function, including direct and channel
sales, strategic accounts, technical pre-sales, customer and
sales operations, and by region, including Americas,
U.S. Federal, EMEA and APAC. As of April 30, 2008, we
had 123 employees in our sales and marketing organizations.
The selling process for ArcSight ESM follows a typical
enterprise software sales cycle. It involves one or more of our
direct sales representatives, even when a channel partner is
involved. The sales cycle for an initial sale normally takes
from three to six months, but can extend to more than a year for
some sales, from the time of initial prospect qualification to
consummation and typically includes product demonstrations and
proof of concepts. We deploy a combination of field account
management supported by technical pre-sales specialists to
manage the activities from qualification through close. After
initial deployment, our sales personnel focus on ongoing account
management and follow-on sales. To assist our customers with
reaching their business and technical goals for their
implementations of our products, our Customer Success Ownership,
or CSO, organization meets with customers to determine their
success criteria and to help formulate both short- and long-term
plans for their deployments of our products. We also have
assigned specific sales personnel to our larger, more diverse
and often global customers in order to understand their
individual needs and increase customer satisfaction.
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We derive a portion of our revenues from sales of our products
and related services through channel partners, such as resellers
and systems integrators. In particular, systems integrators are
an important source of sales leads for us in the
U.S. public sector, as government agencies often rely on
them to meet IT needs, and we use resellers to augment our
internal resources in international markets and, to a lesser
extent, domestically. Our agreements with our channel partners
are generally non-exclusive. Historically, we used our channel
partners to support direct sales of our ESM platform products.
Sometimes we are required by our U.S. government customers
to utilize particular resellers. We also anticipate that we will
derive a substantial portion of our sales of Logger and our
other appliance products through channel partners, including
parties with whom we have not yet developed relationships. In
part to address the mid-market, we created a dedicated channel
team in each of our geographic regions responsible for
recruiting, managing and supporting our channel partners to
develop channel partners that will operate more independently.
We focus our marketing efforts on building brand awareness and
on customer lead generation, including advertising, cooperative
marketing, public relations activities, web-based seminars and
targeted direct mail and
e-mail
campaigns. We also are building our brand through articles
contributed to various trade magazines, public speaking
opportunities and international, national and regional trade
show participation. We reinforce our brand and loyalty among our
customer base with our annual users conference.
Competition
Our primary product is our ArcSight ESM platform, the key
elements of which are the ESM Manager, the connectors and
related toolkit for the creation of custom connectors and our
Consoles that serve as the platform interface. In addition, we
offer complementary software for our ESM platform that delivers
pre-packaged analytics and reports tailored to specific
compliance and security initiatives, as well as our
complementary appliance products, such as Logger which assists
our customers in log archiving.
We believe that the market for a compliance and security
management software platform that collects and correlates event
data from across a heterogeneous IT infrastructure, which we are
addressing with ArcSight ESM, is a developing market. Existing
competitors for a platform-wide solution such as this product
primarily are specialized, privately held companies, such as
Intellitactics and NetForensics, as well as larger companies
such as CA, Cisco and Symantec, and EMC, IBM and Novell, through
their acquisitions of Network Intelligence, Micromuse and
Consul, and
e-Security,
respectively. A greater source of competition is represented by
the custom efforts undertaken by potential customers to analyze
and manage the information produced from their existing devices
and applications to identify and remediate threats. In addition,
some organizations have outsourced these functions to managed
security services providers.
In addition to our existing competitors for our ESM platform, we
believe that we face potential competition from a wide variety
of sources that could become effective competitors. Many large,
integrated software companies offer suites of products that
include software applications for compliance and security and
enterprise management. Hardware vendors, including diversified,
global concerns, also offer products that address other
compliance and security needs of the enterprises and government
agencies that comprise our target market. If and to the extent
that the market for our software platform continues to grow, we
expect that large software and hardware vendors may seek to
enter this market, either by way of the organic development of a
competing product line or through the acquisition of a
competitor.
For our ESM platform, we believe that we compete principally on
the basis of functionality, analytical capability, scalability,
interoperability with other components of the network and
business infrastructure, and customers ability to
successfully and rapidly deploy the product. We believe that we
compete favorably with our existing competitors with respect to
these factors. However, we may be at a competitive disadvantage
when seeking customers that do not require the full range of
features and functionality available in our ESM platform,
especially those that may be price sensitive, which may
particularly be the case for smaller organizations. Those
potential customers may instead elect to purchase a less
feature-rich product.
The market for our Logger products is also competitive. We
expect that to be successful in addressing this market we will
need to work effectively with channel partners. We are unable to
predict the extent to which we will be successful selling these
products independently of sales of our ESM platform. Further, we
may be at a
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disadvantage in dealing with our channel partners, which also
may have relationships with large competitors who offer a wide
variety of products.
Current competitors for sales of our Logger product include
specialized, privately-held companies, such as LogLogic and
Sensage. In addition to these current competitors, we expect to
face competition for our appliance products from both existing
large, diversified software and hardware companies, from
specialized, smaller companies and from new companies that may
seek to enter this market. The primary competitive factors for
our appliance products are functionality, price, scalability,
interoperability with other components of the network and
customers ability to successfully and rapidly deploy the
product. We believe that we currently compete favorably with
respect to these factors.
Mergers, acquisitions or consolidations by and among actual and
potential competitors present heightened competitive challenges
to our business. We believe that this trend toward consolidation
in our industry will continue and may increase the competitive
pressures we face on all our products. Further, continued
industry consolidation may impact customers perceptions of
the viability of smaller or even medium-sized software firms and
consequently customers willingness to purchase from such
firms.
Competitors that offer a large array of security or software
products may be able to offer products or functionality similar
to ours at a more attractive price than we can by integrating or
bundling them with their other product offerings. The trend
toward consolidation in our industry increases the likelihood of
competition based on integration or bundling. If we are unable
to sufficiently differentiate our products from the integrated
or bundled products of our competitors, such as by offering
enhanced functionality, performance or value, we may see a
decrease in demand for those products, which would adversely
affect our business, operating results and financial condition.
Similarly, if customers seek to concentrate their software
purchases in the product portfolios of a few large providers, we
may be at a competitive disadvantage notwithstanding the
superior performance that we believe our products can deliver.
Increased competition could result in fewer customer orders,
price reductions, reduced gross margins and loss of market
share. Many of our existing and potential competitors enjoy
substantial competitive advantages, such as wider geographic
presence, access to larger customer bases and the capacity to
leverage their sales efforts and marketing expenditures across a
broader portfolio of products, and substantially greater
financial, technical and other resources. As a result, they may
be able to adapt more quickly and effectively to new or emerging
technologies and changing opportunities, standards or customer
requirements. In addition, large competitors, such as integrated
software companies and diversified, global hardware vendors, may
regularly sell enterprise-wide and other large software
applications, or large amounts of infrastructure hardware, to,
and may have more extensive relationships within, large
enterprises and government agencies worldwide, which may provide
them with an important advantage in competing for business with
those potential customers. In addition, if our target market
continues to grow small, highly specialized competitors may
continue to emerge.
Intellectual
Property
Our intellectual property is an essential element of our
business. We use a combination of copyright, patent, trademark,
trade secret and other intellectual property laws,
confidentiality agreements and license agreements to protect our
intellectual property. It is our policy that our employees and
independent contractors involved in development are required to
sign agreements acknowledging that all inventions, trade
secrets, works of authorship, developments and other processes
generated by them on our behalf are our property, and assigning
to us any ownership that they may claim in those works. Despite
our precautions, it may be possible for third parties to obtain
and use without consent intellectual property that we own or
license. Unauthorized use of our intellectual property by third
parties, and the expenses incurred in protecting our
intellectual property rights, may adversely affect our business.
Patents and Patent Applications. We have four
issued patents and a number of patent applications pending in
the United States, internationally and in specific foreign
countries. Our issued patents, expire in 2024 and 2025. We do
not know whether any of our patent applications will result in
the issuance of a patent or whether the examination process will
require us to narrow our claims, except that some of our patent
applications have received office actions and in some cases we
have modified the claims. Any patents that may be issued to us
may be contested,
7
circumvented, found unenforceable or invalidated, and we may not
be able to prevent third parties from infringing them.
Therefore, the exact effect of having a patent cannot be
predicted with certainty.
Oracle License Agreement. We license database
software from Oracle that we integrate with our ESM platform.
Our agreement with Oracle, which runs through May 2009, permits
us to distribute Oracle database software embedded in our ESM
platform. Under this agreement, we have agreed to make
third-party royalty payments totaling $3.9 million over the
term of the license. The agreement allows us to offer this
database software to our customers and partners that may not
have previously acquired their own database management software.
From time to time, we may encounter disputes over rights and
obligations concerning intellectual property. Although we
believe that our product offerings do not infringe the
intellectual property rights of any third party, we cannot be
certain that we will prevail in any intellectual property
dispute. If we do not prevail in these disputes, we may lose
some or all of our intellectual property protection, be enjoined
from further sales of our products that are determined to
infringe the rights of others,
and/or be
forced to pay substantial royalties to a third party, any of
which would adversely affect our business, financial condition
and results of operations.
Employees
As of April 30, 2008, we had a total of 335 employees,
consisting of 123 employees in sales and marketing,
101 employees in research and development,
40 employees in professional services, 30 employees in
support and 41 employees in general and administrative
functions. A total of 49 employees are located outside the
United States. None of our employees is represented by a union
or covered by a collective bargaining agreement. We consider our
employee relations to be good and have never experienced a work
stoppage.
Corporate
History and Information
We were incorporated in Delaware on May 3, 2000 as Wahoo
Technologies, Inc. On March 30, 2001, we changed our name
to ArcSight, Inc. Our principal executive offices are located at
5 Results Way, Cupertino, California 95014, and our telephone
number is
(408) 864-2600.
We launched our first product in January 2002, and made our
first product sale in June 2002. Following the completion of our
fiscal year ended December 31, 2002, we changed our fiscal
year end to April 30. As a result of the change, the first
full fiscal year in which we sold our products and services was
the fiscal year ended April 30, 2004. Our revenues have
grown from $0.2 million in the fiscal year ended
December 31, 2002 and $15.3 million in fiscal 2004 to
$101.5 million in the fiscal year ended April 30,
2008. We initially funded our operations primarily through
convertible preferred stock financings that raised a total of
$26.8 million. We made our first sale to the
U.S. federal government in September 2002 and our first
sale internationally in December 2002. We completed our initial
public offering, or IPO, in February 2008.
We released version 1.0 of our ESM platform, which featured a
proprietary security taxonomy that normalizes and categorizes
data to enable cross-device, cross-vendor, time-based
correlation as well as connectors based on a common
architecture, in January 2002. Version 2.0 was released in
November 2002, integrating vulnerability and asset criticality
information to the data analyzed in order to prioritize security
events. Version 2.5, released in September 2003, added real-time
geospatial mapping to the incoming event stream as well as
advanced visual analysis tools, such as three-dimensional
dashboard monitors to enable more efficient analysis and
response. In July 2004, we released version 3.0, which
included real-time analyst collaboration and an enhanced
security taxonomy. At that time, we also launched our Pattern
Discovery product. We released version 3.5 in November 2005,
adding quality of service metrics, improved performance, richer
reporting and auditing. We introduced the first of our
compliance insight packages in January 2006. In June 2006, we
acquired substantially all of the assets of Enira Technologies,
LLC, primarily consisting of the predecessors to our TRM and NCM
products. We launched our TRM and NCM products in June 2006 and
our Logger product in December 2006. We announced the
availability of our current ESM platform, version 4.0, in May
2007. This newest release introduced integrated identity and
role-based correlation capabilities as well as significant
improvements to asset management capability and scalability. We
released the availability of our ESM software as an appliance in
June 2008.
ArcSight and the ArcSight logo are registered
trademarks of ArcSight in the United States and in some other
countries. Where not registered, these marks and ArcSight
Console, ArcSight Manager, ArcSight
Web, FlexConnector, Logger,
NCM SmartConnector and TRM
are trademarks of ArcSight.
8
Available
Information
Our Internet address is www.arcsight.com. There we make
available, free of charge, our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and any amendments to those reports, as soon as reasonably
practicable after we electronically file such material with, or
furnish it to, the SEC. Our SEC reports can be accessed through
the Investors section of our website. The information found on
our website is not part of this or any other report we file with
or furnish to the SEC. The SEC also maintains an Internet
website that contains reports, proxy and information statements
and other information regarding registrants, such as ArcSight,
that file electronically with the SEC. The address of the
website is www.sec.gov. In addition, you may read and copy any
filing that we make with the SEC at the public reference room
maintained by the SEC, located at 100 F Street, N.E.,
Room 1580, Washington, D.C. 20549. Please call the SEC
at
1-800-SEC-0330
for further information about the public reference room.
Risk
Related to Our Business and Industry
We
have a limited operating history in an emerging market and a
history of losses, and we are unable to predict the extent of
any future losses or when, if ever, we will achieve
profitability in the future.
We launched our ESM products in January 2002 and our Logger
product in December 2006. Because we have a limited operating
history, and the market for our products is rapidly evolving, it
is difficult for us to predict our operating results and the
ultimate size of the market for our products. We have a history
of losses from operations, incurring losses from operations of
$2.0 million, $0.3 million and $16.8 million for
the fiscal years ended April 30, 2008, 2007 and 2006,
respectively. As of April 30, 2008, our accumulated deficit
was $46.7 million. We expect our operating expenses to
increase over the next several years as we hire additional sales
and marketing personnel, expand our channel sales program and
develop our technology and new products. In addition, we have
incurred, and anticipate that we will continue to incur,
significant legal, accounting and other expenses relating to
being a public company. If our revenues do not increase to
offset these expected increases in operating expenses, we will
continue to incur significant losses and will not become
profitable. Our historical revenue growth has been inconsistent,
reflects fluctuations not related to performance and should not
be considered indicative of our future performance. See
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of OperationsSources of
Revenue, Cost of Revenues and Operating Expenses. Further,
in future periods, our revenues could decline and, accordingly,
we may not be able to achieve profitability and our losses may
increase. Even if we do achieve profitability, we may not be
able to sustain or increase profitability on a consistent basis,
which may result in a decline in our common stock price.
Our
future operating results may fluctuate significantly and may not
be a good indication of our future performance.
Our revenues and operating results could vary significantly from
period to period as a result of a variety of factors, many of
which are outside of our control. As a result, comparing our
revenues and operating results on a period-to-period basis may
not be meaningful, and you should not rely on our past results
as an indication of our future performance. For example,
revenues in fiscal 2006 and prior years excluded revenues
related to multiple element sales transactions consummated in
that year that were deferred because we did not have
vendor-specific objective evidence of fair value, or VSOE, for
some product elements that were not delivered in the fiscal year
of the transaction. In fiscal 2008 and 2007, we either delivered
these product elements, or we and our customers amended the
contractual terms of these sales transactions to remove the
undelivered product elements. Fiscal 2007 revenues included a
substantial portion of the revenues so deferred from fiscal
2006, as well as a small amount of revenues similarly deferred
from prior years, and fiscal 2008 revenues included
$2.9 million of revenues that were deferred from prior
years. See Managements Discussion and Analysis of
Financial Condition and Results of OperationsSources of
Revenues, Cost of Revenues and Operating Expenses. We
expect that in future periods the comparison of revenues
period-to-period will not be favorably impacted to the same
extent by similar transactions consummated in fiscal 2007 and
prior periods. We may not be able to accurately predict our
future revenues or results of operations. We base our current
and future expense levels on our operating plans and sales
forecasts, and our operating costs are relatively fixed in the
short
9
term. As a result, we may not be able to reduce our costs
sufficiently to compensate for an unexpected shortfall in
revenues, and even a small shortfall in revenues could
disproportionately and adversely affect financial results for
that quarter. In addition, we recognize revenues from sales to
some customers or resellers when cash is received, which may be
delayed because of changes or issues with those customers or
resellers. If our revenues or operating results fall below the
expectations of investors or any securities analysts that may
choose to cover our stock, the price of our common stock could
decline substantially.
In addition to other risk factors listed in this section,
factors that may affect our operating results include:
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the timing of our sales during the quarter, particularly since a
large portion of our sales occurs in the last few weeks of the
quarter and loss or delay of a few large contracts may have a
significant adverse impact on our operating results;
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changes in the mix of revenues attributable to higher-margin
revenues from ESM products as opposed to lower-margin revenues
from sales of our appliance products;
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changes in the renewal rate of maintenance agreements;
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our ability to estimate warranty claims accurately;
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the timing of satisfying revenue recognition criteria, including
establishing VSOE for new products and maintaining VSOE for
maintenance and services;
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the budgeting, procurement and work cycles of our customers,
including customers in the public sector, which may cause
seasonal variation as our business and the market for compliance
and security management software solutions matures; and
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general economic conditions, both domestically and in our
foreign markets, and economic conditions specifically affecting
industries in which our customers participate, such as financial
services and retail.
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Our
sales cycle is long and unpredictable, and our sales efforts
require considerable time and expense. As a result, our revenues
are difficult to predict and may vary substantially from quarter
to quarter, which may cause our operating results to
fluctuate.
Our operating results may fluctuate, in part, because of the
intensive nature of our sales efforts, the length and
variability of the sales cycle of our ESM product and the
short-term difficulty in adjusting our operating expenses.
Because decisions to purchase products such as our ESM product
involve significant capital commitments by customers, potential
customers generally have our products evaluated at multiple
levels within an organization, each often having specific and
conflicting requirements. Enterprise customers make product
purchasing decisions based in part on factors not directly
related to the features of the products, including but not
limited to the customers projections of business growth,
capital budgets and anticipated cost savings from implementation
of the software. As a result of these factors, licensing our
products often requires an extensive sales effort throughout a
customers organization. In addition, we have limited
experience with sales of Logger and our other appliance
products. As a result, the sales cycle for this these products
may be lengthy or may vary significantly. Our sales efforts
involve educating our customers, who are often relatively
unfamiliar with our products and the value of our products,
including their technical capabilities and potential cost
savings to the organization. We spend substantial time, effort
and money in our sales efforts without any assurance that our
efforts will produce any sales.
The length of our sales cycle, from initial evaluation to
delivery of products, tends to be long and varies substantially
from customer to customer. Our sales cycle is typically three to
six months but can extend to more than a year for some sales. We
typically recognize a large portion of our product revenues in
the last few weeks of a quarter. It is difficult to predict
exactly when, or even if, we will actually make a sale with a
potential customer. As a result, large individual sales have, in
some cases, occurred in quarters subsequent to those we
anticipated, or have not occurred at all. The loss or delay of
one or more large product transactions in a quarter could impact
our operating results for that quarter and any future quarters
into which revenues from that transaction are delayed. As a
result of these factors, it is difficult for us to accurately
forecast product revenues in any quarter. Because a substantial
portion of our expenses are relatively fixed in the short term,
our operating results will suffer if revenues
10
fall below our expectations in a particular quarter, which could
cause the price of our common stock to decline significantly.
If
we fail to further develop and manage our distribution channels,
our revenues could decline and our growth prospects could
suffer.
We derive a portion of our revenues from sales of our products
and related services through channel partners, such as resellers
and systems integrators. In particular, systems integrators are
an important source of sales leads for us in the
U.S. public sector, as government agencies often rely on
them to meet information technology, or IT, needs. We also use
resellers to augment our internal resources in international
markets and, to a lesser extent, domestically. We may be
required by our U.S. government customers to utilize
particular resellers that may not meet our criteria for
creditworthiness, and revenues from those resellers may not be
recognizable until receipt of payment. We have derived and
anticipate that in the future we will continue to derive a
substantial portion of the sales of Logger and other appliance
products through channel partners, including parties with which
we have not yet developed relationships. We expect that channel
sales will represent a substantial portion of our
U.S. government and international revenues for the
foreseeable future and, we believe, a growing portion of our
U.S. commercial revenues. We may be unable to recruit
additional channel partners and successfully expand our channel
sales program. If we do not successfully execute our strategy to
increase channel sales, particularly to further penetrate the
mid-market and sell our appliance products, our growth prospects
may be materially and adversely affected.
Our agreements with our channel partners are generally
non-exclusive and many of our channel partners have more
established relationships with our competitors. If our channel
partners do not effectively market and sell our products, if
they choose to place greater emphasis on products of their own
or those offered by our competitors, or if they fail to meet the
needs of our customers, our ability to grow our business and
sell our products may be adversely affected, particularly in the
public sector, the mid-market and internationally. Similarly,
the loss of a substantial number of our channel partners, who
may cease marketing our products and services with limited or no
notice and with little or no penalty, and our possible inability
to replace them, the failure to recruit additional channel
partners, or any reduction or delay in their sales of our
products and services or conflicts between channel sales and our
direct sales and marketing activities could materially and
adversely affect our results of operations. In addition, changes
in the proportion of our revenues attributable to sales by
channel partners, which are more likely than direct sales to
involve collectibility concerns at the time of contract
execution and product delivery, may cause our operating results
to fluctuate from period to period.
We
have limited experience with sale, manufacture, delivery,
service and support of Logger and our other appliance products,
and we may be unable to successfully forecast demand or fulfill
orders for these appliance products.
We introduced our Logger product in fiscal 2007. Prior to June
2006, we offered only software products and related services,
and as a result have limited experience with sales of
appliance-based products. Fulfillment of sales of our appliance
products involves hardware manufacturing, inventory, import
certification and return merchandise authorization processes
with which we have limited experience. For example, if we fail
to accurately predict demand and maintain insufficient hardware
inventory or excess inventory, we may be unable to timely
deliver ordered products or may have substantial inventory
expense. In addition, if our equipment vendor fails to
manufacture our appliance products or fulfill orders in required
volumes, in a timely manner, at a sufficient level of quality,
or at all, we may be unable to fulfill customer orders and our
operating results may fluctuate from period to period. If we
underestimate warranty claims for our appliance products, our
operating expenses may be higher than we anticipate, which in
turn may adversely affect our results of operations. In
addition, if we change our hardware configuration or
manufacturer, some countries may require us to reinitiate their
import certification process. Because our appliance products are
new, we have limited experience with warranty claims, resulting
in limited ability to forecast warranty expense. If we are
unable to successfully perform these functions or develop a
relationship with a fulfillment partner that does so for us, our
sales, operating results and financial condition may be harmed.
11
Because
we derive a significant majority of our revenues from ArcSight
ESM and related products and services, any failure of this
product to satisfy customer demands or to achieve increased
market acceptance will harm our business, operating results,
financial condition and growth prospects.
We have derived a significant majority of our product revenues
from ArcSight ESM and related products. We expect this to
continue for the foreseeable future. For example, in fiscal 2008
and 2007, sales of such products represented 56% and 89% of
product revenues, respectively, with the balance coming from
transactions that included both our ESM products and our
appliance products or included only appliance products. Prior to
fiscal 2007, all of our revenues related to our ESM products. As
a result, although we introduced our complementary appliance
products in fiscal 2007 to more fully serve the enterprise
compliance and security management market, our revenues and
operating results will continue to depend to a large extent on
the demand for our ArcSight ESM product. Demand for ArcSight ESM
is affected by a number of factors beyond our control, including
the timing of development and release of new products by us and
our competitors, technological change, and lower-than-expected
growth or a contraction in the worldwide market for enterprise
compliance and security management solutions or other risks
described in this Annual Report on
Form 10-K.
If we are unable to continue to meet customer demands or to
achieve more widespread market acceptance of ArcSight ESM, our
business, operating results, financial condition and growth
prospects will be adversely affected.
If
we are unable to successfully market our recently introduced
products, successfully develop new products, make enhancements
to our existing products or expand our offerings into new
markets, our business may not grow and our operating results may
suffer.
We introduced our Logger product in fiscal 2007 and are
currently developing new versions of this product and our ESM
platform, as well as new complementary products. Our growth
strategy and future financial performance will depend, in part,
on our ability to market and sell these products and to
diversify our offerings by successfully developing, timely
introducing and gaining customer acceptance of new products.
The software in our products is especially complex because it
must recognize, effectively interact with and manage a wide
variety of devices and applications, and effectively identify
and respond to new and increasingly sophisticated security
threats and other risks, while not impeding the high network
performance demanded by our customers. The typical development
cycle for a patch to our ESM software is one to three months, a
service pack is four to six months and a new version or major
sub-version is 12 to 18 months. Customers and industry
analysts expect speedy introduction of software to respond to
new threats and risks and to add new functionality, and we may
be unable to meet these expectations. Since developing new
products or new versions of, or add-ons to, existing products is
complex, the timetable for their commercial release is difficult
to predict and may vary from our historical experience, which
could result in delays in their introduction from anticipated or
announced release dates. We may not offer updates as rapidly as
new threats affect our customers. If we do not quickly respond
to the rapidly changing and rigorous needs of our customers by
developing and introducing on a timely basis new and effective
products, upgrades and services that can respond adequately to
new security threats, our competitive position, business and
growth prospects will be harmed.
Diversifying our product offerings and expanding into new
markets will require significant investment and planning, will
bring us more directly into competition with software providers
that may be better established or have greater resources than we
do, may complicate our relationships with channel and strategic
partners and will entail significant risk of failure. Sales of
our Logger product and other products that we may develop and
market may reduce revenues of our flagship ESM product and our
overall margin by offering a subset of features or capabilities
at a reduced price with a lower gross margin. Moreover,
increased emphasis on the sale of our appliance products, add-on
products or new product lines could distract us from sales of
our core ArcSight ESM offering, negatively affecting our overall
sales. If we fail or delay in diversifying our existing
offerings or expanding into new markets, or we are unsuccessful
competing in these new markets, our business, operating results
and prospects may suffer.
12
If
we are not able to maintain and enhance our brand, our business
and operating results may be harmed.
We believe that maintaining and enhancing our brand identity is
critical to our relationships with, and to our ability to
attract, new customers and partners. The successful promotion of
our brand will depend largely upon our marketing and public
relations efforts, our ability to continue to offer high-quality
products and services, and our ability to successfully
differentiate our products and services from those of our
competitors, especially to the extent that our competitors
integrate or bundle competitive offerings with a broader array
of products and services that they may offer. Our brand
promotion activities may not be successful or yield increased
revenues. In addition, extension of our brand to products and
uses different from our traditional products and services may
dilute our brand, particularly if we fail to maintain the
quality of our products and services in these new areas.
Moreover, it may be difficult to maintain and enhance our brand
in connection with sales through channel or strategic partners.
The promotion of our brand will require us to make substantial
expenditures, and we anticipate that the expenditures will
increase as our market becomes more competitive and as we expand
into new markets. To the extent that these activities yield
increased revenues, these revenues may not offset the expenses
we incur. If we do not successfully maintain and enhance our
brand, our business may not grow, we may have reduced pricing
power relative to competitors with stronger brands, and we could
lose customers and channel partners, all of which would harm our
business, operating results and financial condition.
In addition, independent industry analysts often provide reviews
of our products and services, as well as those of our
competitors, and perception of our products in the marketplace
may be significantly influenced by these reviews. We have no
control over what these industry analysts report, and because
industry analysts may influence current and potential customers,
our brand could be harmed if they do not provide a positive
review of our products and services or view us as a market
leader.
We
face intense competition in our market, especially from larger,
better-known companies, and we may lack sufficient financial or
other resources to maintain or improve our competitive
position.
The market for enterprise compliance and security management and
log archiving products is intensely competitive, and we expect
competition to increase in the future. A significant number of
companies have developed, or are developing, products that
currently, or in the future are likely to, compete with some or
all of our products. We may not compete successfully against our
current or potential competitors, especially those with
significantly greater financial resources or brand name
recognition. Companies competing with us may introduce products
that are more competitively priced, have greater performance or
functionality or incorporate technological advances that we have
not yet developed or implemented.
Our competitors include large software companies, software or
hardware network infrastructure companies, smaller software
companies offering more narrowly focused enterprise compliance
and security management, log archiving and response products and
small and large companies offering point solutions that compete
with components of our platform or individual products offered
by us. Existing competitors for a compliance and security
management software platform solution such as our ESM platform
primarily are specialized, privately-held companies, such as
Intellitactics and NetForensics, as well as larger companies
such as CA, Cisco, Symantec, EMC (through its acquisition of
Network Intelligence), IBM (through its acquisition of Micromuse
and Consul) and Novell (through its acquisition of
e-Security).
Current competitors for sales of our Logger product include
specialized, privately-held companies, such as LogLogic and
Sensage. In addition to these current competitors, we expect to
face competition for our appliance products from existing large,
diversified software and hardware companies, from specialized,
smaller companies and from new companies that may seek to enter
this market.
A greater source of competition is represented by the custom
efforts undertaken by potential customers to analyze and manage
the information produced from their existing devices and
applications to identify and remediate threats. Many companies,
in particular large corporate enterprises, have developed
internally software that is an alternative to our enterprise
compliance and security management and log archiving products.
Wide adoption of our Common Event Format, which we are promoting
as a standard for event logs generated by security and other
products, may facilitate this internal development. It may also
allow our competitors to offer products with a degree of
compatibility similar to ours or may facilitate new entrants
into our business. New competitors may
13
emerge and rapidly acquire significant market share due to
factors such as greater brand name recognition, larger installed
customer bases and significantly greater financial, technical,
marketing and other resources and experience. If these new
competitors are successful, we would lose market share and our
revenues would likely decline.
Mergers or consolidations among these competitors, or
acquisitions of our competitors by large companies, present
heightened competitive challenges to our business. For example,
in recent years IBM has acquired Internet Security Systems,
Inc., Micromuse and Consul, Novell acquired
e-Security
and EMC acquired Network Intelligence. We believe that the trend
toward consolidation in our industry will continue. These
acquisitions will make these combined entities potentially more
formidable competitors to us if their products and offerings are
effectively integrated. Continued industry consolidation may
impact customers perceptions of the viability of smaller
or even medium-sized software firms and consequently
customers willingness to purchase from those firms.
Many of our existing and potential competitors enjoy substantial
competitive advantages, such as:
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greater name recognition and longer operating histories;
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larger sales and marketing budgets and resources;
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the capacity to leverage their sales efforts and marketing
expenditures across a broader portfolio of products;
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broader distribution and established relationships with
distribution partners;
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access to larger customer bases;
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greater customer support;
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greater resources to make acquisitions;
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lower labor and development costs; and
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substantially greater financial, technical and other resources.
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As a result, they may be able to adapt more quickly and
effectively to new or emerging technologies and changing
opportunities, standards or customer requirements. In addition,
these companies have reduced, and could continue to reduce, the
price of their enterprise compliance and security management,
log archiving and response products and managed security
services, which intensifies pricing pressures within our market.
Increased competition could result in fewer customer orders,
price reductions, reduced operating margins and loss of market
share. Our larger competitors also may be able to provide
customers with different or greater capabilities or benefits
than we can provide in areas such as technical qualifications,
geographic presence, the ability to provide a broader range of
services and products, and price. In addition, large competitors
may have more extensive relationships within large enterprises,
the federal government or foreign governments, which may provide
them with an advantage in competing for business with those
potential customers. Our ability to compete will depend upon our
ability to provide better performance than our competitors at a
competitive price. We may be required to make substantial
additional investments in research, development, marketing and
sales in order to respond to competition, and we cannot assure
you that we will be able to compete successfully in the future.
We
may not be able to compete effectively with companies that
integrate or bundle products similar to ours with their other
product offerings.
Many large, integrated software companies offer suites of
products that include software applications for compliance and
security management. In addition, hardware vendors, including
diversified, global concerns, offer products that address the
compliance and security needs of the enterprises and government
agencies that comprise our target market. Further, several
companies currently sell software products that our customers
and potential customers have broadly adopted, which may provide
them a substantial advantage when they sell products that
perform functions substantially similar to some of our products.
Competitors that offer a large array of security or software
products may be able to offer products or functionality similar
to ours at a more attractive price than we can by integrating or
bundling them with their other product offerings. The trend
toward consolidation in our industry increases the likelihood of
competition based on integration or bundling. Customers may also
increasingly seek to consolidate their enterprise-level software
purchases with a small number of larger companies that can
purport to
14
satisfy a broad range of their requirements. If we are unable to
sufficiently differentiate our products from the integrated or
bundled products of our competitors, such as by offering
enhanced functionality, performance or value, we may see a
decrease in demand for those products, which would adversely
affect our business, operating results and financial condition.
Similarly, if customers seek to concentrate their software
purchases in the product portfolios of a few large providers, we
may be at a competitive disadvantage.
We
face risks related to customer outsourcing to managed security
service providers.
Some of our customers have outsourced the management of their IT
departments or the network security operations function to large
system integrators or managed security service providers, or
MSSPs. If this trend continues, our established customer
relationships could be disrupted and our products could be
displaced by alternative system and network protection solutions
offered by system integrators or MSSPs. Significant product
displacements could impact our revenues and have a negative
effect on our business. While to date we have developed a number
of successful relationships with MSSPs, they may develop or
acquire their own technologies rather than purchasing our
products for use in provision of managed security services.
Our
business depends, in part, on sales to the public sector, and
significant changes in the contracting or fiscal policies of the
public sector could have a material adverse effect on our
business.
We derive a portion of our revenues from contracts with federal,
state, local and foreign governments and government agencies,
and we believe that the success and growth of our business will
continue to depend on our successful procurement of government
contracts. For example, we have historically derived, and expect
to continue to derive, a significant portion of our revenues
from sales to agencies of the U.S. federal government,
either directly by us or through systems integrators and other
resellers. In fiscal 2008, 2007 and 2006, we derived 20%, 32%
and 38% of our revenues, respectively, from contracts with
agencies of the U.S. federal government. Accordingly:
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changes in fiscal or contracting policies or decreases in
available government funding;
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changes in government programs or applicable requirements;
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the adoption of new laws or regulations or changes to existing
laws or regulations;
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changes in political or social attitudes with respect to
security issues;
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potential delays or changes in the government appropriations
process; and
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delays in the payment of our invoices by government payment
offices
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could cause governments and governmental agencies to delay or
refrain from purchasing the products and services that we offer
in the future or otherwise have an adverse effect on our
business, financial condition and results of operations.
Failure
to comply with laws or regulations applicable to our business
could cause us to lose U.S. government customers or our
ability to contract with the U.S. government.
We must comply with laws and regulations relating to the
formation, administration and performance of
U.S. government contracts, which affect how we and our
channel partners do business in connection with
U.S. federal agencies. These laws and regulations may
impose added costs on our business, and failure to comply with
these or other applicable regulations and requirements,
including non-compliance in the past, could lead to claims for
damages from our channel partners, penalties, termination of
contracts and suspension or debarment from government
contracting for a period of time. Any such damages, penalties,
disruption or limitation in our ability to do business with the
U.S. federal government could have a material adverse
effect on our business, operating results and financial
condition.
15
Our
government contracts may limit our ability to move development
activities overseas, which may impair our ability to optimize
our software development costs and compete for non-government
contracts.
Increasingly, software development is being shifted to
lower-cost countries, such as India. However, some contracts
with U.S. government agencies require that at least 50% of
the components of each of our products be of U.S. origin.
Consequently, our ability to optimize our software development
by conducting it overseas may be hampered. Some of our
competitors do not rely on contracts with the
U.S. government to the same degree as we do and may develop
software off-shore. If we are unable to develop software as
cost-effectively as our competitors, our ability to compete for
our non-government customers may be reduced and our customer
sales may decline, resulting in decreased revenues.
Real
or perceived errors, failures or bugs in our products could
adversely affect our operating results and growth
prospects.
Because we offer very complex products, undetected errors,
failures or bugs may occur, especially when products are first
introduced or when new versions are released. Our products are
often installed and used in large-scale computing environments
with different operating systems, system management software and
equipment and networking configurations, which may cause errors
or failures in our products or may expose undetected errors,
failures or bugs in our products. Despite testing by us, errors,
failures or bugs may not be found in new products or releases
until after commencement of commercial shipments. In the past,
we have discovered software errors, failures, and bugs in some
of our product offerings after their introduction.
In addition, our products could be perceived to be ineffective
for a variety of reasons outside of our control. Hackers could
circumvent our customers security measures, and customers
may misuse our products resulting in a security breach or
perceived product failure. We provide a top-level enterprise
compliance and security management solution that integrates a
wide variety of other elements in a customers IT and
security infrastructure, and we may receive blame for a security
breach that was the result of the failure of one of the other
elements.
Real or perceived errors, failures or bugs in our products could
result in negative publicity, loss of or delay in market
acceptance of our products, loss of competitive position, or
claims by customers for losses sustained by them. In such an
event, we may be required, or may choose, for customer relations
or other reasons, to expend additional resources in order to
help correct the problem. Our product liability insurance may
not be adequate. Further, provisions in our license agreements
with end users that limit our exposure to liabilities arising
from such claims may not be enforceable in some circumstances or
may not fully protect us against such claims and related
liabilities and costs. Defending a lawsuit, regardless of its
merit, could be costly and could limit the amount of time that
management has available for day-to-day execution and strategic
planning or other matters.
Many of our end-user customers use our products in applications
that are critical to their businesses and may have a greater
sensitivity to defects in our products than to defects in other,
less critical, software products. In addition, if an actual or
perceived breach of information integrity or availability occurs
in one of our end-user customers systems, regardless of
whether the breach is attributable to our products, the market
perception of the effectiveness of our products could be harmed.
Alleviating any of these problems could require significant
expenditures of our capital and other resources and could cause
interruptions, delays or cessation of our product licensing,
which could cause us to lose existing or potential customers and
could adversely affect our operating results and growth
prospects.
In addition, because we are a leading provider of enterprise
security products and services, hackers and others
may try to access our data or compromise our systems. If we are
the subject of a successful attack, then our reputation in the
industry and with current and potential customers may be
compromised and our sales and operating results could be
adversely affected.
16
Incorrect
or improper use of our complex products, our failure to properly
train customers on how to utilize our products or our failure to
properly provide consulting and implementation services could
result in customer dissatisfaction and negatively affect our
results of operations and growth prospects.
Our ESM products are complex and are deployed in a wide variety
of network environments. The proper use of our products,
particularly our ESM platform, requires training of the end
user. If our products are not used correctly or as intended,
inadequate performance may result. For example, among other
things, deployment of our ESM platform requires categorization
of IT assets and assignment of business or criticality values
for each, selection or configuration of one of our pre-packaged
rule sets, user interfaces and network utilization parameters,
and deployment of connectors for the various devices and
applications from which event data are to be collected. Our
customers or our professional services personnel may incorrectly
implement or use our products. Our products may also be
intentionally misused or abused by customers or their employees
or third parties who obtain access and use of our products.
Because our customers rely on our product, services and
maintenance offerings to manage a wide range of sensitive
security, network and compliance functions, the incorrect or
improper use of our products, our failure to properly train
customers on how to efficiently and effectively use our products
or our failure to properly provide consulting and implementation
services and maintenance to our customers may result in negative
publicity or legal claims against us.
In addition, if customer personnel are not well trained in the
use of our products, customers may defer the deployment of our
products, may deploy them in a more limited manner than
originally anticipated or may not deploy them at all. If there
is substantial turnover of the customer personnel responsible
for implementation and use of our ESM products, our product may
go unused and our ability to make additional sales may be
substantially limited.
If
we are unable to maintain effective relationships with our
technology partners, we may not be able to support the
interoperability of our software with a wide variety of security
and other products and our business may be harmed.
A key feature of ArcSight ESM is that it provides out-of-the-box
support for many third-party devices and applications that the
customer may use in its business and technology infrastructure.
To provide effective interoperability, we work with individual
product vendors to develop our SmartConnectors, which allow our
ESM platform to interface with these products. In addition, we
are promoting the adoption of our Common Event Format as a
standard way to format system log events. Some of these
technology partners are current or potential competitors of
ours. If we are unable to develop and maintain effective
relationships with a wide variety of technology partners, if
companies adopt more restrictive policies with respect to, or
impose unfavorable terms and conditions on, access to their
products, or if our Common Event Format is not widely adopted,
we may not be able to continue to provide our customers with a
high degree of interoperability with their existing IT and
business infrastructure, which could reduce our sales and
adversely affect our business, operating results and financial
condition.
Our
international sales and operations subject us to additional
risks that can adversely affect our operating
results.
In fiscal 2008, 2007 and 2006, we derived 33%, 23% and 21% of
our revenues, respectively, from customers outside the United
States, and we are continuing to expand our international
operations as part of our growth strategy. We currently have
sales personnel and sales and support operations in Australia,
Austria, Canada, China, Germany, Hong Kong, Japan, the
Netherlands, Singapore, South Korea, Spain, the United Arab
Emirates and the United Kingdom. Our international operations
subject us to a variety of risks, including:
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increased management, travel, infrastructure and legal
compliance costs associated with having multiple international
operations;
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longer payment cycles and difficulties in collecting accounts
receivable, especially in emerging markets, and the likelihood
that revenues from international resellers and customers may
need to be recognized when cash is received, at least until
satisfactory payment history has been established;
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the need to localize our products and licensing programs for
international customers;
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differing regulatory and legal requirements and possible
enactment of additional regulations or restrictions on the use,
import or export of encryption technologies and our
appliance-based products, which could delay or prevent the sale
or use of our products in some jurisdictions;
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reduced protection for intellectual property rights in some
countries; and
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overlapping of different tax regimes.
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Any of these risks could harm our international operations and
reduce our international sales, adversely affecting our
business, operating results and financial condition and growth
prospects.
Our
business in countries with a history of corruption and
transactions with foreign governments increase the risks
associated with our international activities.
As we operate and sell internationally, we are subject to the
U.S. Foreign Corrupt Practices Act, or the FCPA, and other
laws that prohibit improper payments or offers of payments to
foreign governments and their officials and political parties by
U.S. and other business entities for the purpose of
obtaining or retaining business. We have operations, deal with
and make sales to governmental customers in countries known to
experience corruption, particularly certain emerging countries
in East Asia, Eastern Europe and the Middle East, and further
expansion of our international selling efforts may involve
additional regions, including Africa and South America. Our
activities in these countries create the risk of unauthorized
payments or offers of payments by one of our employees,
consultants, sales agents or channel partners that could be in
violation of various laws including the FCPA, even though these
parties are not always subject to our control. We have
implemented safeguards to discourage these practices by our
employees, consultants, sales agents and channel partners.
However, our existing safeguards and any future improvements may
prove to be less than effective, and our employees, consultants,
sales agents or channel partners may engage in conduct for which
we might be held responsible. Violations of the FCPA may result
in severe criminal or civil sanctions, including suspension or
debarment from U.S. government contracting, and we may be
subject to other liabilities, which could negatively affect our
business, operating results and financial condition.
Failure
to protect our intellectual property rights could adversely
affect our business.
Our success depends, in part, on our ability to protect
proprietary methods and technologies that we develop under
patent and other intellectual property laws of the United
States, so that we can prevent others from using our inventions
and propriety information. If we fail to protect our
intellectual property rights adequately, our competitors might
gain access to our technology, and our business might be harmed.
In addition, defending our intellectual property rights might
entail significant expenses. Any of our patents, copyrights,
trademarks or other intellectual property rights may be
challenged by others or invalidated through administrative
process or litigation. We have four issued patents and a number
of patent applications pending in the United States,
internationally and in specific foreign countries. Our issued
patents may not provide us with any competitive advantages or
may be challenged by third parties, and our patent applications
may never issue at all. Additionally, the process of obtaining
patent protection is expensive and time-consuming, and we may
not be able to prosecute all necessary or desirable patent
applications at a reasonable cost or in a timely manner. Even if
issued, there can be no assurance that these patents will
adequately protect our intellectual property, as the legal
standards relating to the validity, enforceability and scope of
protection of patent and other intellectual property rights are
uncertain.
Any patents that are issued may subsequently be invalidated or
otherwise limited, enabling other companies to better develop
products that compete with ours, which could adversely affect
our competitive business position, business prospects and
financial condition. In addition, issuance of a patent does not
guarantee that we have a right to practice the patented
invention. Patent applications in the U.S. are typically
not published until 18 months after filing, or in some
cases not at all, and publications of discoveries in
industry-related literature lag behind actual discoveries. We
cannot be certain that we were the first to make the inventions
claimed in our issued patents or pending patent applications or
otherwise used in our products, that we were the first to file
for protection in our patent applications, or that third parties
do not have blocking patents that could be used to prevent us
from
18
marketing or practicing our patented products or technology.
Effective patent, trademark, copyright and trade secret
protection may not be available to us in every country in which
our products and services are available. The laws of some
foreign countries may not be as protective of intellectual
property rights as those in the United States, and mechanisms
for enforcement of intellectual property rights may be
inadequate. Accordingly, despite our efforts, we may be unable
to prevent third parties from infringing upon or
misappropriating our intellectual property.
We might be required to spend significant resources to monitor
and protect our intellectual property rights. We may initiate
claims or litigation against third parties for infringement of
our proprietary rights or to establish the validity of our
proprietary rights. Any litigation, whether or not it is
resolved in our favor, could result in significant expense to us
and divert the efforts of our technical and management
personnel, which may adversely affect our business, operating
results and financial condition.
Confidentiality
agreements with employees and others may not adequately prevent
disclosure of trade secrets and other proprietary
information.
In order to protect our proprietary technology, processes and
methods, we rely in part on confidentiality agreements with our
corporate partners, employees, consultants, advisors and others.
These agreements may not effectively prevent disclosure of
confidential information and may not provide an adequate remedy
in the event of unauthorized disclosure of confidential
information. In addition, others may independently discover
trade secrets and proprietary information, and in these cases we
would not be able to assert any trade secret rights against
those parties. Costly and time-consuming litigation could be
necessary to enforce and determine the scope of our proprietary
rights, and failure to obtain or maintain trade secret
protection could adversely affect our competitive business
position.
We
may in the future be subject to intellectual property rights
claims, which are extremely costly to defend, could require us
to pay significant damages and could limit our ability to use
certain technologies.
Companies in the software, networking and technology industries,
including some of our current and potential competitors, own
large numbers of patents, copyrights, trademarks and trade
secrets and frequently enter into litigation based on
allegations of infringement or other violations of intellectual
property rights. In addition, many of these companies have the
capability to dedicate substantially greater resources to
enforce their intellectual property rights and to defend claims
that may be brought against them. The litigation may involve
patent holding companies or other adverse patent owners who have
no relevant product revenues and against whom our potential
patents may provide little or no deterrence. We have received,
and may in the future receive, notices that claim we have
misappropriated or misused other parties intellectual
property rights, and, to the extent we gain greater visibility,
we face a higher risk of being the subject of intellectual
property infringement claims, which is not uncommon with respect
to software technologies in general and network security
technology in particular. There may be third-party intellectual
property rights, including issued or pending patents, that cover
significant aspects of our technologies or business methods. Any
intellectual property claims, with or without merit, could be
very time-consuming, could be expensive to settle or litigate
and could divert our managements attention and other
resources. These claims could also subject us to significant
liability for damages, potentially including treble damages if
we are found to have willfully infringed patents or copyrights.
These claims could also result in our having to stop using
technology found to be in violation of a third partys
rights. We might be required to seek a license for the
intellectual property, which may not be available on reasonable
terms or at all. Even if a license were available, we could be
required to pay significant royalties, which would increase our
operating expenses. As a result, we may be required to develop
alternative non-infringing technology, which could require
significant effort and expense. If we cannot license or develop
technology for any infringing aspect of our business, we would
be forced to limit or stop sales of one or more of our products
or product features and may be unable to compete effectively.
Any of these results would harm our business, operating results
and financial condition.
We
rely on software licensed from other parties, the loss of which
could increase our costs and delay software
shipments.
We utilize various types of software licensed from unaffiliated
third parties in order to provide certain elements of our
product offering. For example, we license database software from
Oracle that we integrate with our ESM
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product. Our agreement with Oracle permits us to distribute
Oracle software in our products to our customers and partners
worldwide through May 2009. See Item 1.
BusinessIntellectual PropertyOracle License
Agreement. Any errors or defects in this third-party
software could result in errors that could harm our business. In
addition, licensed software may not continue to be available on
commercially reasonable terms, or at all. While we believe that
there are currently adequate replacements for third-party
software, any loss of the right to use any of this software
could result in delays in producing or delivering our software
until equivalent technology is identified and integrated, which
could harm our business. Our business would be disrupted if any
of the software we license from others or functional equivalents
of this software were either no longer available to us or no
longer offered to us on commercially reasonable terms. In either
case, we would be required to either redesign our products to
function with software available from other parties or to
develop these components ourselves, which would result in
increased costs and could result in delays in our product
shipments and the release of new product offerings. Furthermore,
we might be forced to limit the features available in our
current or future products. If we fail to maintain or
renegotiate any of these software licenses, we could face
significant delays and diversion of resources in attempting to
license and integrate a functional equivalent of the software.
Some
of our products contain open source software, and
any failure to comply with the terms of one or more of these
open source licenses could negatively affect our
business.
Certain of our products are distributed with software licensed
by its authors or other third parties under open
source licenses. Some of these licenses contain
requirements that we make available source code for
modifications or derivative works we create based upon the open
source software, and that we license these modifications or
derivative works under the terms of a particular open source
license or other license granting third parties certain rights
of further use. If we combine our proprietary software with open
source software in a certain manner, we could, under certain of
the open source licenses, be required to release the source code
of our proprietary software. In addition to risks related to
license requirements, usage of open source software can lead to
greater risks than use of third-party commercial software, as
open source licensors generally do not provide warranties or
controls on origin of the software. We have established
processes to help alleviate these risks, including a review
process for screening requests from our development organization
for the use of open source, and we plan to implement the use of
software tools to review our source code for potential inclusion
of open source, but we cannot be sure that all open source is
submitted for approval prior to use in our products or that such
software tools will be effective. In addition, open source
license terms may be ambiguous and many of the risks associated
with usage of open source cannot be eliminated, and could, if
not properly addressed, negatively affect our business. If we
were found to have inappropriately used open source software, we
may be required to re-engineer our products, to release
proprietary source code, to discontinue the sale of our products
in the event re-engineering could not be accomplished on a
timely basis or to take other remedial action that may divert
resources away from our development efforts, any of which could
adversely affect our business, operating results and financial
condition.
Indemnity
provisions in various agreements potentially expose us to
substantial liability for intellectual property infringement and
other losses.
Our agreements with customers and channel partners include
indemnification provisions, under which we agree to indemnify
them for losses suffered or incurred as a result of claims of
intellectual property infringement and, in some cases, for
damages caused by us to property or persons. The term of these
indemnity provisions is generally perpetual after execution of
the corresponding product sale agreement. Large indemnity
payments could harm our business, operating results and
financial condition.
Changes
or reforms in the law or regulatory landscape could diminish the
demand for our solutions, and could have a negative impact on
our business.
One factor that drives demand for our products and services is
the legal and regulatory framework in which our customers
operate. Laws and regulations are subject to drastic changes,
and these could either help or hurt the demand for our products.
Thus, some changes in the law and regulatory landscape, such as
legislative reforms that limit corporate compliance obligations,
could significantly harm our business.
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If
we are unable to attract and retain personnel, our business
would be harmed.
We depend on the continued contributions of our senior
management and other key personnel, in particular Robert Shaw,
Tom Reilly and Hugh Njemanze, the loss of whom could harm our
business. All of our executive officers and key employees are
at-will employees, which means they may terminate their
employment relationship with us at any time. We do not maintain
a key-person life insurance policy on any of our officers or
other employees.
Our future success also depends on our ability to identify,
attract and retain highly skilled technical, managerial, finance
and other personnel, particularly in our sales and marketing,
research and development and professional service departments.
We face intense competition for qualified individuals from
numerous security, software and other technology companies. In
addition, competition for qualified personnel is particularly
intense in the San Francisco Bay Area, where our
headquarters are located. Often, significant amounts of time and
resources are required to train technical, sales and other
personnel. Qualified individuals are in high demand. We may
incur significant costs to attract and retain them, and we may
lose new employees to our competitors or other technology
companies before we realize the benefit of our investment in
recruiting and training them. We may be unable to attract and
retain suitably qualified individuals who are capable of meeting
our growing technical, operational and managerial requirements,
on a timely basis or at all, and we may be required to pay
increased compensation in order to do so. If we are unable to
attract and retain the qualified personnel we need to succeed,
our business would suffer.
Volatility or lack of performance in our stock price may also
affect our ability to attract and retain our key employees. Many
of our senior management personnel and other key employees have
become, or will soon become, vested in a substantial amount of
stock or stock options. Employees may be more likely to leave us
if the shares they own or the shares underlying their vested
options have significantly appreciated in value relative to the
original purchase prices of the shares or the exercise prices of
the options, or if the exercise prices of the options that they
hold are significantly above the market price of our common
stock. If we are unable to retain our employees, our business,
operating results and financial condition would be harmed.
If
we fail to manage future growth effectively, our business would
be harmed.
We operate in an emerging market and have experienced, and may
continue to experience, significant expansion of our operations.
In particular, we grew from 287 employees as of
April 30, 2007 to 335 employees as of April 30,
2008. This growth has placed, and will continue to place, a
strain on our employees, management systems and other resources.
Managing our growth will require significant expenditures and
allocation of valuable management resources. If we fail to
achieve the necessary level of efficiency in our organization as
it grows, our business, operating results and financial
condition would be harmed.
Future
acquisitions could disrupt our business and harm our financial
condition and results of operations.
We completed the acquisition of substantially all of the assets
of Enira Technologies, LLC in June 2006, and may pursue
additional acquisitions in the future, any of which could be
material to our business, operating results and financial
condition. Our ability as an organization to successfully
acquire and integrate technologies or businesses on a larger
scale is unproven. Acquisitions involve many risks, including
the following:
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an acquisition may negatively impact our results of operations
because it may require us to incur charges and substantial debt
or liabilities, may cause adverse tax consequences, substantial
depreciation or deferred compensation charges, may result in
acquired in-process research and development expenses or in the
future may require the amortization, write-down or impairment of
amounts related to deferred compensation, goodwill and other
intangible assets, or may not generate sufficient financial
return to offset acquisition costs;
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we may encounter difficulties or unforeseen expenditures in
integrating the business, technologies, products, personnel or
operations of any company that we acquire, particularly if key
personnel of the acquired company decide not to work for us;
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an acquisition may disrupt our ongoing business, divert
resources, increase our expenses and distract our management;
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an acquisition may result in a delay or reduction of customer
purchases for both us and the company acquired due to customer
uncertainty about continuity and effectiveness of service from
either company;
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we may encounter difficulties in, or may be unable to,
successfully sell any acquired products; and
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an acquisition may involve the entry into geographic or business
markets in which we have little or no prior experience.
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If
we fail to maintain an effective system of internal controls,
our ability to produce accurate financial statements or comply
with applicable regulations could be impaired.
As a public company, we are subject to the reporting
requirements of the Exchange Act, the Sarbanes-Oxley Act of
2002, or the Sarbanes-Oxley Act, and the rules and regulations
of The NASDAQ Stock Market. We expect that the requirements of
these rules and regulations will continue to increase our legal,
accounting and financial compliance costs, make some activities
more difficult, time-consuming and costly and place undue strain
on our personnel, systems and resources.
The Sarbanes-Oxley Act requires, among other things, that we
maintain effective disclosure controls and procedures and
internal control over financial reporting. During the audit of
our financial statements for fiscal 2004, 2005, 2006 and 2007,
material weaknesses in our internal control over
financial reporting were identified. While we believe that we
have remediated these material weaknesses, in the future,
additional material weaknesses or other areas of our internal
control over financial reporting may be identified that need
improvement. Given our history of material weaknesses, achieving
and maintaining effective controls may be particularly
challenging for us.
We are continuing to develop and refine our disclosure controls
and other procedures that are designed to ensure that
information required to be disclosed by us in the reports that
we file with the SEC is recorded, processed, summarized and
reported within the time periods specified in SECs rules
and forms. Our current controls and any new controls that we
develop may become inadequate because of changes in conditions,
and the degree of compliance with the policies or procedures may
deteriorate. Further, additional weaknesses in our internal
controls may be discovered in the future. Any failure to develop
or maintain effective controls, or any difficulties encountered
in their implementation or improvement, could harm our operating
results or cause us to fail to meet our reporting obligations
and may result in a restatement of our prior period financial
statements. Any failure to implement and maintain effective
internal controls also could adversely affect the results of
periodic management evaluations and annual auditor attestation
reports regarding the effectiveness of our internal control over
financial reporting that we will be required to include in our
periodic reports filed with the SEC beginning for our fiscal
year ending April 30, 2009 under Section 404 of the
Sarbanes-Oxley Act. Ineffective disclosure controls and
procedures and internal control over financial reporting could
also cause investors to lose confidence in our reported
financial and other information, which would likely have a
negative effect on the trading price of our common stock.
In order to maintain and improve the effectiveness of our
disclosure controls and procedures and internal control over
financial reporting, we are expending significant resources and
providing significant management oversight. We have a
substantial effort ahead of us to maintain the processes that we
have added and to implement additional processes, document our
system of internal control over relevant processes, assess their
design, remediate any deficiencies identified and test their
operation. As a result, managements attention may be
diverted from other business concerns, which could harm our
business, operating results and financial condition. These
efforts will also involve substantial accounting-related costs.
In addition, if we are unable to continue to meet these
requirements, we may not be able to remain listed on The NASDAQ
Global Market.
Implementing any appropriate changes to our internal controls
may require specific compliance training of our directors,
officers and employees, entail substantial costs in order to
modify our existing accounting systems, and take a significant
period of time to complete. These changes may not, however, be
effective in maintaining the adequacy of our internal controls,
and any failure to maintain that adequacy, or consequent
inability to produce accurate financial statements on a timely
basis, could increase our operating costs and could materially
impair our ability to operate our business. In the event that we
are not able to demonstrate compliance with Section 404 of
the
22
Sarbanes-Oxley Act in a timely manner, that our internal
controls are perceived as inadequate or that we are unable to
produce timely or accurate financial statements, investors may
lose confidence in our operating results and our stock price
could decline.
We also have not yet implemented a complete disaster recovery
plan or business continuity plan for our accounting and related
information technology systems. Any disaster could therefore
materially impair our ability to maintain timely accounting and
reporting.
The Sarbanes-Oxley Act and the rules and regulations of The
NASDAQ Stock Market will make it more difficult and more
expensive for us to maintain directors and officers
liability insurance, and we may be required to accept reduced
coverage or incur substantially higher costs to maintain or
increase coverage. If we are unable to maintain adequate
directors and officers insurance, our ability to
recruit and retain qualified directors, especially those
directors who may be considered independent for purposes of The
NASDAQ Stock Market rules, and officers may be curtailed.
We
may not be able to utilize a significant portion of our net
operating loss carry-forwards, which could adversely affect our
operating results.
Due to prior period losses, we have generated significant
federal and state net operating loss carry-forwards, which
expire beginning in fiscal 2022 and fiscal 2013, respectively.
U.S. federal and state income tax laws limit the amount of
these carry-forwards we can utilize upon a greater than 50%
cumulative shift of stock ownership over a three-year period,
including shifts due to the issuance of additional shares of our
common stock, or securities convertible into our common stock.
We have previously experienced a greater than 50% shift in our
stock ownership, which has limited our ability to use a portion
of our net operating loss carry-forwards, and we may experience
subsequent shifts in our stock ownership. Accordingly, there is
a risk that our ability to use our existing carry-forwards in
the future could be further limited and that existing
carry-forwards would be unavailable to offset future income tax
liabilities, which would adversely affect our operating results.
Governmental
export or import controls could subject us to liability or limit
our ability to compete in foreign markets.
Our products incorporate encryption technology and may be
exported outside the U.S. only if we obtain an export
license or qualify for an export license exception. Compliance
with applicable regulatory requirements regarding the export of
our products, including with respect to new releases of our
products, may create delays in the introduction of our products
in international markets, prevent our customers with
international operations from deploying our products throughout
their global systems or, in some cases, prevent the export of
our products to some countries altogether. In addition, various
countries regulate the import of our appliance-based products
and have enacted laws that could limit our ability to distribute
products or could limit our customers ability to implement
our products in those countries. Any new export or import
restrictions, new legislation or shifting approaches in the
enforcement or scope of existing regulations, or in the
countries, persons or technologies targeted by such regulations,
could result in decreased use of our products by existing
customers with international operations, declining adoption of
our products by new customers with international operations and
decreased revenues. If we fail to comply with export and import
regulations, we may be denied export privileges, be subjected to
fines or other penalties and our products may be denied entry
into other countries.
Risks
Related to Ownership of Our Common Stock
Our
stock price may be volatile or may decline regardless of our
operating performance.
The trading prices of the securities of technology companies
have been highly volatile. The market price of our common stock
may fluctuate significantly in response to numerous factors,
many of which are beyond our control, including:
|
|
|
|
|
actual or anticipated fluctuations in our operating results;
|
|
|
|
the financial projections we may provide to the public, any
changes in these projections or our failure to meet these
projections;
|
23
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|
|
|
|
failure of securities analysts to initiate or maintain coverage
of us, changes in financial estimates by any securities analysts
who follow our company, or our failure to meet these estimates
or the expectations of investors;
|
|
|
|
ratings changes by any securities analysts who follow our
company;
|
|
|
|
announcements by us or our competitors of significant technical
innovations, acquisitions, strategic partnerships, joint
ventures or capital commitments;
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|
|
changes in operating performance and stock market valuations of
other technology companies generally, or those in our industry
in particular;
|
|
|
|
price and volume fluctuations in the overall stock market,
including as a result of trends in the economy as a whole;
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|
|
lawsuits threatened or filed against us; and
|
|
|
|
other events or factors, including those resulting from war,
incidents of terrorism or responses to these events.
|
In addition, the stock markets, and in particular The NASDAQ
Global Market on which our common stock is listed, have
experienced extreme price and volume fluctuations that have
affected and continue to affect the market prices of equity
securities of many technology companies. Stock prices of many
technology companies have fluctuated in a manner unrelated or
disproportionate to the operating performance of those
companies. In the past, stockholders have instituted securities
class action litigation following periods of market volatility.
If we were to become involved in securities litigation, it could
subject us to substantial costs, divert resources and the
attention of management from our business and adversely affect
our business, operating results and financial condition.
A
significant portion of our total outstanding shares may be sold
into the market in the near future. If there are substantial
sales of shares of our common stock, the price of our common
stock could decline.
The price of our common stock could decline if there are
substantial sales of our common stock, particularly sales by our
directors, executive officers and significant stockholders, or
if there is a large number of shares of our common stock
available for sale. As of July 15, 2008, we had outstanding
31,050,806 shares of our common stock,
24,188,887 shares, or 77.9%, of which are currently
restricted as a result of market standoff
and/or
lock-up
agreements, but will be able to be sold in the near future as
set forth below.
|
|
|
Date Available for Sale
|
|
Number of Shares and
|
into Public Market
|
|
% of Total Outstanding
|
|
Immediately after the date of this Annual Report on
Form 10-K
|
|
No shares, or 0%
|
August 13, 2008, or 181 days after the date of the
prospectus relating to our IPO, subject to deferral in some
circumstances
|
|
24,188,887 shares, or 77.9%, of which
10,473,461 shares, or 33.7%, will be subject to limitations
under Rules 144 and 701
|
Some holders of shares of our common stock have rights, subject
to some conditions, to require us to file registration
statements covering their shares or to include their shares in
registration statements that we may file for ourselves or our
stockholders. All of these shares are subject to market standoff
and/or
lock-up
agreements restricting their sale for 180 days after the
date of the prospectus relating to our IPO. We also registered
shares of common stock that we have issued and may issue under
our employee equity incentive plans, and such shares may be sold
freely in the public market upon issuance, subject to existing
market standoff
and/or
lock-up
agreements. Morgan Stanley & Co. Incorporated may, in
its sole discretion, permit our officers, directors, employees
and current stockholders who are subject to the
180-day
contractual
lock-up to
sell shares prior to the expiration of the
lock-up
agreements. The
180-day
lock-up
period is subject to extension in some circumstances.
The market price of the shares of our common stock could decline
as a result of sales of a substantial number of our shares in
the public market or the perception in the market that the
holders of a large number of shares intend to sell their shares.
24
If
securities or industry analysts do not publish research or
publish inaccurate or unfavorable research about our business,
our stock price and trading volume could decline.
The trading market for our common stock will depend in part on
the research and reports that securities or industry analysts
publish about us or our business. We currently have limited, and
may not obtain additional, research coverage by securities
analysts, and industry analysts that currently cover us may
cease to do so. If no securities analysts commence coverage of
our company, or if industry analysts cease coverage of our
company, the trading price for our stock would be negatively
impacted. In the event we obtain securities analyst coverage, if
one or more of the analysts who cover us downgrade our stock or
publish inaccurate or unfavorable research about our business,
our stock price would likely decline. If one or more of these
analysts cease coverage of our company or fail to publish
reports on us regularly, demand for our stock could decrease,
which might cause our stock price and trading volume to decline.
Our
directors, executive officers and principal stockholders have
substantial control over us and could delay or prevent a change
in corporate control.
Our directors, executive officers and holders of more than 5% of
our common stock, together with their affiliates, beneficially
own, in the aggregate, 56.3% of our outstanding common stock as
of July 15, 2008. As a result, these stockholders, acting
together, would have the ability to control the outcome of
matters submitted to our stockholders for approval, including
the election of directors and any merger, consolidation or sale
of all or substantially all of our assets. In addition, these
stockholders, acting together, would have the ability to control
the management and affairs of our company. Accordingly, this
concentration of ownership might harm the market price of our
common stock by:
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|
delaying, deferring or preventing a change in control of us;
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|
impeding a merger, consolidation, takeover or other business
combination involving us; or
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|
discouraging a potential acquirer from making a tender offer or
otherwise attempting to obtain control of us.
|
Delaware
law and provisions in our restated certificate of incorporation
and amended and restated bylaws could make a merger, tender
offer or proxy contest difficult, thereby depressing the trading
price of our common stock.
We are a Delaware corporation and the anti-takeover provisions
of the Delaware General Corporation Law may discourage, delay or
prevent a change in control by prohibiting us from engaging in a
business combination with an interested stockholder for a period
of three years after the person becomes an interested
stockholder, even if a change of control would be beneficial to
our existing stockholders. In addition, our restated certificate
of incorporation and amended and restated bylaws contain
provisions that may make the acquisition of our company more
difficult without the approval of our board of directors,
including the following:
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|
our board of directors is classified into three classes of
directors with staggered three-year terms;
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|
only our chairman of the board, our lead independent director,
if any, our chief executive officer, our president or a majority
of our board of directors is authorized to call a special
meeting of stockholders;
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|
|
our stockholders are only able to take action at a meeting of
stockholders and not by written consent;
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|
vacancies on our board of directors are able to be filled only
by our board of directors and not by stockholders;
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|
directors may be removed from office only for cause;
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|
|
our restated certificate of incorporation authorizes
undesignated preferred stock, the terms of which may be
established, and shares of which may be issued, without
stockholder approval; and
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|
|
advance notice procedures will apply for stockholders to
nominate candidates for election as directors or to bring
matters before an annual meeting of stockholders.
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25
|
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Item 1B.
|
Unresolved
Staff Comments
|
Not applicable.
Our corporate headquarters and research and development
facilities occupy approximately 80,000 square feet in
Cupertino, California under a lease that expires in October
2013. We have an option to extend this lease for five years and
a right of first offer to lease adjacent space. In addition to
our principal office space in Cupertino, we lease facilities for
use as sales and local support offices in various cities in the
United States and internationally. We believe our facilities are
adequate for our needs for at least the next 12 months. We
also anticipate that suitable additional or alternative space
will be reasonably available to accommodate foreseeable
expansion of our operations.
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|
Item 3.
|
Legal
Proceedings
|
We are subject to various claims, complaints and legal actions
that arise in the normal course of business from time to time.
We do not believe we are party to any currently pending legal
proceedings the outcome of which will have a material adverse
effect on our operations or financial position. There can be no
assurance that existing or future legal proceedings arising in
the ordinary course of business or otherwise will not have a
material adverse effect on our business, consolidated financial
position, results of operations or cash flows.
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|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
No matters were submitted to a vote of our security holders
during the fourth quarter of fiscal 2008.
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Market
Information for Common Stock
Our common stock has been listed on The NASDAQ Global Market
under the symbol ARST since our IPO in February
2008. The following table sets forth, for the periods indicated,
the high and low
intra-day
prices for our common stock as reported on The NASDAQ Global
Market.
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|
Fiscal Year Ended
|
|
High
|
|
Low
|
|
Fourth Quarter 2008 (beginning February 14, 2008)
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|
$
|
9.68
|
|
|
$
|
6.35
|
|
First Quarter 2009 (through July 15, 2008)
|
|
$
|
10.69
|
|
|
$
|
7.19
|
|
Stockholders
As of July 15, 2008, we had approximately 217 record
holders of our common stock.
26
Stock
Price Performance Graph
The following graph shows a comparison from February 14,
2008 (the date our common stock commenced trading on The NASDAQ
Global Market) through April 30, 2008 of the cumulative
total return for an investment of $100 (and the reinvestment of
dividends) in our common stock, the NASDAQ Composite Index and
the NASDAQ Computer and Data Processing Index. Such returns are
based on historical results and are not intended to suggest
future performance.
COMPARISON
OF 2 MONTH CUMULATIVE TOTAL RETURN*
Among ArcSight, Inc., The NASDAQ Composite Index
And The NASDAQ Computer & Data Processing Index
$100 invested on 2/14/08 in stock or 1/31/08 in index-including
reinvestment of dividends.
Fiscal year ending April 30.
The above information under the heading Stock Price
Performance Graph shall not be deemed to be
filed for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended, or otherwise
subject to the liabilities of that section or Sections 11
and 12(a)(2) of the Securities Act of 1933, as amended, and
shall not be incorporated by reference into any registration
statement or other document filed by us with the Securities and
Exchange Commission, whether made before or after the date of
this Annual Report on
Form 10-K,
regardless of any general incorporation language in such filing,
except as shall be expressly set forth by specific reference in
such filing.
Dividend
Policy
We have never declared or paid cash dividends on our capital
stock. We currently intend to retain any future earnings and do
not expect to declare or pay any dividends in the foreseeable
future. Any further determination to pay dividends on our
capital stock will be at the discretion of our board of
directors and will depend on our financial condition, results of
operations, capital requirements and other factors that our
board of directors considers relevant.
27
Equity
Compensation Plan Information
The following table summarizes information about our equity
compensation plans as of April 30, 2008. All outstanding
awards relate to our common stock.
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|
|
|
|
|
|
|
|
|
|
|
(a) Number of
|
|
|
|
|
|
(c) Number of Securities
|
|
|
|
Securities to be
|
|
|
|
|
|
Remaining Available for
|
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|
|
Issued Upon
|
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|
|
|
|
Future Issuance Under
|
|
|
|
Exercise of
|
|
|
(b) Weighted-Average
|
|
|
Equity Compensation
|
|
|
|
Outstanding
|
|
|
Exercise Price of
|
|
|
Plans (Excluding
|
|
|
|
Options, Warrants
|
|
|
Outstanding Options,
|
|
|
Securities Reflected in
|
|
Plan Category
|
|
and Rights(1)
|
|
|
Warrants and Rights
|
|
|
Column (a))
|
|
|
Equity compensation plans approved by security holders
|
|
|
6,687,045
|
|
|
$
|
5.43
|
|
|
|
4,366,192
|
|
Equity compensation plans not approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6,687,045
|
|
|
$
|
5.43
|
|
|
|
4,366,192
|
|
|
|
|
(1) |
|
Prior to our IPO, we issued securities under our 2002 Stock
Plan, as amended, and our 2000 Stock Incentive Plan. Following
our IPO, we issued securities under our 2007 Equity Incentive
Plan (2007 Plan) and our 2007 Employee Stock
Purchase Plan (ESPP). |
Under the 2007 Plan we may issue stock awards, including but not
limited to restricted stock awards, restricted stock units,
stock bonus awards, stock appreciation rights and performance
share awards. The 2007 Plan contains a provision that the number
of shares available for grant and issuance will be increased on
January 1 of each of 2009 through 2012 by an amount equal to 4%
of our shares outstanding on the immediately preceding
December 31, unless our board of directors, in its
discretion determines to make a smaller increase. It is the
policy of our board of directors that non-employee directors are
granted options to purchase 11,250 shares of common stock
under the 2007 Plan upon initial election or appointment to the
board. Similarly, on the date of the first board meeting
following each annual stockholder meeting each non-employee
director will automatically be granted options to purchase
10,375 shares of common stock under the 2007 Plan pursuant
to that policy. The board may also make discretionary grants to
purchase common stock to any non-employee director.
Under the 2007 ESPP we may grant options for the purchase of our
common stock. The 2007 ESPP contains a provision that the number
of shares available for grant and issuance will be increased on
January 1 of each of 2009 through 2016, by an amount equal to 1%
of our shares outstanding on the immediately preceding
December 31, unless our board of directors, in its
discretion determines to make a smaller increase.
Recent
Sales of Unregistered Securities
During the three months ended April 30, 2008, holders of
warrants elected to net exercise warrants to purchase
6,293 shares of common stock and 425 shares of
Series B preferred stock, and holders of warrants elected
to exercise warrants to purchase 3,919 shares of
Series B preferred stock at a weighted-average exercise
price of $0.00001 per share. The shares of Series B
preferred stock issued upon warrant exercise, as with all other
outstanding shares of preferred stock, were converted to common
stock upon completion of our IPO.
None of the foregoing transactions involved any underwriters,
underwriting discounts or commissions, or any public offering.
The sales of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on
Section 4(2) of the Securities Act or Regulation D of
the Securities Act as transactions by an issuer not involving a
public offering. The recipients of securities in each of these
transactions represented their intention to acquire the
securities for investment only and not with view to or for sale
in connection with any distribution thereof, and appropriate
legends were affixed to the share certificates and instruments
issued in such transactions. All recipients had adequate access,
through their relationship with us, to information about us.
28
Use of
Proceeds from Public Offering of Common Stock
The
Form S-1
Registration Statement (Registration
No. 333-145974)
relating to our IPO was declared effective by the SEC on
February 14, 2008, and the offering commenced that day.
Morgan Stanley & Co. Incorporated acted as the sole
book-running manager for the offering, and Lehman Brothers Inc.,
Wachovia Capital Markets, LLC and RBC Capital Markets
Corporation acted as co-managers of the offering.
The net proceeds to us of our IPO after deducting
underwriters discounts and offering expenses were
$45.9 million. Through April 30, 2008, we did not use
any of the net proceeds. We expect to use the net proceeds for
general corporate purposes, including working capital and
potential capital expenditures and acquisitions. Although we may
also use a portion of the net proceeds for the acquisition of,
or investment in, companies, technologies, products or assets
that complement our business, we have no present understandings,
commitments or agreements to enter into any acquisitions or make
any investments.
Our management will retain broad discretion in the allocation
and use of the net proceeds of our IPO, and investors will be
relying on the judgment of our management regarding the
application of the net proceeds. Pending specific utilization of
the net proceeds as described above, we have invested the net
proceeds of the offering in short-term, interest-bearing
obligations. The goal with respect to the investment of the net
proceeds will be capital preservation and liquidity so that such
funds are readily available to fund our operations.
Purchases
of Equity Securities by the Issuer and Affiliated
Purchasers
For the fiscal year ended April 30, 2008, we did not
repurchase any equity securities.
29
|
|
Item 6.
|
Selected
Financial Data
|
The following selected consolidated financial data should be
read in conjunction with Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations and our consolidated financial statements and
related notes included elsewhere in this Annual Report on
Form 10-K.
The selected financial data in this section is not intended to
replace the financial statements and is qualified in its
entirety by the consolidated financial statements and related
notes thereto included elsewhere in this Annual Report on
Form 10-K.
Our historical results of operations are not necessarily
indicative of results to be expected for any future period.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of
|
|
Fiscal Year Ended April 30,
|
|
Operations Data:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per share data)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
63,765
|
|
|
$
|
43,989
|
|
|
$
|
22,859
|
|
|
$
|
22,357
|
|
|
$
|
12,442
|
|
Maintenance
|
|
|
27,607
|
|
|
|
18,762
|
|
|
|
11,473
|
|
|
|
5,947
|
|
|
|
1,931
|
|
Services
|
|
|
10,173
|
|
|
|
7,082
|
|
|
|
5,103
|
|
|
|
4,518
|
|
|
|
926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
101,545
|
|
|
|
69,833
|
|
|
|
39,435
|
|
|
|
32,822
|
|
|
|
15,299
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
4,767
|
|
|
|
2,569
|
|
|
|
1,769
|
|
|
|
1,084
|
|
|
|
526
|
|
Maintenance(1)
|
|
|
5,691
|
|
|
|
3,498
|
|
|
|
2,085
|
|
|
|
851
|
|
|
|
207
|
|
Services(1)
|
|
|
5,800
|
|
|
|
3,521
|
|
|
|
2,942
|
|
|
|
2,559
|
|
|
|
565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
16,258
|
|
|
|
9,588
|
|
|
|
6,796
|
|
|
|
4,494
|
|
|
|
1,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
85,287
|
|
|
|
60,245
|
|
|
|
32,639
|
|
|
|
28,328
|
|
|
|
14,001
|
|
Operating expenses(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
19,762
|
|
|
|
14,535
|
|
|
|
12,154
|
|
|
|
7,583
|
|
|
|
4,068
|
|
Sales and marketing
|
|
|
53,453
|
|
|
|
36,587
|
|
|
|
24,309
|
|
|
|
14,647
|
|
|
|
8,041
|
|
General and administrative
|
|
|
13,422
|
|
|
|
9,453
|
|
|
|
12,978
|
|
|
|
8,725
|
|
|
|
3,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
86,637
|
|
|
|
60,575
|
|
|
|
49,441
|
|
|
|
30,955
|
|
|
|
15,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(1,350
|
)
|
|
|
(330
|
)
|
|
|
(16,802
|
)
|
|
|
(2,627
|
)
|
|
|
(1,588
|
)
|
Other income (expense), net
|
|
|
472
|
|
|
|
462
|
|
|
|
219
|
|
|
|
(49
|
)
|
|
|
106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes
|
|
|
(878
|
)
|
|
|
132
|
|
|
|
(16,583
|
)
|
|
|
(2,676
|
)
|
|
|
(1,482
|
)
|
Provision for income taxes
|
|
|
1,131
|
|
|
|
389
|
|
|
|
163
|
|
|
|
137
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,009
|
)
|
|
$
|
(257
|
)
|
|
$
|
(16,746
|
)
|
|
$
|
(2,813
|
)
|
|
$
|
(1,505
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share, basic and diluted
|
|
$
|
(0.08
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(2.24
|
)
|
|
$
|
(0.46
|
)
|
|
$
|
(0.28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per common
share
|
|
|
25,936
|
|
|
|
10,042
|
|
|
|
7,469
|
|
|
|
6,162
|
|
|
|
5,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Stock-based compensation expense is included above as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of maintenance revenues
|
|
$
|
106
|
|
|
$
|
3
|
|
|
$
|
5
|
|
|
$
|
4
|
|
|
$
|
|
|
Cost of services revenues
|
|
|
115
|
|
|
|
14
|
|
|
|
5
|
|
|
|
3
|
|
|
|
1
|
|
Research and development
|
|
|
1,356
|
|
|
|
501
|
|
|
|
1,950
|
|
|
|
1,642
|
|
|
|
143
|
|
Sales and marketing
|
|
|
2,685
|
|
|
|
661
|
|
|
|
210
|
|
|
|
746
|
|
|
|
14
|
|
General and administrative
|
|
|
664
|
|
|
|
350
|
|
|
|
5,948
|
|
|
|
4,838
|
|
|
|
425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
4,926
|
|
|
$
|
1,529
|
|
|
$
|
8,118
|
|
|
$
|
7,233
|
|
|
$
|
583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
Revenues in fiscal 2007 and prior years were impacted by
revenues related to multiple element sales transactions
consummated for which the revenues were deferred because we did
not have vendor-specific objective evidence of fair value, or
VSOE, for some product elements that were not delivered in the
fiscal year of the transaction. Following identification in
mid-fiscal 2007 of transactions with such undelivered elements,
with respect to some of these transactions, we and our customers
amended the contractual terms to remove the undelivered product
elements and in other instances we have since delivered such
product elements. The net impact of these transactions reduced
revenues in fiscal 2006 by $6.3 million and increased
revenues in fiscal 2008 and 2007 by $2.9 million and
$1.8 million, respectively. See Item 7:
Managements Discussion and Analysis of Financial Condition
and Results of OperationsSources of Revenues, Cost of
Revenues and Operating Expenses for additional details,
including the net amounts involved. While similar multiple
element transactions with undelivered elements for which we lack
VSOE may be identified prospectively in future periods, we
expect that in future periods the comparison of revenues
period-to-period will not be favorably impacted to the same
extent by similar transactions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of April 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
71,946
|
|
|
$
|
16,917
|
|
|
$
|
16,443
|
|
|
$
|
13,493
|
|
|
$
|
7,976
|
|
Working capital (deficit)
|
|
|
46,711
|
|
|
|
(3,811
|
)
|
|
|
5,377
|
|
|
|
11,606
|
|
|
|
4,990
|
|
Total assets
|
|
|
118,579
|
|
|
|
48,990
|
|
|
|
32,926
|
|
|
|
26,541
|
|
|
|
13,162
|
|
Current and long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible preferred stock
|
|
|
|
|
|
|
26,758
|
|
|
|
26,758
|
|
|
|
26,928
|
|
|
|
26,362
|
|
Common stock and additional paid-in capital
|
|
|
101,574
|
|
|
|
23,479
|
|
|
|
19,383
|
|
|
|
11,301
|
|
|
|
2,950
|
|
Total stockholders equity
|
|
$
|
54,769
|
|
|
$
|
5,130
|
|
|
$
|
1,433
|
|
|
$
|
9,713
|
|
|
$
|
4,460
|
|
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion and analysis should be read in
conjunction with our Selected Consolidated Financial
Data and consolidated financial statements and notes
thereto included elsewhere in this Annual Report on
Form 10-K.
This Annual Report on
Form 10-K
contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as
amended (Securities Act), and Section 21E of the Securities
Exchange Act of 1934, as amended (Exchange Act). These
statements are often identified by the use of words such as
may, will, expect,
believe, anticipate, intend,
could, estimate, or
continue, and similar expressions or variations.
These statements are based on the beliefs and assumptions of our
management based on information currently available to
management. Such forward-looking statements are subject to
risks, uncertainties and other factors that could cause actual
results and the timing of certain events to differ materially
from future results expressed or implied by such forward-looking
statements. Factors that could cause or contribute to such
differences include, but are not limited to, those identified
herein, and those discussed in the section titled Risk
Factors, set forth in Item 1A of this Annual Report
on
Form 10-K
and in our other SEC filings, including our final prospectus
dated as of February 14, 2008. You should review these risk
factors for a more complete understanding of the risks
associated with an investment in our securities. We disclaim any
obligation to update any forward-looking statements to reflect
events or circumstances after the date of such statements.
Overview
We are a leading provider of compliance and security management
solutions that protect enterprises and government agencies. Our
products help customers comply with corporate and regulatory
policy, safeguard their assets and processes and control risk.
Our platform collects and correlates user activity and event
data across the enterprise so that businesses can rapidly
identify, prioritize and respond to compliance violations,
policy breaches, cybersecurity attacks and insider threats. Our
ESM products correlate massive numbers of events from thousands
of security point solutions, network and computing devices and
applications, enabling intelligent identification,
prioritization and response to external threats, insider threats
and compliance and corporate policy violations. We
31
also provide complementary software that delivers pre-packaged
analytics and reports tailored to specific compliance and
security initiatives, as well as appliances that streamline
event log archiving.
We were founded in May 2000 and first sold our initial ESM
product in June 2002. Our revenues have grown from
$32.8 million in fiscal 2005 to $101.5 million in
fiscal 2008.
In February 2008, we completed our IPO, in which we sold
6,000,000 shares of common stock, at an issue price of
$9.00 per share. We raised a total of $54.0 million in
gross proceeds from our IPO, or $45.9 million in net
proceeds after deducting underwriting discounts of
$3.8 million and offering expenses of $4.3 million.
We achieved positive cash flows from operations in fiscal 2004
through 2008. We generated $13.5 million of cash from our
operating activities during fiscal 2008, and we generally expect
to continue to generate positive cash flows from operating
activities on an annual basis. We initially funded our
operations primarily through convertible preferred stock
financings that raised a total of $26.8 million. As of
April 30, 2008, we had cash and cash equivalents and
accounts receivable of $98.6 million, and an aggregate of
$20.9 million in accounts payable and accrued liabilities.
Important
Factors Affecting Our Operating Results and Financial
Condition
We believe that the market for our products is in the early
stages of development. We have identified factors that we expect
to play an important role in our future growth and
profitability. These factors are:
Sales of ESM Platform and Appliance Products to New
Customers. The market for compliance and security
management software solutions is rapidly expanding, with new
purchases often driven by corporate compliance initiatives. We
typically engage in a proof of concept with our customers to
demonstrate the capabilities of our ESM platform in their
specific environment. A new sale usually involves the sale of
licenses for one or more ESM Managers, a bundle of connectors,
depending on the number and type of devices the customer intends
to manage with ArcSight ESM, licenses for our console and web
interfaces, installation services, training and an initial
maintenance arrangement. In many cases, customers will also
purchase one of our complementary software modules which enable
them to implement specific sets of off-the-shelf rules for our
event correlation engine that address specific compliance and
security issues and business risks. In addition, customers may
purchase our Logger appliance to address their log archiving
needs. Our growth depends on our ability to sell our products to
new customers.
Continued Sales to Our Installed Base. Many
customers make an initial purchase from us and then decide
whether to use our products with respect to a larger portion of
their business and technology infrastructure or buy additional
complementary products from us. Thus, a key component of our
growth will be our ability to successfully maintain and further
develop the relationships with our existing customers.
Development and Introduction of New
Products. We believe it is important that we
continue to develop or acquire new products and services that
will help us capitalize on opportunities in the compliance and
security management market. Examples of new product
introductions in fiscal 2008 included our ArcSight ESM
Management Solution, ArcSight Log Management Suite and ArcSight
Connector Appliance products. We continue the enhancement of our
ESM platform and solutions, such as the May 2007 introduction of
features such as identity correlation and role-based management
and from a global perspective, the July 2007 introduction of a
new compliance solution package for the Japanese analogue of
Sarbanes-Oxley (JSOX). In addition, we continue to develop and
release appliance versions of our software products and updates
to complementary solution packages for our Logger product as
well.
Development of an Expanded Channel Network for Our
Products. We currently sell our products
primarily through our direct sales force, although we do sell to
government purchasers and internationally through resellers and
system integrators. We believe further development of our sales
channel will assist us in penetrating the mid-market,
particularly as we expand our appliance-based offerings. In
addition, it is likely that new appliance-based products that we
develop will be sold more effectively through resellers and, if
we are successful in introducing these new products, we will
become more dependent on the development of an effective channel
network. Further, motivating our channel partners to promote our
products will be a key factor in the success of this strategy.
32
Sources
of Revenues, Cost of Revenues and Operating Expenses
Our sales transactions typically include the following elements:
a software license fee paid for the use of our products in
perpetuity or, in limited circumstances, for a specified term;
an arrangement for first-year support and maintenance, which
includes unspecified software updates and upgrades; and
professional services for installation, implementation and
training. We derive the majority of our revenues from sales of
software products. We introduced complementary appliance
products in fiscal 2007. We sell our products and services
primarily through our direct sales force. Additionally, we
utilize resellers and systems integrators, particularly in sales
to government agencies and international customers.
We recognize revenues pursuant to American Institute of
Certified Public Accountants, or AICPA, Statement of Position,
or SOP,
No. 97-2,
Software Revenue Recognition, as amended by
SOP No. 98-9,
Software Revenue Recognition with Respect to Certain
Arrangements, or collectively,
SOP 97-2,
which, if revenues are to be recognized upon product delivery,
requires among other things vendor-specific objective evidence
of fair value, or VSOE, for each undelivered element of multiple
element customer contracts.
Revenues in fiscal 2007 and prior years were impacted by
multiple element sales transactions consummated for which the
revenues were deferred because we did not have vendor-specific
objective evidence of fair value, or VSOE, for some product
elements that were not delivered in the fiscal year of the
transaction. Following identification in mid-fiscal 2007 of
transactions with such undelivered elements, with respect to
some of these transactions, we and our customers amended the
contractual terms to remove the undelivered product elements and
in other instances we have since delivered such product
elements. The net impact of these transactions reduced revenues
in fiscal 2006 by $6.3 million and increased revenues in
fiscal 2008 and 2007 by $2.9 million and $1.8 million,
respectively. In each case, the net impact caused our fiscal
period-to-period revenue growth rate to appear lesser or
greater, as applicable, than it otherwise would. See
Item 6: Selected Financial Data and
Item 8: Financial Statements and Supplementary
DataQuarterly Results of Operations for additional
discussion and information regarding these transactions. As of
April 30, 2008 and 2007, deferred revenues included
$2.5 million and $5.4 million, respectively, related
to transactions such as these.
In addition, if we determine that collectibility is not
reasonably assured, we defer the revenues until collectibility
becomes reasonably assured, generally upon receipt of cash.
Deferred revenue and accounts receivable are reported net of
adjustments for sales transactions invoiced during the period
that are recognized as revenue in a future period once cash is
received and all other revenue recognition criteria have been
met. Accordingly, we believe that in order to understand the
change in both deferred revenue and accounts receivable from one
period to another the impact of these net-down adjustments
should be considered.
Historically sales to the U.S. government have represented
a significant portion of our revenues, while international sales
have represented a smaller portion of our revenues. While we
expect revenues from sales to agencies of the U.S. federal
government to continue to grow in absolute dollars, we believe
that such sales will continue to decrease as a percentage of
revenues in future periods. In addition, we expect that sales to
customers outside of the United States will continue to grow
both in absolute dollars and as a percentage of revenues in
future periods.
Product
Revenues
Product revenues consist of license fees for our software
products and, beginning in fiscal 2007, also includes revenues
for sales of Logger and our other appliance products. License
fees are based on a number of factors, including the type and
number of devices that a customer intends to monitor using our
software as well as the number of users and locations. In
addition to our core solution, some of our customers purchase
additional licenses for optional extension modules that provide
enhanced discovery and analytics capabilities. Sales of our
appliance products consist of sales of the appliance hardware
and associated perpetual licenses to the embedded software. We
first introduced our first appliance products in June 2006 and
Logger, our most widely adopted appliance product to date, in
December 2006. Appliance fees are based on the number of
appliances purchased and, in some cases, on the number of
network devices with which our customer intends to use the
appliances. We generally recognize product revenues at the time
of product delivery, provided all other revenue recognition
criteria have been met. We recognize revenues associated with
products sold through distribution partners on a sell-through
basis once either
33
we or our distribution partner has a contractual agreement in
place with the end user, the products have been delivered to the
end user, collectibility is probable and all other revenue
recognition criteria have been met.
Historically, we have engaged in long sales cycles with our
customers, typically three to six months and more than a year
for some sales, and many customers make their purchase decisions
in the last month of a fiscal quarter, following procurement
trends in the industry. Further, average deal size can vary
considerably depending on our customers configuration
requirements, implementation plan and budget availability. As a
result, it is difficult to predict timing or size of product
sales on a quarterly basis. In addition, we may fail to forecast
sufficient production of our appliance products due to our
limited experience with them, or we may be unable to physically
deliver appliances within the quarter, depending on the
proximity of the order to the end of the quarter. These
situations may lead to delay of revenues until we can deliver
products. The loss or delay of one or more large sales
transactions in a quarter could impact our operating results for
that quarter and any future quarters into which revenues from
that transaction are delayed.
As of April 30, 2008 and 2007, deferred product revenues
were $13.6 million and $10.3 million, respectively.
Included in deferred product revenues as of April 30, 2008
and 2007 were $2.2 million and $4.9 million,
respectively, related to multiple element arrangements where one
or more product elements for which we did not have VSOE remained
undelivered. The remainder of deferred product revenues as of
April 30, 2008 and 2007 were $11.4 million and
$5.4 million, respectively, and primarily related to
product revenues to be recognized ratably over the term of the
maintenance arrangements, prepayments in advance of delivery and
other delivery deferrals. Deferred revenue and accounts
receivable are reported net of adjustments for sales
transactions invoiced during the period that are recognized as
revenue in a future period once cash is received and all other
revenue recognition criteria have been met. Accordingly, we
believe that in order to understand the change in both deferred
revenue and accounts receivable from one period to another the
impact of these net-down adjustments should be considered. As of
April 30, 2008 and 2007, deferred product revenues of
$13.6 million and $10.3 million, respectively, were
reduced by net-down adjustments of $3.3 million and
$2.6 million, respectively. Net-down adjustments decrease
both accounts receivable and deferred revenue and typically
relate to revenue transactions with customers that are only
recognized when cash has been paid and all other revenue
recognition criteria have been met. See Critical
Accounting Policies, Significant Judgments and
EstimatesRevenue Recognition and Note 2 to our
Consolidated Financial Statements (Significant Accounting
PoliciesRevenue Recognition) elsewhere in this
report.
Maintenance
Revenues
Maintenance includes rights to unspecified software product
updates and upgrades, maintenance releases and patches released
during the term of the support period, and internet and
telephone access to maintenance personnel and content.
Maintenance revenues are generated both from maintenance that we
agree to provide in connection with initial sales of software
and hardware products and from maintenance renewals. We
generally sell maintenance on an annual basis. We offer two
levels of
maintenancestandard
and, for customers that require
24-hour
coverage seven days a week, premium. In most cases, we provide
maintenance for sales made through channel partners. In
addition, we sell an enhanced maintenance offering that provides
frequent security content updates for our software. Maintenance
fees are deferred at the time the maintenance agreement is
initiated and recognized ratably over the term of the
maintenance agreement. As our customer base expands, we expect
maintenance revenues to continue to grow, as maintenance is sold
to new customers and existing customers renew.
As of April 30, 2008, deferred maintenance revenues were
$24.3 million, of which $20.0 million represented
current deferred maintenance revenues. As of April 30,
2007, deferred maintenance revenues were $17.1 million, of
which $14.5 million represented current deferred
maintenance revenues. Deferred maintenance revenues relate to
advanced payments for support contracts that are recognized
ratably. As of April 30, 2008 and 2007, the deferred
maintenance revenues of $24.3 million and
$17.1 million, respectively, were reduced by net-down
adjustments of $1.5 million and $0.9 million,
respectively. Net-down adjustments decrease both accounts
receivable and deferred revenue and typically relate to billed
but unpaid customer transactions for maintenance renewal support
terms where services have not yet been provided, or where
revenue from the customer is only recognized when cash has been
paid and all other revenue recognition criteria have been met.
See Critical Accounting Policies, Significant Judgments
and EstimatesRevenue Recognition and Note 2 to
our Consolidated Financial Statements (Significant
Accounting PoliciesRevenue Recognition) elsewhere in
this report.
34
Services
Revenues
Services revenues are generated from sales of services to our
customers, including installation and implementation of our
software, consulting and training. Professional services are not
essential to the functionality of the associated software
products. We generally sell our services on a
time-and-materials
basis and recognize revenues as the services are performed.
Services revenues have generally increased over time as we have
sold and delivered installation and training services to our new
customers and continued to sell training and consulting services
to our existing customers.
As of April 30, 2008 and 2007, deferred service revenues
were $3.4 million and $2.2 million, respectively, in
each case all of which represented current deferred services
revenues. Deferred services revenues relate to customer payments
in advance of services being performed. As of April 30,
2008 and 2007, the deferred service revenues of
$3.4 million and $2.2 million, respectively were
reduced by net-down adjustments of $0.7 million and
$0.9 million, respectively. Net-down adjustments decrease
both accounts receivable and deferred revenue and typically
relate to billed but unpaid customer transactions for service
engagements where services have not yet been provided, or where
revenue from the customer is only recognized when cash has been
paid and all other revenue recognition criteria have been met.
See Critical Accounting Policies, Significant Judgments
and EstimatesRevenue Recognition and Note 2 to
our Consolidated Financial Statements (Significant
Accounting PoliciesRevenue Recognition) elsewhere in
this report.
Cost
of Revenues
Cost of revenues for our software products consists of
third-party royalties and license fees for licensed technology
incorporated into our software product offerings. Cost of
revenues for appliance products consists of the hardware costs
of the appliances and, for certain appliance products,
third-party royalties for licensed technology. The cost of
product revenues is primarily impacted by the mix of software
and appliance products as well as the relative ratio of
third-party royalty bearing products included in software sales
transactions. Sales of our appliance products are generally at a
lower gross margin than sales of our software products.
Cost of maintenance revenues consists primarily of salaries and
benefits related to maintenance personnel, royalties and other
out-of-pocket expenses, and facilities and other related
overhead.
Cost of services revenues consists primarily of the salaries and
benefits of personnel, travel and other out-of-pocket expenses,
facilities and other related overhead that are allocated based
on the portion of the efforts of such personnel that are related
to performance of professional services, and cost of services
provided by subcontractors for professional services. Services
gross margin may fluctuate as a result of periodic changes in
our use of third party service providers, resulting in lower or
higher gross margins for these services.
We intend to increase sales to the mid-market, a goal that we
believe will be aided by our recent introduction of additional
appliance products. We expect the percentage of our mid-market
sales made through our distribution channel will be greater than
it has been to date. We also expect a high percentage of our
international sales to continue to be made through our
distribution channel. Sales through the channel tend to be at a
lower gross margin than direct sales. As a result, we may report
lower gross margins in future periods than has been the case for
prior periods.
Operating
and Non-Operating Expenses
Research and Development Expenses. Research
and development expenses consist primarily of salaries and
benefits of personnel engaged in the development of new
products, the enhancement of existing products, quality
assurance activities and, to a lesser extent, facilities costs
and other related overhead. We expense all of our research and
development costs as they are incurred. We expect research and
development expenses to increase in absolute dollars for the
foreseeable future as we continue to invest in the development
of our products.
Sales and Marketing Expenses. Sales and
marketing expenses consist primarily of salaries, commissions
and benefits related to sales and marketing personnel and
consultants; travel and other out-of-pocket expenses; expenses
for marketing programs, such as for trade shows and our annual
users conference, marketing materials and corporate
communications; and facilities costs and other related overhead.
Commissions on sales of products and
35
maintenance are typically accrued and expensed when the
respective revenue elements are ordered. During fiscal 2007
commissions on sales of services were typically accrued and
expensed when the services were delivered, and during fiscal
2008 as a result of changes in commission plan structure, when
the services were ordered. We also pay commissions for channel
sales not only to our channel sales force but also to our direct
sales force in an effort to minimize channel conflicts as we
develop our channel network. We intend to hire additional sales
personnel, initiate additional marketing programs and build
additional relationships with resellers, systems integrators and
strategic partners on a global basis. Accordingly, we expect
that our sales and marketing expenses will continue to increase
for the foreseeable future in absolute dollars.
General and Administrative Expenses. General
and administrative expenses consist primarily of salaries and
benefits related to general and administrative personnel and
consultants; accounting and legal fees; insurance costs and
facilities costs and other related overhead. We expect that, in
the future, general and administrative expenses will increase in
absolute dollars as we add personnel and incur additional
insurance costs related to the growth of our business and
additional legal, accounting and other expenses in connection
with our reporting and compliance obligations as a public
company.
Other Income (Expense), Net. Other income
(expense), net consists of interest earned on our cash
investments and foreign currency-related gains and losses. Our
interest income will vary each reporting period depending on our
average cash balances during the period and the current level of
interest rates. Following our IPO, we had additional cash and
cash equivalents of approximately $45.9 million resulting
from the net proceeds of our IPO, after deducting the
underwriting discounts and other offering expenses. This will
likely cause a substantial increase in our interest income
compared to periods prior to our IPO. Similarly, our foreign
currency-related gains and losses will also vary depending upon
movements in underlying exchange rates.
Provision for Income Taxes. Provision for
income taxes is calculated in compliance with
SFAS No. 109, Accounting for Income Taxes, or
SFAS 109, and other related guidance, and generally
consists of tax expense related to current period earnings. We
estimate income taxes in each of the jurisdictions in which we
operate. This process involves determining income tax expense
together with calculating the deferred income tax expense
related to temporary differences resulting from the differing
treatment of items for tax and accounting purposes, such as
deferred revenue or deductibility of certain intangible assets
which are recognized for the estimated future tax consequences
attributable to differences between the consolidated financial
statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets are
recognized for deductible temporary differences, along with net
operating loss carry-forwards, if it is more likely than not
that the tax benefits will be realized. Deferred tax assets and
liabilities are measured using enacted tax rates in effect for
the year in which those temporary differences are expected to be
recovered or settled. These temporary differences result in
deferred tax assets and liabilities, which are included within
the consolidated balance sheets. To the extent a deferred tax
asset cannot be recognized under the preceding criteria, a
valuation allowance is established. Changes in these estimates
may result in significant increases or decreases to our tax
provision in a subsequent period, which in turn would affect net
income. We have previously experienced a greater than 50% shift
in our stock ownership, which creates annual limitations on our
ability to use a portion of our net operating loss
carry-forwards. As a result, our provision for income taxes and
our resulting effective tax rate may be greater than if our net
operating loss carry-forwards were available without limitation.
In addition, our net operating loss carry-forwards may expire
before we fully utilize them.
We recorded a full valuation allowance of $18.5 million as
of April 30, 2008 because, based on the available evidence,
we assessed that it was more likely than not that we would not
be able to utilize all of our deferred tax assets in the future.
We intend to maintain the full valuation allowances until
sufficient evidence exists to support the reversal of all or
some portion of these allowances. Should the actual amounts
differ from our estimates, the amount of our valuation allowance
could be materially impacted.
Critical
Accounting Policies, Significant Judgments and
Estimates
Our consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the
United States, which requires us to make estimates and judgments
that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date
of the financial statements as
36
well as the reported amounts of revenues and expenses during the
reporting period. We base our estimates and judgments on our
historical experience, knowledge of current conditions and our
beliefs regarding likely occurrences in the future, given
available information. Estimates are used for, but are not
limited to, revenue recognition, determination of fair value of
stock awards, valuation of goodwill and intangible assets
acquired in business combinations, impairment of goodwill and
other intangible assets, amortization of intangible assets,
accounting for uncertainties in income taxes, contingencies and
litigation, allowances for doubtful accounts, and accrued
liabilities. Actual results may differ from those estimates, and
any differences may be material to our financial statements.
Further, if we apply different factors, or change the method by
which we apply the various factors that are used, in making our
critical estimates and judgments, our reported operating results
and financial condition could be materially affected.
Revenue
Recognition
We recognize revenues in accordance with
SOP 97-2.
Accordingly, we exercise judgment and use estimates in
connection with the determination of the amount of product,
maintenance and services revenues to be recognized in each
accounting period.
We derive revenues primarily from three sources: (i) sales
of our software and hardware products, (ii) fees for
maintenance to provide unspecified upgrades and customer
technical support, and (iii) fees for services, including
professional services for product installation and training. Our
appliance products contain software that is more than incidental
to the functionality of the product. In accordance with
SOP 97-2,
we recognize revenues when the following conditions have been
met:
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|
|
|
|
persuasive evidence of an arrangement exists;
|
|
|
|
the fee is fixed or determinable;
|
|
|
|
product delivery has occurred or services have been
rendered; and
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|
collection is considered probable.
|
We typically use a binding purchase order in conjunction with
either a signed contract or reference on the purchase order to
the terms and conditions of our shrinkwrap or end-user license
agreement as evidence of an arrangement. We assess whether the
fee is fixed or determinable based on the payment terms
associated with the transaction and whether the sales price is
subject to refund or forfeiture, concession or other adjustment.
We do not generally grant rights of return or price protection
to our distribution partners or end users, other than limited
rights of return during the warranty period in some cases. We
use shipping documents, contractual terms and conditions and
customer acceptance, when applicable, to verify product delivery
to the customer. For perpetual software license fees in
arrangements that do not include customization, or services that
are not considered essential to the functionality of the
licenses, delivery is deemed to occur when the product is
delivered to the customer. Services and consulting arrangements
that are not essential to the functionality of the licensed
product are recognized as revenues as these services are
provided. Delivery of maintenance is considered to occur on a
straight-line basis over the life of the contract. We consider
probability of collection based on a number of factors, such as
creditworthiness of the customer as determined by credit checks
and analysis, past transaction history, the geographic location
and financial viability. We do not request, nor do we require,
collateral from customers. If we determine that collectibility
is not reasonably assured, we defer the revenues until
collectibility becomes reasonably assured, generally upon
receipt of cash. A net-down adjustment may be recorded in cases
where, sales transactions have been invoiced but are recognized
on cash receipt, for invoiced but unpaid sales transactions
related to post-contract customer support obligations for which
the term has not commenced, or for invoiced but unpaid service
engagements where services have not yet been provided. Net-down
adjustments decrease both accounts receivable and deferred
revenue. Any such transactions included in accounts receivable
and deferred revenue at period end are reflected on the balance
sheet on a net basis.
Our sales of software products to date have typically been
multiple element arrangements, which have included software
licenses and corresponding maintenance, and have also generally
included some amount of professional services. Our sales of
appliance products to date have been multiple element
arrangements as well, which included hardware, software licenses
and corresponding maintenance, and have also generally included
37
some amount of professional services. We allocate the total
arrangement fee among these multiple elements based upon their
respective fair values as determined by VSOE or, if applicable,
by the residual method under
SOP 97-2.
VSOE for maintenance and support services is based on separate
sales and/or
renewals to other customers or upon renewal rates quoted in
contracts when the quoted renewal rates are deemed substantive
in both rate and term. VSOE for professional services is
established based on prices charged to customers when those
services are sold separately. If we cannot objectively determine
the fair value of any undelivered element in a multiple element
arrangement, we defer revenues for each element until all
elements have been delivered, or until VSOE can objectively be
determined for any remaining undelivered element. If VSOE for
maintenance does not exist, and this represents the only
undelivered element, then revenues for the entire arrangement
are recognized ratably over the performance period. When VSOE of
a delivered element has not been determined, but the fair value
for all undelivered elements has, we use the residual method to
record revenues for the delivered element. Under the residual
method, the fair value of the undelivered elements is deferred
and the remaining portion of the arrangement fee is allocated to
the delivered element and recognized immediately as revenues.
Revenues from time-based (term) license sales that include
ongoing delivery obligations throughout the term of the
arrangement are recognized ratably over the term.
Our agreements generally do not include acceptance provisions.
However, if acceptance provisions exist, we deem delivery to
have occurred upon customer acceptance.
We recognize revenues associated with products and professional
services sold through our channel partners once either we or our
channel partner has a contractual agreement in place with the
end user, delivery has occurred to the end user and all other
revenue recognition criteria have been met.
We assess whether fees are collectible and fixed or determinable
at the time of the sale, and recognize revenues if all other
revenue recognition criteria have been met. Our standard payment
terms are net 30 days and are considered normal up to
net three months, while payment terms beyond three months are
considered to be extended terms. Payments that are due within
three months are generally deemed to be fixed or determinable
based on our successful collection history on these agreements.
Stock-Based
Compensation
Prior to May 1, 2006, we accounted for our stock-based
awards to employees using the intrinsic value method prescribed
in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, or APB 25 and
related interpretations. Under the intrinsic value method,
compensation expense is measured on the date of the grant as the
difference between the fair value of our common stock and the
exercise or purchase price multiplied by the number of stock
options or restricted stock awards granted. We amortize deferred
stock-based compensation using the multiple option method as
prescribed by Financial Accounting Standards Board, or FASB,
Interpretation No. 28, Accounting for Stock Appreciation
Rights and Other Variable Stock Option or Award Plans, or
FIN 28, over the option vesting period using an accelerated
amortization schedule. We amortized employee stock-based
compensation of $0.1 million, $0.3 million and
$0.6 million for fiscal 2008, 2007 and 2006, respectively.
Effective May 1, 2006, we adopted SFAS 123R, which
requires companies to expense the fair value of employee stock
options and other forms of stock-based compensation.
SFAS 123R requires nonpublic companies that used the
minimum value method under SFAS No. 123, Accounting
for Stock-Based Compensation, or SFAS 123, for either
recognition or pro forma disclosures to apply SFAS 123R
using the prospective-transition method. As such, we will
continue to apply APB 25 in future periods to unvested equity
awards outstanding at the date of adoption of SFAS 123R
that were measured using the minimum value method. In addition,
we are continuing to amortize those awards granted prior to
May 1, 2006 utilizing an accelerated amortization schedule.
In accordance with SFAS 123R, we will recognize the
compensation cost of employee stock-based awards granted
subsequent to April 30, 2006 in the statement of operations
using the straight-line method over the vesting period of the
award.
To determine the fair value of stock options granted after
May 1, 2006, we have elected to use the
Black-Scholes
option pricing model, which requires, among other inputs, an
estimate of the fair value of the underlying common stock on the
date of grant and assumptions as to volatility of our stock over
the expected term of the related options, the expected term of
the options, the risk-free interest rate and the option
forfeiture rate. As there
38
had been no public market for our common stock prior to our IPO
in February 2008, we have determined the volatility for options
granted for fiscal 2008 and fiscal 2007 based on an analysis of
reported data for a peer group of companies that issued options
with substantially similar terms. The expected volatility of
options granted has been determined using weighted-average
measures of the implied volatility and the historical volatility
for this peer group of companies for a period equal to the
expected life of the option. The weighted-average expected
volatility for options granted during fiscal 2008 and 2007, was
55% and 66%, respectively. The expected life of options has been
determined considering the expected life of options granted by a
group of peer companies and the average vesting and contractual
terms of options granted to our employees. The weighted-average
expected life of options granted for both fiscal 2008 and 2007
was 5.25 years. For fiscal 2008 and 2007, the
weighted-average risk-free interest rate used was 4.22% and
5.00%, respectively. The risk-free interest rate is based on a
zero coupon United States treasury instrument whose term is
consistent with the expected life of the stock options. We have
not paid and do not anticipate paying cash dividends on our
shares of common stock; therefore, the expected dividend yield
is assumed to be zero. In addition, SFAS 123R requires
companies to utilize an estimated forfeiture rate when
calculating the expense for the period, whereas SFAS 123
permitted companies to record forfeitures based on actual
forfeitures, which was our historical policy under
SFAS 123. As a result, we applied an estimated annual
forfeiture rate of 5% for fiscal 2008 and 2007, in determining
the expense recorded in our consolidated statement of operations.
We recorded expense of $4.2 million and $0.9 million
for fiscal 2008 and 2007, respectively, in connection with
stock-based awards accounted for under SFAS 123R. As of
April 30, 2008, unrecognized stock-based compensation
expense of non-vested stock options was $11.2 million. As
of April 30, 2008, the unrecognized stock-based
compensation expense is expected to be recognized using the
straight line method over the required service period of the
options. We expect stock-based compensation expense to increase
in absolute dollars as a result of the adoption of
SFAS 123R. The actual amount of stock-based compensation
expense we record in any fiscal period will depend on a number
of factors, including the number of stock options issued and the
volatility of our stock price over time. In future periods,
stock-based compensation expense may increase as we issue
additional equity-based awards to continue to attract and retain
key employees. Additionally, SFAS 123R requires that we
recognize compensation expense only for the portion of stock
options that are expected to vest. If the actual number of
forfeitures differs from that estimated by management, we will
be required to record adjustments to stock-based compensation
expense in future periods.
Our 2007 Employee Stock Purchase Plan, or ESPP, became effective
on the effectiveness of our IPO on February 14, 2008. The
ESPP provides for consecutive six-month offering periods, except
for the first offering period, which commenced on
February 14, 2008 and will end on September 15, 2008.
The ESPP is compensatory and results in compensation cost
accounted for under SFAS 123R. We use the Black-Scholes
option pricing model to estimate the fair value of rights to
acquire stock granted under the ESPP. For the fiscal year ended
April 30, 2008, we recorded stock-based compensation
expense associated with the ESPP of $0.2 million. As of
April 30, 2008, unrecognized stock-based compensation
expense associated with rights to acquire shares of common stock
under the ESPP was $0.4 million.
Business
Combinations
We account for business combinations in accordance with
SFAS No. 141, Business Combinations, or
SFAS 141, which requires the purchase method of accounting
for business combinations. In accordance with SFAS 141, we
determine the recognition of intangible assets based on the
following criteria: (i) the intangible asset arises from
contractual or other rights; or (ii) the intangible asset
is separable or divisible from the acquired entity and capable
of being sold, transferred, licensed, returned or exchanged. In
accordance with SFAS 141, we allocate the purchase price of
our business combinations to the tangible assets, intangible
assets and liabilities acquired based on their estimated fair
values. We record the excess of the purchase price over the
total of those fair values as goodwill.
Our valuations require significant estimates, especially with
respect to intangible assets. Critical estimates in valuing
certain intangible assets include, but are not limited to,
future expected cash flows from customer contracts, customer
lists and distribution agreements and discount rates. We
estimate fair value based upon assumptions we
39
believe to be reasonable, but which are inherently uncertain and
unpredictable, and, as a result, actual results may differ from
our estimates.
Goodwill
and Intangible Assets
In accordance with SFAS No. 142, Goodwill and Other
Intangible Assets, or SFAS 142, we do not amortize
goodwill or other intangible assets with indefinite lives but
rather test them for impairment. SFAS 142 requires us to
perform an impairment review of our goodwill balance at least
annually, which we intend to perform on November 1 of each
fiscal year, and also whenever events or changes in
circumstances indicate that the carrying amount of these assets
may not be recoverable. The allocation of the acquisition cost
to intangible assets and goodwill requires the extensive use of
estimates and assumptions, including estimates of future cash
flows expected to be generated by the acquired assets and
amortization of intangible assets, other than goodwill. Further,
when impairment indicators are identified with respect to
previously recorded intangible assets, the values of the assets
are determined using discounted future cash flow techniques.
Significant management judgment is required in the forecasting
of future operating results that are used in the preparation of
the projected discounted cash flows, and should different
conditions prevail, material write-downs of net intangible
assets could occur. We review periodically the estimated
remaining useful lives of our acquired intangible assets. A
reduction in our estimate of remaining useful lives, if any,
could result in increased amortization expense in future
periods. Future goodwill impairment tests could result in a
charge to earnings.
Allowance
for Doubtful Accounts
We maintain an allowance for doubtful accounts based on a
periodic review of customer accounts, payment patterns and
specific collection issues. Where account-specific collection
issues are identified, we record a specific allowance based on
the amount that we believe will not be collected. For accounts
where specific collection issues are not identified, we record a
reserve based on the age of the receivables. As of
April 30, 2008, we had two customers that accounted for 25%
and 15%, respectively, of our net accounts receivable, which
receivables were fully paid subsequent to the end of fiscal 2008.
Accounting
for Income Taxes
Management judgment is required in determining our provision for
income taxes, our deferred tax assets and liabilities and any
valuation allowance recorded against our net deferred tax assets.
Provision for income taxes is calculated in compliance with
SFAS No. 109, Accounting for Income Taxes, or
SFAS 109, and other related guidance, and consists of tax
expense related to current period earnings. As part of the
process of preparing our consolidated financial statements, we
are required to estimate income taxes in each of the
jurisdictions in which we operate. This process involves
determining our income tax expense together with calculating the
deferred income tax expense or benefit related to temporary
differences resulting from the differing treatment of items for
tax and accounting purposes, such as deferred revenue or
deductibility of certain intangible assets. These temporary
differences result in deferred tax assets and liabilities. We
must then assess the likelihood that the deferred tax assets may
be recovered through carry back to prior years income or
through the generation of future taxable income after
consideration of tax planning strategies and then record a
valuation allowance to reduce deferred tax assets to an amount
we believe more likely than not will be realized. Changes in
these estimates may result in significant increases or decreases
to our tax provision in a period in which such estimates are
changed which in turn would affect net income.
We recorded a full valuation allowance as of April 30, 2008
because, based on the available evidence, we assessed that it
was more likely than not that we would not be able to utilize
all of our deferred tax assets in the future. We intend to
maintain the full valuation allowances until sufficient evidence
exists to support the reversal of all or some portion of these
allowances. Should the actual amounts differ from our estimates,
the amount of our valuation allowance could be materially
impacted.
We have previously experienced a greater than 50% shift in our
stock ownership, which creates annual limitations on our ability
to use a portion of our net operating loss carry-forwards.
40
We adopted FASB Interpretation 48, Accounting for Uncertainty
in Income Taxes, an Interpretation of SFAS 109, or
FIN 48, on May 1, 2007. FIN 48 prescribes a
recognition threshold and measurement attributes for the
financial statement recognition and measurement of uncertain tax
positions taken or expected to be taken in a companys
income tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition with
respect to income tax uncertainty. Management judgment is
required to determine if the weight of available evidence
indicates that a tax position is more likely than not to be
sustained, as well as the largest amount of benefit from each
sustained position that is more likely than not to be realized.
As a result of the implementation of FIN 48, we recognized
a liability for uncertain tax positions and a cumulative effect
adjustment to the beginning balance of accumulated deficit on
the balance sheet of $0.1 million. As of April 30,
2008, the liability for uncertain tax positions was increased to
$0.3 million. As of the date of adoption, we also recorded
a $1.4 million reduction to deferred tax assets for
unrecognized tax benefits, all of which is currently offset by a
full valuation allowance that had no affect on the beginning
balance of accumulated deficit or the net balance sheet. As of
April 30, 2008, the unrecognized tax benefit of
$1.4 million increased to $1.8 million, all of which
is offset by a full valuation allowance.
Our total unrecognized tax benefit as of the May 1, 2007
adoption date and as of April 30, 2008 was
$1.5 million and $2.1 million, respectively. As of
April 30, 2008, we had $0.3 million of unrealized tax
benefits that, if recognized, would affect our effective tax
rate for fiscal 2008. In addition, we do not expect any material
changes to the estimated amount of liability associated with our
uncertain tax positions within the next 12 months related
to any statute of limitations expiring and may increase as a
result of normal operating activity. Our policy is that we
recognize interest and penalties accrued on any unrecognized tax
benefits as a component of income tax expense. As of the date of
adoption of FIN 48 and as of April 30, 2008, we had
approximately $21,000 and $23,000, respectively of accrued
interest or penalties associated with unrecognized tax benefits.
We file income tax returns in the U.S. federal
jurisdiction, California and various state and foreign tax
jurisdictions in which we have a subsidiary or branch operation.
The tax years 2001 to 2007 remain open to examination by the
U.S. and state tax authorities, and the tax years 2005 and
2007 remain open to examination by the foreign tax authorities.
41
Results
of Operations
The following table presents our results of operations as a
percentage of total revenues for the periods indicated:
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|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
62.8
|
%
|
|
|
63.0
|
%
|
|
|
58.0
|
%
|
Maintenance
|
|
|
27.2
|
|
|
|
26.9
|
|
|
|
29.1
|
|
Services
|
|
|
10.0
|
|
|
|
10.1
|
|
|
|
12.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
Cost of revenues:
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|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
4.7
|
|
|
|
3.7
|
|
|
|
4.5
|
|
Maintenance
|
|
|
5.6
|
|
|
|
5.0
|
|
|
|
5.3
|
|
Services
|
|
|
5.7
|
|
|
|
5.0
|
|
|
|
7.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
16.0
|
|
|
|
13.7
|
|
|
|
17.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
84.0
|
|
|
|
86.3
|
|
|
|
82.8
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
19.5
|
|
|
|
20.8
|
|
|
|
30.8
|
|
Sales and marketing
|
|
|
52.6
|
|
|
|
52.4
|
|
|
|
61.7
|
|
General and administrative
|
|
|
13.2
|
|
|
|
13.6
|
|
|
|
32.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
85.3
|
|
|
|
86.8
|
|
|
|
125.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
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|
(1.3
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)%
|
|
|
(0.5
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)%
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|
|
(42.6
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)%
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|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison
of Fiscal 2008 and Fiscal 2007
Revenues
Revenues for 2008 and 2007 were as follows (in thousands, except
percentages):
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|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30,
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|
|
Change in
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|
|
Change in
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|
|
|
2008
|
|
|
2007
|
|
|
Dollars
|
|
|
Percent
|
|
|
Products
|
|
$
|
63,765
|
|
|
$
|
43,989
|
|
|
$
|
19,776
|
|
|
|
45.0
|
%
|
Percentage of total revenues
|
|
|
62.8
|
%
|
|
|
63.0
|
%
|
|
|
|
|
|
|
|
|
Maintenance
|
|
|
27,607
|
|
|
|
18,762
|
|
|
|
8,845
|
|
|
|
47.1
|
%
|
Percentage of total revenues
|
|
|
27.2
|
%
|
|
|
26.9
|
%
|
|
|
|
|
|
|
|
|
Services
|
|
|
10,173
|
|
|
|
7,082
|
|
|
|
3,091
|
|
|
|
43.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenues
|
|
|
10.0
|
%
|
|
|
10.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
101,545
|
|
|
$
|
69,833
|
|
|
$
|
31,712
|
|
|
|
45.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product Revenues. Product revenues in fiscal
2008 included revenues of $31.0 million from 164 new
customers and revenues of $32.8 million from existing
customers. New customer revenues in fiscal 2008 increased by
$5.5 million compared to new customer revenues in fiscal
2007. Existing customer revenues in fiscal 2008 increased by
$14.3 million compared to existing customer revenues in
fiscal 2007. There was a net recognition of $1.7 million of
product revenues in fiscal 2007 related to sales transactions
that included undelivered product elements for which we did not
have VSOE, while in fiscal 2008 there was a net recognition of
product revenues of $2.7 million from such transactions. As
of April 30, 2008, deferred product revenues included
$2.2 million related to similar transactions. See the
related discussion in Sources of Revenues, Cost of
Revenues and Operating Expenses.
42
Maintenance Revenues. Maintenance revenues
increased by $8.8 million in fiscal 2008 as a result of
providing support services to a larger installed base as well as
the incremental maintenance revenues from increased product
sales. As a result of the timing of revenue recognition for
sales transactions that included an undelivered product element
for which we did not have VSOE, there was a net recognition of
$0.1 million of maintenance revenues in fiscal 2007, and a
net recognition of $0.2 million of maintenance revenues in
fiscal 2008. See the related discussion in Sources
of Revenues, Cost of Revenues and Operating Expenses.
Services Revenues. Services revenues increased
by $3.1 million in fiscal 2008, as a result of increased
service transactions and providing services to a larger
installed base.
Geographic Regions. We sell our product in
three geographic regions: Americas; Europe-Middle East; and Asia
Pacific. Revenues, which include product, maintenance and
service revenues in absolute amounts and as a percentage of
total revenues for each region are summarized in the following
table (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30,
|
|
|
Change in
|
|
|
Change in
|
|
|
|
2008
|
|
|
2007
|
|
|
Dollars
|
|
|
Percent
|
|
|
Americas
|
|
$
|
77,621
|
|
|
$
|
55,704
|
|
|
$
|
21,917
|
|
|
|
39.3
|
%
|
Percentage of total revenues
|
|
|
76.4
|
%
|
|
|
79.8
|
%
|
|
|
|
|
|
|
|
|
Europe-Middle East
|
|
|
18,447
|
|
|
|
9,408
|
|
|
|
9,039
|
|
|
|
96.1
|
%
|
Percentage of total revenues
|
|
|
18.2
|
%
|
|
|
13.5
|
%
|
|
|
|
|
|
|
|
|
Asia Pacific
|
|
|
5,477
|
|
|
|
4,721
|
|
|
|
756
|
|
|
|
16.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenues
|
|
|
5.4
|
%
|
|
|
6.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
101,545
|
|
|
$
|
69,833
|
|
|
$
|
31,712
|
|
|
|
45.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Revenues and Gross Margin
The following table is a summary of cost of product, maintenance
and services revenues in absolute amounts and as a percentage of
total revenues (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30,
|
|
|
Change in
|
|
|
Change in
|
|
|
|
2008
|
|
|
2007
|
|
|
Dollars
|
|
|
Percent
|
|
|
Products
|
|
$
|
4,767
|
|
|
$
|
2,569
|
|
|
$
|
2,198
|
|
|
|
85.6
|
%
|
Percentage of total revenues
|
|
|
4.7
|
%
|
|
|
3.7
|
%
|
|
|
|
|
|
|
|
|
Maintenance
|
|
|
5,691
|
|
|
|
3,498
|
|
|
|
2,193
|
|
|
|
62.7
|
%
|
Percentage of total revenues
|
|
|
5.6
|
%
|
|
|
5.0
|
%
|
|
|
|
|
|
|
|
|
Services
|
|
|
5,800
|
|
|
|
3,521
|
|
|
|
2,279
|
|
|
|
64.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenues
|
|
|
5.7
|
%
|
|
|
5.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
$
|
16,258
|
|
|
$
|
9,588
|
|
|
$
|
6,670
|
|
|
|
69.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
The following table is a summary of gross profit for products,
maintenance and services and their respective gross margins (in
thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
Gross margin
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
58,998
|
|
|
$
|
41,420
|
|
Percentage of product revenues
|
|
|
92.5
|
%
|
|
|
94.2
|
%
|
Maintenance
|
|
$
|
21,916
|
|
|
$
|
15,264
|
|
Percentage of maintenance revenues
|
|
|
79.4
|
%
|
|
|
81.4
|
%
|
Services
|
|
$
|
4,373
|
|
|
$
|
3,561
|
|
Percentage of services revenues
|
|
|
43.0
|
%
|
|
|
50.3
|
%
|
|
|
|
|
|
|
|
|
|
Total gross margin
|
|
$
|
85,287
|
|
|
$
|
60,245
|
|
Percentage of total revenues
|
|
|
84.0
|
%
|
|
|
86.3
|
%
|
|
|
|
|
|
|
|
|
|
Cost of Product Revenues and Gross
Margin. Cost of product revenues increased by
$2.2 million in fiscal 2008, primarily due to increased
appliance cost of goods of $1.9 million related to
increased appliance sales, as well as a $0.3 million
increase in license expense for third party software used in our
products. Product gross margin fell by 1.7 percentage
points as a percentage of product revenues to 92.5% in fiscal
2008, compared to 94.2% in fiscal 2007. This drop was primarily
attributable to increased appliance sales where product costs
are higher creating lower gross margin for product revenues. In
future periods, we expect the appliance portion of our product
revenues to continue to increase as a percentage of total
revenues and, accordingly, we expect cost of product revenues to
increase and product gross margin as a percentage of product
revenues to decrease slightly.
Cost of Maintenance Revenues and Gross
Margin. Cost of maintenance revenues increased by
$2.2 million in fiscal 2008, primarily due to increased
compensation related expenses of $1.1 million related to
increased head count, an increase in third-party royalty
maintenance expenses of $0.5 million, and an increase in
facilities expenses of $0.2 million. Maintenance gross
margin fell by 2.0% as a percentage of maintenance revenues to
79.4% in fiscal 2008 compared to 81.4% in fiscal 2007. This
decrease in maintenance gross margin is primarily attributable
to increased head count in our technical support organization
and increases in third-party royalty maintenance expenses.
Cost of Services Revenues and Gross
Margin. Cost of service revenues increased by
$2.3 million in fiscal 2008, primarily due to increased
compensation related-expenses of $1.5 million related to
increased head count and cost per employee. Additionally,
billable travel expense and use of third party contractors
increased by $0.3 million and $0.2 million,
respectively. Services gross margin as a percentage of services
revenues decreased to 43.0% for fiscal 2008 compared to 50.3% in
fiscal 2007, due primarily to an increase in cost per employee
without a corresponding increase in revenue billing rates and a
decrease in productivity due to training of employees.
44
Operating
Expenses
The following table is a summary of research and development,
sales and marketing, and general and administrative expenses in
absolute amounts and as a percentage of total revenues (in
thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30,
|
|
|
Change in
|
|
|
Change in
|
|
|
|
2008
|
|
|
2007
|
|
|
Dollars
|
|
|
Percent
|
|
|
Research and development
|
|
$
|
19,762
|
|
|
$
|
14,535
|
|
|
$
|
5,227
|
|
|
|
36.0
|
%
|
Percentage of total revenues
|
|
|
19.5
|
%
|
|
|
20.8
|
%
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
53,453
|
|
|
|
36,587
|
|
|
|
16,866
|
|
|
|
46.1
|
%
|
Percentage of total revenues
|
|
|
52.6
|
%
|
|
|
52.4
|
%
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
13,422
|
|
|
|
9,453
|
|
|
|
3,969
|
|
|
|
42.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenues
|
|
|
13.2
|
%
|
|
|
13.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
86,637
|
|
|
$
|
60,575
|
|
|
$
|
26,062
|
|
|
|
43.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenues
|
|
|
85.3
|
%
|
|
|
86.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and Development Expenses. The
increase in research and development expenses in fiscal 2008 of
$5.2 million compared to fiscal 2007 was primarily
attributable to an increase of $3.0 million in
compensation-related expenses and an increase of
$0.9 million in stock-based compensation expense, in each
case associated with an increase in research and development
personnel from 89 to 101 at the respective period ends. In
addition, there was an increase in facilities-related expense of
$0.9 million as a result of the expansion of our
headquarters in Cupertino, California to accommodate the
increase in our personnel. Research and development expense as a
percentage of revenues was 19.5% in fiscal 2008 compared to
20.8% in fiscal 2007.
Sales and Marketing Expenses. The increase in
sales and marketing expenses in fiscal 2008 of
$16.9 million compared to fiscal 2007 was primarily
attributable to an increase of $10.2 million in
compensation-related expense and $2.0 million in
stock-based compensation expense, in each case associated with
an increase in sales and marketing personnel from 104 to 123 at
the respective period ends. In addition, travel and
entertainment expenses increased by $1.6 million,
overhead-related expenses such as employee relations and network
communications, increased by $1.3 million, marketing
program expenses increased by $0.6 million, and facilities
expenses increased $0.4 million. Sales and marketing
expense as a percentage of revenues remained essentially the
same at 52.6% in fiscal 2008 compared to 52.4% in fiscal 2007.
General and Administrative Expenses. The
increase in general and administrative expenses of
$4.0 million in fiscal 2008 compared to fiscal 2007 was
primarily attributable to an increase of $2.3 million
associated with compensation-related expense and an increase of
$0.3 million in stock-based compensation expense, in each
case associated with an increase in personnel from 32 to 41 at
the respective period ends. In addition, there was an increase
of $0.7 million in accounting, audit and tax expense, an
increase in facilities expense of $0.4 million and an
increase of $0.2 million in liability insurance expense
associated with increasing our coverage level in connection with
our becoming a public company. General and administrative
expense as a percentage of revenues remained essentially the
same at 13.2% in fiscal 2008 compared to 13.5% in fiscal 2007.
45
Non-Operating
Expenses
The following table is a summary of interest income and other
expenses, net, in absolute amounts and as a percentage of total
revenues (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30,
|
|
|
Change in
|
|
|
Change in
|
|
|
|
2008
|
|
|
2007
|
|
|
Dollars
|
|
|
Percent
|
|
|
Interest income
|
|
$
|
857
|
|
|
$
|
637
|
|
|
$
|
220
|
|
|
|
34.5
|
%
|
Percentage of total revenues
|
|
|
0.8
|
%
|
|
|
0.9
|
%
|
|
|
|
|
|
|
|
|
Other expense, net
|
|
|
(385
|
)
|
|
|
(175
|
)
|
|
|
(210
|
)
|
|
|
(120.0
|
)%
|
Percentage of total revenues
|
|
|
(0.4
|
)%
|
|
|
(0.2
|
)%
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
(1,131
|
)
|
|
|
(389
|
)
|
|
|
(742
|
)
|
|
|
(190.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenues
|
|
|
(1.1
|
)%
|
|
|
(0.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-operating expenses
|
|
$
|
(659
|
)
|
|
$
|
73
|
|
|
$
|
(732
|
)
|
|
|
(1002.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenues
|
|
|
(0.6
|
)%
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income. The increase in interest
income was primarily attributable to increased cash and cash
equivalents related to net proceeds received from our IPO.
Other Income (Expense), Net. The decrease in
other income (expense), net in fiscal 2008 is primarily a result
of higher interest expense related to capitalized software
licenses and, to a lesser extent, foreign currency losses.
Provision for Income Taxes. The provision for
income taxes of $1.1 million for the year ended
April 30, 2008, is primarily related to foreign corporate
income taxes, federal and state alternative minimum taxes
currently due, and a charge of $0.3 million to establish a
deferred tax liability related to the temporary timing
difference between the tax deductible amortization of goodwill
related to the acquisition of Enira Technologies, LLC in
June 2006 under applicable tax rules and
SFAS No. 142 under which goodwill must be analyzed
annually for impairment rather than amortized for financial
reporting purposes (see Note 11Income
Taxes for more detail discussion). The provision for
income taxes of $0.4 million for the years ended
April 30, 2007, was primarily for foreign corporate income
taxes.
Comparison
of Fiscal 2007 and Fiscal 2006
Revenues
Revenues for 2007 and 2006 were as follows (in thousands, except
percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30,
|
|
|
Change in
|
|
|
Change in
|
|
|
|
2007
|
|
|
2006
|
|
|
Dollars
|
|
|
Percent
|
|
|
Products
|
|
$
|
43,989
|
|
|
$
|
22,859
|
|
|
$
|
21,130
|
|
|
|
92.4
|
%
|
Percentage of total revenues
|
|
|
63.0
|
%
|
|
|
58.0
|
%
|
|
|
|
|
|
|
|
|
Maintenance
|
|
|
18,762
|
|
|
|
11,473
|
|
|
|
7,289
|
|
|
|
63.5
|
%
|
Percentage of total revenues
|
|
|
26.9
|
%
|
|
|
29.1
|
%
|
|
|
|
|
|
|
|
|
Services
|
|
|
7,082
|
|
|
|
5,103
|
|
|
|
1,979
|
|
|
|
38.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenues
|
|
|
10.1
|
%
|
|
|
12.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
69,833
|
|
|
$
|
39,435
|
|
|
$
|
30,398
|
|
|
|
77.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product Revenues. Product revenues in fiscal
2007 included revenues of $25.5 million from sales to 120
new customers and revenues of $18.5 million from sales to
existing customers. New customer revenues in fiscal 2007
increased by $11.5 million compared to new customer
revenues in fiscal 2006. Existing customer revenues in fiscal
2007 increased by $9.6 million compared to existing
customer revenues in fiscal 2006. As a result of the timing of
revenue recognition for sales transactions that included an
undelivered product element for which we did not have
46
VSOE, there was a net deferral of $6.0 million of product
revenues in fiscal 2006 and a net recognition of
$1.7 million of product revenues in fiscal 2007. This
accounted for $0.3 million of the increase in product
revenues from new customers, and $7.4 million of the
increase in product revenues from existing customers, in fiscal
2007 compared with fiscal 2006. As of April 30, 2007,
deferred product revenues included $4.9 million related to
similar transactions. See the related discussion in
Sources of Revenues, Cost of Revenues and Operating
Expenses.
Maintenance Revenues. Maintenance revenues
increased $7.3 million in fiscal 2007 as a result of
providing support services to a larger installed base as well as
the incremental maintenance revenues from increased product
sales. As a result of the timing of revenue recognition for
sales transactions that included an undelivered product element
for which we did not have VSOE, there was a net deferral of
$0.3 million of maintenance revenues in fiscal 2006 and a
net recognition of $0.1 million of maintenance revenues in
fiscal 2007. This accounted for $0.4 million of the
increase in maintenance revenues in fiscal 2007 compared to
fiscal 2006. As of April 30, 2007, deferred maintenance
revenues included $0.5 million related to similar
transactions. See the related discussion in Sources
of Revenues, Cost of Revenues and Operating Expenses.
Services Revenues. Services revenues increased
by $2.0 million in fiscal 2007 as a result of providing
services to a larger installed base.
Geographic Regions. We sell our product in
three geographic regions: Americas; Europe-Middle East; and Asia
Pacific. Revenues, which include product, maintenance and
service revenues, in absolute amounts and as a percentage of
total revenues for each region are summarized in the following
table (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30,
|
|
|
Change in
|
|
|
Change in
|
|
|
|
2007
|
|
|
2006
|
|
|
Dollars
|
|
|
Percent
|
|
|
Americas
|
|
$
|
55,704
|
|
|
$
|
32,743
|
|
|
$
|
22,961
|
|
|
|
70.1
|
%
|
Percentage of total revenues
|
|
|
79.8
|
%
|
|
|
83.0
|
%
|
|
|
|
|
|
|
|
|
Europe-Middle East
|
|
|
9,408
|
|
|
|
4,668
|
|
|
|
4,740
|
|
|
|
101.5
|
%
|
Percentage of total revenues
|
|
|
13.5
|
%
|
|
|
11.9
|
%
|
|
|
|
|
|
|
|
|
Asia Pacific
|
|
|
4,721
|
|
|
|
2,024
|
|
|
|
2,697
|
|
|
|
133.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenues
|
|
|
6.7
|
%
|
|
|
5.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
69,833
|
|
|
$
|
39,435
|
|
|
$
|
30,398
|
|
|
|
77.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Revenues and Gross Margin
The following table is a summary of cost of product,
maintenance, and services revenues in absolute amounts and as a
percentage of total revenues (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30,
|
|
|
Change in
|
|
|
Change in
|
|
|
|
2007
|
|
|
2006
|
|
|
Dollars
|
|
|
Percent
|
|
|
Products
|
|
$
|
2,569
|
|
|
$
|
1,769
|
|
|
$
|
800
|
|
|
|
45.2
|
%
|
Percentage of total revenues
|
|
|
3.7
|
%
|
|
|
4.5
|
%
|
|
|
|
|
|
|
|
|
Maintenance
|
|
|
3,498
|
|
|
|
2,085
|
|
|
|
1,413
|
|
|
|
67.8
|
%
|
Percentage of total revenues
|
|
|
5.0
|
%
|
|
|
5.3
|
%
|
|
|
|
|
|
|
|
|
Services
|
|
|
3,521
|
|
|
|
2,942
|
|
|
|
579
|
|
|
|
19.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenues
|
|
|
5.0
|
%
|
|
|
7.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
$
|
9,588
|
|
|
$
|
6,796
|
|
|
$
|
2,792
|
|
|
|
41.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
The following table is a summary of gross margin for products,
maintenance, and services and their respective gross margins (in
thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Gross margin
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
41,420
|
|
|
$
|
21,090
|
|
Percentage of product revenues
|
|
|
94.2
|
%
|
|
|
92.3
|
%
|
Maintenance
|
|
|
15,264
|
|
|
|
9,388
|
|
Percentage of maintenance revenues
|
|
|
81.4
|
%
|
|
|
81.8
|
%
|
Services
|
|
|
3,561
|
|
|
|
2,161
|
|
Percentage of services revenues
|
|
|
50.3
|
%
|
|
|
42.3
|
%
|
|
|
|
|
|
|
|
|
|
Total gross margin
|
|
$
|
60,245
|
|
|
$
|
32,639
|
|
Percentage of total revenues
|
|
|
86.3
|
%
|
|
|
82.8
|
%
|
|
|
|
|
|
|
|
|
|
Cost of Product Revenues and Gross
Margin. Product gross margin as a percentage of
product revenues increased to 94.2% in fiscal 2007 from 92.3% in
fiscal 2006. The increase of 1.9 percentage points in
product gross margin as a percentage of product revenues in
fiscal 2007 compared to fiscal 2006 was primarily a result of
the timing of revenue recognition for sales transactions that
included an undelivered product element for which we did not
have VSOE.
Cost of Maintenance Revenues and Gross
Margin. Maintenance gross margin remained
essentially the same at 81.4% and 81.8% in fiscal 2007 and 2006,
respectively.
Cost of Services Revenues and Gross
Margin. Services gross margin increased to 50.3%
in fiscal 2007 from 42.3% in fiscal 2006 due to a decreased
volume of lower gross margin services revenues in fiscal 2007,
including fewer services for which we used a third-party service
provider related to certain government contracts.
Operating
Expenses
The following table is a summary of research and development,
sales and marketing, and general and administrative expenses in
absolute amounts and as a percentage of total revenues (in
thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30,
|
|
|
Change in
|
|
|
Change in
|
|
|
|
2007
|
|
|
2006
|
|
|
Dollars
|
|
|
Percent
|
|
|
Research and development
|
|
$
|
14,535
|
|
|
$
|
12,154
|
|
|
$
|
2,381
|
|
|
|
19.6
|
%
|
Percentage of total revenues
|
|
|
20.8
|
%
|
|
|
30.8
|
%
|
|
|
|
|
|
|
|
|
Sales and Marketing
|
|
|
36,587
|
|
|
|
24,309
|
|
|
|
12,278
|
|
|
|
50.5
|
%
|
Percentage of total revenues
|
|
|
52.4
|
%
|
|
|
61.7
|
%
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
9,453
|
|
|
|
12,978
|
|
|
|
(3,525
|
)
|
|
|
(27.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenues
|
|
|
13.5
|
%
|
|
|
32.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
60,575
|
|
|
$
|
49,441
|
|
|
$
|
11,134
|
|
|
|
22.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenues
|
|
|
86.7
|
%
|
|
|
125.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and Development Expenses. The
increase in research and development expenses in fiscal 2007 of
$2.4 million compared to fiscal 2006 was primarily
attributable to an increase of $2.8 million in compensation
expenses associated with an increase in research and development
personnel from 71 to 89 at the respective period ends, and an
increase in depreciation of $0.5 million, an increase of
$0.3 million for outside service providers and an increase
of $0.3 million of compensation-related expenses, including
our incurrence of stock-based compensation expense of
$0.1 million as a result of our adoption of SFAS 123R
in fiscal 2007, offset by the decrease in stock-
48
based compensation of $1.9 million in fiscal 2007 as a
result of the repayment of an employee loan in fiscal 2006 and
the associated cessation of variable accounting. Research and
development expense as a percentage of revenues was 20.8% in
fiscal 2007, compared to 30.8% in fiscal 2006. The timing of
revenue recognition for sales transactions that included an
undelivered product element for which we did not have VSOE
contributed to 4.8 percentage points of the
10.0 percentage point reduction in research and development
expenses as a percentage of revenues.
Sales and Marketing Expenses. The increase in
sales and marketing expenses in fiscal 2007 of
$12.3 million compared to fiscal 2006 was primarily
attributable to an increase of $8.9 million in compensation
and related expense associated with an increase in sales and
marketing personnel from 74 to 104 at the respective period
ends. The increase in compensation and related expense included
$0.6 million as a result of our adoption in fiscal 2007 of
SFAS 123R. In addition, marketing expenses related to trade
shows, public relations and advertising increased by
$1.6 million and travel expenses increased by
$0.9 million. Sales and marketing expense as a percentage
of revenues was 52.4% in fiscal 2007, compared to 61.7% in
fiscal 2006. The reduction in sales and marketing expenses as a
percentage of revenues was due to the timing of revenue
recognition for sales transactions that included an undelivered
product element for which we did not have VSOE.
General and Administrative Expenses. The
decrease in general and administrative expenses of
$3.5 million in fiscal 2007 compared to fiscal 2006 was
primarily associated with a decrease in compensation and related
expenses of $4.0 million, offset in part by an increase of
$0.3 million associated with professional service provider
fees. The decrease in compensation and related expenses is
primarily a result of the decreased stock-based compensation
expense of $5.6 million in fiscal 2007 as a result of the
repayment of an employee loan in fiscal 2006, offset by an
increase of $1.6 million associated with an increase in
personnel from 22 to 32 at the respective period ends. Fiscal
2007 stock-based compensation expense included $0.2 million
from our adoption in fiscal 2007 of SFAS 123R. General and
administrative expense as a percentage of revenues declined to
13.6% in fiscal 2007, compared to 32.9% in fiscal 2006. The
timing of revenue recognition for sales transactions that
included an undelivered product element for which we did not
have VSOE contributed to 4.8 percentage points of the
19.3 percentage point reduction in general and
administrative expenses as a percentage of revenues.
Non-Operating
Expenses
The following table is a summary of interest income and other
expenses, net, in absolute amounts and as a percentage of total
revenues (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30,
|
|
|
Change in
|
|
|
Change in
|
|
|
|
2007
|
|
|
2006
|
|
|
Dollars
|
|
|
Percent
|
|
|
Interest income
|
|
$
|
637
|
|
|
$
|
435
|
|
|
$
|
202
|
|
|
|
46.4
|
%
|
Percentage of total revenues
|
|
|
0.9
|
%
|
|
|
1.1
|
%
|
|
|
|
|
|
|
|
|
Other expense, net
|
|
|
(175
|
)
|
|
|
(216
|
)
|
|
|
41
|
|
|
|
19.0
|
%
|
Percentage of total revenues
|
|
|
(0.2
|
)%
|
|
|
(0.5
|
)%
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
(389
|
)
|
|
|
(163
|
)
|
|
|
(226
|
)
|
|
|
(138.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenues
|
|
|
(0.6
|
)%
|
|
|
(0.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-operating expenses
|
|
$
|
73
|
|
|
$
|
56
|
|
|
$
|
17
|
|
|
|
30.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenues
|
|
|
0.1
|
%
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income. The increase in interest
income was primarily due to increased sales.
Other Expense, Net. The increase in other
expense, net in fiscal 2007 is primarily a result of higher
invested cash balances generated from operations, as our foreign
currency related gains and losses remained comparable year over
year.
Provision for Income Taxes. The provision for
income taxes of $0.4 million and $0.2 million for
fiscal 2007 and 2006, respectively was primarily related to
foreign corporate income taxes.
49
Liquidity
and Capital Resources
From our inception in May 2000 through October 2002, we funded
our operations primarily through convertible preferred stock
financings that raised a total of $26.8 million. We
achieved positive cash flows from operations in fiscal 2004
through 2008, and generally expect to continue generating
positive operating cash flows on an annual basis. Although,
there may be individual quarters in which we use cash as a
result of the timing of receipts or payments such as receipt of
a large receivable from a customer whose revenue is recognized
on a cash basis or payment of annual bonuses in the first
quarter of a fiscal year. In February 2008, we completed our IPO
in which we sold 6,000,000 shares of common stock at an
issue price of $9.00 per share. We raised a total of
$54.0 million in gross proceeds from our IPO, or
$45.9 million in net proceeds after deducting underwriting
discounts and offering expenses.
At April 30, 2008, we had cash and cash equivalents
totaling $71.9 million and accounts receivable of
$26.7 million, compared to $16.9 million of cash and
cash equivalents and $15.6 million of accounts receivable
at April 30, 2007.
Historically our principal uses of cash have consisted of
payroll and other operating expenses and purchases of property
and equipment to support our growth. In fiscal 2007, we used
$7.2 million in cash to purchase the assets of Enira
Technologies, LLC and pay acquisition costs.
The following table shows our cash flows from operating
activities, investing activities and financing activities for
the stated periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net cash provided by operating activities
|
|
$
|
13,532
|
|
|
$
|
11,050
|
|
|
$
|
3,848
|
|
Net cash used in investing activities
|
|
|
(4,012
|
)
|
|
|
(10,233
|
)
|
|
|
(1,431
|
)
|
Net cash provided by (used in) financing activities
|
|
$
|
45,567
|
|
|
|
(359
|
)
|
|
|
538
|
|
Operating
Activities
Although we have reported a net loss in fiscal 2008, 2007 and
2006, our operating activities have provided positive cash
flows, primarily due to the significant non-cash charges
associated with stock-based compensation and depreciation and
amortization reflected in operating expenses and cash received
from collections from customers. Our cash flows from operating
activities in any period will continue to be significantly
influenced by our results of operations, these non-cash charges
and changes in deferred revenues, as well as changes in other
components of our working capital.
While we may report negative cash flows from operating
activities from time to time in particular quarterly periods, we
generally expect to continue to generate positive cash flows
from operating activities on an annual basis. Future cash from
operations will depend on many factors, including:
|
|
|
|
|
the growth in our sales transactions and associated cash
collections or growth in receivables;
|
|
|
|
the level of our sales and marketing activities, including
expansion into new territories;
|
|
|
|
the timing and extent of spending to support product development
efforts; and
|
|
|
|
the timing of the growth in general and administrative expenses
as we further develop our administrative infrastructure to
support the business as a public company.
|
We generated $13.5 million of cash from operating
activities during fiscal 2008, primarily as a result of a
$11.7 million increase in deferred revenues, a
$5.2 million increase in our accrued compensation and
benefits because sales commissions and performance bonus accrued
under our fiscal 2008 bonus plan were not paid until the first
quarter of fiscal 2009, a $0.6 million decrease in prepaid
expenses, offset in part by a $11.1 million increase in
accounts receivable associated with the growth in revenue and
timing of sales. In addition, we had a net loss of
$2.0 million for this period, which included non-cash
charges of $4.9 million for stock-based compensation
expense and $2.5 million of depreciation and amortization.
50
We generated $11.1 million of cash from operating
activities during fiscal 2007, primarily as a result of a
$5.0 million increase in deferred revenues, a
$3.3 million increase in our accrued compensation and
benefits because sales commissions and performance bonuses
accrued under our fiscal 2007 bonus plan were not paid until the
first quarter of fiscal 2008, a $2.2 million increase in
accounts payable resulting from the timing of payment
obligations and a $1.4 million increase in other accrued
liabilities, offset in part by a $3.4 million increase in
accounts receivable associated with the growth in our revenues
and a $1.0 million increase in prepaid expenses. In
addition, we generated cash from operations in fiscal 2007
because our reported net loss of $0.3 million included
$1.5 million of non-cash stock-based compensation expense
and $1.9 million of non-cash depreciation and amortization
charges.
We generated $3.8 million of cash from operating activities
during fiscal 2006, primarily as a result of the
$13.2 million increase in deferred revenues, which was
primarily a function of the relatively large portion of our
sales during the fiscal year that involved multiple element
arrangements where one or more of the product elements for which
we did not have VSOE remained undelivered. See the related
discussion in Sources of Revenues, Cost of Revenues
and Operating Expenses. We used cash in operations to the
extent that we incurred a net loss of $16.7 million,
although this loss included non-cash stock-based compensation
expense of $8.1 million related primarily to variable
stock-based compensation awards and non-cash depreciation and
amortization charges of $0.9 million. In fiscal 2006, we
also used cash of $1.6 million because our accounts
receivable grew along with our growth in revenue.
Investing
Activities
During fiscal 2008, we used $4.0 million in cash for
investing activities, of which $2.0 million was related to
capital expenditures associated with computer equipment,
furniture and fixtures and software, and $1.4 million
related to leasehold improvements, all in support of the
expansion of our infrastructure and work force. During fiscal
2007, we used $10.2 million in cash for investing
activities, primarily as a result of $7.2 million of cash
consideration and acquisition costs, for the purchase of the
assets of Enira Technologies, LLC, $2.2 million in
purchases of property and equipment and $0.8 million in a
restricted cash account used to secure a standby letter of
credit. Investing activities for fiscal 2006 consisted of
$1.4 million in purchases of property and equipment to
support our growth.
Financing
Activities
During fiscal 2008, we generated $45.6 million of cash from
financing activities, comprised primarily of $50.2 million
in proceeds from our IPO (after underwriting discounts and
commissions) and $0.9 million of net proceeds from the
exercise of stock options, offset by payments of
$3.7 million in IPO preparation costs, $1.9 million in
payments for capital lease obligations and capitalized software
licenses used as a component in our product sales. During fiscal
2007, cash used in financing activities was $0.4 million,
and consisted of $0.6 million of costs incurred in
conjunction with our IPO and $0.3 million in payments for
capital lease obligations and capitalized software licenses,
offset by proceeds from the exercise of stock options. In fiscal
2006, the net cash provided by financing activities was
$0.5 million and consisted primarily of $0.4 million
in proceeds from the repayment of certain stockholder notes and
proceeds from the exercise of stock options.
Other
Factors Affecting Liquidity and Capital Resources
We believe that our cash and cash equivalents and any cash flow
from operations will be sufficient to meet our anticipated cash
needs, including for working capital purposes, capital
expenditures and various contractual obligations, for at least
the next 12 months. We may, however, require additional
cash resources due to changed business conditions or other
future developments, including any investments or acquisitions
we may decide to pursue. If these sources are insufficient to
satisfy our cash requirements, we may seek to sell debt
securities or additional equity securities or to obtain a credit
facility. The sale of additional equity securities could result
in additional dilution to our stockholders. The incurrence of
indebtedness would result in debt service obligations and could
result in operating and financial covenants that would restrict
our operations. In addition, there can be no assurance that any
additional financing will be available on acceptable terms, if
at all. We anticipate that, from time
51
to time, we may evaluate acquisitions of complementary
businesses, technologies or assets. However, there are no
current understandings, commitments or agreements with respect
to any acquisitions.
Off-Balance
Sheet Arrangements
As of April 30, 2008, we had no off-balance sheet
arrangements as defined in Item 303(a)(4) of the SECs
Regulation S-K.
Contractual
Obligations and Commitments
We lease facilities for our corporate headquarters, subsidiaries
and regional sales offices. We lease our principal facility in
Cupertino, California under a non-cancelable operating lease
agreement that expires in October 2013. We also have leases
for our regional sales offices that are for 13 months or
less.
The following table is a summary of our contractual obligations
as of April 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
Total
|
|
|
FY 2009
|
|
|
FY 2010
|
|
|
FY 2011
|
|
|
FY 2012
|
|
|
Thereafter
|
|
|
|
(In thousands)
|
|
|
Operating lease obligations
|
|
$
|
11,581
|
|
|
$
|
2,323
|
|
|
$
|
1,933
|
|
|
$
|
1,988
|
|
|
$
|
2,068
|
|
|
$
|
3,269
|
|
Accrued contractual obligations
|
|
$
|
2,298
|
|
|
|
2,134
|
|
|
|
161
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
13,879
|
|
|
$
|
4,457
|
|
|
$
|
2,094
|
|
|
$
|
1,991
|
|
|
$
|
2,068
|
|
|
$
|
3,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recent
Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurement, or SFAS 157, which
defines fair value, establishes a framework for measuring fair
value under generally accepted accounting principles, and
expands disclosures about fair value measurements. SFAS 157
does not require any new fair value measurements. SFAS 157
is effective for all financial statements issued for fiscal
years beginning after November 15, 2007. We are currently
assessing the impact, if any, the adoption of SFAS 157 will
have on our consolidated results of operations, financial
position and cash flows.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities, or SFAS 159, including an amendment of
SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities, which allows an entity to
choose to measure certain financial instruments and liabilities
at fair value. Subsequent measurements for the financial
instruments and liabilities an entity elects to measure at fair
value will be recognized in earnings. SFAS 159 also
establishes additional disclosure requirements. SFAS 159 is
effective for fiscal years beginning after November 15,
2007, with early adoption permitted provided that the entity
also adopts SFAS 157. We are currently evaluating the
effect, if any, the adoption of SFAS 159 will have on our
consolidated results of operations, financial position and cash
flows.
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations, or SFAS 141R which
replaces SFAS No. 141. SFAS 141R establishes
principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and non-controlling interests
in the acquiree and the goodwill acquired, in connection with a
business combination. SFAS 141R also establishes disclosure
requirements. SFAS 141R is effective for fiscal years
beginning after December 15, 2008. We will adopt
SFAS 141R on May 1, 2009, which is the beginning of
our fiscal 2010.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51, or
SFAS 160. SFAS 160 changes how noncontrolling
interests in subsidiaries are measured to initially be measured
at fair value and classified as a separate component of equity.
SFAS No. 160 establishes a single method of accounting
for changes in a parents ownership interest in a
subsidiary that do not result in deconsolidation. No gains or
losses will be recognized on partial disposals of a subsidiary
where control is retained. In addition, in partial acquisitions,
where control is obtained, the acquiring company will recognize
and measure at fair value all of the assets and liabilities,
including goodwill, as if the entire target
52
company had been acquired. SFAS 160 is to be applied
prospectively for fiscal years beginning on or after
December 15, 2008. We will adopt SFAS 160 on
May 1, 2009, which is the beginning of fiscal 2010.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
Market Risk. Market risk represents the risk
of loss that may impact our financial position due to adverse
changes in financial market prices and rates. Our market risk
exposure is primarily a result of fluctuations in foreign
exchange rates and interest rates. We do not hold or issue
financial instruments for trading purposes.
Foreign Currency Exchange Risk. To date,
substantially all of our international sales have been
denominated in U.S. dollars, and therefore the majority of
our net revenues are not subject to foreign currency risk. Our
operating expenses and cash flows are subject to fluctuations
due to changes in foreign currency exchange rates, but
historically have had relatively little impact on our operating
results and cash flows. We utilize foreign currency forward and
option contracts to manage our currency exposures as part of our
ongoing business operations. We do not expect to enter into
foreign currency exchange contracts for trading or speculative
purposes.
Interest Rate Risk. Our investment policy is
intended to preserve principal, provide liquidity and maximize
income by limiting default risk, market risk and reinvestment
risk. To minimize these risks, we primarily invest in money
market funds. We had cash and cash equivalents totaling
$71.9 million as of April 30, 2008, including the
$45.9 million net proceeds from our IPO, which are
primarily held for working capital and general corporate
purposes. The fair value of our investment portfolio would not
be significantly impacted by either a 100 basis point
increase or decrease in market interest rates due mainly to the
short-term nature of the majority of our investment portfolio.
As a result, we do not believe that we have any material
exposure to changes in the fair value of our investment
portfolio as a result of changes in interest rates. Declines in
interest rates, however, will reduce future interest income. We
do not enter into investments for trading or speculative
purposes.
53
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
Quarterly
Results of Operations
The following table sets forth unaudited quarterly consolidated
statements of operations data for each of the years in the
two-year period ended April 30, 2008, (in thousands, except
per share data). We derived this information from our unaudited
consolidated financial statements, which we prepared on the same
basis as our audited consolidated financial statements contained
in this Annual Report on
Form 10-K.
In our opinion, these unaudited statements include all
adjustments, consisting only of normal recurring adjustments
that we consider necessary for a fair statement of that
information when read in conjunction with the consolidated
financial statements and related notes included elsewhere in
this Annual Report on
Form 10-K.
The operating results for any quarter should not be considered
indicative of results for any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
July 31,
|
|
|
Oct. 31,
|
|
|
Jan. 31,
|
|
|
April 30,
|
|
|
July 31,
|
|
|
Oct. 31,
|
|
|
Jan. 31,
|
|
|
April 30,
|
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
|
(Unaudited, in thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
7,712
|
|
|
$
|
8,962
|
|
|
$
|
10,209
|
|
|
$
|
17,106
|
|
|
$
|
12,205
|
|
|
$
|
15,670
|
|
|
$
|
17,698
|
|
|
$
|
18,192
|
|
Maintenance
|
|
|
3,631
|
|
|
|
4,137
|
|
|
|
4,611
|
|
|
|
6,383
|
|
|
|
5,630
|
|
|
|
6,617
|
|
|
|
7,380
|
|
|
|
7,980
|
|
Services
|
|
|
1,614
|
|
|
|
1,663
|
|
|
|
1,914
|
|
|
|
1,891
|
|
|
|
2,035
|
|
|
|
2,341
|
|
|
|
2,593
|
|
|
|
3,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
12,957
|
|
|
|
14,762
|
|
|
|
16,734
|
|
|
|
25,380
|
|
|
|
19,870
|
|
|
|
24,628
|
|
|
|
27,671
|
|
|
|
29,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
657
|
|
|
|
392
|
|
|
|
625
|
|
|
|
895
|
|
|
|
684
|
|
|
|
1,130
|
|
|
|
1,487
|
|
|
|
1,466
|
|
Maintenance(1)
|
|
|
807
|
|
|
|
843
|
|
|
|
851
|
|
|
|
997
|
|
|
|
1,246
|
|
|
|
1,381
|
|
|
|
1,456
|
|
|
|
1,608
|
|
Services(1)
|
|
|
954
|
|
|
|
930
|
|
|
|
847
|
|
|
|
790
|
|
|
|
1,078
|
|
|
|
1,362
|
|
|
|
1,454
|
|
|
|
1,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
2,418
|
|
|
|
2,165
|
|
|
|
2,323
|
|
|
|
2,682
|
|
|
|
3,008
|
|
|
|
3,873
|
|
|
|
4,397
|
|
|
|
4,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
10,539
|
|
|
|
12,597
|
|
|
|
14,411
|
|
|
|
22,698
|
|
|
|
16,862
|
|
|
|
20,755
|
|
|
|
23,274
|
|
|
|
24,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
3,358
|
|
|
|
3,575
|
|
|
|
3,636
|
|
|
|
3,966
|
|
|
|
4,260
|
|
|
|
4,847
|
|
|
|
5,063
|
|
|
|
5,592
|
|
Sales and marketing
|
|
|
7,735
|
|
|
|
7,728
|
|
|
|
9,226
|
|
|
|
11,898
|
|
|
|
11,919
|
|
|
|
12,688
|
|
|
|
12,760
|
|
|
|
16,086
|
|
General and administrative
|
|
|
1,757
|
|
|
|
2,104
|
|
|
|
2,125
|
|
|
|
3,467
|
|
|
|
3,520
|
|
|
|
3,468
|
|
|
|
2,939
|
|
|
|
3,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
12,850
|
|
|
|
13,407
|
|
|
|
14,987
|
|
|
|
19,331
|
|
|
|
19,699
|
|
|
|
21,003
|
|
|
|
20,762
|
|
|
|
25,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(2,311
|
)
|
|
|
(810
|
)
|
|
|
(576
|
)
|
|
|
3,367
|
|
|
|
(2,837
|
)
|
|
|
(248
|
)
|
|
|
2,512
|
|
|
|
(777
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income, net
|
|
|
113
|
|
|
|
71
|
|
|
|
131
|
|
|
|
147
|
|
|
|
19
|
|
|
|
21
|
|
|
|
98
|
|
|
|
334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes
|
|
|
(2,198
|
)
|
|
|
(739
|
)
|
|
|
(445
|
)
|
|
|
3,514
|
|
|
|
(2,818
|
)
|
|
|
(227
|
)
|
|
|
2,610
|
|
|
|
(443
|
)
|
Provision for income taxes
|
|
|
98
|
|
|
|
97
|
|
|
|
97
|
|
|
|
97
|
|
|
|
118
|
|
|
|
139
|
|
|
|
257
|
|
|
|
617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(2,296
|
)
|
|
$
|
(836
|
)
|
|
$
|
(542
|
)
|
|
$
|
3,417
|
|
|
$
|
(2,936
|
)
|
|
$
|
(366
|
)
|
|
$
|
2,353
|
|
|
$
|
(1,060
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Stock-based compensation expense as included in above: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of maintenance revenues
|
|
$
|
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
8
|
|
|
$
|
30
|
|
|
$
|
24
|
|
|
$
|
44
|
|
Cost of services revenues
|
|
|
2
|
|
|
|
2
|
|
|
|
3
|
|
|
|
7
|
|
|
|
8
|
|
|
|
38
|
|
|
|
23
|
|
|
|
46
|
|
Research and development
|
|
|
91
|
|
|
|
131
|
|
|
|
136
|
|
|
|
143
|
|
|
|
157
|
|
|
|
490
|
|
|
|
293
|
|
|
|
416
|
|
Sales and marketing
|
|
|
42
|
|
|
|
53
|
|
|
|
110
|
|
|
|
456
|
|
|
|
461
|
|
|
|
680
|
|
|
|
771
|
|
|
|
773
|
|
General and administrative
|
|
|
80
|
|
|
|
92
|
|
|
|
97
|
|
|
|
81
|
|
|
|
81
|
|
|
|
180
|
|
|
|
171
|
|
|
|
232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expenses
|
|
$
|
215
|
|
|
$
|
279
|
|
|
$
|
347
|
|
|
$
|
688
|
|
|
$
|
715
|
|
|
$
|
1,418
|
|
|
$
|
1,282
|
|
|
$
|
1,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
The following table sets forth our historical results, for the
periods indicated, as a percentage of our revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
July 31,
|
|
|
Oct. 31,
|
|
|
Jan. 31,
|
|
|
April 30,
|
|
|
July 31,
|
|
|
Oct. 31,
|
|
|
Jan. 31,
|
|
|
April 30,
|
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
59.5
|
%
|
|
|
60.7
|
%
|
|
|
61.0
|
%
|
|
|
67.4
|
%
|
|
|
61.4
|
%
|
|
|
63.6
|
%
|
|
|
64.0
|
%
|
|
|
61.9
|
%
|
Maintenance
|
|
|
28.0
|
|
|
|
28.0
|
|
|
|
27.6
|
|
|
|
25.1
|
|
|
|
28.3
|
|
|
|
26.9
|
|
|
|
26.6
|
|
|
|
27.2
|
|
Services
|
|
|
12.5
|
|
|
|
11.3
|
|
|
|
11.4
|
|
|
|
7.5
|
|
|
|
10.3
|
|
|
|
9.5
|
|
|
|
9.4
|
|
|
|
10.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
5.1
|
|
|
|
2.7
|
|
|
|
3.7
|
|
|
|
3.5
|
|
|
|
3.4
|
|
|
|
4.6
|
|
|
|
5.4
|
|
|
|
5.0
|
|
Maintenance
|
|
|
6.2
|
|
|
|
5.7
|
|
|
|
5.1
|
|
|
|
3.9
|
|
|
|
6.3
|
|
|
|
5.6
|
|
|
|
5.3
|
|
|
|
5.5
|
|
Services
|
|
|
7.4
|
|
|
|
6.3
|
|
|
|
5.1
|
|
|
|
3.1
|
|
|
|
5.4
|
|
|
|
5.5
|
|
|
|
5.2
|
|
|
|
6.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
18.7
|
|
|
|
14.7
|
|
|
|
13.9
|
|
|
|
10.6
|
|
|
|
15.1
|
|
|
|
15.7
|
|
|
|
15.9
|
|
|
|
17.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
81.3
|
|
|
|
85.3
|
|
|
|
86.1
|
|
|
|
89.4
|
|
|
|
84.9
|
|
|
|
84.3
|
|
|
|
84.1
|
|
|
|
83.0
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
25.9
|
|
|
|
24.2
|
|
|
|
21.7
|
|
|
|
15.6
|
|
|
|
21.4
|
|
|
|
19.7
|
|
|
|
18.3
|
|
|
|
19.0
|
|
Sales and marketing
|
|
|
59.7
|
|
|
|
52.4
|
|
|
|
55.1
|
|
|
|
46.9
|
|
|
|
60.0
|
|
|
|
51.5
|
|
|
|
46.1
|
|
|
|
54.8
|
|
General and administrative
|
|
|
13.6
|
|
|
|
14.3
|
|
|
|
12.7
|
|
|
|
13.7
|
|
|
|
17.7
|
|
|
|
14.1
|
|
|
|
10.6
|
|
|
|
11.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
99.2
|
|
|
|
90.8
|
|
|
|
89.6
|
|
|
|
76.2
|
|
|
|
99.1
|
|
|
|
85.3
|
|
|
|
75.0
|
|
|
|
85.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(17.8
|
)%
|
|
|
(5.5
|
)%
|
|
|
(3.4
|
)%
|
|
|
13.3
|
%
|
|
|
(14.3
|
)%
|
|
|
(1.0
|
)%
|
|
|
9.1
|
%
|
|
|
(2.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to rounding to the nearest tenth of a percent, totals may
not equal the sum of the line items in the table above. |
Our operating results may fluctuate due to a variety of factors,
many of which are outside our control. As a result, comparing
our operating results on a period-to-period basis may not be
meaningful. You should not rely on our past results as an
indication of our future performance.
55
Revenues have increased over the quarters presented, other than
the first quarter of fiscal 2008, due to increases in the number
of products sold to new and existing customers and expansion
into the international and mid-size markets. This revenue trend
was impacted by multiple element sales transactions that
included undelivered product elements for which we did not have
VSOE. Revenues in fiscal 2007 and prior years excluded revenues
related to multiple element sales transactions consummated for
which the revenues were deferred because we did not have VSOE,
for some product elements that were not delivered in the fiscal
year of the transaction. Following identification in mid-fiscal
2007 of transactions with such undelivered elements, in fiscal
2008 and the fourth quarter of fiscal 2007, with respect to many
of these transactions, we either delivered such product
elements, or we and our customers amended the contractual terms
of these sales transactions to remove the undelivered product
elements. See Item 7. Managements Discussion
and Analysis of Financial Condition and Results of
OperationsSources of Revenues, Cost of Revenues and
Operating Expenses. In particular, there was a significant
impact to revenues in the three months ended April 30, 2007
related to such sales transactions, resulting in increasing
revenues by $4.2 million. The following table sets forth
the net quarterly impact of these types of sales transactions by
quarter for fiscal 2007 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
July 31,
|
|
|
Oct. 31,
|
|
|
Jan. 31,
|
|
|
April 30,
|
|
|
July 31,
|
|
|
Oct. 31,
|
|
|
Jan. 31,
|
|
|
April 30,
|
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
|
(Unaudited, in millions)
|
|
|
Product revenues
|
|
$
|
|
|
|
|
(0.2
|
)
|
|
|
(1.2
|
)
|
|
|
3.1
|
|
|
|
0.8
|
|
|
|
0.6
|
|
|
|
1.0
|
|
|
|
0.3
|
|
Maintenance revenues
|
|
|
(0.3
|
)
|
|
|
(0.3
|
)
|
|
|
(0.3
|
)
|
|
|
1.0
|
|
|
|
0.1
|
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
Services revenues
|
|
|
|
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
(0.3
|
)
|
|
|
(0.5
|
)
|
|
|
(1.6
|
)
|
|
|
4.2
|
|
|
|
0.9
|
|
|
|
0.6
|
|
|
|
1.1
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
While similar multiple element transactions with undelivered
elements for which we lack VSOE may be identified prospectively
in future periods, we expect that in future periods the
comparison of revenues period-to-period will not be favorably
impacted to the same extent by similar prior or future
transactions.
56
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
57
Report of
Ernst & Young LLP, Independent Registered Public
Accounting Firm
The Board of Directors and Stockholders
ArcSight, Inc.
We have audited the accompanying consolidated balance sheets of
ArcSight, Inc. as of April 30, 2008 and 2007, and the
related consolidated statements of operations,
stockholders equity, and cash flows for each of the three
years in the period ended April 30, 2008. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Companys internal control over financial
reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also 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 our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of ArcSight, Inc. at April 30, 2008 and
2007, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended
April 30, 2008, in conformity with U.S. generally
accepted accounting principles.
As discussed in Note 2 to the consolidated financial
statements, ArcSight, Inc. changed its method of accounting for
stock-based compensation as of May 1, 2006 and its method
of accounting for uncertain tax positions as of May 1, 2007.
/s/ Ernst &
Young LLP
San Jose, California
July 17, 2008
58
ARCSIGHT,
INC.
Consolidated
Balance Sheets
(In
thousands, except share amounts and par value)
|
|
|
|
|
|
|
|
|
|
|
As of April 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
Assets
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
71,946
|
|
|
$
|
16,917
|
|
Accounts receivable, net of allowance for doubtful accounts of
$133 and $123, as of April 30, 2008 and 2007, respectively
|
|
|
26,658
|
|
|
|
15,554
|
|
Capitalized software licenses, current
|
|
|
1,900
|
|
|
|
249
|
|
Other prepaid expenses and current assets
|
|
|
3,665
|
|
|
|
2,207
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
104,169
|
|
|
|
34,927
|
|
Restricted cash
|
|
|
842
|
|
|
|
842
|
|
Income taxes receivable
|
|
|
391
|
|
|
|
761
|
|
Property and equipment, net
|
|
|
4,834
|
|
|
|
2,753
|
|
Goodwill
|
|
|
5,746
|
|
|
|
5,746
|
|
Acquired intangible assets, net
|
|
|
2,161
|
|
|
|
2,734
|
|
Capitalized software licenses, non-current
|
|
|
144
|
|
|
|
394
|
|
Other long-term assets
|
|
|
292
|
|
|
|
833
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
118,579
|
|
|
$
|
48,990
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,115
|
|
|
$
|
2,846
|
|
Accrued compensation and benefits
|
|
|
11,864
|
|
|
|
6,678
|
|
Obligations for software licenses
|
|
|
2,222
|
|
|
|
551
|
|
Other accrued liabilities
|
|
|
3,745
|
|
|
|
3,869
|
|
Deferred revenues, current
|
|
|
36,512
|
|
|
|
24,794
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
57,458
|
|
|
|
38,738
|
|
Deferred revenues, non-current
|
|
|
4,754
|
|
|
|
4,794
|
|
Other long-term liabilities
|
|
|
1,598
|
|
|
|
328
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
63,810
|
|
|
|
43,860
|
|
Commitments and contingencies (Note 6)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Convertible preferred stock, $0.00001 par value per share,
10,000,000 and 21,601,752 shares authorized as of
April 30, 2008, and 2007, respectively; no shares and
13,032,497 issued and outstanding as of April 30, 2008 and
2007, respectively
|
|
|
|
|
|
|
26,758
|
|
Common stock, $0.00001 par value per share; 150,000,000 and
32,500,000 shares authorized as of April 30, 2008 and
April 30, 2007, respectively; 31,022,190 and 10,620,041
issued and outstanding as of April 30, 2008 and 2007,
respectively
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
101,574
|
|
|
|
23,479
|
|
Deferred stock-based compensation
|
|
|
(53
|
)
|
|
|
(554
|
)
|
Accumulated other comprehensive (loss) income
|
|
|
(45
|
)
|
|
|
13
|
|
Accumulated deficit
|
|
|
(46,707
|
)
|
|
|
(44,566
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
54,769
|
|
|
|
5,130
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
118,579
|
|
|
$
|
48,990
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
59
ARCSIGHT,
INC.
Consolidated
Statements of Operations
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
63,765
|
|
|
$
|
43,989
|
|
|
$
|
22,859
|
|
Maintenance
|
|
|
27,607
|
|
|
|
18,762
|
|
|
|
11,473
|
|
Services
|
|
|
10,173
|
|
|
|
7,082
|
|
|
|
5,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
101,545
|
|
|
|
69,833
|
|
|
|
39,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
4,767
|
|
|
|
2,569
|
|
|
|
1,769
|
|
Maintenance(1)
|
|
|
5,691
|
|
|
|
3,498
|
|
|
|
2,085
|
|
Services(1)
|
|
|
5,800
|
|
|
|
3,521
|
|
|
|
2,942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
16,258
|
|
|
|
9,588
|
|
|
|
6,796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
85,287
|
|
|
|
60,245
|
|
|
|
32,639
|
|
Operating expenses(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
19,762
|
|
|
|
14,535
|
|
|
|
12,154
|
|
Sales and marketing
|
|
|
53,453
|
|
|
|
36,587
|
|
|
|
24,309
|
|
General and administrative
|
|
|
13,422
|
|
|
|
9,453
|
|
|
|
12,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
86,637
|
|
|
|
60,575
|
|
|
|
49,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(1,350
|
)
|
|
|
(330
|
)
|
|
|
(16,802
|
)
|
Interest income
|
|
|
857
|
|
|
|
637
|
|
|
|
435
|
|
Other income and expense, net
|
|
|
(385
|
)
|
|
|
(175
|
)
|
|
|
(216
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes
|
|
|
(878
|
)
|
|
|
132
|
|
|
|
(16,583
|
)
|
Provision for income taxes
|
|
|
1,131
|
|
|
|
389
|
|
|
|
163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,009
|
)
|
|
$
|
(257
|
)
|
|
$
|
(16,746
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share, basic and diluted
|
|
$
|
(0.08
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(2.24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per common
share
|
|
|
25,936
|
|
|
|
10,042
|
|
|
|
7,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Stock-based compensation expense included in above (see
Note 9): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of maintenance revenues
|
|
$
|
106
|
|
|
$
|
3
|
|
|
$
|
5
|
|
Cost of services revenues
|
|
|
115
|
|
|
|
14
|
|
|
|
5
|
|
Research and development
|
|
|
1,356
|
|
|
|
501
|
|
|
|
1,950
|
|
Sales and marketing
|
|
|
2,685
|
|
|
|
661
|
|
|
|
210
|
|
General and administrative
|
|
|
664
|
|
|
|
350
|
|
|
|
5,948
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
60
ARCSIGHT,
INC.
Consolidated Statements of Stockholders Equity
For the Fiscal Years Ended April 2006, 2007 and 2008
(In thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Convertible
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Stock-
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Based
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Income (Loss)
|
|
|
Deficit
|
|
|
Equity
|
|
|
Balance as of April 30, 2005
|
|
|
13,029,223
|
|
|
$
|
26,928
|
|
|
|
9,742,375
|
|
|
|
|
|
|
$
|
11,301
|
|
|
$
|
(955
|
)
|
|
$
|
2
|
|
|
$
|
(27,563
|
)
|
|
$
|
9,713
|
|
Cost of dispute settlement regarding Series B preferred
stock issuance
|
|
|
|
|
|
|
(170
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(170
|
)
|
Issuance of common stock upon exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
279,593
|
|
|
|
|
|
|
|
189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
189
|
|
Repurchase of common stock subject to vesting
|
|
|
|
|
|
|
|
|
|
|
(54,407
|
)
|
|
|
|
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18
|
)
|
Compensation expense related to stock options accounted for
under variable accounting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,549
|
|
Repayment of non-recourse notes by employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
367
|
|
Reclassification of options exercised but not vested, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
(15
|
)
|
Amortization of deferred stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
569
|
|
|
|
|
|
|
|
|
|
|
|
569
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
(5
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,746
|
)
|
|
|
(16,746
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,751
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of April 30, 2006
|
|
|
13,029,223
|
|
|
|
26,758
|
|
|
|
9,967,561
|
|
|
|
|
|
|
|
19,383
|
|
|
|
(396
|
)
|
|
|
(3
|
)
|
|
|
(44,309
|
)
|
|
|
1,433
|
|
Issuance of common stock in connection with legal settlement
|
|
|
|
|
|
|
|
|
|
|
62,500
|
|
|
|
|
|
|
|
178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
178
|
|
Exercise of Series B preferred stock warrants
|
|
|
3,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock in connection with acquisition of Enira
Technologies, LLC
|
|
|
|
|
|
|
|
|
|
|
253,038
|
|
|
|
|
|
|
|
1,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,538
|
|
Reclassification of options exercised but not vested, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122
|
|
Issuance of common stock upon exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
225,326
|
|
|
|
|
|
|
|
582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
582
|
|
Repurchase of common stock subject to vesting
|
|
|
|
|
|
|
|
|
|
|
(21,263
|
)
|
|
|
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11
|
)
|
Amortization of deferred stock-based compensation, net of
terminations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13
|
)
|
|
|
280
|
|
|
|
|
|
|
|
|
|
|
|
267
|
|
Stock-based compensation under SFAS 123R options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
892
|
|
Issuance of restricted stock in connection with acquisition of
Enira Technologies, LLC
|
|
|
|
|
|
|
|
|
|
|
132,879
|
|
|
|
|
|
|
|
808
|
|
|
|
(808
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of restricted stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
370
|
|
|
|
|
|
|
|
|
|
|
|
370
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
16
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(257
|
)
|
|
|
(257
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(241
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of April 30, 2007
|
|
|
13,032,497
|
|
|
|
26,758
|
|
|
|
10,620,041
|
|
|
|
|
|
|
|
23,479
|
|
|
|
(554
|
)
|
|
|
13
|
|
|
|
(44,566
|
)
|
|
|
5,130
|
|
61
ARCSIGHT,
INC.
Consolidated
Statements of Stockholders
Equity (Continued)
(In
thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Convertible
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Stock-
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Based
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Income (Loss)
|
|
|
Deficit
|
|
|
Equity
|
|
|
Cumulative effect adjustment due to the adoption of FIN 48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(132
|
)
|
|
|
(132
|
)
|
Issuance of common stock upon exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
402,260
|
|
|
|
|
|
|
|
923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
923
|
|
Reclassification of options exercised but not vested, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
|
|
Repurchase of common stock subject to vesting
|
|
|
|
|
|
|
|
|
|
|
(6,845
|
)
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
Amortization of deferred stock-based compensation, net of
terminations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6
|
)
|
|
|
97
|
|
|
|
|
|
|
|
|
|
|
|
91
|
|
Amortization of restricted stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
404
|
|
|
|
|
|
|
|
|
|
|
|
404
|
|
Stock-based compensation under SFAS 123R
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,431
|
|
Exercise of Series B preferred stock warrants
|
|
|
12,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of common stock warrants
|
|
|
|
|
|
|
|
|
|
|
6,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of preferred stock into common stock
|
|
|
(13,045,406
|
)
|
|
|
(26,758
|
)
|
|
|
14,000,441
|
|
|
|
|
|
|
|
26,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from initial public offering, net of issuance costs of
$4,288
|
|
|
|
|
|
|
|
|
|
|
6,000,000
|
|
|
|
|
|
|
|
45,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,932
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(58
|
)
|
|
|
|
|
|
|
(58
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,009
|
)
|
|
|
(2,009
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,067
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of April 30, 2008
|
|
|
|
|
|
$
|
|
|
|
|
31,022,190
|
|
|
$
|
|
|
|
$
|
101,574
|
|
|
$
|
(53
|
)
|
|
$
|
(45
|
)
|
|
$
|
(46,707
|
)
|
|
$
|
54,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
62
ARCSIGHT,
INC.
Consolidated
Statements of Cash Flows
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,009
|
)
|
|
$
|
(257
|
)
|
|
$
|
(16,746
|
)
|
Adjustments to reconcile net loss to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,945
|
|
|
|
1,414
|
|
|
|
941
|
|
Amortization of acquired intangibles
|
|
|
573
|
|
|
|
476
|
|
|
|
|
|
Loss (gain) on disposal of property and equipment
|
|
|
(6
|
)
|
|
|
3
|
|
|
|
1
|
|
Stock-based compensation
|
|
|
4,926
|
|
|
|
1,529
|
|
|
|
8,118
|
|
Provision for allowance for doubtful accounts
|
|
|
33
|
|
|
|
112
|
|
|
|
60
|
|
Changes in operating assets and liabilities, net of the effects
of the acquisition of Enira Technologies, LLC:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(11,137
|
)
|
|
|
(3,352
|
)
|
|
|
(1,612
|
)
|
Prepaid expenses and other assets
|
|
|
638
|
|
|
|
(984
|
)
|
|
|
(523
|
)
|
Income taxes receivable
|
|
|
370
|
|
|
|
259
|
|
|
|
(870
|
)
|
Accounts payable
|
|
|
269
|
|
|
|
2,199
|
|
|
|
(498
|
)
|
Accrued compensation and benefits
|
|
|
5,186
|
|
|
|
3,294
|
|
|
|
719
|
|
Other accrued liabilities
|
|
|
1,066
|
|
|
|
1,386
|
|
|
|
1,067
|
|
Deferred revenues
|
|
|
11,678
|
|
|
|
4,971
|
|
|
|
13,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
13,532
|
|
|
|
11,050
|
|
|
|
3,848
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
|
|
|
|
(842
|
)
|
|
|
|
|
Acquisition of Enira Technologies, LLC
|
|
|
|
|
|
|
(7,209
|
)
|
|
|
|
|
Purchase of property and equipment
|
|
|
(4,031
|
)
|
|
|
(2,182
|
)
|
|
|
(1,431
|
)
|
Proceeds from sales of property and equipment
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(4,012
|
)
|
|
|
(10,233
|
)
|
|
|
(1,431
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial public offering preparation costs
|
|
|
(3,669
|
)
|
|
|
(619
|
)
|
|
|
|
|
Proceeds from initial public offering
|
|
|
50,220
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options, net of repurchases
|
|
|
920
|
|
|
|
571
|
|
|
|
171
|
|
Payment of capital lease and software license obligations
|
|
|
(1,904
|
)
|
|
|
(311
|
)
|
|
|
|
|
Net proceeds from repayment of stockholder notes
|
|
|
|
|
|
|
|
|
|
|
367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
45,567
|
|
|
|
(359
|
)
|
|
|
538
|
|
Effect of exchange rate changes on cash
|
|
|
(58
|
)
|
|
|
16
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
55,029
|
|
|
|
474
|
|
|
|
2,950
|
|
Cash and cash equivalents at beginning of period
|
|
|
16,917
|
|
|
|
16,443
|
|
|
|
13,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
71,946
|
|
|
$
|
16,917
|
|
|
$
|
16,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
331
|
|
|
$
|
583
|
|
|
$
|
1,470
|
|
Supplemental disclosure of non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual of cost of dispute settlement regarding Series B
preferred stock issuance
|
|
|
|
|
|
|
|
|
|
|
170
|
|
Common stock issued to non-employee for settlement of
Series B financing costs and for consulting services
|
|
|
|
|
|
|
178
|
|
|
|
|
|
Issuance of restricted stock in connection with acquisition of
Enira Technologies, LLC
|
|
|
|
|
|
|
808
|
|
|
|
|
|
Common stock issued upon conversion of preferred stock
|
|
|
26,758
|
|
|
|
|
|
|
|
|
|
Common stock issued for acquisition
|
|
|
|
|
|
|
1,538
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
63
ARCSIGHT,
INC.
|
|
1.
|
Description
of Business
|
ArcSight, Inc. (ArcSight or the Company)
is a leading provider of compliance and security management
solutions that protect enterprises and government agencies. The
Company helps customers comply with corporate and regulatory
policy, safeguard their assets and processes and control risk.
The Companys platform collects and correlates user
activity and event data across the enterprise so that businesses
can rapidly identify, prioritize and respond to compliance
violations, policy breaches, cybersecurity attacks and insider
threats. The Companys ESM products correlate massive
numbers of events from thousands of security point solutions,
network and computing devices and applications, enabling
intelligent identification, prioritization and response to
external threats, insider threats and compliance and corporate
policy violations. The Company also provides complementary
software that delivers pre-packaged analytics and reports
tailored to specific compliance and security initiatives, as
well as appliances that streamline event log archiving. The
Company is headquartered in Cupertino, California, and was
incorporated on May 3, 2000 under the laws of the state of
Delaware.
Initial
Public Offering
In February 2008, the Company completed an initial public
offering (IPO), in which it sold
6,000,000 shares of common stock, at an issue price of
$9.00 per share. The Company raised a total of
$54.0 million in gross proceeds from the IPO, or
$45.9 million in net proceeds after deducting
underwriters discounts of $3.8 million and other
offering expenses of $4.3 million. Upon the completion of
the IPO, all shares of convertible preferred stock outstanding
automatically converted into 14,000,441 shares of common
stock.
|
|
2.
|
Significant
Accounting Policies
|
Basis
of Presentation and Consolidation
The accompanying audited consolidated financial statements
include the accounts of the Company and its wholly-owned
subsidiaries. All significant inter-company transactions have
been eliminated on consolidation. Certain amounts in the
consolidated financial statements for prior periods have been
reclassified to conform to the current presentation.
On November 20, 2007, the Board of Directors and the
Companys stockholders approved a
1-for-4
reverse stock split of the Companys outstanding shares of
common stock and convertible preferred stock (the Reverse
Split). All authorized, reserved, issued and outstanding
common stock, convertible preferred stock and per share amounts
contained in these notes and the accompanying consolidated
financial statements have been retroactively adjusted to reflect
the Reverse Split.
On June 2, 2006, the Company completed the acquisition of
substantially all of the assets of Enira Technologies, LLC
(Enira), a privately-held provider of solutions for
responding to network security compromises. The accompanying
consolidated financial statements include the combined activity
since the date of the acquisition.
Use of
Estimates
The preparation of financial statements in conformity with
U.S. 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 as well as the reported amounts of revenues and
expenses during the reporting period. The Company bases its
estimates and judgments on its historical experience, knowledge
of current conditions, and its beliefs on what could occur in
the future, given available information. Estimates, assumptions
and judgments, are used for, but are not limited to, revenue
recognition, determination of fair value of stock awards,
valuation of goodwill and intangible assets acquired in business
combinations, impairment of goodwill and other intangible
assets, amortization of intangible assets, contingencies and
litigation, uncertain tax positions, allowances for doubtful
accounts, valuations of cash
64
ARCSIGHT,
INC.
Notes to
Consolidated Financial
Statements (Continued)
equivalents, and accrued liabilities. Actual results may differ
from those estimates, and such differences may be material to
the financial statements.
Cash
and Cash Equivalents
The Company maintains its cash and cash equivalents in accounts
with high-credit quality financial instruments. The Company
considers all highly liquid investments purchased with a
maturity of three months or less at the date of purchase to be
cash equivalents. The Companys cash equivalents consist of
money market accounts on deposit with two banks and are stated
at cost, which approximates fair value.
Fair
Value of Financial Instruments
The carrying amounts of cash equivalents, restricted cash, trade
accounts receivable, accounts payable, other accrued liabilities
and derivative financial instruments approximate their
respective fair values due to their relative short-term
maturities.
Foreign
Currency Translation/Transactions
The functional currency of the Companys foreign
subsidiaries is the local currency. Adjustments resulting from
translating foreign functional currency financial statements
into U.S. dollars are recorded as a separate component of
accumulated other comprehensive income loss. Income and expense
accounts are translated into U.S. dollars at average rates
of exchange prevailing during the periods presented. All assets
and liabilities denominated in a foreign currency are translated
into U.S. dollars at the exchange rates in effect on the
balance sheet dates.
Net foreign currency transaction losses of approximately
$0.1 million, $0.2 million, and $0.2 million for
fiscal 2008, 2007 and 2006, respectively, were primarily the
result of the settlement of inter-company transactions and are
included in other expense.
Derivative
Financial Instruments
The majority of the Companys sales are denominated in
United States dollars; however, there are some sales
transactions denominated in foreign currencies. In addition, the
Companys foreign subsidiaries pay their expenses in local
currency. Therefore, movements in exchange rates could cause net
sales and expenses to fluctuate, affecting the Companys
profitability and cash flows. The Companys general
practice is to use foreign currency forward contracts to reduce
its exposure to foreign currency exchange rate fluctuations.
Unrealized gains and losses associated with these foreign
currency contracts are reflected in the Companys balance
sheet and recorded in prepaid expenses and other current assets
or accrued expenses and other current liabilities. Changes in
fair value and premiums paid for foreign currency contracts are
recorded directly in other expense in the consolidated
statements of operations. The objective of these contracts is to
reduce the impact of foreign currency exchange rate movements on
the Companys operating results. During fiscal 2008 and
2007, the Company considered the net results of the use of
foreign currency forward contracts to be an effective mechanism
to minimize the fluctuations and movements in exchange rates
that affect the Companys profitability and cash flows. All
of the Companys foreign currency forward contracts mature
within 12 months from the balance sheet date. The Company
does not use derivatives for speculative or trading purposes,
nor does the Company designate its derivative instruments as
hedging instruments, as defined by the Financial Accounting
Standard Board (FASB) under Statement of Financial
Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging
Activities (SFAS 133).
In February 2006, the FASB issued SFAS No. 155,
Accounting for Certain Hybrid Financial Instruments
(SFAS 155), which amends the guidance in
SFAS 133, Accounting for Derivative Instruments and
Hedging Activities, and SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities. SFAS 155 allows
financial instruments that have embedded derivatives to be
accounted for as a
65
ARCSIGHT,
INC.
Notes to
Consolidated Financial
Statements (Continued)
whole (eliminating the need to bifurcate the derivative from its
host) if the holder elects to account for the whole instrument
on a fair-value basis. SFAS 155 is effective for all
financial instruments acquired or issued after the beginning of
an entitys first fiscal year that begins after
September 15, 2006. The adoption of SFAS 155 did not
have a material impact on the Companys consolidated
results of operations, financial position or cash flows.
Concentration
of Credit Risk and Business Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash
equivalents and accounts receivable. The Company is exposed to
credit risk in the event of default by the financial institution
holding its cash and cash equivalents to the extent recorded on
its balance sheet. Risks associated with cash equivalents are
mitigated by banking with high-credit quality institutions. Such
deposits may be in excess of insured limits. Management believes
that the financial institutions that hold the Companys
investments are financially sound and, accordingly, minimal
credit risk exists with respect to these investments. To date,
the Company has not experienced any losses on its cash and cash
equivalents. The Company performs periodic evaluations of the
relative credit standing of the financial institutions.
The Company sells its products and maintenance and services to
customers and resellers in the Americas, Europe and Asia, with
the majority of its sales in United States. The Company monitors
its exposure within accounts receivable and records an allowance
against doubtful accounts as necessary. The Company performs
ongoing credit evaluations of its customers and extends credit
in the normal course of business and generally does not require
collateral. Historically, the Company has not experienced
significant credit losses on its accounts receivable. Management
believes that any risk of loss for trade receivables is
mitigated by the Companys ongoing credit evaluations of
its customers.
No customer or reseller accounted for more than 10% of total
revenues for fiscal 2008, 2007 or 2006. As of April 30,
2008, the Company had two customers with accounts receivable
balances greater than 10% of the Companys net accounts
receivable, with balances of 25% and 15% of net accounts
receivable. The Company had one customer that accounted for 12%
of the Companys net accounts receivable as of
April 30, 2007.
The majority of the Companys revenues are derived from
sales of the ESM product and related products and services, and
the Company expects this to continue for the foreseeable future.
As a result, although the Company has introduced complementary
appliance products in fiscal 2007 and 2008 for which the Company
uses a single source for manufacture and fulfillment of its
appliance product, the Companys revenues and operating
results will continue to depend significantly on the demand for
the ArcSight ESM product. Demand for ArcSight ESM is affected by
a number of factors, some of which are beyond the Companys
control, including the timing of development and release of new
products by the Company and its competitors, technological
change, lower-than-expected growth or a contraction in the
worldwide market for enterprise compliance and security
management solutions and other risks. If the Company is unable
to continue to meet customer demands or achieve more widespread
market acceptance of ArcSight ESM, its business, operating
results, financial condition and growth prospects will be
adversely affected.
Revenue
Recognition
The Company derives its revenues from three sources:
(1) sales of software licenses and related appliances
(products); (2) fees for maintenance to provide
unspecified upgrades and customer technical support; and
(3) fees for services, which includes services performed in
connection with
time-and-materials
based consulting agreements (maintenance and
services).
For all sales, revenues are subject to the guidance and
requirements of American Institute of Certified Public
Accountants (AICPA) Statement of Position
(SOP)
No. 97-2,
Software Revenue Recognition
(SOP 97-2),
as amended by
SOP No. 98-9,
Software Revenue Recognition with Respect to Certain
Arrangements
(SOP 98-9).
66
ARCSIGHT,
INC.
Notes to
Consolidated Financial
Statements (Continued)
The Company enters into software license agreements through
direct sales to customers and through resellers. The license
agreements include post-contract customer support and may
include professional services deliverables. Post-contract
customer support includes rights to receive unspecified software
product updates and upgrades, maintenance releases and patches
released during the term of the support period, and Internet and
telephone access to technical support personnel and content.
Professional services include installation and implementation of
the Companys software and customer training. Professional
services are not essential to the functionality of the
associated licensed software.
For all sales, revenues attributable to an element in a customer
arrangement are recognized when persuasive evidence of an
arrangement exists and delivery has occurred, provided the fee
is fixed or determinable and collectibility is reasonably
assured.
The Company typically uses a binding purchase order in
conjunction with either a signed contract or reference on the
purchase order to the terms and conditions of the Companys
shrinkwrap or end-user license agreement as evidence of an
arrangement. In circumstances where the customer does not issue
purchase orders separate from a signed contract, the Company
uses the signed contract as evidence of the arrangement. Sales
through its significant resellers are evidenced by a master
agreement governing the relationship.
Resellers and systems integrators purchase products for specific
end users and do not hold inventory. Resellers and systems
integrators perform functions that include delivery to the end
customer, installation or integration and post-sales service and
support. The agreements with these resellers and systems
integrators have terms that are generally consistent with the
standard terms and conditions for the sale of the Companys
products and services to end users and do not provide for
product rotation or pricing allowances. Revenues on sales to
resellers and systems integrators are recognized after delivery
to the end user on a sell-through basis, provided all other
criteria for revenue recognition have been met.
At the time of each transaction, the Company assesses whether
the fees associated with the transaction are fixed or
determinable. If a significant portion of a fee is due after the
Companys normal payment terms, currently up to three
months (payment terms beyond three months are considered to be
extended terms), or if as a result of customer acceptance
provisions, the price is subject to refund or forfeiture,
concession or other adjustment, then the Company considers the
fee to not be fixed or determinable. In the limited instances in
which these cases occur, revenues are deferred and recognized
when payments become due and payable, or the right to refund or
forfeiture, concession or adjustment, if any, lapses upon
customer acceptance.
The Company assesses whether collection is reasonably assured
based on a number of factors including the creditworthiness of
the customer as determined by credit checks and analysis, past
transaction history, geographic location and financial
viability. The Company generally does not require collateral
from customers. If the determination is made at the time of the
transaction that collection of the fee is not reasonably
assured, then all of the related revenues are deferred until the
time that collection becomes reasonably assured, which in some
cases requires the collection of cash prior to recognition of
the related revenues.
The Company uses shipping documents, contractual terms and
conditions and customer acceptance, when applicable, to verify
delivery to the customer. For perpetual software license fees in
arrangements that do not include customization, or services that
are not considered essential to the functionality of the
licenses, delivery is deemed to occur when the product is
delivered to the customer. Services and consulting arrangements
that are not essential to the functionality of the licensed
product are recognized as revenues as these services are
provided. Delivery of maintenance agreements is considered to
occur on a straight-line basis over the life of the contract,
typically 12 months.
Vendor-specific objective evidence of fair value
(VSOE) for maintenance and support services is based
on separate sales
and/or
renewals to other customers or upon renewal rates quoted in
contracts when the quoted renewal rates are deemed substantive
in both rate and term. VSOE for professional services is
established based on prices charged to customers when such
services are sold separately. For deliverables and multiple
element
67
ARCSIGHT,
INC.
Notes to
Consolidated Financial
Statements (Continued)
arrangements subject to
SOP 97-2,
as amended by
SOP 98-9,
when VSOE exists for all of the undelivered elements of the
arrangement, but does not exist for the delivered elements in
the arrangement, the Company recognizes revenues under the
residual method. Under the residual method, at the outset of the
arrangement with a customer, revenues are deferred for the fair
value of the undelivered elements and revenues are recognized
for the remainder of the arrangement fee attributed to the
delivered elements (typically products) under the residual
method when all of the applicable criteria in
SOP 97-2
have been met. In the event that VSOE for maintenance services
does not exist, and this represents the only undelivered
element, revenues for the entire arrangement are recognized
ratably over the performance period. Revenues from maintenance
and support agreements are recognized on a straight-line basis
over the life of the contract. Revenues from time-based (term)
license sales that include ongoing delivery obligations
throughout the term of the arrangement are recognized ratably
over the term because the Company does not have VSOE for the
undelivered elements.
Many of the Companys product contracts include
implementation and training services. When products are sold
together with consulting services, license fees are recognized
upon delivery, provided that (i) the criteria of software
revenue recognition have been met, (ii) payment of the
license fees is not dependent upon the performance of the
services, and (iii) the services do not provide significant
customization of the products and are not essential to the
functionality of the software that was delivered. The Company
does not provide significant customization of its software
products. These services are recognized on a
time-and-materials
basis.
The cost of providing the Companys products and
maintenance and services consists primarily of direct material
costs for products and the fully burdened cost of the
Companys service organization for maintenance and
services. Shipping and handling charges incurred and billed to
customers for product shipments are recorded in product revenue
and related cost of product revenues in the accompanying
Consolidated Statements of Operations. If it becomes probable
that the amount allocated to an undelivered element will result
in a loss on that element of the arrangement, the loss is
recognized pursuant to SFAS No. 5, Accounting
for Contingencies (SFAS 5).
Deferred revenues consist primarily of deferred product
revenues, deferred maintenance fees and deferred services fees.
Deferred revenues are recorded net of pre-billed services,
post-contract customer support billings for which the term has
not commenced and invoices for cash basis customers. Deferred
product revenues generally relate to product sales being
recognized ratably over the term of the licensing arrangement,
and, to a lesser extent, partial shipments when the Company does
not have VSOE for the undelivered elements and products that
have been delivered but await customer acceptance. Deferred
maintenance fees and consulting services generally relate to
payments for maintenance and consulting services in advance of
the time of delivery of services. These deferred amounts are
expected to be recognized as revenues based on the policy
outlined above.
Allowance
for Doubtful Accounts
The Company maintains an allowance for doubtful accounts for
potential future estimated losses resulting from the inability
or unwillingness of certain customers to make all of their
required payments. The allowance for doubtful accounts is based
on the Companys assessment of the collectibility of
customer accounts. The Company regularly reviews the allowance
by considering factors such as historical experience, credit
quality, the age of the accounts receivable balances, and
current economic conditions that may affect a customers
ability to pay. This assessment requires significant judgment.
When facts and circumstances indicate the collection of specific
amounts or from specific customers is at risk, the Company
assesses the impact on amounts recorded for bad debts and, if
necessary, records a charge in the period the determination is
made. If the financial condition of its customers or any of the
other factors the Company uses to analyze creditworthiness were
to worsen, additional allowances may be required, resulting in
future operating losses that are not included in the allowance
for doubtful accounts as of April 30, 2008.
68
ARCSIGHT,
INC.
Notes to
Consolidated Financial
Statements (Continued)
The following describes activity in the allowance for doubtful
accounts for fiscal 2008, 2007 and 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Addition
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning
|
|
|
Costs and
|
|
|
|
|
|
End
|
|
Period
|
|
of Period
|
|
|
Expenses
|
|
|
Deductions(1)
|
|
|
of Period
|
|
|
2006
|
|
$
|
11
|
|
|
$
|
60
|
|
|
$
|
(17
|
)
|
|
$
|
54
|
|
2007
|
|
$
|
54
|
|
|
$
|
112
|
|
|
$
|
(43
|
)
|
|
$
|
123
|
|
2008
|
|
$
|
123
|
|
|
$
|
33
|
|
|
$
|
(23
|
)
|
|
$
|
133
|
|
|
|
|
(1) |
|
Uncollectible amounts written off, net of recoveries. |
Restricted
Cash
Restricted cash consists of a deposit in a money market account
amounting to $0.8 million as of April 30, 2008 and
2007 that is held to secure a standby letter of credit required
in connection with the operating lease for the Companys
headquarters in Cupertino, California.
Capitalized
Software Licenses
Capitalized software licenses represent purchases by the Company
of the right to utilize and incorporate as a component of its
product, the intellectual property of certain third parties. As
a result of these purchases, the Company is contractually
obligated to pay minimum royalties on fixed and determinable
dates over a two-year period regardless of product sales being
generated. In accordance with Accounting Principles Board
Opinion No. 21, Interest on Receivables and
Payables, these purchases have been recorded on the
accompanying consolidated balance sheets based on the discounted
present value of the Companys contractual payment
obligations. The capitalized software licenses are being
amortized ratably over the terms of the agreements of two years
and are included as a component of cost of product revenues and
cost of maintenance revenues in the amount of $2.2 million
and $0.1 million for fiscal 2008 and 2007, respectively. During
fiscal 2008 and 2007, payments under these agreements amounted
to $2.1 million and $0.3 million with related interest
expense of $0.2 million and $17,000, respectively.
Impairment
of Long-Lived Assets
Long-lived assets, such as property, plant and equipment and
acquired intangible assets subject to amortization, are reviewed
for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable in accordance with the provisions of
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (SFAS 144).
Among the factors and circumstances considered by management in
determining assessments of recoverability are: (i) a
significant decrease in the market price of a long-lived asset;
(ii) a significant adverse change in the extent or manner
in which a long-lived asset is being used or in its physical
condition; (iii) a significant adverse change in legal
factors or in the business climate that could affect the value
of a long-lived asset, including an adverse action or assessment
by a regulator; (iv) an accumulation of costs significantly
in excess of the amount originally expected for the acquisition
or construction of a long-lived asset; (v) current-period
operating or cash flow loss combined with a history of operating
or cash flow losses or a projection or forecast that
demonstrates continuing losses associated with the use of a
long-lived asset; and (vi) a current expectation that, more
likely than not, a long-lived asset will be sold or otherwise
disposed of significantly before the end of its previously
estimated useful life. Under SFAS 144, recoverability of
assets to be held and used is measured by a comparison of the
carrying amount of an asset to the estimated undiscounted future
cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated future cash
flows, an impairment charge is recognized in the amount by which
the carrying amount of the asset group exceeds the fair
69
ARCSIGHT,
INC.
Notes to
Consolidated Financial
Statements (Continued)
value of the asset. There have been no indicators of impairment
and no impairment losses have been recorded by the Company in
any period presented.
Property
and Equipment, Net
Property and equipment are carried at cost, net of accumulated
depreciation and amortization. Depreciation is computed using
the straight-line method over the estimated useful lives of the
property and equipment typically ranging from two to five years.
Leasehold improvements are recorded at cost with any
reimbursement from the landlord being accounted for as an offset
to rent expense using the straight-line method over the lease
term. Leasehold improvements are amortized over the shorter of
the remaining operating lease term or the useful lives of the
assets.
Business
Combinations
The Company accounts for business combinations in accordance
with SFAS No. 141, Business Combinations
(SFAS 141), which requires the purchase method
of accounting for business combinations. In accordance with
SFAS 141, the Company determines the recognition of
intangible assets based on the following criteria: (i) the
intangible asset arises from contractual or other rights; or
(ii) the intangible is separable or divisible from the
acquired entity and capable of being sold, transferred,
licensed, returned or exchanged. In accordance with
SFAS 141, the Company allocates the purchase price of its
business combinations to the tangible assets, liabilities and
intangible assets acquired based on their estimated fair values.
The excess purchase price over those fair values is recorded as
goodwill.
The Company must make valuation assumptions that require
significant estimates, especially with respect to intangible
assets. Critical estimates in valuing certain intangible assets
include, but are not limited to, future expected cash flows from
customer contracts, customer lists, distribution agreements and
discount rates. The Company estimates fair value based upon
assumptions the Company believes to be reasonable, but which are
inherently uncertain and unpredictable and, as a result, actual
results may differ from estimates.
Goodwill
Goodwill is not amortized, but rather it is periodically
assessed for impairment.
The Company tests goodwill for impairment annually on November 1
of each fiscal year, and more frequently if events merit. The
Company performs this fair-value based test in accordance with
SFAS No. 142, Goodwill and Other Intangible
Assets. Future goodwill impairment tests could result in a
charge to earnings.
Software
Development Costs
In accordance with SFAS No. 86, Accounting for
the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed, costs incurred for the development of new
software products are expensed as incurred until technological
feasibility is established. Development costs are capitalized
beginning when a products technological feasibility has
been established and ending when the product is available for
general release to customers. Technological feasibility is
reached when the product reaches the beta stage using the
working model approach. To date, the period of time between the
establishment of a technologically feasible working model and
the subsequent general release of the product have been of a
relatively short duration of time and have resulted in
insignificant amounts of costs qualifying for capitalization for
all years presented. Thus, all software development costs have
been expensed as incurred in research and development expense.
Research
and Development Expenses
The Company expenses research and development expenses in the
period in which these costs are incurred.
70
ARCSIGHT,
INC.
Notes to
Consolidated Financial
Statements (Continued)
Advertising
Expenses
Advertising costs are expensed as incurred. The Company incurred
$0.2 million, $0.4 million and $0.1 million in
advertising expenses for fiscal 2008, 2007 and 2006,
respectively.
Income
Taxes
The Company uses the liability method of accounting for income
taxes in accordance with SFAS No. 109 Accounting
for Income Taxes. The Company estimates income taxes in
each of the jurisdictions in which it operates. This process
involves determining income tax expense together with
calculating the deferred income tax expense related to temporary
differences resulting from the differing treatment of items for
tax and accounting purposes, such as deferred revenue or
deductibility of certain intangible assets which are recognized
for the estimated future tax consequences attributable to
differences between the consolidated financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets are recognized for
deductible temporary differences, along with net operating loss
carry-forwards, if it is more likely than not that the tax
benefits will be realized. To the extent a deferred tax asset
cannot be recognized under the preceding criteria, a valuation
allowance is established. Deferred tax assets and liabilities
are measured using tax rates currently in effect for the year in
which those temporary differences are expected to be recovered
or settled. These temporary differences result in deferred tax
assets and liabilities. To the extent a deferred tax asset
cannot be recognized under the preceding criteria, a valuation
allowance is established. Changes in these estimates may result
in significant increases or decreases to the Companys tax
provision in a period in which such estimates are charged, which
would affect net income.
The Company adopted FASB Interpretation 48, Accounting for
Uncertainty in Income Taxes, an interpretation of
SFAS 109 (FIN 48), on May 1,
2007. As a result of the implementation of FIN 48, the
Company recognized a liability for uncertain tax positions and a
cumulative effect adjustment to the beginning balance of
accumulated deficit on the balance sheet of $0.1 million.
Stock-Based
Compensation Expense
Prior to May 1, 2006, the Company accounted for its
stock-based awards to employees using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB
25), and related interpretations as permitted by
SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS 123). Under the
intrinsic value method, compensation expense is measured on the
date of the grant as the difference between the deemed fair
value of the Companys common stock and the exercise or
purchase price multiplied by the number of stock options or
restricted stock awards granted. The Company amortizes deferred
stock-based compensation using the multiple option method as
prescribed by FASB Interpretation No. 28 Accounting
for Stock Appreciation Rights and Other Variable Stock Option
Award Plans (FIN 28) over the option
vesting period using an accelerated amortization schedule, which
results in amortization to expense over the grants vesting
period, which is generally four years.
Effective May 1, 2006, the Company adopted the provisions
of SFAS No. 123(r) (revised 2004), Share-Based
Payment (SFAS 123R), using the
prospective transition method. In accordance with
SFAS 123R, measurement and recognition of compensation
expense for all share-based payment awards made to employees and
directors beginning on May 1, 2006 is recognized based on
estimated fair values. SFAS 123R requires nonpublic
companies that used the minimum value method under SFAS 123
for either recognition or pro forma disclosures to apply
SFAS 123R using the prospective-transition method. As such,
the Company continues to apply APB 25 in future periods to
unvested equity awards outstanding at the date of adoption of
SFAS 123R that were measured using the intrinsic value
method. In addition, the Company continues to amortize those
awards granted prior to May 1, 2006 using the multiple
option method as prescribed by FIN 28, as described above.
In accordance with SFAS 123R, the Company uses the
Black-Scholes pricing model to determine the fair value of the
stock options on the grant dates
71
ARCSIGHT,
INC.
Notes to
Consolidated Financial
Statements (Continued)
for stock awards made on or after May 1, 2006, and the
Company amortizes the fair value of share-based payments on a
straight-line basis.
The Companys 2007 Employee Stock Purchase Plan
(ESPP) became effective upon the effectiveness of
the Companys IPO on February 14, 2008. The ESPP
provides for consecutive six-month offering periods, except for
the first such offering period which commenced on
February 14, 2008 and will end on September 15, 2008.
The ESPP is compensatory and results in compensation cost
accounted for under SFAS 123R. The Black-Scholes option
pricing model is used to estimate the fair value of rights to
acquire stock granted under the ESPP.
Comprehensive
(Loss) Income
The Company reports comprehensive (loss) income in accordance
with SFAS No. 130, Reporting Comprehensive
Income. Comprehensive (loss) income includes certain
unrealized gains and losses that are recorded as a component of
stockholders equity and excluded from the determination of
net income. The Companys accumulated other comprehensive
(loss) income consisted solely of cumulative currency
translation adjustments resulting from the translation of the
financial statements of its foreign subsidiaries. The tax
effects on the foreign currency translation adjustments have not
been significant.
Recent
Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurement (SFAS 157),
which defines fair value, establishes a framework for measuring
fair value under generally accepted accounting principles, and
expands disclosures about fair value measurements. The statement
does not require any new fair value measurements. SFAS 157
is effective for all financial statements issued for fiscal
years beginning after November 15, 2007. The Company is
currently assessing the impact, if any, the adoption of
SFAS 157 will have on its consolidated results of
operations, financial position and cash flows.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities (SFAS 159), including an
amendment of SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities, which
allows an entity to choose to measure certain financial
instruments and liabilities at fair value. Subsequent
measurements for the financial instruments and liabilities an
entity elects to measure at fair value will be recognized in
earnings. SFAS 159 also establishes additional disclosure
requirements. SFAS 159 is effective for fiscal years
beginning after November 15, 2007, with early adoption
permitted provided that the entity also adopts SFAS 157.
The Company is currently evaluating the effect, if any, the
adoption of SFAS 159 will have on its consolidated results
of operations, financial position and cash flows.
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations (SFAS 141R)
which replaces SFAS No. 141. SFAS 141R
establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and
non-controlling interests in the acquiree and the goodwill
acquired, in connection with a business combination.
SFAS 141R also establishes disclosure requirements.
SFAS 141R is effective for fiscal years beginning after
December 15, 2008. The Company will adopt SFAS 141R at
the beginning of its 2010 fiscal year, or May 1, 2009. The
Company is currently evaluating the effect, if any, the adoption
of SFAS 141(r) will have on its consolidated results of
operations, financial position and cash flows.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51
(SFAS 160). The statement changes how noncontrolling
interests in subsidiaries are measured to initially be measured
at fair value and classified as a separate component of equity.
SFAS 160 establishes a single method of accounting for
changes in a parents ownership interest in a subsidiary
that do not result in deconsolidation. No gains or losses will
be recognized on partial disposals of a subsidiary where control
is retained. In addition, in partial acquisitions, where control
is obtained, the acquiring company will recognize and measure at
fair value all of the assets and liabilities, including
goodwill, as if the entire target
72
ARCSIGHT,
INC.
Notes to
Consolidated Financial
Statements (Continued)
company had been acquired. The statement is to be applied
prospectively for fiscal years beginning on or after
December 15, 2008. The Company is currently evaluating the
effect, if any, the adoption of SFAS 160 will have on its
consolidated results of operations, financial position and cash
flows.
|
|
3.
|
Net Loss
Per Common Share
|
On February 20, 2008, the closing date of the
Companys IPO, and pursuant to the amended and restated
certificate of incorporation, all outstanding shares of
convertible preferred stock converted into an aggregate of
14,000,441 shares of common stock. Additionally, in
connection with the conversion of the shares of convertible
preferred stock, warrants to purchase shares of convertible
preferred stock and common stock were also converted to a
net 19,202 shares of common stock.
Basic and diluted net loss per common share is computed using
the weighted-average number of shares of common stock
outstanding during the period. Potentially dilutive securities
consisting of convertible preferred stock, stock options, common
stock subject to repurchase and warrants were not included in
the diluted loss per common share computation for any period
presented because the inclusion of such shares would have had an
anti-dilutive effect.
The following table sets forth the computation of basic and
diluted net loss per share (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Numerator for basic and diluted net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,009
|
)
|
|
$
|
(257
|
)
|
|
$
|
(16,746
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares, net of weighted-average shares
subject to repurchase, used in computing net loss per common
share-basic and diluted
|
|
|
25,936
|
|
|
|
10,042
|
|
|
|
7,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share, basic and diluted
|
|
$
|
(0.08
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(2.24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As the Company had a net loss for each of the periods presented,
basic and diluted net loss per share are the same. The
weighted-average shares used in the computation of basic and
diluted net loss per share for the periods are presented net of
shares subject to repurchase.
The following table sets forth the weighted-average number of
shares subject to potentially dilutive outstanding securities
(i.e., convertible preferred stock, common stock options, common
stock subject to repurchase and warrants) that were excluded
from the computation of diluted net loss per share for the
periods presented because including them would have had an
anti-dilutive effect (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Convertible preferred stock (as converted)
|
|
|
11,046
|
|
|
|
13,984
|
|
|
|
13,970
|
|
Options to purchase common stock
|
|
|
2,484
|
|
|
|
2,519
|
|
|
|
2,129
|
|
Common stock subject to repurchase
|
|
|
153
|
|
|
|
353
|
|
|
|
618
|
|
Warrants to purchase common stock and convertible preferred
stock (as converted)
|
|
|
13
|
|
|
|
22
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
13,696
|
|
|
|
16,878
|
|
|
|
16,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73
ARCSIGHT,
INC.
Notes to
Consolidated Financial
Statements (Continued)
|
|
4.
|
Acquisition
of Enira Technologies, LLC
|
On June 2, 2006, the Company completed the acquisition of
substantially all of the assets of Enira Technologies, LLC
(Enira), a privately-held provider of solutions for
responding to network security compromises. Eniras core
product, Network Response, was an appliance-based solution that
speeds the time to threat remediation by automating the
error-prone and time-consuming network discovery and network
change/configuration tasks without altering an
organizations existing infrastructure. Through this
acquisition, the Company acquired the predecessor products to
its TRM and NCM appliance products.
The acquisition was accounted for under the purchase method of
accounting in accordance with SFAS 141. Assets acquired and
liabilities assumed were recorded at their fair values as of
June 2, 2006.
The total purchase price of $8.7 million was comprised of
(in thousands):
|
|
|
|
|
Cash consideration for members of Enira
|
|
$
|
7,000
|
|
Fair value of common stock issued(1)
|
|
|
1,538
|
|
Estimated acquisition-related costs(2)
|
|
|
209
|
|
|
|
|
|
|
Total consideration
|
|
$
|
8,747
|
|
|
|
|
|
|
|
|
|
(1) |
|
The members of Enira received $7.0 million in aggregate
cash consideration and 253,038 shares of the Companys
common stock. The fair value of the Companys shares issued
was based on a per share value of $6.08, which was equal to its
then deemed fair value. |
|
(2) |
|
The acquisition-related costs consist primarily of legal and
accounting fees and other directly related costs. |
The total purchase consideration has been allocated to the
assets and liabilities acquired, including identifiable
intangible assets and assumed contractual obligations and
related contingent liabilities, based on their respective fair
values at the acquisition date and resulting in excess purchase
consideration over the net tangible liabilities and identifiable
intangible assets acquired of $5.7 million.
In connection with the Enira acquisition, 132,879 additional
shares of restricted common stock were issued to Enira employees
who accepted employment with the Company. These shares are
subject to a two-year vesting requirement based on continued
employment by these former Enira employees. The fair value of
these restricted shares amounted to $0.8 million and was
based on a per share value of $6.08. In accordance with Emerging
Issues Task Force (EITF) Issue
No. 95-8,
Accounting for Contingent Consideration Paid to
Shareholders of an Acquired Enterprise in a Purchase Business
Combination, the total fair value of these shares is being
accounted for as deferred compensation expense and is being
amortized on a straight-line basis over the term of the required
post-combination services. For fiscal 2008 and 2007 the related
compensation expense amounted to approximately $0.4 million
and $0.4 million, respectively.
The following condensed balance sheet data presents the
respective fair values of the assets and liabilities acquired
(in thousands):
|
|
|
|
|
Accounts receivable
|
|
$
|
67
|
|
Inventory
|
|
|
32
|
|
Other assets
|
|
|
15
|
|
Goodwill
|
|
|
5,746
|
|
Intangible assets
|
|
|
3,210
|
|
Liabilities
|
|
|
(323
|
)
|
|
|
|
|
|
Total
|
|
$
|
8,747
|
|
|
|
|
|
|
74
ARCSIGHT,
INC.
Notes to
Consolidated Financial
Statements (Continued)
The estimated fair value of identified intangible assets and the
useful lives assigned to them at the time of acquisition are as
follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Useful Lives
|
|
|
|
Purchase Price
|
|
|
in Years
|
|
|
Core and developed technologies
|
|
$
|
1,970
|
|
|
|
5.00
|
|
Customer installed-base relationships
|
|
|
80
|
|
|
|
6.00
|
|
Employee non-compete agreements
|
|
|
1,160
|
|
|
|
5.00
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The excess of the purchase price over the fair value of the net
tangible and identifiable intangible assets was recorded as
goodwill, and is deductible for federal tax purposes.
Acquired intangible assets other than goodwill are amortized
over their respective estimated useful lives to match the
amortization to the benefits received. The total amortization
expense related to intangible assets was $0.6 million and
$0.5 million for fiscal 2008 and 2007, respectively.
The gross carrying amount and net book value of goodwill and
intangible assets as of April 30, 2008 and 2007 are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of April 30, 2008
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Core and developed technologies
|
|
$
|
1,970
|
|
|
$
|
(434
|
)
|
|
$
|
1,536
|
|
Customer installed-base relationships
|
|
|
80
|
|
|
|
(37
|
)
|
|
|
43
|
|
Employee non-compete agreements
|
|
|
1,160
|
|
|
|
(578
|
)
|
|
|
582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,210
|
|
|
$
|
(1,049
|
)
|
|
$
|
2,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
$
|
5,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of April 30, 2007
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Core and developed technologies
|
|
$
|
1,970
|
|
|
$
|
(139
|
)
|
|
$
|
1,831
|
|
Customer installed-base relationships
|
|
|
80
|
|
|
|
(19
|
)
|
|
|
61
|
|
Employee non-compete agreements
|
|
|
1,160
|
|
|
|
(318
|
)
|
|
|
842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,210
|
|
|
$
|
(476
|
)
|
|
$
|
2,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
$
|
5,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There was no impairment of goodwill or intangible assets in
fiscal 2008 or 2007.
75
ARCSIGHT,
INC.
Notes to
Consolidated Financial
Statements (Continued)
As of April 30, 2008, future estimated amortization costs
per year for the Companys existing intangible assets other
than goodwill are estimated as follows (in thousands):
|
|
|
|
|
|
|
Estimated
|
|
|
|
Amortization
|
|
Fiscal Year Ending April 30:
|
|
Expense
|
|
|
2009
|
|
$
|
842
|
|
2010
|
|
|
889
|
|
2011
|
|
|
425
|
|
2012
|
|
|
5
|
|
|
|
|
|
|
Total
|
|
$
|
2,161
|
|
|
|
|
|
|
Property
and Equipment, Net
Property and equipment consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of April 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
Computers and equipment
|
|
$
|
6,135
|
|
|
$
|
4,898
|
|
Furniture and fixtures
|
|
|
1,071
|
|
|
|
451
|
|
Software
|
|
|
754
|
|
|
|
576
|
|
Leasehold improvements
|
|
|
2,080
|
|
|
|
640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,040
|
|
|
|
6,565
|
|
Less: accumulated depreciation and amortization
|
|
|
(5,206
|
)
|
|
|
(3,812
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
4,834
|
|
|
$
|
2,753
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was $1.6 million, $1.0 million,
and $0.7 million for fiscal 2008, 2007 and 2006,
respectively. Amortization expense was $0.3 million,
$0.4 million, and $0.3 million for fiscal 2008, 2007
and 2006, respectively.
Accrued
Compensation and Benefits
Accrued compensation and benefits consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
As of April 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
Accrued commissions
|
|
$
|
3,997
|
|
|
$
|
2,016
|
|
Accrued bonus
|
|
|
4,621
|
|
|
|
2,572
|
|
Accrued payroll taxes
|
|
|
672
|
|
|
|
591
|
|
Accrued vacation
|
|
|
1,804
|
|
|
|
1,296
|
|
Accrued ESPP
|
|
|
600
|
|
|
|
|
|
Other compensation and benefits
|
|
|
170
|
|
|
|
203
|
|
|
|
|
|
|
|
|
|
|
Total accrued compensation and benefits
|
|
$
|
11,864
|
|
|
$
|
6,678
|
|
|
|
|
|
|
|
|
|
|
76
ARCSIGHT,
INC.
Notes to
Consolidated Financial
Statements (Continued)
Deferred
Revenues
Deferred revenues consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of April 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
Deferred product revenues
|
|
$
|
13,627
|
|
|
$
|
10,316
|
|
Deferred maintenance revenues
|
|
|
24,256
|
|
|
|
17,051
|
|
Deferred services revenues
|
|
|
3,383
|
|
|
|
2,221
|
|
|
|
|
|
|
|
|
|
|
Total deferred revenues
|
|
|
41,266
|
|
|
|
29,588
|
|
Less deferred revenues, current portion
|
|
|
(36,512
|
)
|
|
|
(24,794
|
)
|
|
|
|
|
|
|
|
|
|
Deferred revenues, non-current
|
|
$
|
4,754
|
|
|
$
|
4,794
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
|
Commitments
and Contingencies
|
The Company and its subsidiaries operate from leased premises in
the United States, Asia and Europe with lease periods expiring
through 2013. In April 2007, the Company entered into a lease
extension through October 2013, and added additional office
space to the lease for the corporate headquarters. This lease
agreement includes a rent escalation clause of 4% per annual
lease term through expiration in October 2013. The lease
agreement includes leasehold improvement allowances in the
amount of $0.7 million which is recorded as deferred rent
and amortized as reductions to rent expense on a straight line
basis over the remainder of the lease term. The lease agreement
also includes a renewal period at the Companys option for
an additional 5 years at the then current fair market
value. The Company recognizes expense for scheduled rent
increases on a straight-line basis over the lease term beginning
with the date the Company takes possession of the leased space.
Future minimum lease payments under the Companys
noncancelable operating leases as of April 30, 2008 are as
follows (in thousands):
|
|
|
|
|
|
|
Amount of
|
|
Fiscal Year Ending April 30:
|
|
Payments
|
|
|
2009
|
|
$
|
2,323
|
|
2010
|
|
|
1,933
|
|
2011
|
|
|
1,988
|
|
2012
|
|
|
2,068
|
|
2013
|
|
|
2,151
|
|
Thereafter
|
|
|
1,118
|
|
|
|
|
|
|
Total future minimum lease payments
|
|
$
|
11,581
|
|
|
|
|
|
|
Rent expense under all operating leases was approximately
$2.2 million, $0.9 million, and $0.7 million for
fiscal 2008, 2007 and 2006, respectively.
|
|
7.
|
Indemnification
and Warranties
|
The Company from time to time enters into certain types of
contracts that contingently require it to indemnify various
parties against claims from third parties. These contracts
primarily relate to (i) certain real estate leases under
which the Company may be required to indemnify property owners
for environmental and other liabilities and other claims arising
from the Companys use of the applicable premises,
(ii) the Companys bylaws, under which it must
indemnify directors, and may indemnify officers and employees,
for liabilities arising out of their relationship,
(iii) contracts under which the Company may be required to
indemnify customers or resellers against third-party claims,
including claims that a Company product infringes a patent,
copyright or other intellectual property right,
77
ARCSIGHT,
INC.
Notes to
Consolidated Financial
Statements (Continued)
and (iv) procurement, consulting, or license agreements
under which the Company may be required to indemnify vendors,
consultants or licensors for certain claims, including claims
that may be brought against them arising from the Companys
acts or omissions with respect to the supplied products or
technology.
In the event that one or more of these matters were to result in
a claim against the Company, an adverse outcome, including a
judgment or settlement, may cause a material adverse effect on
the Companys future business, operating results or
financial condition. It is not possible to determine the maximum
potential amount under these indemnification agreements due to
the limited history of prior indemnification claims and the
unique facts and circumstances involved in each particular
agreement.
The Company maintains director and officer insurance, which may
cover certain liabilities arising from its obligation to
indemnify its directors. To date, the Company has not been
required to make any payment resulting from infringement claims
asserted against its customers and has not recorded any related
accruals.
The Company generally provides a warranty for its products and
services to its customers and accounts for its warranties under
SFAS 5. To date, the Companys product warranty
expense has not been significant. Accordingly, the Company has
not recorded a warranty reserve as of April 30, 2008 or
2007.
Common
Stock
In February 2008, the Company completed an IPO of common stock
in which it sold 6,000,000 shares of common stock, at an
issue price of $9.00 per share. The Company raised a total of
$54.0 million in gross proceeds from the IPO, or
$45.9 million in net proceeds after deducting underwriting
discounts of $3.8 million and offering expenses of
$4.3 million. Upon the closing of the IPO, all shares of
convertible preferred stock outstanding automatically converted
into 14,000,441 shares of common stock.
Convertible
Preferred Stock
Number of shares of preferred stock authorized, issued and
outstanding as of April 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Issued
|
|
|
|
Authorized
|
|
|
and
|
|
|
|
Shares
|
|
|
Outstanding
|
|
|
Series A
|
|
|
3,681,913
|
|
|
|
3,681,909
|
|
Series B
|
|
|
8,419,840
|
|
|
|
7,416,112
|
|
Series C
|
|
|
2,000,000
|
|
|
|
1,934,476
|
|
Undesignated
|
|
|
7,499,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,601,752
|
|
|
|
13,032,497
|
|
|
|
|
|
|
|
|
|
|
On February 20, 2008, the closing date of the
Companys IPO, and pursuant to the amended and restated
certificate of incorporate, all outstanding shares of
convertible preferred stock converted to an aggregate of
14,000,441 shares of common stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate
|
|
|
|
|
|
|
|
|
|
Conversion
|
|
|
Preferred
|
|
|
Common
|
|
Preferred Stock Series
|
|
Ratio
|
|
|
Stock Shares
|
|
|
Stock Shares
|
|
|
Series A
|
|
|
1.2582-for-1
|
|
|
|
3,681,909
|
|
|
|
4,632,724
|
|
Series B
|
|
|
1-for-1
|
|
|
|
7,429,021
|
|
|
|
7,429,021
|
|
Series C
|
|
|
1.0022-for-1
|
|
|
|
1,934,476
|
|
|
|
1,938,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,045,406
|
|
|
|
14,000,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78
ARCSIGHT,
INC.
Notes to
Consolidated Financial
Statements (Continued)
In connection with the conversion of the shares of convertible
preferred stock, warrants to purchase shares of convertible
preferred stock and common stock were also converted to a
net 19,202 shares of common stock. The converted
preferred stock warrants are included in the Series B
Preferred Stock Series above.
Following the IPO, the Companys Board of Directors is
authorized, subject to limitations prescribed by Delaware law,
to issue at their discretion preferred stock in one or more
series, to establish from time to time the number of shares to
be included in each series and to fix the designation, powers,
preferences and rights of the shares of each series and any of
its qualifications, limitations or restrictions. The Board of
Directors also can increase or decrease the number of authorized
shares of any series, but not below the number of shares of that
series then outstanding, without any further vote or action by
our stockholders.
The following is a summary of the authorized, issued and
outstanding convertible preferred stock as of April 30,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Issued
|
|
|
|
Authorized
|
|
|
and
|
|
|
|
Shares
|
|
|
Outstanding
|
|
|
Undesignated
|
|
|
10,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock Reserved for Issuance
Number of shares of common stock reserved for future issuance is
as follows:
|
|
|
|
|
|
|
As of April 30,
|
|
|
|
2008
|
|
|
Options available for future grant under the 2002 Stock Plan and
2007 Equity Incentive Plan
|
|
|
4,366,192
|
|
Options outstanding under the stock option plans
|
|
|
6,687,045
|
|
Conversion of convertible preferred stock
|
|
|
|
|
ESPP shares reserved for future issuance
|
|
|
1,000,000
|
|
Warrants to purchase common stock
|
|
|
|
|
|
|
|
|
|
Total shares reserved
|
|
|
12,053,237
|
|
|
|
|
|
|
Stock
Plans
2007 Equity Incentive Plan. In November 2007,
the Board of Directors and the Companys stockholders
approved the 2007 Equity Incentive Plan, which became effective
on the effective date of the Companys initial public
offering on February 14, 2008. A total of
4,569,015 shares of the Companys common stock were
originally authorized for future issuance under the 2007
Incentive Plan, including shares that became available for grant
upon the concurrent termination of the Companys 2002 Stock
Plan. In addition, shares subject to outstanding grants under
the Companys 2000 Stock Incentive Plan and the 2002 Stock
Plan on February 14, 2008, and any shares issued thereunder
that are forfeited or repurchased by the Company or that are
issuable upon exercise of options that expire or become
unexercisable for any reason without having been exercised in
full, will be available for grant and issuance under the 2007
Equity Incentive Plan. An aggregate of 65,564 of such additional
shares became available for grant and issuance under the 2007
Equity Incentive Plan during the remainder of fiscal 2008. The
number of shares available for grant and issuance under the 2007
Equity Incentive Plan will automatically increase on each
January 1 of 2009 through 2012 by an amount equal to 4% of the
Companys shares outstanding on the immediately preceding
December 31, unless the Companys Board of Directors,
in its discretion, determines to make a smaller increase. The
2007 Equity Incentive Plan will terminate ten years from the
date the Companys Board of Directors approves the plan,
unless it is terminated earlier by the Companys Board of
Directors.
79
ARCSIGHT,
INC.
Notes to
Consolidated Financial
Statements (Continued)
The 2007 Equity Incentive Plan provides for the grant of
options, which includes both incentive and nonqualified stock
options, restricted stock awards, stock appreciation rights,
restricted stock units, stock bonus awards and performance share
awards. Incentive stock options are granted under the 2007 Stock
Plan to employees at exercise prices not less than 100% of the
fair market value of such shares as determined by the
Companys Board of Directors as of the grant date (and not
less than 110% of such fair market value for grants to any
person who owns more than 10% of the total combined voting power
of all classes of outstanding stock of the Company as of the
grant date). Nonqualified stock options may be granted under the
2007 Stock Plan to employees, directors and service providers at
exercise prices that may be less than 100% of the closing fair
market value of the Companys common stock as quoted on the
NASDAQ Global Market on the day of grant at the Committees
discretion. Options granted under the 2007 Equity Incentive Plan
generally expire ten years from the date of grant and are
exercisable either (i) at any time after the date of grant
or (ii) as such stock options vest. Options granted
generally vest over four years. Shares issued upon exercise
prior to vesting are subject to a right of repurchase, which
lapses according to the vesting schedule of the original option.
2007 Employee Stock Purchase Plan. In November
2007, the Board of Directors and the Companys stockholders
approved the 2007 Employee Stock Purchase Plan, which became
effective on the effective date of the Companys initial
public offering in February 2008. 1,000,000 shares of the
Companys common stock were originally authorized for
future issuance under the 2007 Employee Stock Purchase. The
number of shares reserved for issuance under the Companys
2007 Employee Stock Purchase Plan will increase automatically on
January 1 of each of the first eight years commencing with 2009
by the number of shares equal to 1% of the Companys total
outstanding shares as of the immediately preceding December 31
(rounded to the nearest whole share). The Board of Directors or
Compensation Committee may reduce the amount of the increase in
any particular year. No more than 20,000,000 shares of the
Companys common stock may be issued under the 2007
Employee Stock Purchase Plan, and no other shares may be added
to this plan without the approval of the Companys
stockholders.
The 2007 Employee Stock Purchase Plan is designed to enable
eligible employees to purchase shares of the Companys
common stock periodically at a discount, and is intended to
qualify as an employee stock purchase plan under
Section 423 of the Code. The Companys employees
generally will be eligible to participate in the 2007 Employee
Stock Purchase Plan if they are employed by the Company, or a
subsidiary or parent of the Company that the Company may
designate. Employees who are 5% stockholders, or would become 5%
stockholders as a result of their participation in the 2007
Employee Stock Purchase Plan, are not eligible to participate in
the 2007 Employee Stock Purchase Plan. Eligible employees may
acquire shares of the Companys common stock by
accumulating funds through payroll deductions, at selected rates
between 1% and 15% of their base salary or regular hourly wages.
The purchase price for shares of the Companys common stock
purchased under the 2007 Employee Stock Purchase Plan will be
85% of the lesser of the fair market value of the Companys
common stock on the first day of the offering period or the last
trading day of the applicable purchase period within that
offering period. For the initial offering period, the fair
market value on the first day of the offering period will be the
price at which the Companys shares are initially offered
in this offering. The 2007 Employee Stock Purchase Plan will
terminate on the tenth anniversary of the first purchase date
(as set forth in the plan), unless it is terminated earlier by
the Board of Directors. An employees participation will
automatically end upon termination of employment for any reason.
2002 Stock Plan. In March 2002, the Board of
Directors adopted the 2002 Stock Plan, as amended, and the
Companys stockholders approved the 2002 Stock Plan.
4,020,074 shares were originally authorized for issuance
under this plan. In addition, 93,940 shares were rolled
over from the 2000 Stock Incentive Plan, 18,911 shares were
cancelled or repurchased under the 2000 Stock Incentive Plan and
the Board of Directors has authorized a net increase of an
additional 5,964,807 shares for issuance. The 2002 Stock
Plan provides for either the award of stock purchase rights or
the grant of options, which includes both incentive and
non-statutory stock options. Options have been granted under the
2002 Stock Plan to employees, directors and service providers at
exercise prices not less than 85% of the fair market value of
such shares as determined by the Companys Board of
Directors as of the grant date (and not less than 110% of such
fair market value for grants to any person who owns more than
10% of the total combined voting power of all classes of
outstanding stock of the Company as of the grant date). Options
granted
80
ARCSIGHT,
INC.
Notes to
Consolidated Financial
Statements (Continued)
under the 2002 Stock Plan generally expire ten years from the
date of grant and are exercisable either (i) at any time
after the date of grant or (ii) as such stock options vest.
Options granted generally vest over four years. Shares issued
upon exercise prior to vesting are subject to a right of
repurchase, which lapses according to the vesting schedule of
the original option. The Company ceased granting awards under
the 2002 Stock Plan upon the implementation of the 2007 Equity
Incentive Plan, which is described above.
2000 Stock Incentive Plan. The 2000 Stock
Incentive Plan provides for both the award of restricted stock
and the grant of options, which includes both incentive and
non-statutory stock options. The Company ceased granting awards
under the 2000 Stock Incentive Plan upon the implementation of
the 2002 Stock Plan, which is described above. These options
generally expire ten years from the date of grant and are
exercisable at any time after the date of grant. Options granted
generally vest over four years. Shares issued upon exercise
prior to vesting are subject to a right of repurchase, which
lapses according to the vesting schedule of the original option.
The Company is not obligated to but has the right to repurchase
the vested shares at the fair market value of the vested shares
if the participants service is terminated for any reason.
The repurchase right terminated with respect to the vested
shares upon the first sale of common stock of the Company to the
general public pursuant to the Companys IPO on
February 14, 2008.
Stock
Plan Activity
A summary of the option activity under the 2007 Equity Incentive
Plan, the 2002 Stock Plan and the 2000 Stock Incentive Plan
during fiscal 2008, 2007 and 2006, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Options
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Shares
|
|
|
|
|
|
Exercise
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Available
|
|
|
Number of
|
|
|
Price
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
for Grant
|
|
|
Shares
|
|
|
per Share
|
|
|
Term (Years)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Options outstanding as of April 30, 2005
|
|
|
222,642
|
|
|
|
2,730,308
|
|
|
$
|
0.47
|
|
|
|
|
|
|
|
|
|
Options authorized
|
|
|
2,333,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(2,114,431
|
)
|
|
|
2,114,431
|
|
|
|
4.45
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
(279,593
|
)
|
|
|
0.67
|
|
|
|
|
|
|
|
|
|
Options canceled
|
|
|
285,167
|
|
|
|
(285,167
|
)
|
|
|
1.81
|
|
|
|
|
|
|
|
|
|
Shares repurchased
|
|
|
54,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as of April 30, 2006
|
|
|
780,876
|
|
|
|
4,279,979
|
|
|
|
2.34
|
|
|
|
|
|
|
|
|
|
Options authorized
|
|
|
2,591,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(2,208,347
|
)
|
|
|
2,208,347
|
|
|
|
6.87
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
(225,326
|
)
|
|
|
2.58
|
|
|
|
|
|
|
|
|
|
Options canceled
|
|
|
490,188
|
|
|
|
(490,188
|
)
|
|
|
3.66
|
|
|
|
|
|
|
|
|
|
Shares repurchased
|
|
|
21,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as of April 30, 2007
|
|
|
1,675,840
|
|
|
|
5,772,812
|
|
|
|
3.95
|
|
|
|
8.31
|
|
|
$
|
31,003
|
|
Options authorized
|
|
|
4,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(1,731,313
|
)
|
|
|
1,731,313
|
|
|
|
9.78
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
(402,260
|
)
|
|
|
2.30
|
|
|
|
|
|
|
|
|
|
Options canceled
|
|
|
414,820
|
|
|
|
(414,820
|
)
|
|
|
6.10
|
|
|
|
|
|
|
|
|
|
Shares repurchased
|
|
|
6,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as of April 30, 2008
|
|
|
4,366,192
|
|
|
|
6,687,045
|
|
|
|
5.43
|
|
|
|
7.89
|
|
|
|
15,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest as of April 30, 2008, net of
anticipated forfeitures
|
|
|
|
|
|
|
5,944,783
|
|
|
|
5.43
|
|
|
|
7.89
|
|
|
|
13,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable as of April 30, 2008
|
|
|
|
|
|
|
3,310,418
|
|
|
|
3.18
|
|
|
|
6.97
|
|
|
|
14,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81
ARCSIGHT,
INC.
Notes to
Consolidated Financial
Statements (Continued)
The aggregate intrinsic values shown in the table above are
equal to the difference between the per share exercise price of
the underlying stock options and the fair value of the
Companys common stock as of the respective dates in the
table.
The following table summarizes additional information regarding
outstanding options as of April 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Options Vested and Exercisable
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
Average
|
|
|
|
Number
|
|
|
Contractual
|
|
|
Number of
|
|
|
Exercise
|
|
Exercise Price
|
|
Outstanding
|
|
|
Life (Years)
|
|
|
Shares
|
|
|
Price per Share
|
|
|
$0.12
|
|
|
3,923
|
|
|
|
3.96
|
|
|
|
3,923
|
|
|
$
|
0.12
|
|
$0.16
|
|
|
385,444
|
|
|
|
4.68
|
|
|
|
385,444
|
|
|
|
0.16
|
|
$0.24
|
|
|
356,523
|
|
|
|
5.72
|
|
|
|
356,523
|
|
|
|
0.24
|
|
$0.36
|
|
|
45,625
|
|
|
|
6.07
|
|
|
|
45,246
|
|
|
|
0.36
|
|
$0.40
|
|
|
39,375
|
|
|
|
3.20
|
|
|
|
39,375
|
|
|
|
0.40
|
|
$0.48
|
|
|
235,728
|
|
|
|
6.43
|
|
|
|
210,617
|
|
|
|
0.48
|
|
$0.80
|
|
|
813,898
|
|
|
|
6.76
|
|
|
|
646,594
|
|
|
|
0.80
|
|
$4.00
|
|
|
774,630
|
|
|
|
7.16
|
|
|
|
542,604
|
|
|
|
4.00
|
|
$6.08
|
|
|
756,495
|
|
|
|
7.99
|
|
|
|
388,038
|
|
|
|
6.08
|
|
$6.65-6.80
|
|
|
1,443,450
|
|
|
|
8.71
|
|
|
|
520,658
|
|
|
|
6.80
|
|
$7.17-7.95
|
|
|
42,725
|
|
|
|
9.98
|
|
|
|
|
|
|
|
7.66
|
|
$8.28-8.50
|
|
|
87,787
|
|
|
|
9.85
|
|
|
|
|
|
|
|
8.49
|
|
$9.00-9.32
|
|
|
322,313
|
|
|
|
9.32
|
|
|
|
59,302
|
|
|
|
9.19
|
|
$10.00
|
|
|
1,379,129
|
|
|
|
9.42
|
|
|
|
112,094
|
|
|
|
10.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,687,045
|
|
|
|
7.89
|
|
|
|
3,310,418
|
|
|
$
|
3.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intrinsic value of options exercised for fiscal 2008, 2007
and 2006 was $3.0 million, $1.0 million and
$0.6 million, respectively, determined at the date of
option exercise.
|
|
9.
|
Stock-Based
Compensation
|
During fiscal 2008, 2007 and 2006, the Company recorded
stock-based compensation as described below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Stock-based compensation under SFAS 123R
|
|
$
|
4,186
|
|
|
$
|
892
|
|
|
$
|
|
|
Stock-based compensation under prospective transition method for
option awards granted prior to the adoption of SFAS 123R
|
|
|
91
|
|
|
|
267
|
|
|
|
569
|
|
Amortization of restricted stock awards in connection with the
acquisition of Enira Technologies, LLC
|
|
|
404
|
|
|
|
370
|
|
|
|
|
|
Stock-based compensation under Employee Stock Purchase Plan
|
|
|
245
|
|
|
|
|
|
|
|
|
|
Stock-based compensation under variable accounting
|
|
|
|
|
|
|
|
|
|
|
7,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,926
|
|
|
$
|
1,529
|
|
|
$
|
8,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82
ARCSIGHT,
INC.
Notes to
Consolidated Financial
Statements (Continued)
Adoption
of SFAS 123R
On May 1, 2006, the Company adopted SFAS 123R, which
establishes standards for the accounting of transactions in
which an entity exchanges its equity instruments for goods or
services, primarily focusing on accounting for transactions
where an entity obtains employee services in stock-based payment
transactions. SFAS 123R requires the Company to measure the
cost of employee services received in exchange for an award of
equity instruments, including stock options, based on the
grant-date fair value of the award and to recognize it as
compensation expense over the period the employee is required to
provide service in exchange for the award, usually the vesting
period. SFAS 123R superseded the Companys previous
accounting under APB 25 beginning May 1, 2006.
The Company adopted SFAS 123R using the prospective
transition method, which requires the application of the
accounting standard as of May 1, 2006, the first day of
fiscal 2007. The consolidated financial statements for fiscal
2008 and 2007, reflect the impact of SFAS 123R. In
accordance with the prospective transition method, the
consolidated financial statements for prior periods have not
been restated to reflect, and do not include, the impact of
SFAS 123R.
Effective with the adoption of SFAS 123R, the fair value of
stock-based awards to employees is calculated using the
Black-Scholes option pricing model. The Black-Scholes model
requires, among other inputs, an estimate of the fair value of
the underlying common stock on the date of grant and assumptions
as to volatility of the Companys stock over the term of
the related options, the expected term of the options, the
risk-free interest rate and the option forfeiture rate. These
assumptions used in the pricing model are determined by the
Company at each grant date. As there has been no public market
for the Companys common stock prior to the IPO, the
Company has determined the volatility for options granted in
fiscal 2007 and 2008, based on an analysis of reported data for
a peer group of companies that issued options with substantially
similar terms. The expected volatility of options granted has
been determined using weighted-average measures of this peer
group of companies of the implied volatility and the historical
volatility for a period equal to the expected life of the
option. The expected life of options has been determined
considering the expected life of options granted by a group of
peer companies and the average vesting and contractual term of
the Companys options. The risk-free interest rate is based
on a zero coupon United States treasury instrument whose term is
consistent with the expected life of the stock options. As the
Company has not paid and does not anticipate paying cash
dividends on outstanding shares of common stock, the expected
dividend yield is assumed to be zero. In addition,
SFAS 123R requires companies to utilize an estimated
forfeiture rate when calculating the expense for the period,
whereas SFAS 123 permitted companies to record forfeitures
based on actual forfeitures, which was the Companys
historical policy under SFAS 123. The Company applied an
estimated annual forfeiture rate of 5%, based on its historical
forfeiture experience during the previous six years, in
determining the expense recorded in its consolidated statement
of operations.
SFAS 123R requires the cash flows resulting from the tax
benefits resulting from tax deductions in excess of the
compensation cost recognized for those options to be classified
as financing cash flows. Due to the Companys historical
loss position, no tax benefits have been realized or recorded
for any of the periods presented. Prior to the adoption of
SFAS 123R those benefits would have been reported as
operating cash flows had the Company received any tax benefits
related to stock option exercises.
83
ARCSIGHT,
INC.
Notes to
Consolidated Financial
Statements (Continued)
Valuation
and Expense Information under SFAS 123R
The weighted-average fair value calculations for options granted
within the period are based on the following weighted-average
assumptions set forth in the table below and assume no dividends
will be paid. Options that were granted in prior periods are
based on assumptions prevailing at the date of grant.
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
Risk-free interest rate
|
|
|
4.22
|
%
|
|
|
5.00
|
%
|
Expected volatility
|
|
|
55
|
%
|
|
|
66
|
%
|
Expected life (years)
|
|
|
5.25 years
|
|
|
|
5.25 years
|
|
Based on these calculations, the weighted-average fair value per
share of common stock was $5.17 and $4.20 per share for
fiscal 2008 and 2007, respectively. The compensation costs that
have been included in the Companys results of operations
for these stock-based compensation arrangements during fiscal
2008 and 2007, as a result of the Companys adoption of
SFAS 123R, were as follows (in thousands, except per share
amount):
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
Cost of maintenance revenues
|
|
$
|
106
|
|
|
$
|
1
|
|
Cost of services revenues
|
|
|
115
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
SFAS 123R expense included in cost of revenues
|
|
|
221
|
|
|
|
10
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
1,356
|
|
|
|
135
|
|
Sales and marketing
|
|
|
2,685
|
|
|
|
583
|
|
General and administrative
|
|
|
664
|
|
|
|
164
|
|
|
|
|
|
|
|
|
|
|
SFAS 123R expense included in operating expenses
|
|
|
4,705
|
|
|
|
882
|
|
|
|
|
|
|
|
|
|
|
SFAS 123R expense included in net loss
|
|
$
|
4,926
|
|
|
$
|
892
|
|
|
|
|
|
|
|
|
|
|
SFAS 123R expense included in basic and diluted net loss
per share
|
|
$
|
0.19
|
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Because the amount of stock-based compensation associated with
the Companys cost of products is not significant, no
amounts have been capitalized for any of the periods presented.
As of April 30, 2008 and 2007, there was $11.2 million
and $7.4 million, respectively, of total unrecognized stock
based compensation expenses under SFAS 123R, net of
estimated forfeitures, that the Company expects to amortize.
Total unrecognized stock based compensation expenses related to
non-vested awards are expected to be recognized over a
weighted-average period of 2.87 years.
During fiscal 2008, the Company granted 1,731,313 options. These
options have exercise prices equal to the deemed market value of
the Companys common stock on the dates these options were
granted, with exercise prices ranging from $6.65 to $10.00 per
share at a weighted-average per share price of $9.78. During
fiscal 2007, the Company granted options to employees to
purchase a total of 2,208,347 shares of common stock at per
share exercise prices ranging from $6.08 to $9.32 per share at a
weighted-average per share price of $6.87. The valuations used
to determine the fair values of the options were
contemporaneous. Since the completion of the Companys IPO,
the Company grants options to employees at exercise prices equal
to the closing fair market value of the Companys common
stock as quoted on the NASDAQ on the day of grant.
84
ARCSIGHT,
INC.
Notes to
Consolidated Financial
Statements (Continued)
Employee
Stock Purchase Plan
In November 2007, the Board of Directors and the Companys
stockholders approved the 2007 Employee Stock Purchase Plan (the
ESPP), which became effective upon the
Companys IPO on February 14, 2008. A total of
1,000,000 shares of the Companys common stock were
initially reserved for future issuance under the ESPP. Under the
ESPP, employees may purchase shares of common stock at a price
that is 85% of the lesser of the fair market value of the
Companys common stock as of beginning or the end of each
offering period. The ESPP provides for consecutive offering
periods of six months each, except for the first such offering
period which commenced on February 14, 2008 and will end on
September 15, 2008.
The ESPP is compensatory and results in compensation cost
accounted for under SFAS 123R. The Black-Scholes option
pricing model is used to estimate the fair value of rights to
acquire stock granted under the ESPP. The weighted-average fair
value calculations for rights to acquire stock under the ESPP
within the period are based on the following weighted-average
assumptions set forth in the table below, assuming no dividends
will be paid, and based on assumptions prevailing as of the
enrollment date of the offering period.
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
April 30,
|
|
|
|
2008
|
|
|
Risk-free interest rate
|
|
|
2.11
|
%
|
Expected volatility
|
|
|
53
|
%
|
Expected term (in years)
|
|
|
0.58 years
|
|
Based on these calculations, the weighted-average fair value per
share of common stock was $2.77 per share for fiscal 2008. For
the year ended April 30, 2008, the Company recorded
stock-based compensation expense associated with its ESPP of
$0.2 million. As of April 30, 2008, there was
$0.4 million of total unrecognized compensation expenses
under SFAS 123R, net of expected forfeitures, related to
common stock purchase rights that the Company expects to
amortize over the remaining offering period ending
September 15, 2008.
APB 25
Intrinsic Value Charges
Given the absence of an active market for the Companys
common stock prior to the Companys IPO on
February 14, 2008, the Companys Board of Directors
historically determined the fair value of the Companys
common stock in connection with the Companys grant of
stock options and stock awards. The Companys Board of
Directors made such determinations based on the business,
financial and venture capital experience of the individual
directors along with input from management. In January 2006, the
Company engaged Financial Strategies Consulting Group, an
unrelated third-party valuation firm as described by AICPA
Practice Aid Valuation of Privately-Held Company Equity
Securities Issued as Compensation, to advise the Board of
Directors in determining the fair value of its common stock.
As a result of managements reassessment of the fair value
of the Companys common stock at the grant dates of options
granted to purchase common stock in fiscal 2004 and 2005,
deferred stock compensation has been recorded for the excess of
the fair value of the common stock underlying the options at the
grant date over the exercise price of the options. These amounts
are being amortized on an accelerated basis over the vesting
period, generally four years, consistent with the method
described in FIN 28. Amortization of the deferred
compensation was $0.1 million, $0.3 million and
$0.6 million for fiscal 2008, 2007 and 2006, respectively.
All options granted in and after fiscal 2006 were issued with
exercise prices equal to the fair value.
85
ARCSIGHT,
INC.
Notes to
Consolidated Financial
Statements (Continued)
Information regarding the Companys stock option grants for
these fiscal years is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
|
|
|
|
Subject to
|
|
|
per Share
|
|
|
Reassessed
|
|
|
|
Options
|
|
|
and Original
|
|
|
per Share
|
|
Grant Date
|
|
Granted
|
|
|
Fair Value
|
|
|
Fair Value
|
|
|
May 25, 2004
|
|
|
341,251
|
|
|
$
|
0.36
|
|
|
$
|
0.48
|
|
August 12, 2004
|
|
|
147,188
|
|
|
|
0.48
|
|
|
|
0.64
|
|
October 6, 2004
|
|
|
669,375
|
|
|
|
0.48
|
|
|
|
0.64
|
|
November 11, 2004
|
|
|
160,750
|
|
|
|
0.48
|
|
|
|
0.72
|
|
February 3, 2005
|
|
|
911,524
|
|
|
|
0.80
|
|
|
|
1.88
|
|
Restricted
Stock Awards for Enira Acquisition
In connection with the acquisition of Enira Technologies, LLC,
132,879 shares of restricted common stock that were subject
to two-year vesting were issued. See Note 4
Acquisition of Enira Technologies, LLC. During
fiscal 2008, 66,441 of such shares vested. No such shares vested
in fiscal 2007. As of April 30, 2008, 66,438 shares
remain unvested, and are expected to vest in June 2008. As of
April 30, 2008, total unrecognized stock based compensation
expected to be recognized during fiscal 2009 is $34,000.
Variable
Compensation
Between November 2000 and March 2002, the Company issued, upon
the exercise of options and the receipt of promissory notes,
890,137 shares of common stock at exercise prices ranging
from $0.12 per share to $0.40 per share to employees.
The promissory notes bore annual interest rates between 4.25%
and 8.75%, with principal and interest due upon termination of
the notes. The employees executed full-recourse promissory notes
for $324,864, as well as stock pledge agreements, with the
Company. In May 2002, in conjunction with the termination of one
employee, the Company forgave a portion of the principal of one
of these notes. As a result, all such employee promissory notes
were deemed to be non-recourse in nature and therefore subject
to the provisions of EITF Issue
No. 95-16,
Accounting for Stock Compensation Arrangements with
Employer Loan Features Under APB Opinion No. 25.
Variable accounting for these fully vested options ceased in
fiscal 2006 upon repayment of the notes outstanding. For fiscal
2006, additional stock-based compensation of $7.5 million
was recorded.
The Company operates in one industry segment selling compliance
and security management solutions.
SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, establishes standards
for reporting information about operating segments. Operating
segments are defined as components of an enterprise for which
separate financial information is available and is evaluated
regularly by the chief operating decision maker, or decision
making group, in deciding how to allocate resources and in
assessing performance. The Companys chief operating
decision maker is the Chief Executive Officer (CEO).
The CEO reviews financial information presented on a
consolidated basis for evaluating financial performance and
allocating resources. There are no segment managers who are held
accountable for operations below the consolidated financial
statement level. Accordingly, the Company has determined that it
operates in a single reportable segment.
The CEO evaluates performance based primarily on revenues in the
geographic locations in which the Company operates. Revenues are
attributed to geographic locations based on the ship-to location
of the Companys customers. The Companys assets are
primarily located in the United States and not allocated to any
specific region. Therefore, geographic information is presented
only for total revenues. As of April 30, 2008, 2007 and
2006, long-lived assets, which represent property, plant and
equipment, goodwill and intangible assets, net of accumulated
depreciation and amortization, located outside the Americas were
immaterial and less than one percent of the total net assets as
of these dates.
86
ARCSIGHT,
INC.
Notes to
Consolidated Financial
Statements (Continued)
Total revenues by geographical region are based on the ship-to
location and are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Total revenues by geography:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
40,021
|
|
|
$
|
32,782
|
|
|
$
|
17,442
|
|
Maintenance
|
|
|
21,042
|
|
|
|
15,444
|
|
|
|
9,523
|
|
Services
|
|
|
7,280
|
|
|
|
5,529
|
|
|
|
4,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
68,343
|
|
|
|
53,755
|
|
|
|
31,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EMEA:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
12,923
|
|
|
|
6,462
|
|
|
|
2,754
|
|
Maintenance
|
|
|
3,960
|
|
|
|
2,126
|
|
|
|
1,311
|
|
Services
|
|
|
1,564
|
|
|
|
820
|
|
|
|
603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
18,447
|
|
|
|
9,408
|
|
|
|
4,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asia Pacific:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
3,553
|
|
|
|
3,532
|
|
|
|
1,405
|
|
Maintenance
|
|
|
1,305
|
|
|
|
701
|
|
|
|
390
|
|
Services
|
|
|
619
|
|
|
|
488
|
|
|
|
229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
5,477
|
|
|
|
4,721
|
|
|
|
2,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Americas:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
7,267
|
|
|
|
1,214
|
|
|
|
1,259
|
|
Maintenance
|
|
|
1,301
|
|
|
|
490
|
|
|
|
248
|
|
Services
|
|
|
710
|
|
|
|
245
|
|
|
|
119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
9,278
|
|
|
|
1,949
|
|
|
|
1,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
101,545
|
|
|
$
|
69,833
|
|
|
$
|
39,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys book income (loss) before provision for
income taxes is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(2,360
|
)
|
|
$
|
102
|
|
|
$
|
(16,769
|
)
|
Foreign
|
|
|
1,482
|
|
|
|
30
|
|
|
|
186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(878
|
)
|
|
$
|
132
|
|
|
$
|
(16,583
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87
ARCSIGHT,
INC.
Notes to
Consolidated Financial
Statements (Continued)
The provision of federal, state and foreign income tax expense
on income from continuing operations consists of the following
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
150
|
|
|
$
|
73
|
|
|
$
|
|
|
State
|
|
|
185
|
|
|
|
91
|
|
|
|
6
|
|
Foreign
|
|
|
512
|
|
|
|
225
|
|
|
|
157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current
|
|
|
847
|
|
|
|
389
|
|
|
|
163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
250
|
|
|
|
|
|
|
|
|
|
State
|
|
|
34
|
|
|
|
|
|
|
|
|
|
Total Deferred
|
|
|
284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision
|
|
$
|
1,131
|
|
|
$
|
389
|
|
|
$
|
163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys effective tax rates vary from the federal
statutory rates due to non-deductible items, such as a portion
of the Companys meals and entertainment expenses and state
and foreign taxes.
A reconciliation of income taxes at the statutory federal income
tax rate of 34% to the income tax expense included in the
accompanying consolidated statements of operations is as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
U.S. federal taxes (benefit) at statutory rate
|
|
$
|
(298
|
)
|
|
$
|
45
|
|
|
$
|
(5,638
|
)
|
State tax expense, net
|
|
|
122
|
|
|
|
60
|
|
|
|
4
|
|
Foreign taxes
|
|
|
512
|
|
|
|
225
|
|
|
|
157
|
|
Net operating losses not benefited (benefited)
|
|
|
(653
|
)
|
|
|
(231
|
)
|
|
|
4,837
|
|
Alternative minimum tax
|
|
|
149
|
|
|
|
73
|
|
|
|
|
|
Stock option expense
|
|
|
905
|
|
|
|
214
|
|
|
|
811
|
|
Meals and entertainment
|
|
|
101
|
|
|
|
92
|
|
|
|
|
|
Amortization of tax deductible goodwill
|
|
|
284
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
9
|
|
|
|
(89
|
)
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision
|
|
$
|
1,131
|
|
|
$
|
389
|
|
|
$
|
163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision for income taxes of $1.1 million for the year
ended April 30, 2008, is primarily related to foreign
corporate income taxes due, federal and state alternative
minimum taxes, and a charge to establish deferred tax
liabilities of $0.3 million related to the tax deductible
amortization of goodwill related to the acquisition of Enira
Technologies, LLC in fiscal 2007. The provision for income taxes
of $0.4 million and $0.2 million for the years ended
April 30, 2007 and 2006, respectively, was primarily
related to foreign corporate income taxes.
U.S. income taxes and foreign withholding taxes are not
provided on undistributed earnings of foreign subsidiaries that
are considered to be indefinitely reinvested in the operations
of such subsidiaries. The amount of these earnings was
approximately $0.4 million. The aggregate tax savings based
on the exclusion of these earnings from fiscal 2006 and prior
fiscal years tax provisions is $30,000.
88
ARCSIGHT,
INC.
Notes to
Consolidated Financial
Statements (Continued)
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. Significant components of the
deferred tax assets are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of April 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating losses
|
|
$
|
3,303
|
|
|
$
|
6,282
|
|
Research credits
|
|
|
2,777
|
|
|
|
3,329
|
|
Non-deductible reserves and accruals
|
|
|
1,705
|
|
|
|
1,194
|
|
Non-deductible stock-based compensation
|
|
|
5,619
|
|
|
|
4,768
|
|
Deferred revenues
|
|
|
4,377
|
|
|
|
2,765
|
|
Foreign earnings
|
|
|
230
|
|
|
|
175
|
|
Intangibles
|
|
|
247
|
|
|
|
|
|
Other
|
|
|
276
|
|
|
|
437
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
18,534
|
|
|
|
18,950
|
|
Valuation allowance
|
|
|
(18,534
|
)
|
|
|
(18,814
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
$
|
|
|
|
$
|
136
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Amortization of tax deductible goodwill
|
|
$
|
(284
|
)
|
|
$
|
(136
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
$
|
(284
|
)
|
|
$
|
(136
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets (liabilities)
|
|
$
|
(284
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Realization of deferred tax assets is dependent upon future
earnings, if any, the timing and amount of which are uncertain.
Accordingly, the net deferred tax assets have been fully offset
by a valuation allowance. The valuation allowance increased
(decreased) by $(0.3) million, $1.3 million and
$6.5 million for fiscal 2008, 2007 and 2006.
As of April 30, 2008, the Company had net operating loss
carry-forwards for federal income tax purposes of approximately
$7.8 million, which expire beginning in fiscal 2022 if not
utilized. The Company also has California net operating loss
carry-forwards of approximately $11.3 million which expire
beginning in fiscal 2013. The Company also has federal and
California research and development tax credits of
$1.6 million and $1.8 million, respectively. The
federal research credits will begin to expire in fiscal 2020,
and the California research credits have no expiration date.
Utilization of the Companys net operating loss may be
subject to substantial annual limitation due to the ownership
change limitations provided by the Internal Revenue Code and
similar state provision. Such an annual limitation could result
in the expiration of the net operating loss before utilization.
The Company has experienced annual limitations in its ability to
utilize its net operating losses due to ownership changes. Our
current annual limitation amounts to $2.7 million as of
April 30, 2008.
During fiscal 2007 the Company acquired substantially all of the
assets the assets of Enira Technologies, LLC in a taxable asset
acquisition. For tax purposes, the goodwill acquired in a
taxable asset acquisition is amortized over a period of
15 years, while SFAS No. 142 provides that
goodwill cannot be amortized but must be analyzed annually for
impairment. In accordance with SFAS No. 109, a
deferred tax liability must be recorded to account for this tax
deductible temporary difference and such liability may not be
used as a source of income to support deferred tax assets. The
Company has, therefore, recorded a non-cash charge of
$0.3 million during the year and a corresponding deferred
tax liability on the balance sheet to establish deferred tax
liabilities related to the tax deductible amortization of
goodwill since June 2006.
89
ARCSIGHT,
INC.
Notes to
Consolidated Financial
Statements (Continued)
The Company adopted FASB Interpretation 48, Accounting for
Uncertainty in Income Taxes, an interpretation of
SFAS 109 (FIN 48), on May 1,
2007. As a result of the implementation of FIN 48, the
Company recognized a liability for uncertain tax positions and a
cumulative effect adjustment to the beginning balance of
accumulated deficit on the balance sheet of $0.1 million.
As of April 30, 2008, the liability for uncertain tax
positions increased to $0.3 million. As of the date of
adoption, the Company also recorded a $1.4 million
reduction to deferred tax assets for unrecognized tax benefits,
all of which is currently offset by a full valuation allowance
that had no effect to the beginning balance of accumulated
deficit or the net balance sheet. As of April 30, 2008, the
unrecognized tax benefit of $1.4 million increased to
$1.8 million, all of which is offset by a full valuation
allowance.
The Companys total unrecognized tax benefit as of the
May 1, 2007 adoption date and as of April 30, 2008 was
$1.5 million and $2.1 million, respectively. As of
April 30, 2008, the Company had $0.3 million of
unrealized tax benefits that, if recognized, would affect its
effective tax rate for fiscal 2008. In addition, the Company
does not expect any material changes to the estimated amount of
liability associated with its uncertain tax positions within the
next 12 months related to any statute of limitations
expiring and may increase as a result of normal operating
activity.
The following is a roll-forward of the total gross unrecognized
tax benefit for fiscal 2008 (in thousands):
|
|
|
|
|
Balance as of May 1, 2007
|
|
$
|
1,497
|
|
Tax positions related to current year:
|
|
|
|
|
Additions
|
|
|
615
|
|
Reductions
|
|
|
|
|
Settlements
|
|
|
|
|
Lapse of statute of limitations
|
|
|
|
|
|
|
|
|
|
Balance as of April 30, 2008
|
|
$
|
2,112
|
|
|
|
|
|
|
The Company files income tax returns in the U.S. federal
jurisdiction, California and various state and foreign tax
jurisdictions in which it has a subsidiary or branch operation.
The tax years 2001 to 2008 remain open to examination by
U.S. and state tax authorities, and the tax years 2005 to
2008 remain open to examination by the foreign tax authorities.
The Companys policy is that it recognizes interest and
penalties accrued on any unrecognized tax benefits as a
component of income tax expense. As of April 30, 2008, the
Company had approximately $23,000 of accrued interest or
penalties associated with unrecognized tax benefits.
|
|
12.
|
Related-Party
Transactions
|
Certain employees had outstanding promissory notes with the
Company relating to stock option exercises, which are disclosed
in Note 9. Certain of these transactions have been made
between the Company and its executive officers as follows:
In March 2002, the Company granted its Chief Technology Officer
(CTO) an option to purchase 562,500 shares of
common stock at an exercise price of $0.12 per share under its
2002 Stock Plan. In July 2002, the CTO exercised this option and
paid for the $23 aggregate par value of the shares in cash and
the remainder of the purchase price of $67,477 in the form of a
full-recourse promissory note. The note bore interest at a rate
of 8.75% per year, compounded annually. The note was
collateralized by the 562,500 shares. The note, including
the accrued interest, was repaid in January 2006.
In March 2002, the Company entered into a restricted stock
purchase agreement with its CEO. This agreement provided the CEO
with a right to purchase up to 1,800,000 shares of the
Companys common stock at $0.12 per share. In September
2002, the CEO purchased all 1,800,000 shares of common
stock. The CEO paid for the $72
90
ARCSIGHT,
INC.
Notes to
Consolidated Financial
Statements (Continued)
aggregate par value of the shares in cash and the remainder of
the purchase price of $215,928 in the form of a full-recourse
promissory note. The note bore interest at a rate of 3.75% per
year, compounded annually, and was payable in arrears on each
anniversary date of the note. The note was collateralized by the
1,800,000 shares. The note, including the accrued interest,
was repaid in January 2006.
In September 2001, the Company granted its then Chief Customer
Officer (CCO) an option to purchase
75,000 shares of common stock at an exercise price of $0.40
per share under its 2002 Stock Plan. In January 2002, the
CCO exercised this option and paid for the $3 aggregate par
value of the shares in cash and the remainder of the purchase
price of $29,997 in the form of a full-recourse promissory note.
The note bore interest at a rate of 4.77% per year, compounded
annually. The note was collateralized by the 75,000 shares.
The portion of the note that related to 27,447 shares plus
the accrued interest was repaid in April 2005. The portion of
the note that related to 12,767 shares plus the accrued
interest was repaid in July 2005. The remainder of the note,
including the accrued interest, was repaid in November 2005.
In May 2001, the Company granted its CTO an option to purchase
31,250 shares of common stock at an exercise price of $0.40
per share under its 2002 Stock Plan. In January 2002, the CTO
exercised this option and paid for the $1.25 aggregate par value
of the shares in cash and the remainder of the purchase price of
$12,499 in the form of a full-recourse promissory note. The note
bore interest at a rate of 4.77% per year, compounded annually.
The note, including the accrued interest, was repaid in January
2006.
As of April 30, 2008, the company had prepaid commission
payments to certain employees in the Companys sales and
marketing organization, which amounted to approximately
$195,000. These prepayments are properly reflected on the
balance sheet as of April 20, 2008 under other prepaid
expenses and current assets.
During fiscal 2008 and 2007, the Company entered into various
agreements with M-Factor to provide event planning and hosting
of the Companys corporate events. A member of the
Companys board of directors is also a director and 10%
shareholder of M-Factor. During 2008 and 2007, the Company
recorded expenses of $1,189,251, and $679,572, respectively
related to such activities. All such activities were provided in
the ordinary course of business at prices and on terms and
conditions that the Company believes are the same as those that
would result from arms-length negotiations between
unrelated parties.
|
|
13.
|
Employee
Benefit Plan
|
The Company sponsors a 401(k) savings plan for all employees who
meet certain eligibility requirements. Participants may
contribute, on a pretax basis, up to 100% of their annual
compensation, but not to exceed a maximum contribution pursuant
to Section 401(k) of the Internal Revenue Code. The Company
is not required to contribute, nor has it contributed, to the
plan for any of the periods presented. Administrative expenses
relating to the plan are insignificant.
91
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
Our management, with the participation and supervision of our
chief executive officer and chief financial officer, evaluated
the effectiveness of our disclosure controls and procedures
pursuant to
Rule 13a-15
under the Exchange Act. In designing and evaluating the
disclosure controls and procedures, management recognizes that
any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the
desired control objectives. In addition, the design of
disclosure controls and procedures must reflect the fact that
there are resource constraints and that management is required
to apply its judgment in evaluating the benefits of possible
controls and procedures relative to their costs.
Based on the aforementioned evaluation, our chief executive
officer and chief financial officer have concluded that as of
April 30, 2008, our disclosure controls and procedures are
designed at a reasonable assurance level and are effective to
provide reasonable assurance that information we are required to
disclose in reports that we file or submit under the Exchange
Act is recorded, processed, summarized and reported within the
time periods specified in SEC rules and forms, and that such
information is accumulated and communicated to our management,
including our chief executive officer and chief financial
officer, as appropriate, to allow timely decisions regarding
required disclosure.
Internal
Control over Financial Reporting
This Annual Report on
Form 10-K
does not include a report of managements assessment
regarding internal control over financial reporting or an
attestation report of our independent registered public
accounting firm due to a transition period established by rules
of the SEC for newly public companies. At April 30, 2009,
Section 404 of the Sarbanes-Oxley Act will require our
management to provide an assessment of the effectiveness of our
internal control over financial reporting, and our independent
registered public accounting firm will be required to provide
its attestation report regarding such assessment. We are in the
process of performing the system and process documentation,
evaluation and testing required for management to make this
assessment and for its independent auditors to provide its
attestation report. We have not completed this process or its
assessment, and this process will require significant amounts of
management time and resources. In the course of evaluation and
testing, management may identify deficiencies that will need to
be addressed and remediated.
Changes
in Internal Control over Financial Reporting
Regulations under the Exchange Act require public companies,
including our company, to evaluate any change in our
internal control over financial reporting as such
term is defined in
Rule 13a-15(f)
and
Rule 15d-15(f)
of the Exchange Act.
We have a history of material weaknesses in our
internal control over financial reporting as defined by the
standards established by the Public Company Accounting Oversight
Board. A material weakness is a deficiency or combination of
deficiencies in internal control over financial reporting, such
that there is a reasonable possibility that a material
misstatement of the annual or interim financial statements will
not be prevented or detected on a timely basis. During the
audits of our financial statements for fiscal 2004, 2005, 2006
and 2007, material weaknesses in our internal control over
financial reporting were identified.
We determined as of April 30, 2007, that we no longer have
material weaknesses in the areas identified as material
weaknesses in connection with the preparation of our fiscal
2004, 2005 and 2006 financial statements. The material weakness
identified during the audit of our fiscal 2007 financial
statements relates to internal review, primarily due to failure
of the review process of accounting computations and
reconciliations prepared by third parties as part of the
preparation of our fiscal 2007 financial statements. This
weakness led to four adjustments to our financial statements.
The largest such adjustment resulted from a failure to detect an
overstatement of stock-
92
based compensation expense of $0.3 million under Statement
of Financial Accounting Standards, or SFAS, No. 123(R),
Share-Based Payment, or SFAS 123R, in calculations
prepared by a third-party service provider.
We have completed our remediation efforts with respect to the
material weakness identified in connection with the preparation
of our fiscal 2007 financial statements. Prior to our IPO, our
remediation efforts initially included the hiring of senior
management personnel in our finance and accounting function and
the addition of review procedures relating to journal entry
approvals, account reconciliations, balance sheet and statement
of operation flux analyses, and outcome analyses. In addition to
our initial efforts, we added review procedures relating to
fixed assets obsolescence, vendor payments and our filings under
the Exchange Act. In connection with the preparation of our
financial statements for fiscal 2008, we determined that, as of
April 30, 2008, the material weakness identified in
connection with the audit of our fiscal 2007 financial statement
has been remediated.
|
|
Item 9B.
|
Other
Information
|
None.
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
Except as set forth below, the information required by this item
is incorporated by reference to our Proxy Statement for our 2008
Annual Meeting of Stockholders to be filed with the SEC within
120 days after the end of the fiscal year ended
April 30, 2008.
We maintain a Code of Business Conduct and Ethics that
incorporates our code of ethics applicable to all employees,
including all officers. Our Code of Business Conduct and Ethics
is published on the Investors page of our website at
www.arcsight.com. We intend to disclose future amendments to
certain provisions of our Code of Business Conduct and Ethics,
or waivers of such provisions granted to executive officers and
directors, on this website within four business days following
the date of such amendment or waiver.
|
|
Item 11.
|
Executive
Compensation
|
The information required by this item is incorporated by
reference to our Proxy Statement for our 2008 Annual Meeting of
Stockholders to be filed with the SEC within 120 days after
the end of the fiscal year ended April 30, 2008.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information required by this item with respect to Item 403
of Regulation S-K regarding security ownership of certain
beneficial owners and management is incorporated by reference to
our Proxy Statement for our 2008 Annual Meeting of Stockholders
to be filed with the SEC within 120 days after the end of
the fiscal year ended April 30, 2008. For the information
required by this item with respect to Item 201(d) of
Regulation S-K regarding securities authorized for issuance
under equity compensation plans, see Item 5: Market for
Registrants Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity SecuritiesEquity Compensation
Plan Information.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The information required by this item is incorporated by
reference to our Proxy Statement for our 2008 Annual Meeting of
Stockholders to be filed with the SEC within 120 days after
the end of the fiscal year ended April 30, 2008.
93
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
The information required by this item is incorporated by
reference to our Proxy Statement for our 2008 Annual Meeting of
Stockholders to be filed with the SEC within 120 days after
the end of the fiscal year ended April 30, 2008.
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a)(1) Financial Statements: The financial
statements filed as part of this Annual Report on
Form 10-K
are listed on the index to financial statements on page 57.
(2) No Financial Statement Schedules were required to be
filed as part of this report because the required information is
not present or is not present in amounts sufficient to require
submission of the schedules or because the information required
is included in the Consolidated Financial Statements or Notes
thereto.
(b) Exhibits. The exhibits listed on the
Exhibit Index (following the Signatures section of this
report) are included, or incorporated by reference, in this
Annual Report on
Form 10-K.
94
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, on July 22, 2008, the
Registrant has duly caused this Annual Report on
Form 10-K
to be signed on its behalf by the undersigned, thereunto duly
authorized.
ARCSIGHT,
INC.
|
|
|
|
|
|
Robert W. Shaw
Chief Executive Officer
|
|
Stewart Grierson
Chief Financial Officer
|
POWER OF
ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Robert W. Shaw
as his attorney-in-fact, each with the power of substitution,
for him in any and all capacities, to sign any amendments to
this Annual Report on
Form 10-K,
and to file the same, with exhibits thereto and other documents
in connection therewith with the Securities and Exchange
Commission, hereby ratifying and confirming all that said
attorney-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons
in the capacities and on the dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Robert
W. Shaw
Robert
W. Shaw
|
|
Chief Executive Officer and Chairman of the Board of Directors
(Principal Executive Officer)
|
|
July 22, 2008
|
|
|
|
|
|
/s/ Stewart
Grierson
Stewart
Grierson
|
|
Chief Financial Officer
(Principal Accounting and
Financial Officer)
|
|
July 22, 2008
|
|
|
|
|
|
/s/ Thomas
Reilly
Thomas
Reilly
|
|
President and Chief Operating Officer
Director
|
|
July 22, 2008
|
|
|
|
|
|
/s/ Sandra
Bergeron
Sandra
Bergeron
|
|
Director
|
|
July 22, 2008
|
|
|
|
|
|
/s/ William
P. Crowell
William
P. Crowell
|
|
Director
|
|
July 22, 2008
|
|
|
|
|
|
/s/ E.
Stanton McKee, Jr.
E.
Stanton McKee, Jr.
|
|
Director
|
|
July 22, 2008
|
|
|
|
|
|
/s/ Craig
Ramsey
Craig
Ramsey
|
|
Director
|
|
July 22, 2008
|
95
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Scott
A. Ryles
Scott
A. Ryles
|
|
Director
|
|
July 22, 2008
|
|
|
|
|
|
/s/ Ted
Schlein
Ted
Schlein
|
|
Director
|
|
July 22, 2008
|
|
|
|
|
|
/s/ Ernest
von Simson
Ernest
von Simson
|
|
Director
|
|
July 22, 2008
|
96
EXHIBIT INDEX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
|
|
Exhibit
|
|
|
|
|
|
|
|
|
|
|
|
Filing
|
|
Provided
|
Number
|
|
|
Exhibit Description
|
|
Form
|
|
File No.
|
|
Exhibit
|
|
|
Date
|
|
Herewith
|
|
|
3.1
|
|
|
Restated Certificate of Incorporation of ArcSight, Inc., as
currently in effect.
|
|
S-1/A
|
|
333-145974
|
|
|
3.2
|
|
|
11/23/07
|
|
|
|
3.2
|
|
|
Amended and Restated Bylaws of ArcSight, Inc., as currently in
effect.
|
|
S-1/A
|
|
333-145974
|
|
|
3.4
|
|
|
11/23/07
|
|
|
|
4.1
|
|
|
Form of ArcSight, Inc. common stock certificate.
|
|
S-1/A
|
|
333-145974
|
|
|
4.1
|
|
|
11/23/07
|
|
|
|
4.2
|
|
|
Amended and Restated Investors Rights Agreement, dated as
of October 24, 2002, between ArcSight, Inc. and certain
security holders of ArcSight, Inc.
|
|
S-1/A
|
|
333-145974
|
|
|
4.2
|
|
|
9/11/07
|
|
|
|
10.1
|
|
|
Form of Indemnity Agreement entered into between ArcSight, Inc.
and its directors and executive officers.
|
|
S-1/A
|
|
333-145974
|
|
|
10.1
|
|
|
10/29/07
|
|
|
|
10.2
|
|
|
2000 Stock Incentive Plan.
|
|
S-1/A
|
|
333-145974
|
|
|
10.2
|
|
|
9/11/07
|
|
|
|
10.3
|
|
|
Forms of Stock Option Agreement and Stock Option Exercise
Agreement under the 2000 Stock Incentive Plan.
|
|
S-1/A
|
|
333-145974
|
|
|
10.3
|
|
|
9/11/07
|
|
|
|
10.4
|
|
|
2002 Stock Plan, as amended.
|
|
S-1/A
|
|
333-145974
|
|
|
10.4
|
|
|
9/11/07
|
|
|
|
10.5
|
|
|
Forms of Stock Option Agreement and Stock Option Exercise
Agreement under the 2002 Stock Plan.
|
|
S-1/A
|
|
333-145974
|
|
|
10.5
|
|
|
9/11/07
|
|
|
|
10.6
|
|
|
2007 Equity Incentive Plan.
|
|
S-1/A
|
|
333-145974
|
|
|
10.6
|
|
|
11/23/07
|
|
|
|
10.7
|
|
|
Form of Stock Option Agreement, Stock Option Exercise Agreement,
Restricted Stock Agreement, Restricted Stock Units Award
Agreement, Stock Appreciation Right Award Agreement, Performance
Shares Award Agreement and Stock Bonus Award Agreement under the
2007 Equity Incentive Plan.
|
|
S-1/A
|
|
333-145974
|
|
|
10.7
|
|
|
11/23/07
|
|
|
|
10.8
|
|
|
2007 Employee Stock Purchase Plan.
|
|
S-1/A
|
|
333-145974
|
|
|
10.8
|
|
|
11/23/07
|
|
|
|
10.9
|
|
|
Form of Subscription Agreement under the 2007 Employee Stock
Purchase Plan.
|
|
S-1/A
|
|
333-145974
|
|
|
10.9
|
|
|
11/23/07
|
|
|
|
10.10
|
|
|
Second Amended and Restated Employment Agreement, effective as
of August 13, 2007, between ArcSight, Inc. and Robert W.
Shaw.
|
|
S-1/A
|
|
333-145974
|
|
|
10.10
|
|
|
9/20/07
|
|
|
|
10.11
|
|
|
Offer Letter, dated June 1, 2000, between ArcSight, Inc.
and Hugh S. Njemanze.
|
|
S-1/A
|
|
333-145974
|
|
|
10.11
|
|
|
9/20/07
|
|
|
|
10.12
|
|
|
Offer Letter, dated January 24, 2003, between ArcSight,
Inc. and Stewart Grierson, as amended.
|
|
S-1/A
|
|
333-145974
|
|
|
10.12
|
|
|
11/23/07
|
|
|
|
10.13
|
|
|
Offer Letter, dated October 5, 2006, between ArcSight, Inc.
and Thomas Reilly, as amended.
|
|
S-1/A
|
|
333-145974
|
|
|
10.14
|
|
|
11/23/07
|
|
|
|
10.14
|
|
|
Fiscal Year 2007 Management and Employee Bonus Plan.
|
|
S-1/A
|
|
333-145974
|
|
|
10.15
|
|
|
9/20/07
|
|
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
|
|
Exhibit
|
|
|
|
|
|
|
|
|
|
|
|
Filing
|
|
Provided
|
Number
|
|
|
Exhibit Description
|
|
Form
|
|
File No.
|
|
Exhibit
|
|
|
Date
|
|
Herewith
|
|
|
10.15
|
|
|
Lease Agreement, dated April 24, 2007, between ArcSight,
Inc. and ECI Two Results LLC.
|
|
S-1/A
|
|
333-145974
|
|
|
10.17
|
|
|
9/11/07
|
|
|
|
10.16
|
|
|
Oracle PartnerNetwork Embedded Software License Distribution
Agreement, dated March 31, 2006, as amended, between
ArcSight, Inc. and Oracle USA, Inc.
|
|
S-1/A
|
|
333-145974
|
|
|
10.18
|
|
|
9/20/07
|
|
|
|
10.17
|
|
|
Fiscal Year 2008 Management Bonus Plan.
|
|
S-1/A
|
|
333-145974
|
|
|
10.19
|
|
|
1/22/08
|
|
|
|
10.18
|
|
|
Sales Commission Plan FY 2008 (Kevin Mosher) Plan.
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
10.19
|
|
|
Offer Letter, dated May 6, 2007, between ArcSight, Inc. and
Reed Henry, as amended.
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
21.1
|
|
|
Subsidiaries of ArcSight, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
23.1
|
|
|
Consent of Independent Registered Public Accounting Firm.
|
|
|
|
|
|
|
|
|
|
|
|
X
|
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31.01
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Certification of Principal Executive Officer Pursuant to
Securities Exchange Act
Rule 13a-14(a).
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X
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31.02
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Certification of Principal Financial Officer Pursuant to
Securities Exchange Act
Rule 13a-14(a).
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X
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32.01
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Certification of Principal Executive Officer Pursuant to
18 U.S.C. Section 1350 and Securities Exchange Act
Rule 13a-14(b).*
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X
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32.02
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Certification of Principal Financial Officer Pursuant to
18 U.S.C. Section 1350 and Securities Exchange Act
Rule 13a-14(b).*
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X
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* |
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This certification is not deemed filed for purposes
of Section 18 of the Securities Exchange Act, or otherwise
subject to the liability of that section. Such certification
will not be deemed to be incorporated by reference into any
filing under the Securities Act of 1933 or the Securities
Exchange Act of 1934, except to the extent that ArcSight, Inc.
specifically incorporates it by reference. |
98