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- - --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number: 0-27310
RED BRICK SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0145392
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
485 Alberto Way
Los Gatos, California 95032
(Address of principal executive offices, including zip code)
(408) 399-3200
(Registrant's Telephone No., including area code)
------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days:
Yes No X
------ ------
Although the registrant has filed all reports required to be filed by Section
13 or 15 (d) of the Securities and Exchange Act of 1934 during the period that
the registrant has been required to file such reports, the registrant did not
become subject to such filing requirements until the registration of certain
shares of its common stock pursuant to a Registration Statement on Form S-1
(the "Registration Statement") was declared effective by the Securities and
Exchange Commission on January 22, 1996.
As of April 23, 1996, there were 11,110,365 shares of the Registrant's Common
Stock outstanding.
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RED BRICK SYSTEMS, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
At March 31, 1996 and December 31, 1995.......................... 3
Condensed Consolidated Statements of Operations
For the Three Months Ended March 31, 1996 and 1995............... 4
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 1996 and 1995............... 5
Notes to Condensed Consolidated Financial Statements............. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................20
SIGNATURES....................................................................21
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
RED BRICK SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
----------- -----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash & cash equivalents $ 18,335 $ 2,998
Short-term investments 17,131 0
Accounts receivable, net of allowance of $670 and $670 8,319 5,511
Prepaid expenses and other current assets 172 293
--------- ---------
Total current assets 43,957 8,802
Property and equipment, net 2,419 1,980
Other assets 193 195
--------- ---------
Total assets $ 46,569 $ 10,977
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to stockholder due within one year $ 21 $ 33
Accounts payable 334 658
Accrued expenses 1,536 1,251
Accrued compensation 1,813 1,258
Deferred revenue 2,625 2,015
Capital lease obligations due within one year 981 974
--------- ---------
Total current liabilities 7,310 6,189
--------- ---------
Capital lease obligations 1,181 1,068
--------- ---------
Stockholders' equity:
Preferred stock, $.0001 par value:
Authorized shares -- 2,000,000 -- none issued -- --
Convertible preferred stock, $.0001 par value;
Authorized shares -- 10,000,000
Issued and outstanding shares -- 0 and 5,863,242 -- 1
Common stock, $.0001 par value:
Authorized shares -- 20,000,000
Issued and outstanding shares -- 11,110,365 and 2,555,721 1 1
Additional paid in capital 50,194 16,270
Accumulated deficit (11,891) (12,325)
Deferred compensation (46) (49)
Notes receivable from stockholders (180) (178)
--------- ---------
Total stockholders' equity 38,078 3,720
--------- ---------
Total liabilities and stockholders' equity $ 46,569 $ 10,977
========= =========
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
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RED BRICK SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data; unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1996 1995
-------- -------
<S> <C> <C>
Revenues:
Software license $ 5,285 $ 3,076
Maintenance and service 1,229 1,151
-------- -------
Total revenues 6,514 4,227
-------- -------
Cost of revenues:
Software license 264 116
Maintenance and service 457 272
-------- -------
Total cost of revenues 721 388
-------- -------
Gross margin 5,793 3,839
-------- -------
Operating expenses:
Sales and marketing 3,497 2,336
Research and development 1,505 1,111
General and administrative 559 280
-------- -------
Total operating expenses 5,561 3,727
-------- -------
Income from operations 232 112
Interest and other income 319 13
Interest expense (69) (54)
-------- -------
Income before provision for income taxes 482 71
Provision for income taxes (48) (28)
-------- -------
Net income $ 434 $ 43
======== =======
Net income per share $ 0.04 $ 0.00
======== =======
Shares used to compute net income per share 12,254 8,953
======== =======
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
4
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RED BRICK SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands; unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
1996 1995
--------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 434 $ 43
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 300 175
Changes in assets and liabilities:
Accounts receivable (2,808) 705
Prepaid expenses and other current assets 121 21
Accounts payable (324) (39)
Accrued expenses and compensation 843 125
Deferred revenue 610 458
--------- -------
Net cash provided by (used in) operating activities (824) 1,488
--------- -------
Cash flows from investing activities:
Purchases of short-term investments (18,231) --
Proceeds from sales of short-term investments 1,100 --
Acquisition of property and equipment (487) (268)
Deposits and other assets (27) 14
--------- -------
Net cash used in investing activities (17,645) (254)
--------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock, net 33,924 113
Payment on notes receivable 2 (64)
Payment on notes payable to stockholders (12) --
Principle payments on capital lease obligations (108) 69
--------- -------
Net cash provided by financing activities 33,806 118
--------- -------
Net increase in cash and cash equivalents 15,337 1,352
Cash and cash equivalents at beginning of year 2,998 1,958
--------- -------
Cash and cash equivalents at end of year $ 18,335 $ 3,310
========= =======
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
5
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RED BRICK SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
---------------------
The unaudited condensed consolidated financial statements included herein
reflect all adjustments, consisting only of normal recurring accruals, which in
the opinion of management are necessary to fairly present the Company's
consolidated financial position, results of operations, and cash flows for the
periods presented. These financial statements should be read in conjunction
with the Company's audited consolidated financial statements as included in the
Company's Registration Statement on Form S-1 as declared effective by the
Securities and Exchange Commission on January 22, 1996, (Reg. No. 33-97430).
The consolidated results of operations for the period ended March 31, 1996, are
not necessarily indicative of the results to be expected for any subsequent
quarter or for the entire fiscal year ending December 31, 1996. The December
31, 1995, balance sheet was derived from audited financial statements, but does
not include all disclosures required by generally accepted accounting
principles.
2. Initial Public Offering
-----------------------
On January 26, 1996, the Company completed its initial offering and issued
2,070,000 shares of its common stock to the public at a price of $18.00 per
share. The Company received approximately $33.9 million of cash, net of
underwriting discounts, commissions, and other offering costs paid to date. Upon
completion of the offering, all outstanding shares of Series A, Series B, Series
C, and Series D Preferred Stock (a total of approximately 5,863,000 shares) were
converted into shares of Common Stock on a one-for-one basis.
3. Net Income Per Share
--------------------
Net income per share is computed using the weighted average number of common
and dilutive common equivalent shares outstanding during the period. Dilutive
common equivalent shares consist of shares issuable upon the exercise of stock
options and warrants (using the treasury stock method) and the Common Stock
issuable upon the conversion of convertible Preferred Stock (using the if-
converted method). Pursuant to the Securities and Exchange Commission Staff
Accounting Bulletins and Staff policy, such computations include all common and
common equivalent shares issued within the twelve months prior to the filing
date as if they were outstanding for all periods presented prior to the filing
date using the treasury stock method.
4. Cash, Cash Equivalents, and Short-Term Investments
--------------------------------------------------
The Company classifies all of its investments as "available-for-sale," in
accordance with the provisions of Statement No. 115 of the Financial Accounting
Standards Board entitled "Accounting for Certain Investments in Debt and Equity
Securities." Accordingly, the Company states its investments at estimated fair
value. Differences between cost and fair value of investments at March 31, 1996,
were not material. The Company deems all investments to be available to meet
current working capital requirements.
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4. Cash, Cash Equivalents, and Short-Term Investments (cont.)
The following is a summary of the Company's investments at March 31, 1996.
Estimated
Fair
(In Thousands) Value
- - ------------------------------------------- ----------
March 31, 1996
Money Market $ 321
Auction rate preferred stock 1,000
Bankers notes and acceptances 3,793
Corporate bonds and notes 8,234
Commercial paper 16,409
Government debt securities 2,001
----------
Total investments $ 31,758
==========
The following is a reconciliation of the Company's investments to the balance
sheet classifications:
Estimated
Fair
(In Thousands) Value
- - ------------------------------------------- ----------
March 31, 1996
Cash equivalents $ 14,627
Short-term investments 17,131
----------
Total investments $ 31,758
==========
At March 31, 1996, $29,705,000 of the investments were due in one year or
less with the remainder due from one to three years.
7
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RED BRICK SYSTEMS, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The discussion in this Report contains forward-looking statements that involve
risks and uncertainties. The Company's actual results could differ materially
from those discussed herein. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in the section
below entitled "Risk Factors That May Affect Future Results," as well as those
risks discussed in this section and elsewhere in this Report, and the risks
discussed in the "Risk Factors" section of the Company's Registration Statement
on Form S-1 as declared effective by the Securities and Exchange Commission on
January 22, 1996, (Reg. No. 33-97430).
RESULTS OF OPERATIONS
Revenues
The Company's revenues are derived from (i) license fees for its software
products and (ii) fees for services complementing its products, including
software maintenance and support, training, consulting and development
agreements. Fees for service revenues are charged separately from the Company's
software products. Software license revenues are derived from product licensing
fees, while maintenance and service revenues are derived from maintenance
support services, training, consulting and development agreements. The Company
recognizes revenue in accordance with the American Institute of Certified Public
Accountants Statement of Position 91-1 on Software Revenue Recognition. Revenue
from software licensing is generally recognized after execution of a licensing
agreement and shipment of the product. Maintenance revenue is recognized over
the term of the contract. Consulting and training revenues are recognized at
the time the service is performed. The Company has entered into several
software development and license agreements with third parties. Revenue under
software development agreements is recognized using the percentage-of-completion
method based on the ratio that incurred costs bear to total estimated costs.
The Company's license agreements generally do not provide a right of return.
However, reserves are maintained for potential credit losses. The Company has
entered into an agreement with Red Brick Capital, a non-affiliated leasing
group, to provide customers with financing options for Red Brick Warehouse
software and service.
Total Revenues. Total revenues were $6.5 million and $4.2 million for the
quarters ended March 31, 1996 and 1995, respectively, representing an increase
of 54.1%.
Software License Revenues. The Company currently derives substantially all of
its software license revenues from licenses of Red Brick Warehouse, a relational
database management system that is specifically designed for serving data
warehouse applications. Revenues from software licenses were $5.3 million, or
81.1% of total revenues, and $3.1 million, or 72.8% of total revenues, for the
quarters ended March 31, 1996 and 1995, respectively. This represents an
increase of 71.8%. The increase in software license revenues was attributable
to increases in the number of units sold, as well as overall average increases
in the unit prices of products sold by the Company. The Company intends to
continue to enhance its current software products, as well as to develop new
products. The Company expects that prior growth rates of the Company's software
license revenues will not be sustainable in the future.
8
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Maintenance and Service Revenues. Maintenance and service revenues were $1.2
million, or 18.9% of total revenues, compared with $1.2 million, or 27.2% of
total revenues, for the quarters ended March 31, 1996 and 1995, respectively.
For the quarter ended March 31, 1996, sales to Tandy Corporation accounted for
20% of total revenues. For the quarter ended March 31, 1995, sales to Unisys, a
reseller of the Company's products, accounted for 35% of total revenues and
sales to AT&T accounted for 19% of total revenues. No other customer or
reseller accounted for more than 10% of the Company's revenues during the
periods indicated. The Company expects that licenses of its products to a
limited number of customers and resellers will continue to account for a
significant percentage of revenue for the foreseeable future. There can be no
assurance that any customer or reseller will continue to license the Company's
products. The loss of a major customer or reseller or any reduction in orders by
such customers or resellers, including reductions due to market or competitive
conditions, would have a material adverse effect on the Company's business,
financial condition and results of operations.
Except for sales to Unisys, the Company's indirect channels have accounted for
limited revenue to date. The Company is currently investing, and intends to
continue to invest, significant resources to develop this channel, which could
adversely affect the Company's operating results if the Company's efforts do not
generate license revenues. There can be no assurance that the Company will be
able to attract distributors, VARs and system integrators that will be able to
market the Company's products effectively and will be qualified to provide
timely and cost-effective customer support and service. The inability to recruit
important distributors, VARs or system integrators could adversely affect the
Company's results of operations. In addition, if the Company is successful in
selling its products through this channel, the Company expects that any material
increase in the Company's indirect sales as a percentage of total revenues will
adversely affect the Company's average selling prices and gross margins due to
the lower unit prices that the Company receives when selling through indirect
channels.
The Company's international revenues for the quarters ended March 31, 1996
and 1995, were immaterial. The Company intends to continue to expand its
international operations and enter additional international markets.
Cost of Revenues
Cost of Software License Revenues. Cost of software license revenues consists
primarily of the cost of royalties paid to third-party vendors, product media
and duplication, shipping expenses, manuals and packaging materials. Cost of
software license revenues was $264,000 and $116,000 for the quarters ended
March 31, 1996 and 1995, respectively, representing 5.0% and 3.8% of the related
software license revenues for each quarter, respectively. The increase in the
dollar amount of cost of software license revenues reflects the higher volume of
product shipped.
Cost of Maintenance and Service Revenues. Cost of maintenance and service
revenues consists primarily of personnel-related costs incurred in providing
telephone support, consulting services and training to customers. Cost of
maintenance and service revenues was $457,000 and $272,000 for the quarters
ended March 31, 1996 and 1995, respectively, representing 37.2% and
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23.6% of the related maintenance and service revenues for each quarter,
respectively. Cost of maintenance and service revenues for the quarter ended
March 31, 1996, increased significantly over such costs for the quarter ended
March 31, 1995, as a result of increased personnel-related costs as the Company
continued to expand its customer service organizations to support an increase in
sales. The Company believes that cost of maintenance and service revenues will
increase in dollar amounts and may increase as a percentage of such revenues in
the future as the Company continues to build its customer service organization.
Operating Expenses
Total operating expenses were $5.6 million and $3.7 million, or 85.4% and
88.2% of total revenues, for the quarters ended March 31, 1996 and 1995,
respectively.
Sales and Marketing. Sales and marketing expenses consist primarily of
personnel-related costs, including sales commissions, of all personnel involved
in the sales process, as well as promotional expenses, including advertising,
public relations, seminars, and trade shows. Sales and marketing expenses were
$3.5 million and $2.3 million, or 53.7% and 55.3% of total revenues, for the
quarters ended March 31, 1996 and 1995, respectively. The increase in dollar
amount in sales and marketing expenses was primarily due to the expansion of the
Company's sales operations and increased marketing activities, including trade
shows and promotional expenses. The Company believes that such expenses will
increase in dollar amount in the future as the Company expands its sales and
marketing activities.
Research and Development. Research and development expenses consist primarily
of salaries and other personnel-related expenses, and depreciation of
development equipment. Research and development expenses were $1.5 million and
$1.1 million, or 23.1% and 26.3% of total revenues, for the quarters ended
March 31, 1996 and 1995, respectively. The increase in dollar amounts in
research and development expenses were primarily attributable to the increased
staffing of software engineers required to expand and enhance the Company's
product line. The Company believes that research and development expenses will
continue to increase in dollar amount in the future.
In accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed," the Company capitalizes eligible computer software costs upon the
achievement of technological feasibility, subject to net realizable value
considerations. The Company has defined technological feasibility as completion
of a working model. As of March 31, 1996, such capitalizable costs were
insignificant. Accordingly, the Company has charged all such costs to research
and development expenses in the accompanying consolidated statements of
operations.
General and Administrative. General and administrative expenses consist
primarily of personnel costs for finance and general management, as well as
insurance and professional expenses. General and administrative expenses were
$559,000 and $280,000, or 8.6% and 6.6% of total revenues, for the quarters
ended March 31, 1996 and 1995, respectively. The increase in dollar amount and
as a percentage of total revenues in general and administrative expenses was
primarily attributable to hiring of additional personnel. The Company believes
that its general and administrative expenses will increase in dollar amounts in
the future as the Company continues to expand its staffing and to incur costs
associated with operating as a public company.
10
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Interest and Other Income and Interest Expense
Interest and other income primarily represents interest income earned on the
Company's cash, cash equivalents, and short-term investments. Interest and other
income increased from $13,000 for the quarter ended March 31, 1995, to $319,000
for the quarter ended March 31, 1996, due to investing of proceeds received from
the Company's initial public offering. The Company's interest expense was
$69,000, and $54,000, for the quarters ended March 31, 1996 and 1995,
respectively.
Provision for Income Taxes
The effective tax rates for the three months ended March 31, 1996 and 1995,
were 10% and 40%, respectively. The projected effective tax rate for 1996 is
expected to be less than 1995 due to the reduction in domestic alternative
minimum taxes relative to pre-tax book income. Both the 1996 and 1995 effective
tax rates are attributable to domestic alternative minimum taxes and foreign
taxes. The effective tax rate for 1996 is expected to differ from the federal
statutory tax rate of 34% primarily due to the utilization of net operating loss
carryforwards, offset by adjustments of the valuation allowance, alternative
minimum taxes and foreign taxes. As of December 31, 1996 and 1995, the Company
had federal and state net operating loss carryforwards of approximately $6.9
million and $2.1 million, respectively, and federal and state research credit
carryforwards of $290,000 and $167,000, respectively. These carryforwards will
expire from 1998 to 2009.
Utilization of approximately $1.1 million of net operating losses is limited
to approximately $100,000 per year due to the ownership change provisions
provided by the Tax Reform Act of 1986 and similar state provisions. Future
changes of ownership could result in additional limitations in the Company's
ability to utilize the net operating loss and credit carryforwards.
11
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LIQUIDITY AND CAPITAL RESOURCES
In January 1996, the Company completed its initial public offering and its
Common Stock began trading on the NASDAQ National Market under the symbol REDB.
The Company sold 2,070,000 shares of its Common Stock in the offering and
generated approximately $34.7 million of cash, net of underwriting discounts and
commissions.
For the three months ended March 31, 1996, $824,000 of cash was used in
operations, while in the same quarter in 1995, $1.5 million of cash was provided
by operations. For the three months ended March 31, 1996, net cash used in
operating activities resulted primarily from an increase in accounts receivable,
a decrease in accrued expenses and compensation, a decrease in deferred revenue,
and a decrease in accounts payable, offset by net income. For the three months
ended March 31, 1995, net cash provided by operations was primarily from a
decrease in accounts receivable, an increase in deferred revenue and accrued
expenses, a decrease in depreciation and amortization, partially offset by a
decrease in accounts payable and net income.
For the three months ended March 31, 1996, the Company's investing activities
consisted of purchases of investment grade, interest-bearing securities, as well
as purchases of property and equipment. Capital expenditures were $487,000 in
the period, compared to $268,000 in the three months ended March 31, 1995. The
Company's 1995 investing activities consisted primarily of purchases of computer
workstations and file servers for the Company's growing employee base. The
Company expects that its capital expenditures will remain constant or increase
as the Company's employee base grows. The Company's principal commitments
consist primarily of leases on its headquarters facilities and its equipment.
At March 31, 1996, the Company had $35.5 million in cash, cash equivalents,
and short-term investments, and $36.6 million of working capital. The Company
also has available a $2.0 million bank line of credit agreement that expires on
May 30, 1996, is secured by the assets of the Company and permits borrowings of
80% of eligible accounts receivable. Eligible accounts receivable include
accounts receivable that have been outstanding less than 90 days from the date
of the invoice (excluding foreign, government, contra and intercompany accounts
and excluding accounts in which more than 50% of the account is outstanding more
than 90 days from the invoice date). There were no borrowings outstanding under
the line of credit, although the Company could have borrowed $2.0 million.
The Company believes that its current cash balance, its credit facility, and
the cash flow provided by operations, if any, will be sufficient to meet its
anticipated working capital and capital expenditure requirements for at least
the next 12 months.
12
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RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company operates in a rapidly changing environment that involves a number
of risks, some of which are beyond the Company's control. The following
discussion highlights some of these risks. These risks should be read in
conjunction with the "Risk Factors" section included in the Company's
Registration Statement on Form S-1 as declared effective by the Securities and
Exchange Commission on January 22, 1996, (Reg. No. 33-97430).
Limited Profitability; Accumulated Deficit; Future Operating Results
Uncertain. As of March 31, 1996, the Company had an accumulated deficit of
$11.9 million. Although the Company has had seven consecutive quarters of
profitability, this profitability has been marginal and there can be no
assurance that the Company will remain profitable on a quarterly basis or
achieve profitability on an annual basis. The Company's limited operating
history makes the prediction of future operating results difficult. The Company
began shipping its principal product, Red Brick Warehouse, in December 1991.
Although the Company has experienced significant percentage growth in revenues
in recent periods, the Company does not believe prior percentage growth rates
are sustainable or indicative of future operating results. Future operating
results will depend on many factors, including the demand for the Company's
products, the level of product and price competition, the Company's success in
expanding its direct sales force and indirect distribution channels, the ability
of the Company to develop and market new products and control costs, the
percentage of the Company's revenues derived from indirect channels, which have
lower gross margins than direct sales, and general economic conditions.
Potential Fluctuations in Quarterly Results; Seasonality. The Company's
quarterly operating results have in the past, and may in the future, vary
significantly depending on factors such as increased competition, the size and
timing of significant orders, the timing of new product announcements and
pricing policy changes by the Company and its competitors, market acceptance of
new and enhanced versions of the Company's products, changes in operating
expenses, changes in personnel, the mix of direct and indirect sales, general
economic factors, and foreign currency exchange rates. The Company currently
operates with virtually no order backlog because its software products typically
are shipped shortly after orders are received. The Company derives a
substantial portion of its revenues from licenses of its Red Brick Warehouse.
As a result, the timing of the receipt and shipment of a single order can have a
significant impact on the Company's revenues and results of operations for a
particular period. Historically, the Company has often recognized a substantial
portion of its revenues in the last month of a quarter, with these revenues
frequently concentrated in the last two weeks of a quarter. As a result,
product revenues in any quarter are substantially dependent on orders booked and
shipped in that quarter, and revenues for any future quarter are not predictable
with any significant degree of certainty. Product revenues are also difficult
to forecast because the market for data warehouse software products is rapidly
evolving, and the Company's sales cycle, which may last many months, varies
substantially from customer to customer. The Company's expense levels are
relatively fixed and are based, in part, on expectations as to future revenues.
Consequently, if revenue levels fall below expectations, operating results will
likely be adversely affected, and net income may be disproportionately affected
because a proportionately smaller amount of the Company's expenses varies with
its revenues. In addition, the Company expects that sales derived through
indirect channels, which are harder to forecast and have lower gross margins
than direct sales, will increase as a percentage of total revenues. Due to all
of the foregoing factors, the Company believes that period-to-period
13
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comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as indications of future performance. It is likely
that in some future quarter the Company's operating results will be below the
expectations of public market analysts and investors. In such event, the price
of the Company's Common Stock would likely be materially adversely affected.
The Company's business has experienced, and is expected to continue to
experience, significant seasonality, largely due to customer buying patterns. In
recent years, the Company has generally had stronger demand for its software
products during the quarters ending in June and December and weaker demand in
the quarters ending in March and September. The Company believes this pattern
will continue.
Competition. The market for the Company's products is intensely competitive
and subject to rapid change. The Company primarily encounters competition from
large, public companies, including Oracle Corporation ("Oracle"), Informix
Corporation ("Informix"), Sybase, Inc. ("Sybase"), International Business
Machines Corporation ("IBM") and AT&T Global Information Systems ("AT&T GIS").
In addition, because there are relatively low barriers to entry in the software
market, the Company expects additional competition from other established and
emerging companies if the data warehouse software market continues to develop
and expand. Most of the Company's competitors have longer operating histories,
significantly greater financial, technical, marketing, and other resources,
significantly greater name recognition, and a larger installed base of
customers. In addition, many of the Company's competitors have well-established
relationships with current and potential customers of the Company, have
extensive knowledge of the relational database industry, and are capable of
offering a single vendor solution. As a result, the Company's competitors may
be able to respond more quickly to new or emerging technologies and changes in
customer requirements, or to devote greater resources to the development,
promotion, and sale of their products. In addition, current and potential
competitors have established or may establish cooperative relationships among
themselves or with third parties to increase the ability of their products to
address customer needs. Accordingly, it is possible that new competitors or
alliances among competitors may emerge and rapidly acquire significant market
share. The Company also expects that competition will increase as a result of
software industry consolidations. Increased competition is likely to result in
price reductions, reduced gross margins, and loss of market share, any of which
could materially adversely affect the Company's business, operating results, and
financial condition. There can be no assurance that the Company will be able to
compete successfully against current and future competitors or that competitive
pressures faced by the Company will not materially adversely affect its
business, operating results and financial condition.
Dependence on Continued Growth of the Data Warehouse Market. Although demand
for data warehouse software has grown in recent years, the market is still
emerging. The Company's future financial performance will depend to a large
extent on continued growth in the number of organizations adopting data
warehouses. There can be no assurance that the market for data warehouses will
continue to grow. If the data warehouse market fails to grow, or grows more
slowly than the Company currently anticipates, the Company's business, operating
results, and financial condition would be materially adversely affected.
Product Concentration. Substantially all of the Company's revenues have been
attributable to sales of Red Brick Warehouse, a relational database management
system that is specifically designed for serving data warehouse applications.
This product is currently expected to account
14
<PAGE>
for a significant part of the Company's revenues for the foreseeable future. As
a result, a decline in demand for, or failure to achieve broad market acceptance
of, Red Brick Warehouse as a result of competition, technological change or
otherwise, would have a material adverse effect on the business, operating
results, and financial condition of the Company. A decline in sales of Red Brick
Warehouse would also have a material adverse effect on sales of other Company
products that may be sold to Red Brick Warehouse customers. The Company's future
financial performance will depend in part on the successful development,
introduction, and customer acceptance of new and enhanced versions of Red Brick
Warehouse and other products. There can be no assurance that the Company will
continue to be successful in marketing Red Brick Warehouse or any new or
enhanced products.
Dependence on New Products and Rapid Technological Change. The market for the
Company's software is characterized by rapid technological change, frequent new
product introductions, and evolving industry standards. The introduction of
products embodying new technologies and the emergence of new industry standards
can render existing products obsolete and unmarketable. The life cycles of the
Company's products are difficult to estimate. The Company's future success
depends on its ability to enhance its current products, to develop and introduce
new products that keep pace with technological developments and emerging
industry standards on a timely basis, and to address the increasingly
sophisticated needs of its customers. There can be no assurance that the
Company will be successful in developing and marketing product enhancements or
new products that respond to technological change or evolving industry
standards, that the Company will not experience difficulties that could delay or
prevent the successful development, introduction, and marketing of these
products, or that the Company's new products and product enhancements will
adequately meet the requirements of the marketplace and achieve market
acceptance. Any potential new products would likely be subject to significant
technical risks. If the Company experiences delays in the commencement of
commercial shipments of new products and enhancements, the Company could
experience delays or loss of product revenues. If the Company is unable, for
technological or other reasons, to develop and introduce new products or
enhancements of existing products in a timely manner in response to changing
market conditions or customer requirements, the Company's business, operating
results, and financial condition will be materially adversely affected.
Customer Concentration. A relatively small number of customers and resellers
account for a significant percentage of the Company's revenues. The Company
expects that licenses of its products to a limited number of customers and
resellers may continue to account for a high percentage of revenue for the
foreseeable future. There can be no assurance that any customer or reseller will
continue to purchase the Company's products. The loss of a major customer or
reseller or any reduction in orders by such customers or resellers, including
reductions due to market or competitive conditions, would have a material
adverse effect on the Company's business, financial condition, and results of
operations.
Risk of Product Defects. Software products as complex as those offered by the
Company may contain undetected errors or failures when first introduced or when
new versions are released. The Company has previously discovered post-
production software errors in certain of its new products. Although the Company
has not experienced material adverse effects resulting from any such errors to
date, there can be no assurance that, despite testing by the Company and by
current and potential customers, errors will not be found in new versions of Red
Brick Warehouse or administration tools after commencement of commercial
shipments, resulting in
15
<PAGE>
loss of or delay in market acceptance, which could have a material adverse
effect upon the Company's business, operating results and financial condition.
Dependence Upon Key Personnel; Need to Increase Sales and Technical Personnel.
The Company's future performance depends in a significant part upon the
continued service of its key technical, sales and senior management personnel,
none of whom is bound by an employment agreement. The loss of the services of
one or more of the Company's key employees could have a material adverse effect
on the Company's business, operating results, and financial condition. The
Company's future success also depends on its continuing ability to attract,
train, and retain highly qualified technical, sales, and managerial personnel.
The Company intends to hire a significant number of additional sales and
technical personnel in 1996 and beyond. Competition for such personnel is
intense, and there can be no assurance that the Company can retain its key
technical, sales, and managerial employees or that it can attract, assimilate or
retain other highly qualified technical, sales, and managerial personnel in the
future. Because of the complexity of RDBMS and the differences in on-line
transaction processing systems from data warehouse systems, the Company has in
the past, and expects to continue in the future, to experience a time lag
between the date technical and sales personnel are hired and the date such
personnel become fully productive. Although the Company increased the size of
its direct sales force and its research and development groups in 1994, 1995,
and 1996, the Company experienced difficulty in recruiting a sufficient number
of sales and technical personnel during this period. If the Company is unable
to hire such personnel on a timely basis in the future, the Company's business,
operating results, and financial condition could be materially adversely
affected.
Management of Changing Business. The Company has recently experienced a
period of significant growth in revenues that has placed a serious strain upon
its management systems and resources. The Company recently implemented a number
of new financial and management controls, reporting systems, and procedures.
The Company's ability to compete effectively and to manage future growth, if
any, will require the Company to continually improve its financial and
management controls, reporting systems, and procedures on a timely basis,
implement new systems as necessary, and expand, train and manage its employee
work force. There can be no assurance that the Company will be able to do so
successfully. The Company's failure to do so could have a material adverse
effect upon the Company's business, operating results, and financial condition.
Expansion of Indirect Channels. An integral part of the Company's strategy is
to develop a channel of distributors, value added resellers ("VARs"), and system
integrators, and to increase the proportion of the Company's customers licensed
through this indirect channel. Except for sales to Unisys, the Company's
indirect channels have accounted for limited revenue to date. The Company is
currently investing, and intends to continue to invest, significant resources to
develop this channel, which could adversely affect the Company's operating
results if the Company's efforts do not generate significant license revenues.
There can be no assurance that the Company will be able to attract distributors,
VARs, and system integrators that will be able to market the Company's products
effectively and will be qualified to provide timely and cost-effective customer
support and service. The inability to recruit important distributors, VARs, or
system integrators could adversely affect the Company's results of operations.
In addition, if it is successful in selling products through this channel, the
Company's gross margins will be negatively affected due to the lower unit prices
the Company expects to receive when selling through indirect channels.
16
<PAGE>
International Operations. The Company's international revenues in the first
quarter of 1996 and 1995 accounted for less than 10% of total revenues during
such periods. The Company intends to continue to expand its international
operations and enter additional international markets. This will require
significant management attention and financial resources, and could adversely
affect the Company's business, operating results, or financial condition. In
order to expand international sales successfully in 1996 and subsequent periods,
the Company must establish additional foreign operations, hire additional
personal, and recruit additional international resellers and distributors. To
the extent that the Company is unable to do so in a timely manner, the Company's
growth in international sales, if any, will be limited, and the Company's
business, operating results, and financial condition could be materially
adversely affected. In addition, there can be no assurance that the Company
will be able to maintain or increase international market demand for the
Company's products. The Company's international sales are currently denominated
in U.S. dollars. An increase in the value of the U.S. dollar relative to
foreign currencies could make the Company's products more expensive and,
therefore, potentially less competitive in those markets. Additional risks
inherent in the Company's international business activities generally include
unexpected changes in regulatory requirements, tariffs and other trade barriers,
costs of localizing products for foreign countries, lack of acceptance of
localized products in foreign countries, longer accounts receivable payment
cycles, difficulties in managing international operations, potentially adverse
tax consequences including restrictions on the repatriation of earnings, weaker
intellectual property protection, and the burdens of complying with a wide
variety of foreign laws. There can be no assurance that such factors will not
have a material adverse effect on the Company's future international sales and,
consequently, the Company's results of operations.
Limited Protection of Proprietary Technology; Risks of Infringement. The
Company relies primarily on a combination of copyright and trademark laws, trade
secrets, confidentiality procedures, and contractual provisions to protect its
proprietary technology. For example, the Company licenses rather than sells its
software and requires licensees to enter into license agreements, which impose
certain restrictions on licensees' ability to utilize the software. In
addition, the Company seeks to avoid disclosure of its trade secrets, including,
but not limited to, requiring those persons with access to the Company's
proprietary information to execute confidentiality agreements with the Company
and restricting access to the Company's source code. The Company seeks to
protect its software, documentation, and other written materials under trade
secret and copyright laws, which afford only limited protection. The Company
presently has no patents or patent applications pending. Despite the Company's
efforts to protect its proprietary rights, unauthorized parties may attempt to
copy aspects of the Company's products or to obtain and use information that the
Company regards as proprietary. Policing unauthorized use of the Company's
products is difficult, and while the Company is unable to determine the extent
to which piracy of its software products exists, software piracy can be expected
to be a persistent problem. In addition, the laws of some foreign countries do
not protect the Company's proprietary rights to as great an extent as do the
laws of the United States. There can be no assurance that the Company's means
of protecting its proprietary rights will be adequate or that the Company's
competitors will not independently develop similar technology. The Company has
not been notified that the Company's products infringe the proprietary rights of
third parties. There can be no assurance, however, that third parties will not
claim infringement by the Company with respect to current or future products.
The Company expects that software product developers will increasingly be
subject to infringement claims as the number of products and competitors in the
Company's industry segment grows and
17
<PAGE>
the functionality of products in different industry segments overlaps. Any such
claims, with or without merit, could be time-consuming, result in costly
litigation, cause product shipment delays, or require the Company to enter into
royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company or at all,
which could have a material adverse effect upon the Company's business,
operating results and financial condition.
The Company licenses Open Server and Open Client products from Sybase, a
competitor of the Company, pursuant to a non-exclusive, royalty bearing reseller
agreement, which expires in November 1997. The Open Server and Open Client
products provide client/server access to the Company's data warehouse. If the
agreement is terminated prior to November 1997, or if the Company is unable to
renew the agreement in November 1997, the Company will have to develop
alternative technology or license alternative technology from another source.
There can be no assurance that the Company will be able to renew the agreement,
develop alternative technology, or license alternative technology from an
alternative source on a timely basis. If the Company does not renew the
agreement, develop such technology, or license such technology from another
source prior to the termination of its arrangement with Sybase, the Company's
business, operating results, and financial condition could be materially
adversely affected.
Product Liability. The Company's license agreements with its customers
typically contain provisions designed to limit the Company's exposure to
potential product liability claims. Although the Company has not experienced
product liability claims to date, the license and support of products by the
Company may entail the risk of such claims. A successful product liability
claim brought against the Company could have a material adverse effect on the
Company's business, operating results, and financial condition.
Potential Volatility of Stock Price. The trading price of the Company's
Common Stock is highly volatile and may be subject to wide fluctuations in
response to quarterly variations in operating results, announcements of
technological innovations or new products by the Company or its competitors,
changes in financial estimates by securities analysts and other events or
factors. In addition, the stock market has experienced volatility, often
unrelated to operating performance, that particularly affected market prices of
equity securities of many high technology companies. The trading prices of many
high technology companies' stocks are at or near their historic highs and
reflect price/earnings ratios substantially above historic norms. There can be
no assurance that these trading prices and price/earnings ratios will be
sustained. These broad market fluctuations may adversely affect the market
price of the Company's Common Stock.
Shares Eligible for Future Sale. The 2,070,000 shares of Common Stock
purchased in the Company's initial public offering are not restricted and are
freely tradable. The number of shares of Common Stock available for sale in the
public market is limited by restrictions under the Securities Act of 1933, as
amended (the "Securities Act"), and lock-up agreements under which the holders
of such shares have agreed not to sell or otherwise dispose of any of their
shares for a period of 180 days after the date of this effective date of the
Company's Registration Statement on Form S-1 without the prior written consent
of Morgan Stanley & Co. Incorporated. Such lock-up period is due to expire on
July 22, 1996. As a result of these restrictions, based on shares outstanding
as of March 31, 1996, the following shares of Common Stock will be eligible for
future sale. An additional 8,627,144 shares will be eligible for sale on July
22, 1996, and an additional 413,221 shares will be eligible for sale in
September
18
<PAGE>
and October 1997. The Company registered on a registration statement on Form S-8
on January 22, 1996, a total of 500,000 shares of Common Stock reserved for
issuance under the Company's Employee Stock Purchase Plan and a total of
1,968,000 shares of Common Stock subject to outstanding options or reserved for
issuance under the Company's 1995 Stock Option Plan. If such holders sell in the
public market, such sales could have a material adverse effect on the market
price for the Company's Common Stock. Morgan Stanley & Co. Incorporated may, in
its sole discretion and at any time without notice, release all or any portion
of the securities subject to lock-up agreements.
19
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 11.1 Statement Regarding Computation of Earnings Per Share
(b) Exhibit 27 Financial Data Schedule
(c) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter ended March
31, 1996.
20
<PAGE>
RED BRICK SYSTEMS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 1, 1996 RED BRICK SYSTEMS, INC.
(Registrant)
By: /s/ Robert C. Hausmann
-------------------------------
Robert C. Hausmann
Vice President, Finance and Administration
(Duly authorized officer and principal
financial and accounting officer)
21
<PAGE>
EXHIBIT 11.1
RED BRICK SYSTEMS, INC.
STATEMENT REGARDING
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Net income $ 433,935 $ 42,747
============ ============
Computations of weighted average common and common
equivalent shares outstanding:
Weighted average common equivalent shares
attributable to convertible preferred stock -- 5,450,041
Weighted average common shares outstanding 10,011,308 1,413,405
Weighted average common equivalent shares
attributable to stock options and warrants 2,242,302 485,400
Common shares sold and common equivalent
shares from stock options granted or issued
during the twelve-month period prior to the
Company's initial public offering -- 1,604,107
------------ ------------
Shares used in computing net income per share 12,253,610 8,952,953
============ ============
Net income per share $ 0.04 $ 0.00
============ ============
</TABLE>
Fully diluted computation not presented since such amounts differ by less than
3% of the net income per share amount shown above.
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 18,335
<SECURITIES> 17,131
<RECEIVABLES> 8,989
<ALLOWANCES> 670
<INVENTORY> 0
<CURRENT-ASSETS> 43,957
<PP&E> 4,146
<DEPRECIATION> 1,727
<TOTAL-ASSETS> 46,569
<CURRENT-LIABILITIES> 7,310
<BONDS> 0
0
0
<COMMON> 50,195
<OTHER-SE> (12,117)
<TOTAL-LIABILITY-AND-EQUITY> 46,569
<SALES> 6,514
<TOTAL-REVENUES> 6,514
<CGS> 721
<TOTAL-COSTS> 721
<OTHER-EXPENSES> 5,561
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 69
<INCOME-PRETAX> 482
<INCOME-TAX> 48
<INCOME-CONTINUING> 434
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 434
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
