<PAGE>
- --------------------------------------------------------------------------------
UNITED STATES
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 September 30, 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)
Registrant's Telephone No., including area code: (408) 399-3200
Registrant's Internet Address: WWW.REDBRICK.COM
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days:
Yes X No
---------- ----------
As of October 25, 1996, there were 11,247,294 shares of the Registrant's Common
Stock outstanding.
- --------------------------------------------------------------------------------
1
<PAGE>
RED BRICK SYSTEMS, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C> <C>
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets
As of September 30, 1996 and December 31, 1995 ................. 3
Consolidated Statements of Income
For the Three Months and Nine Months Ended September
30, 1996 and 1995 .............................................. 4
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1996 and 1995 .......... 5
Notes to 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 21 ........................... 21
SIGNATURES ................................................................ 22
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RED BRICK SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 15,338 $ 2,998
Short-term investments 20,613 --
Accounts receivable, net of allowance of $858 and $670 8,931 5,511
Prepaid expenses and other assets 733 293
------------- ------------
Total current assets 45,615 8,802
Property and equipment, net 2,711 1,980
Other assets 246 195
------------- ------------
Total assets $ 48,572 $ 10,977
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to stockholder $ -- $ 33
Accounts payable 245 658
Accrued expenses 2,096 1,251
Accrued compensation 1,535 1,258
Deferred revenue 2,452 2,015
Capital lease obligations due within one year 887 974
------------- ------------
Total current liabilities 7,215 6,189
Capital lease obligations 774 1,068
Minority interest 84 --
Stockholders' equity:
Preferred stock, $.0001 par value; 2,000,000 shares authorized;
no shares outstanding -- --
Convertible preferred stock, $.0001 par value; 10,000,000 shares
authorized; 0 and 5,863,242 shares issued and outstanding -- 1
Common stock, $.0001 par value; 20,000,000 shares authorized;
11,236,456 and 2,555,721 shares issued and outstanding 1 1
Additional paid in capital 51,490 16,269
Accumulated deficit (10,881) (12,325)
Deferred compensation (39) (49)
Notes receivable from stockholders (122) (177)
Translations adjustments 5
Unrealized gains on marketable securities 45 --
------------- ------------
Total stockholders' equity 40,499 3,720
------------- ------------
Total liabilities and stockholders' equity $ 48,572 $ 10,977
============= ============
</TABLE>
See accompanying notes to Consolidated Financial Statements
3
<PAGE>
RED BRICK SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data; unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------------------
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Software license $ 7,319 $ 3,873 $19,065 $10,716
Maintenance and service 1,694 1,264 4,492 3,640
------- ------- ------- -------
Total revenues 9,013 5,137 23,557 14,356
------- ------- ------- -------
Cost of revenues:
Software license 317 141 779 444
Maintenance and service 851 490 1,911 1,130
------- ------- ------- -------
Total cost of revenues 1,168 631 2,690 1,574
------- ------- ------- -------
Gross margin 7,845 4,506 20,867 12,782
------- ------- ------- -------
Operating expenses:
Sales and marketing 5,153 2,686 13,361 7,536
Research and development 1,465 1,292 4,393 3,685
General and administrative 717 384 2,018 1,173
In-process technology - - 500 -
------- ------- ------- -------
Total operating expenses 7,335 4,362 20,272 12,394
------- ------- ------- -------
Income from operations 510 144 595 388
Interest and other income 459 45 1,223 76
Interest expense (86) (56) (239) (168)
------- ------- ------- -------
Income before provision for
income taxes and minority
interest 883 133 1,579 296
Provision for income taxes 102 50 172 116
------- ------- ------- -------
Income before minority
interest 781 83 1,407 180
Minority interest 37 - 37 -
------- ------- ------- -------
Net income $ 818 $ 83 $ 1,444 $ 180
======= ======= ======= =======
Net income per share $ 0.06 $ 0.01 $ 0.11 $ 0.02
======= ======= ======= =======
Shares used to compute
net income per share 12,770 10,468 12,635 9,704
======= ======= ======= =======
</TABLE>
See accompanying notes to Consolidated Financial Statements
4
<PAGE>
RED BRICK SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands; unaudited)
<TABLE>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1996 1995
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,444 $ 180
Adjustments to reconcile net income to net cash provided by
(used In) operating activities:
Depreciation and amortization 1,043 609
Minority Interest 84
Changes in assets and liabilities:
Accounts receivable (3,420) (2,280)
Prepaid expenses and other current assets (440) 359
Accounts payable (413) 111
Accrued expenses and compensation 1,132 974
Deferred revenue 437 378
---------- ----------
Net cash provided by (used in) operating activities (133) 331
---------- ----------
Cash flows from investing activities:
Purchases of short-term investments (34,106) --
Proceeds from sales of short-term investments 13,493 --
Acquisition of property and equipment (1,389) (69)
Deposits and other assets (51) (29)
---------- ----------
Net cash used in investing activities (22,053) (98)
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of stock, net 35,275 336
Advances to stockholders - net -- (53)
Payment on notes payable to stockholders (33) (34)
Principle payments on capital lease obligations (766) (495)
Unrealized gains on marketable securities 45 --
Translation adjustment 5 --
---------- ----------
Net cash provided by (used in) financing activities 34,526 (246)
---------- ----------
Net increase (decrease) in cash and cash equivalents 12,340 (13)
Cash and cash equivalents at beginning of period 2,998 1,958
---------- ----------
Cash and cash equivalents at end of period $ 15,338 $ 1,945
========== ==========
SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING ACTIVITIES
Property and equipment acquired under capital lease financing $ 385 $ 646
</TABLE>
See accompanying notes to Consolidated Financial Statements
5
<PAGE>
RED BRICK SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
---------------------
The unaudited 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 three and nine months ended September 30, 1996,
are not necessarily indicative of the results to be expected for any subsequent
period 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 public offering
and its Common Stock began trading on the NASDAQ National Market under the
symbol REDB. The Company sold 2,070,000 shares in the offering and generated
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 September 30,
1996, were not material. The Company deems all investments to be available to
meet current working capital requirements.
6
<PAGE>
4. Cash, Cash Equivalents, and Short-Term Investments (cont.)
----------------------------------------------------------
The following is a summary of the Company's investments at September 30,
1996.
<TABLE>
<CAPTION>
Estimated
(In Thousands) Fair Value
- ------------------------------------------ ----------
<S> <C>
Money Market $ 81
Corporate bonds and notes 17,315
Commercial paper 11,017
Government debt securities 3,000
International bond 748
---------
Total investments $ 32,161
=========
</TABLE>
The following is a reconciliation of the Company's investments to the
balance sheet classifications.
<TABLE>
<CAPTION>
Estimated
(In Thousands) Fair Value
- ------------------------------------------ ----------
<S> <C>
Cash equivalents $ 11,548
Short-term investments 20,613
----------
Total investments $ 32,161
==========
</TABLE>
At September 30, 1996, $26,634,933 of the investments were due in one year or
less, with the remainder due in one to three years.
5. In-Process Technology
---------------------
The Company acquired in-process technology associated with a $500,000
licensing arrangement during the second quarter of 1996. The acquired in-process
technology had not yet reached technological feasibility and did not have
alternative future uses.
6. Red Brick Systems Australasia Pty. Ltd.
--------------------------------------
On July 1, 1996, the Company entered into an agreement with Productivity
Software Group Limited (PSG) to form a joint venture to distribute the Company's
products and services in Australia and New Zealand. The Company owns over 50% of
the voting stock of the joint venture and is consolidating this entity. The
minority interest shown on the financial statements represents PSG's
proportionate share in the net assets and operating activity of the Australasian
subsidiary.
7. Use of Estimates
----------------
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
7
<PAGE>
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
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ -----------------------------
1996 CHANGE 1995 1996 CHANGE 1995
------ ------- ------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
Software license $ 7,319 89.0% $ 3,873 $19,065 77.9% $10,716
Percentage of total revenues 81.2% 75.4% 80.9% 74.6%
Maintenance and service $ 1,694 34.0% $ 1,264 $ 4,492 23.4% $ 3,640
Percentage of total revenues 18.8% 24.6% 19.1% 25.4%
Total revenues $ 9,013 75.5% $ 5,137 $23,557 64.1% $14,356
</TABLE>
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. 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.
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. The increase in software license revenues was primarily
attributable to increases in the number of units sold, as well as to increases
in the unit prices of products licensed by the Company. The Company intends to
continue to enhance its current software
8
<PAGE>
products, as well as to develop new products. Management expects that prior
growth rates of the Company's software license revenues may not be sustainable
in the future.
Maintenance and Service Revenues. The growth in maintenance and service
--------------------------------
revenues is primarily attributable to increased licensing activity and the
renewal of maintenance contracts after the initial one-year term. The Company
expects that prior growth rates of the Company's maintenance and service
revenues may not be sustainable in the future.
For the three month period ended September 30, 1996, sales to American
Portable Telecom, Inc., accounted for 16% of total revenues and sales to Kraft
Foods, Inc., accounted for 11% of total revenues. For the nine month
period ended September 30, 1996, no one customer accounted for 10% or more of
total revenues. For the three months ended September 30, 1995, sales to
ems accounted for 37% of total revenues and sales to Unisys, a reseller of the
Company's products, accounted for 17% of total revenues. For the nine
months ended September 30, 1995, sales to Unisys accounted for 29% of total
revenues, sales to ems accounted for 13% of total revenues, and sales to AT&T
accounted for 11% of total revenues. No other customer or reseller accounted
for more than 10% of the Company's total 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 materially adverse effect on the Company's business, financial condition,
and results of operations.
The Company's international revenues for the three and nine
month periods ended September 30, 1996 and 1995, were less than 10% of total
revenues. The Company intends to continue to expand its international operations
and to enter additional international markets.
COST OF REVENUES
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ -----------------------------
1996 CHANGE 1995 1996 CHANGE 1995
---- ------ -------- ---- ----- -------
<S> <C> <C> <C> <C> <C> <C>
Software license $ 317 124.8% $ 141 $ 779 75.5% $ 444
Percentage of total revenues 3.5% 2.7% 3.3% 3.1%
Maintenance and service $ 851 73.7% $ 490 $ 1,911 69.1% $ 1,130
Percentage of total revenues 9.4% 9.5% 8.1% 7.9%
Total cost of revenues $ 1,168 85.1% $ 631 $ 2,690 70.9% $ 1,574
Percentage of total revenues 13.0% 12.3% 11.4% 11.0%
</TABLE>
Cost of Software License Revenues. Cost of software license revenues
---------------------------------
consisted primarily of the cost of royalties paid to third-party vendors,
product media and duplication, shipping expenses, manuals and packaging
materials. The increase in the dollar amount of cost of software license
revenues reflected the higher volume of product shipped.
Cost of Maintenance and Service Revenues. Cost of maintenance and service
----------------------------------------
revenues consisted primarily of personnel-related costs incurred in providing
telephone support, consulting services, and training to customers. Cost of
maintenance and service revenues for
9
<PAGE>
the three and nine month periods ended September 30, 1996, increased over such
costs for the same periods ended September 30, 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 the
cost of maintenance and service revenues may increase in dollar amount and may
increase as a percentage of such revenues in the future as the Company continues
to build its customer service organizations.
<TABLE>
<CAPTION>
OPERATING EXPENSES
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- ---------------------------------------
1996 CHANGE 1995 1996 CHANGE 1995
------ ------ ------ ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Sales and marketing $5,153 91.8% $2,686 $13,361 77.3% $ 7,536
Percentage of total revenues 57.2% 52.3% 56.7% 52.5%
Research and development $1,465 13.4% $1,292 $ 4,393 19.2% $ 3,685
Percentage of total revenues 16.3% 25.2% 18.6% 25.7%
General and administrative $ 717 86.7% $ 384 $ 2,018 72.0% $ 1,173
Percentage of total revenues 8.0% 7.5% 8.6% 8.2%
In-process technology $ -- * $ -- $ 500 * $ --
Percentage of total revenues * * 2.1% *
Total operating expenses $7,335 68.2% $4,362 $20,272 63.6% $12,394
Percentage of total revenues 81.4% 84.9% 86.1% 86.3%
</TABLE>
- ---------------------------
* Not meaningful
Sales and Marketing. Sales and marketing expenses consisted 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. 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 may increase in
dollar amount in the future as the Company expands its sales and marketing
activities.
Research and Development. Research and development expenses consisted
------------------------
primarily of salaries and other personnel-related expenses, and depreciation of
development equipment. The increase in dollar amount in research and development
expenses was 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 may 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 September 30, 1996, such capitalizable costs were
insignificant. Accordingly, the Company has charged all such costs to research
and development expense in the accompanying consolidated statements of income.
10
<PAGE>
General and Administrative. General and administrative expenses consisted
--------------------------
primarily of personnel costs for finance and general management, as well as
insurance and professional expenses. The increase in dollar amount 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 amount in the future as the Company continues expanding
its staffing and incurring costs associated with operating as a public company.
Cost of in-process technology. In the second quarter of 1996, the Company
-----------------------------
acquired in-process technology associated with a $500,000 licensing arrangement.
The acquired in-process technology had not yet reached technological feasibility
and did not have alternative future uses.
INTEREST AND OTHER INCOME AND INTEREST EXPENSE
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- ------------------------------------
1996 CHANGE 1995 1996 CHANGE 1995
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Interest and other income $ 459 920.0% $ 45 $ 1,223 1,509.2% $ 76
Percentage of total revenues 5.1% 0.9% 5.2% 0.5%
Interest expense $ (86) 53.6% $ (56) $ (239) 42.3% $ (168)
Percentage of total revenues (1.0%) (1.1%) (1.0%) (1.2%)
</TABLE>
Interest and other income primarily represented interest income earned
on the Company's cash, cash equivalents, and short-term investments. Interest
and other income increased during the three and nine month periods ended
September 30, 1996, due to investing the proceeds received from the Company's
initial public offering. The Company's interest expense was due primarily to
acquisition of computer equipment for new personnel.
PROVISION FOR INCOME TAXES
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- ------------------------------------
1996 CHANGE 1995 1996 CHANGE 1995
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Provision for income taxes $ 102 104.0% $ 50 $ 172 48.3% $ 116
Percentage of total revenues 1.1% 1.0% 0.7% 0.8%
</TABLE>
The estimated effective tax rates for the three and nine month periods ended
September 30, 1996 and 1995, were 11% 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, 1995, the Company had federal and state net operating loss
carryforwards of approximately $8.5 million and $3.5 million, respectively, and
federal and state research credit carryforwards of $375,000 and $225,000,
respectively. These carryforwards will expire from 1998 to 2010.
11
<PAGE>
Utilization of approximately $1.0 million of the net operating loss
carryforwards 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. Utilization of the remaining net operating loss and credit
carryforwards is also limited to approximately $6.5 million per year.
MINORITY INTEREST, NET INCOME, AND EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- ------------------------------------
1996 CHANGE 1995 1996 CHANGE 1995
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Minority Interest $ 37 * $ -- $ 37 * $ --
Percentage of total revenues 0.4% * 0.2% *
Net income $ 818 886% $ 83 $ 1,444 702% $ 180
Percentage of total revenues 9.1% 1.6% 6.1% 1.3%
Net income per share $ 0.06 500% $0.01 $ 0.11 450% $ 0.02
</TABLE>
- ------------------------
* Not meaningful
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 CHANGE 1995
------------ ---------- ------------
<S> <C> <C> <C>
Working capital $ 38,400 * $ 2,613
Cash and cash equivalents and short-term investments $ 35,951 * $ 2,998
</TABLE>
- -----------------------
* Not meaningful
Working capital increased at September 30, 1996 over that at December 31,
1995, primarily due to the proceeds received from the initial public offering,
and an increase in accounts receivable.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------------
1996 CHANGE 1995
---------- ---------- ----------
<S> <C> <C> <C>
Cash provided by (used in) operating activities $ (133) * $ 331
Cash used in investing activities $ (22,053) * $ (98)
Cash provided by (used in) financing activities $ 34,526 * $ (246)
</TABLE>
- -----------------------
* Not meaningful
For the nine months ended September 30, 1996, net cash used in operating
activities resulted primarily from an increase in accounts receivable and a
decrease in accounts payable and prepaid expenses and other current assets,
offset by increases in accrued expenses and compensation, deferred revenue,
and depreciation and amortization, and by net income. For the nine months ended
September 30, 1995, net cash provided by operations was primarily from an
increase in accrued expenses and compensation and depreciation and amortization,
offset by an increase in accounts receivable.
For the nine months ended September 30, 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 $1.4 million in the period, compared to $69,000 in the nine months ended
September 30, 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 facilities and equipment.
The cash provided by financing activities during the nine months ended
September 30, 1996, was primarily from the initial public offering.
The Company has available a $3.0 million bank line of credit agreement that
expires on April 30, 1997, 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
13
<PAGE>
account is outstanding more than 90 days from the invoice date). There are
currently no borrowings outstanding under the line of credit.
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.
14
<PAGE>
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 September 30, 1996, the Company had an accumulated deficit of
- ---------
$10.9 million. Although the Company has had nine 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 on
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, and 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, varied
significantly depending on factors such as increased competition, size and
timing of significant orders, 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, 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 hard 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 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
15
<PAGE>
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. The Company believes
this pattern may 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. 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 licenses 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 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 materially adverse effect on the business, operating
results, and financial condition of the
16
<PAGE>
Company. A decline in sales of Red Brick Warehouse would also have a materially
adverse effect on licensing of other Company products that may be licensed 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 new products
and product enhancements, 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 or product enhancements
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 materially
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 materially 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 loss of or delay in market acceptance, which could have
a materially 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
17
<PAGE>
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 materially 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 late
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
personnel in the future. Because of the complexity of RDBMS technology and the
differences between on-line transaction processing (OLTP) and data warehouse
systems, the Company has experienced in the past, and expects to experience in
the future, 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 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 has 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, implementing new
systems as necessary, and expanding, training, and managing 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 materially 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. 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.
International Operations. The Company's international revenues in the first
------------------------
nine months 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, and financial condition. In
order to expand international sales successfully in late 1996 and subsequent
18
<PAGE>
periods, the Company must establish additional foreign operations, hire
additional personnel, 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. 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 materially 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. There can be no
assurance 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 the
functionality of products in different industry segment 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 materially 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
19
<PAGE>
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. During the second quarter of 1996, the Company acquired a license to
further develop and offer an alternative connectivity product. There can be no
assurances that this alternative product will be available in the near future or
will perform adequately as a replacement to the products licensed to the Company
by Sybase. If the Company does not renew the agreement or is not able to
adequately develop this alternative product 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 materially 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. There can be no assurance
that prices and price/earnings ratios will be sustained. Market fluctuations may
adversely affect the market price of the Company's Common Stock.
20
<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 (EDGAR version only)
(c) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter ended
September 30, 1996.
21
<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: October 29, 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)
22
<PAGE>
EXHIBIT 11.1
RED BRICK SYSTEMS, INC.
STATEMENT REGARDING
COMPUTATION OF EARNINGS PER SHARE
(unaudited)
<TABLE>
THREE MONTHS ENDED, NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- ------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income $ 817,347 $ 83,112 $ 1,443,723 $ 179,763
=========== =========== =========== ===========
Computations of weighted average
common and common equivalent shares
outstanding:
Weighted average common equivalent
shares attributable to convertible
preferred stock -- 5,450,041 -- 5,450,041
Weighted average common shares
outstanding 11,188,350 2,169,566 10,770,116 1,848,850
Weighted average common equivalent
shares attributable to stock options
and warrants 1,581,662 1,244,158 1,864,632 800,849
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 -- 1,604,107
----------- ----------- ----------- -----------
Shares used in computing net income
per share 12,770,012 10,467,872 12,634,748 9,703,847
=========== =========== =========== ===========
Net income per share $ 0.06 $ 0.01 $ 0.11 $ 0.02
=========== =========== =========== ===========
</TABLE>
Fully diluted computation not presented since such amounts differ by less than
3% of the net income per share amount shown above.
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> JUL-01-1996 JAN-01-1996
<PERIOD-END> SEP-30-1996 SEP-30-1996
<CASH> 15,338 15,338
<SECURITIES> 20,613 20,613
<RECEIVABLES> 9,789 9,789
<ALLOWANCES> 858 858
<INVENTORY> 0 0
<CURRENT-ASSETS> 45,615 45,615
<PP&E> 4,759 4,759
<DEPRECIATION> 2,048 2,048
<TOTAL-ASSETS> 48,572 48,572
<CURRENT-LIABILITIES> 7,215 7,215
<BONDS> 0 0
0 0
0 0
<COMMON> 51,491 51,491
<OTHER-SE> (11,042) (11,042)
<TOTAL-LIABILITY-AND-EQUITY> 48,572 48,572
<SALES> 9,013 23,557
<TOTAL-REVENUES> 9,013 23,557
<CGS> 1,168 2,690
<TOTAL-COSTS> 1,168 2,690
<OTHER-EXPENSES> 7,335 20,272
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 86 239
<INCOME-PRETAX> 883 1,579
<INCOME-TAX> 102 172
<INCOME-CONTINUING> 818 1,444
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 818 1,444
<EPS-PRIMARY> 0.06 0.11
<EPS-DILUTED> 0.06 0.11
</TABLE>
