<PAGE>
================================================================================
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 June 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)
(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 X No
--- ---
As of July 26, 1996, there were 11,118,276 shares of the Registrant's Common
Stock outstanding.
================================================================================
<PAGE>
RED BRICK SYSTEMS, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
At June 30, 1996 and December 31, 1995......................... 3
Condensed Consolidated Statements of Income
For the Three Months and Six Months Ended
June 30, 1996 and 1995......................................... 4
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 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
<PAGE>
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>
JUNE 30, DECEMBER 31,
1996 1995
----------- ------------
<S> <C> <C>
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 16,277 $ 2,998
Short-term investments 18,892 --
Accounts receivable, net of allowance of $724 and $670 8,854 5,511
Prepaid expenses and other current assets 605 293
----------- ------------
Total current assets 44,628 8,802
Property and equipment, net 2,628 1,980
Other assets 209 195
----------- ------------
Total assets $ 47,465 $ 10,977
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to stockholder $ 8 $ 33
Accounts payable 242 658
Accrued expenses 3,537 1,251
Accrued compensation 611 1,258
Deferred revenue 2,989 2,015
Capital lease obligations due within one year 1,004 974
----------- ------------
Total current liabilities 8,391 6,189
----------- ------------
Capital lease obligations 918 1,068
----------- ------------
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;
11,110,912 and 2,555,721 shares issued and outstanding 1 1
Additional paid in capital 50,068 16,269
Accumulated deficit (11,699) (12,325)
Deferred compensation (42) (49)
Notes receivable from stockholders (177) (177)
Unrealized gains on marketable securities 5 --
----------- ------------
Total stockholders' equity 38,156 3,720
----------- ------------
Total liabilities and stockholders' equity $ 47,465 $ 10,977
=========== ============
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
3
<PAGE>
RED BRICK SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data; unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ----------------------------
1996 1995 1996 1995
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Revenues:
Software license $ 6,461 $ 3,767 $ 11,746 $ 6,843
Maintenance and service 1,569 1,225 2,798 2,376
--------- --------- ---------- ---------
Total revenues 8,030 4,992 14,544 9,219
--------- --------- ---------- ---------
Cost of revenues:
Software license 198 187 462 303
Maintenance and service 603 368 1,060 640
--------- --------- ---------- ---------
Total cost of revenues 801 555 1,522 943
--------- --------- ---------- ---------
Gross margin 7,229 4,437 13,022 8,276
--------- --------- ---------- ---------
Operating expenses:
Sales and marketing 4,711 2,514 8,208 4,850
Research and development 1,423 1,282 2,928 2,393
General and administrative 742 509 1,301 789
In-process technology 500 -- 500 --
--------- --------- ---------- ---------
Total operating expenses 7,376 4,305 12,937 8,032
--------- --------- ---------- ---------
Income (loss) from operations (147) 132 85 244
Interest and other income 445 18 764 31
Interest expense (84) (58) (153) (112)
--------- --------- ---------- ---------
Income before provision for
income taxes 214 92 696 163
Provision for income taxes 22 38 70 66
--------- --------- ---------- ---------
Net income $ 192 $ 54 $ 626 $ 97
========= ========= ========== =========
Net income per share $ 0.01 $ 0.01 $ 0.05 $ 0.01
========= ========= ========== =========
Shares used to compute
net income per share 12,881 9,691 12,567 9,322
========= ========= ========== =========
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
4
<PAGE>
RED BRICK SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands; unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------------------------
1996 1995
----------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 626 $ 97
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 647 393
Changes in assets and liabilities:
Accounts receivable (3,343) 742
Prepaid expenses and other current assets (312) 46
Accounts payable (416) 121
Accrued expenses and compensation 1,646 523
Deferred revenue 974 256
----------- ---------
Net cash provided by (used in) operating activities (178) 2,178
----------- ---------
Cash flows from investing activities:
Purchases of short-term investments (27,335) --
Proceeds from sales of short-term investments 8,443 --
Acquisition of property and equipment (910) (52)
Deposits and other assets (14) (20)
----------- ---------
Net cash used in investing activities (19,816) (72)
----------- ---------
Cash flows from financing activities:
Proceeds from issuance of stock, net 33,798 275
Advances to stockholders - net -- (53)
Payment on notes payable to stockholders (25) (23)
Principle payments on capital lease obligations (505) (326)
Unrealized gains on marketable securities 5 --
----------- ---------
Net cash provided by (used in) financing activities 33,273 (127)
----------- ---------
Net increase in cash and cash equivalents 13,279 1,979
Cash and cash equivalents at beginning of period 2,998 1,958
----------- ---------
Cash and cash equivalents at end of period $ 16,277 $ 3,937
=========== =========
SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING ACTIVITIES
Property and equipment acquired under capital lease financings $ 385 $ 421
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
5
<PAGE>
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 adjustments, 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 six months ended June 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 at a price of $18.00 per share. 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 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 issueable 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
dates 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 June 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 June 30, 1996.
<TABLE>
<CAPTION>
Estimated
(In Thousands) Fair Value
- --------------------------------------- ----------
JUNE 30, 1996
<S> <C>
Money Market $ 105
Corporate bonds and notes 16,376
Commercial paper 12,409
Government debt securities 2,199
International bond 746
----------
Total investments $ 31,835
==========
</TABLE>
The following is a reconciliation of the Company's investments to the
balance sheet classifications.
<TABLE>
<CAPTION>
Estimated
(In Thousands) Fair Value
- --------------------------------------- ----------
JUNE 30, 1996
<S> <C>
Cash equivalents $ 12,943
Short-term investments 18,892
----------
Total investments $ 31,835
==========
</TABLE>
At June 30, 1996, $28,120,160 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. The acquired in-process technology had not yet reached
technological feasibility and did not have alternative future uses.
6. Subsequent Events
-----------------
On July 1, 1996, the Company entered into an agreement with Productivity
Software Group Limited 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 and will consolidate this entity.
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 bewlow 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------- -----------------------------------
1996 CHANGE 1995 1996 CHANGE 1995
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Software license $ 6,461 71.5% $ 3,767 $ 11,746 71.6% $ 6,843
Percentage of total revenues 80.5% 75.5% 80.8% 74.2%
Maintenance and service $ 1,569 28.1% $ 1,225 $ 2,798 17.8% $ 2,376
Percentage of total revenues 19.5% 24.5% 19.2% 25.8%
Total revenues $ 8,030 60.9% $ 4,992 $ 14,544 57.8% $ 9,219
</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. 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
formed a division called Red Brick Capital to provide customers with financing
options for Red Brick Warehouse software and service.
Software License Revenues. The Company currently derives substantially
-------------------------
all of its software license revenues from licenses of Red Brick Warehouse, a
relational database management
8
<PAGE>
system that is specifically designed for serving data warehouse applications.
The increase in software license revenues was attributable to increases in the
number of units sold, as well as to 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. Management expects that
prior growth rates of the Company's software license revenues will 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 will not be sustainable in the future.
For the three and six month periods ended June 30, 1996, no one customer
accounted for 10% or more of total revenues. For the three months ended June 30,
1995, sales to Unisys, a reseller of the Company's products, accounted for 31%
of total revenues. For the six months ended June 30, 1995, sales to AT&T
accounted for 11% of total revenues and sales to Unisys accounted for 33% 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 material adverse effect on the
Company's business, financial condition, and results of operations.
The Company's international revenues for the three and six month periods
ended June 30, 1996, were less than 10% of total revenues. The Company's
international revenues for the three and six month periods ended June 30, 1995,
were 19% and 12%, respectively. The Company intends to continue to expand its
international operations and to enter additional international markets.
COST OF REVENUES
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------------- -------------------------------------
1996 CHANGE 1995 1996 CHANGE 1995
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Software license $ 198 5.9% $ 187 $ 462 52.5% $ 303
Percentage of total revenues 2.5% 3.7% 3.2% 3.3%
Maintenance and service $ 603 63.9% $ 368 $ 1,060 65.6% $ 640
Percentage of total revenues 7.5% 7.4% 7.3% 6.9%
Total cost of revenues $ 801 44.3% $ 555 $ 1,522 61.4% $ 943
Percentage of total revenues 10.0% 11.1% 10.5% 10.2%
</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.
9
<PAGE>
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 the three and six month periods ended June
30, 1996, over such costs for the same periods ended June 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 will 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 organizationss.
OPERATING EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------------- ----------------------------------------
1996 CHANGE 1995 1996 CHANGE 1995
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Sales and marketing $ 4,711 87.4% $ 2,514 $ 8,208 69.2% $ 4,850
Percentage of total revenues 58.7% 50.4% 56.4% 52.6%
Research and development $ 1,423 11.0% $ 1,282 $ 2,928 22.4% $ 2,393
Percentage of total revenues 17.7% 25.7% 20.1% 26.0%
General and administrative $ 742 45.8% $ 509 $ 1,301 64.9% $ 789
Percentage of total revenues 9.2% 10.2% 8.9% 8.6%
In-process technology $ 500 * $ -- $ 500 * $ --
Percentage of total revenues 6.2% * 3.4% *
Total operating expenses $ 7,376 71.3% $ 4,305 $ 12,937 61.1% $ 8,032
Percentage of total revenues 91.9% 86.2% 89.0% 87.1%
- ------------------
</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 increases 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 amounts 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 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 June 30, 1996, such capitalizable costs
10
<PAGE>
were insignificant. Accordingly, the Company has charged all such costs to
research and development expense in the accompanying consolidated statements of
income.
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------------------- ---------------------------------------
1996 CHANGE 1995 1996 CHANGE 1995
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest and other income $ 445 2372.2% $ 18 $ 764 2364.5% $ 31
Percentage of total revenues 5.5% 0.4% 5.3% 0.3%
Interest expense $ (84) 44.8% $ (58) $ (153) 36.6% $ (112)
Percentage of total revenues (1.0%) (1.2%) (1.1%) (1.2%)
</TABLE>
Interest and other income primarily represented interest income earned on
the Company's cash, cash equivalents, and short-term investments, and other
items. Interest and other income increased during the three and six month
periods ended June 30, 1996, due to investing the proceeds received from the
Company's initial public offering. The Company's net interest expense was due
primarily to acquisitions of computer equipment for new personnel.
PROVISION FOR INCOME TAXES
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------- ------------------------------------
1996 CHANGE 1995 1996 CHANGE 1995
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Provision for income taxes $ 22 (42.1%) $ 38 $ 70 6.1% $ 66
Percentage of total revenues 0.3% 0.8% 0.5% 0.7%
</TABLE>
The estimated effective tax rates for the three and six month periods ended
June 30, 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, 1995, the Company had federal and
11
<PAGE>
state net operating loss carryforwards of approximately $8.5 million and $3.5
million, respectively, and federal and state research credit carryforwards of
$325,000 and $225,000, respectively. These carryforwards will expire from 1998
to 2010.
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.
NET INCOME AND EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------ --------------------------------------
1996 CHANGE 1995 1996 CHANGE 1995
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net income $ 192 255.6% $ 54 $ 626 545.4% $ 97
Percentage of total revenues 2.4% 1.1% 4.3% 1.1%
Net income per share $ 0.01 0.0% $ 0.01 $ 0.05 400.0% $ 0.01
</TABLE>
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------------------------
1996 CHANGE 1995
---------- ----------- --------------
<S> <C> <C> <C>
Working capital $ 36,237 2,031.6% $ 1,700
Cash and cash equivalents and short-term investments $ 35,169 793.3% $ 3,937
Cash provided by (used in) operating activities $ (178) (108.2%) $ 2,178
Cash used in investing activities $ (19,816) 27,422.2% $ (72)
Cash provided by financing activities $ 33,273 (26,299.2%) $ (127)
</TABLE>
Working capital increased at June 30, 1996 over that at June 30, 1995,
primarily due to the proceeds from the initial public offering, and an increase
in accounts receivable.
For the six months ended June 30, 1996, net cash used in operating
activities resulted primarily from an increase in accounts receivable and a
decrease in accounts payable, offset by a decrease in accrued expenses and
compensation, a decrease in deferred revenue, and by net income. For the six
months ended June 30, 1995, net cash provided by operations was primarily from a
decrease in accounts receivable, an increase in accounts payable, deferred
revenue and accrued expenses, a decrease in depreciation and amortization, and
by net income.
For the six months ended June 30, 1996, the Company's investing activities
have consisted of purchases of investment grade, interest-bearing securities, as
well as purchases of property and equipment. Capital expenditures were $910,000
in the period, compared to $52,000 in the six months ended June 30, 1995. The
Company's 1995 investing activities consisted primarily of purchases of property
and equipment. Capital expenditures, including capital leases, were $1.2 million
to purchase property and equipment, primarily 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 six months ended
June 30, 1996, was primarily from the IPO.
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 account is
outstanding more than 90 days from the invoice date). There were 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.
13
<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 June 30, 1996, the Company had an accumulated deficit of $11.7
- ---------
million. Although the Company has had eight 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 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, 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 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 comparisons
of its results of operations are not necessarily meaningful and should not be
relied
14
<PAGE>
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 for a significant
part of the Company's revenues for the foreseeable future. As a result, a
decline
15
<PAGE>
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 Company. A decline in sales of Red Brick Warehouse
would also have a materially 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 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,
16
<PAGE>
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 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 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 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 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,
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.
17
<PAGE>
International Operations. The Company's international revenues in the first
------------------------
six 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 1996 and subsequent 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. The Company's international sales are primarily 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 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 segments overlaps. Any such
claims, with or without merit, could be time-consuming, result in costly
litigation, cause product shipment delays, or require the
18
<PAGE>
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 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. 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.
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.
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
(EDGAR version only)
(c) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter ended
June 30, 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: August 2, 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
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- --------------------------
1996 1995 1996 1995
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Net income $ 192,441 $ 53,904 $ 626,376 $ 96,651
========== ========= ========== =========
Computation 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 11,110,691 1,963,580 10,561,000 1,688,492
Weighted average common equivalent shares
attributable to stock optons and warrants 1,769,932 672,989 2,006,116 579,195
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 12,880,623 9,690,717 12,567,116 9,321,835
========== ========= ========== =========
Net income per share $ 0.01 $ 0.01 $ 0.05 $ 0.01
========== ========= ========== =========
</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> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> APR-01-1996 JAN-01-1996
<PERIOD-END> JUN-30-1996 JUN-30-1996
<CASH> 16,277 16,277
<SECURITIES> 18,892 18,892
<RECEIVABLES> 9,578 9,578
<ALLOWANCES> 724 724
<INVENTORY> 0 0
<CURRENT-ASSETS> 44,628 44,628
<PP&E> 4,676 4,676
<DEPRECIATION> 2,048 2,048
<TOTAL-ASSETS> 47,465 47,465
<CURRENT-LIABILITIES> 8,391 8,391
<BONDS> 0 0
0 0
0 0
<COMMON> 50,069 50,069
<OTHER-SE> (11,918) (11,918)
<TOTAL-LIABILITY-AND-EQUITY> 47,465 47,465
<SALES> 8,030 14,544
<TOTAL-REVENUES> 8,030 14,544
<CGS> 801 1,522
<TOTAL-COSTS> 801 1,522
<OTHER-EXPENSES> 7,376 12,937
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 84 153
<INCOME-PRETAX> 214 696
<INCOME-TAX> 22 70
<INCOME-CONTINUING> 192 626
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 192 626
<EPS-PRIMARY> 0.01 0.05
<EPS-DILUTED> 0.01 0.05
</TABLE>
