<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 March 31, 1997
[ ] 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 April 30, 1997 there were 11,488,710 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
As of March 31, 1997 and December 31, 1996........................ 3
Condensed Consolidated Statements of Operations
For the Three Months Ended March 31, 1997 and 1996................ 4
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 1997 and 1996................ 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)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
--------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $23,547 $14,552
Short-term investments 15,922 20,599
Accounts receivable, net 7,723 13,106
Prepaid expenses and other current assets 1,184 1,213
Deferred tax assets 850 850
------- -------
Total current assets 49,226 50,320
Property and equipment, net 2,585 2,693
Deposits and other assets 337 205
Deferred tax assets 150 150
------- -------
Total assets $52,298 $53,368
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 567 $ 316
Accrued expenses 3,789 2,565
Accrued compensation 1,569 2,191
Deferred revenue 7,122 4,180
Capital lease obligations due within one year 660 760
------- -------
Total current liabilities 13,707 10,012
Capital lease obligations 278 396
Minority interest 99 36
Stockholders' equity:
Common stock 1 1
Additional paid-in capital 53,179 51,570
Accumulated deficit (14,869) (8,507)
Deferred compensation -- (36)
Translation adjustment 4 4
Unrealized losses on marketable securities (19) --
------- -------
38,296 43,032
Notes receivable from stockholders (82) (108)
------- -------
Total stockholders' equity 38,214 42,924
------- -------
Total liabilities and stockholders' equity $52,298 $53,368
======= =======
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements
3
<PAGE>
RED BRICK SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data; unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1997 1996
------- -------
<S> <C> <C>
Revenues:
Software license $ 3,645 $ 5,285
Maintenance and service 2,878 1,229
------- -------
Total revenues 6,523 6,514
------- -------
Cost of revenues:
Software license 382 264
Maintenance and service 1,839 457
------- -------
Total cost of revenues 2,221 721
------- -------
Operating expenses:
Sales and marketing 7,276 3,497
Research and development 2,711 1,505
General and administrative 980 559
------- -------
Total operating expenses 10,967 5,561
------- -------
Income (loss) from operations (6,665) 232
Interest and other income 506 319
Interest and other expense (40) (69)
------- -------
Income (loss) before provision for income
taxes and minority interest (6,199) 482
Provision for income taxes 100 48
------- -------
Income (loss) before minority interest (6,299) 434
Minority interest (63) --
------- -------
Net income (loss) $(6,362) $ 434
======= =======
Net income (loss) per share $ (0.56) $ 0.04
======= =======
Shares used to compute net income (loss) per share 11,433 12,254
======= =======
</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>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1997 1996
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(6,362) $ 434
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation 370 276
Amortization 41 24
Minority interest 63 --
Changes in assets and liabilities:
Accounts receivable 5,383 (2,808)
Prepaid expneses and other current assets 29 121
Accounts payable 251 (324)
Accrued expenses and compensation 638 843
Deferred revenue 2,942 610
------- -------
Net cash provided by (used in) operating
activities 3,355 (824)
------- -------
Cash flows from investing activities:
Purchases of short-term investment (12,641) (18,231)
Proceeds from sales of short-term investments 17,318 1,100
Acquisition of property and equipment (303) (487)
Deposits and other assets (132) (27)
------- -------
Net cash provided by (used in) investing
activities 4,242 (17,645)
------- -------
Cash flows from financing activities:
Proceeds from issuance of stock, net 1,609 33,924
Advances to stockholders - net -- 2
Payment on notes receivable 26 --
Payment on notes payable to stockholders -- (12)
Principal payments on capital lease obligations (218) (108)
Unrealized losses on marketable securities (19) --
------- -------
Net cash provided by financing activities 1,398 33,806
------- -------
Net increase in cash and cash equivalents 8,995 15,337
Cash and cash equivalents at beginning of period 14,552 $ 2,998
------- -------
Cash and cash equivalents at end of period $23,547 $18,335
======= =======
</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
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
included in the Company's fiscal year 1996 Annual Report on Form 10-K. The
consolidated results of operations for the three months ended March 31, 1997 are
not necessarily indicative of the results to be expected for any subsequent
period or for the entire fiscal year ending December 31, 1997. The December 31,
1996 balance sheet was derived from audited financial statements, but does not
include all disclosures required by generally accepted accounting principles.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Such estimates relate to the useful lives of fixed assets,
allowances for doubtful accounts and customer returns, other reserves, and
income tax valuation allowances. Actual results inevitably will differ from
those estimates, and such differences may be material to the financial
statements.
2. Net Income (Loss) Per Share
---------------------------
Net loss per share is computed using the weighted average number of common
shares outstanding during the period.
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). 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 of the Company's initial public
offerings as if they were outstanding for all periods presented prior to the
filing date using the treasury stock method.
3. 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
approximately 50.1% 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 Australian subsidiary. Beginning in 1999, the Company may be
obligated to purchase the remaining
6
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stock owned by PSG at a pre-determined price, not to exceed $5 million, based on
1998 revenue for the joint venture.
4. Red Brick Japan Co., Ltd.
------------------------
Red Brick Japan Co., Ltd., a wholly-owned subsidiary of Red Brick Systems,
Inc., was incorporated in Japan on January 16, 1997, for the purpose of
assisting the Company and its distributors in the licensing and sale of Red
Brick products and services in Japan.
5. Recent Pronouncements
---------------------
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share, which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method currently
used to compute earnings per share and to restate all prior periods. Under the
new requirements for calculating primary earnings per share, the dilutive effect
of stock options, warrants, convertible preferred stock, and common and common
equivalent shares, within twelve months of the Company's initial public
offering, will be excluded. The impact is expected to result in an increase in
primary earnings per share for the first quarter ended March 31, 1996 of $0.02
per share, and is expected to result in no change in primary loss per share for
the first quarter ended March 31, 1997. The impact of Statement 128 on the
calculation of fully diluted earnings per share for these quarters is not
expected to be material.
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 including, without limitation, statements made
in the sections entitled "Revenues", "Operating Expenses" and "Minority
Interest, Net Income and Earnings (Loss) Per Share", regarding the Company's
revenues and associated costs and expenses. 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.
RESULTS OF OPERATIONS
REVENUES
Three Months Ended
March 31,
----------------------------------------
1997 Change 1996
---------- ------------ -----------
Software license $3,645 (31%) $5,285
Percentage of total revenues 55.9% 81.1%
Maintenance and service $2,878 134% $1,229
Percentage of total revenues 44.1% 18.9%
Total revenues $6,523 0% $6,514
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. 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 maintenance period, which
is typically 12 months. Consulting and training revenues are recognized at the
time the services are 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 decrease in software license revenues for the
period ending March 31, 1997 was because the number of orders received was
significantly below the Company's expectations. Also, the number of new
customers, who generally have lower sales amounts, relative to the number of
repeat customers was higher. The
8
<PAGE>
Company intends to continue to enhance its current software products, as well as
to develop new products.
Maintenance and Service Revenues. The growth in maintenance revenues
--------------------------------
was primarily attributable to the renewal of maintenance contracts after the
initial one-year term, and to increased licensing activity during the fourth
quarter of 1996. Service revenues increased as a result of additional consulting
and training engagements. The Company expects that prior growth rates of the
Company's maintenance and service revenues may not be sustainable in the future.
In For the three month period ended March 31, 1997, no one customer
accounted for 10% or more of total revenues. For the three month period ended
March 31, 1996, sales to Tandy Corporation accounted for 20% of total revenues
No other customer or reseller accounted for 10% or more 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.
Substantially all of tThe Company's international revenues infor the
three month period ended March 31, 1997 were 24% of total revenues. The
Company's international revenues infor the three month period ended March 31,
1996 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
Three Months Ended
March 31,
-----------------------------------------
1997 Change 1996
---------- ------------- ---------
Software license $382 45% $264
Percentage of total revenues 5.9% 4.1%
Maintenance and service $1,839 302% $457
Percentage of total revenues 28.2% 7.0%
Total cost of revenues $2,221 208% $721
Percentage of total revenues 34.0% 11.1%
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.
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 month period ended March
31, 1997 increased from quarters ended March 31, 1995 to 1996over such costs for
the same periods ended March 31, 1996, as a result of increased personnel-
related costs as the Company continued to expand its customer service and
consulting organizations. The Company believes that the cost of maintenance and
service revenues may increase in dollar amount and may increase as a percentage
of maintenance and service
9
<PAGE>
revenues in the future as the Company continues to build its customer service
and consulting organizations.
OPERATING EXPENSES
Three Months Ended
March 31,
---------------------------------------
1997 Change 1996
---------- --------- ---------
Sales and marketing $7,276 108% $3,497
Percentage of total revenues 111.5% 53.7%
Research and development $2,711 80% $1,505
Percentage of total revenues 41.6% 23.1%
General and administrative $ 980 75% $ 559
Percentage of total revenues 15.0% 8.6%
Total operating expenses $10,967 97% $5,561
Percentage of total revenues 168.1% 85.4%
Sales and Marketing. Sales and marketing expenses consisted primarily
-------------------
of personnel-related costs, including sales commissions, as well as promotional
expenses including advertising, public relations, seminars, and trade shows. The
increases in dollar amounts in dollar amount in sales and marketing expenses
were as primarily due to the expansion of the Company's sales operations and
increased marketing activities. The Company believes that such expenses may
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 was primarily attributable to the increased staffing for of software
engineers required to expand and enhance the Company's product line and the
expensing of technology and software that had not met technological feasibility
under the criteria of Statement of Financial Accounting Standards ("SFAS") No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed". The Company believes that research and development expenses
may continue to increase in dollar amounts in the future.
In accordance with SFAS No. 86, the Company capitalizes eligible
computer software costs upon the achievement of technological feasibility,
subject to net realizable value considerations. The Company has defined
technological feasibility as completion of a working model. As of March 31,
1997, 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.
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 increased
staffing and professional fees necessary to manage and support the Company and
to provide the infrastructure required for a public company. The Company
believes that its general and administrative expenses will continue to increase
in dollar amount in the future as the Company expands its administrative staff,
adds infrastructure, and incurs additional costs related to being a public
company.
10
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INTEREST AND OTHER INCOME AND INTEREST EXPENSE
Three Months Ended
March 31,
---------------------------------------
1997 Change 1996
---------- ---------- ---------
Interest and other income $506 59% $ 319
Percentage of total revenues 7.8% 4.9%
Interest expense $ (40) (42%) $ (69)
Percentage of total revenues (0.6%) (1.1%)
Interest and other income represent 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 months ended March 31, 1997 compared to the year earlier period because
the funds were invested for the full three months in 1997 and were invested for
a shorter period in 1996 following the Company's initial public offering on
January 22, 1996.
PROVISION FOR INCOME TAXES
Three Months Ended
March 31,
----------------------------
1997 Change 1996
------- -------- ---------
Provision for income taxes $ 100 108% $ 48
Percentage of total revenues 1.5% 0.7%
The income tax provision for the three months ended March 31, 1997 of
$100,000 is attributable to current income taxes, and consists principally of
foreign withholding taxes and other foreign income taxes and state minimum
taxes. No income tax benefit has been recognized for the loss incurred in the
first quarter of 1997. Although realization is not assured, the Company
continues to believe that it is "more likely than not" that it will generate
future taxable income sufficient to realize the benefit of the $1 million net
deferred tax asset previously recognized. The amount of the net deferred tax
asset considered realizable, however, could be reduced in the near term if
estimates of future taxable income are reduced. Management intends to evaluate
the realizability of the net deferred tax asset each quarter to assess the need
for the valuation allowance.
The effective tax rate for the three months ended March 31, 1996 was
10%, which differed from the federal statutory tax rate of 34%, primarily due to
the utilization of net operating loss carryforwards, offset by domestic
alternative minimum taxes and foreign taxes.
As of December 31, 1996, the Company had federal and state net operating
loss carryforwards of approximately of $4.4 million and $3.6 million,
respectively, and federal and state research credit carryforwards of $430,000
and $290,000, respectively. Utilization of approximately $1.5 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. These carryforwards will expire from 1998 to 2009.
11
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MINORITY INTEREST, NET INCOME, AND EARNINGS (LOSS) PER SHARE
Three Months Ended
March 31,
---------------------------------------
1997 Change 1996
--------- ----------- ----------
Minority Interest $ (63) * $ --
Percentage of total revenues (1.0%) *
Net income (loss) $(6,362) (1,566%) $ 434
Percentage of total revenues (97.5%) 6.7%
Net income (loss) per share $ (0.56) (1,500%) $0.04
- --------------------
*Not meaningful
Net income and loss per share for the three month period ended March 31,
1997 was a direct result of the revenue shortfall for the quarter. As noted
under "Software License Revenues," software license revenues for the period
ended March 31, 1997 decreased over the year earlier period. In addition, as
noted in "Risk Factors" below, the Company's expense levels are relatively fixed
and are based, in part, on expectations as to future revenues. Consequently,
since revenue fell below expectations, operating results were adversely affected
and net income was disproportionately affected because a proportionately smaller
amount of the Company's expenses varies with its revenues.
LIQUIDITY AND CAPITAL RESOURCES
March 31, December 31,
1997 Change 1996
--------- --------- ------------
Working capital $35,519 (12%) $40,308
Cash and cash equivalents and
short-term investments $39,469 12% $35,151
Working capital decreased at March 31, 1997, compared to that at
December 31, 1996, primarily due to a decrease in accounts receivable and an
increase in deferred revenue partially offset by an increase in cash, cash
equivalents, and short-term investments.
Three Months Ended
March 31,
------------------------------------
1997 Change 1996
---------- ---------- ----------
Cash provided by (used in)
operating activities $3,355 * $ (824)
Cash provided by (used in)
investing activities $4,242 * $(17,645)
Cash provided by financing activities $1,398 (96%) $ 33,806
- ----------------------
* Not meaningful
For the three months ended March 31, 1997, net cash provided by
operating activities resulted primarily from a decrease in accounts receivable,
increases in deferred revenue, accrued expenses and compensation, and
depreciation and amortization, offset by the net loss. For the three months
12
<PAGE>
ended March 31, 1996, net cash used in operations was primarily from an increase
in accounts receivable and a decrease in accounts payable, offset by increases
in accrued expenses and compensation, deferred revenue, and depreciation and
amortization, and by net income.
For the three months ended March 31, 1997 and 1996, the Company's
investing activities have consisted of purchases of investment grade, interest-
bearing securities, offset by purchases of property and equipment. Capital
expenditures were $31.5 million in interest-bearing securities and $0.4 to
purchase property and equipment. In 303,000 in the three months ended March 31,
1997, compared to $487,000 in the three months ended March 31, 1996. 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 three months ended
March 31, 1997 was primarily from the issuance of common stock through the
Company's Employee Stock Purchase Plan. The cash provided by financing
activities during the three months ended March 31, 1996 was primarily from the
initial public offering.
The Company has a $3,000,000 unsecured line of credit which expires
April 30, 1998. Borrowings under this line bear interest at the lender's current
index. The credit agreement requires the Company to maintain certain financial
ratios, minimum working capital, and minimum tangible net worth. The agreement
also restricts the payment of dividends. At March 31, 1997 there were no
borrowings outstanding.
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. Thereafter, the Company may find it necessary to obtain
additional debt or equity financing. There can be no assurance that, in the
event additional financing is required, the Company will be able to raise such
additional financing on acceptable terms or at all.a
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.
Potential Fluctuations in Quarterly Results; Seasonality. The Company's
--------------------------------------------------------
quarterly operating results have varied significantly in the past, and may vary
significantly in the future, 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, a
relational database management system that is specifically designed for serving
data warehouse applications and typically has a selling price in excess of
$100,000. 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. In the first quarter of 1997, for example,
the Company received significantly fewer orders than expected which had an
immediate impact on the bottom line for the 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 as occurred during the
quarter ended March 31, 1997. 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 upon as indications of future performance.
As occurred during the quarter ended March 31, 1997 and as may occur in some
future quarters, the Company's operating results were and/or may be below the
expectations of public market analysts and investors. Should this occur, the
price of the Company's Common Stock would 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. For example, this pattern occurred in the quarter ended March
31, 1997, and, as a result, total revenues and net income for the period were
lower than in the quarter ended December 31, 1996.
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,
14
<PAGE>
including Oracle, Informix, Sybase, IBM, and NCR/Teradata. 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, 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 than can the
Company. 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.
Limited Profitability; Accumulated Deficit; Future Operating Results
--------------------------------------------------------------------
Uncertain. As of March 31, 1997, the Company had an accumulated deficit of $14.9
- ---------
million. The Company had a $6.4 million loss in the first quarter of 1997 and
was only marginally profitable in 1996. There can be no assurance that the
Company will return to being profitable on a quarterly basis or remain
profitable 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. 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.
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. These products
are 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 Company. A decline in sales of Red Brick Warehouse would also have a
materially adverse effect on licensing of other Company products that
15
<PAGE>
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 by others of products embodying new technologies and the emergence
of new industry standards can render the Company's 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
software errors in certain of its new products after their introduction.
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,
financial condition, and results of operations.
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
16
<PAGE>
agreement. In December 1996, Thomas Henn, who had been serving as the Company's
Vice President Worldwide Sales, and Christopher Grejtak, who had been serving as
the Company's Vice President Marketing, decided to leave the Company. Also in
December 1996, the Company promoted Alexander Wilson, formerly Vice President
North American Sales, to the position of Vice President Worldwide Sales, and Mr.
Erickson began acting as the Company's Vice President Marketing until the
successful conclusion of an executive search for Mr. Grejtak's replacement. The
loss of the services of one of more of the Company's key employees in the future
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 may hire a number of additional
sales and technical personnel in 1997. 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 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 1997 and 1996 and during 1995, the
Company experienced difficulty in recruiting a sufficient number of sales and
technical personnel during this period such periods. 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 experienced a period
-------------------------------
of significant growth in its employee base and a growth in its revenue during
1996 that has placed a serious strain upon its management systems and resources.
The Company implemented and expanded upon a number of 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 further 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
------------------------
three months ended March 31, 1997 and 1996, accounted for 24% and less than 10%
of total revenues, respectively. The Company intends to continue to expand and
maximize the sales potential of its existing international operations and enter
additional international markets. This will require significant management
attention
17
<PAGE>
and financial resources, and could adversely affect the Company's business,
operating results, and financial condition. In order to expand international
sales successfully in 1997 and subsequent periods, the Company believes it may
need to restructure some of its existing international operations, 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 segments overlaps. Any such
claims, with or without merit, could be time-consuming, result in costly
litigation, cause product shipment delays, or require the Company to enter into
royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company, or at all,
which could have a 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
18
<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 Sybase 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, as was demonstrated during the quarter ended
March 31, 1997, 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. Market fluctuations may adversely affect the market price
of the Company's Common Stock. There can be no assurance that prices and
price/earnings ratios will be sustained.
19
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 11.1: Statement Regarding Computation of Earnings Per
Share
Exhibit 27: Financial Data Schedule (EDGAR version only)
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the three months ended
March 31, 1997.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 12, 1997 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
March 31,
----------------------------
1997 1996
------------ -----------
<S> <C> <C>
Net income (loss) $ (6,361,556) $ 433,935
============ ===========
Computations of weighted average common
and common equivalent shares outstanding:
Weighted average common shares outstanding 11,432,797 10,011,308
Weighted average common equivalent
shares attributable to stock options and warrants 0 2,242,302
------------ -----------
Shares used in computing net income
(loss) per share 11,432,797 12,253,610
============ ===========
Net income (loss) per share $ (0.56) $ 0.04
============ ===========
</TABLE>
Fully diluted computation not presented since such amounts differ by less than
3% of the net income per share amount shown above.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 23,547
<SECURITIES> 15,922
<RECEIVABLES> 8,709
<ALLOWANCES> 986
<INVENTORY> 0
<CURRENT-ASSETS> 49,226
<PP&E> 4,633
<DEPRECIATION> 2,048
<TOTAL-ASSETS> 52,298
<CURRENT-LIABILITIES> 13,707
<BONDS> 0
0
0
<COMMON> 53,180
<OTHER-SE> (14,966)
<TOTAL-LIABILITY-AND-EQUITY> 52,298
<SALES> 6,523
<TOTAL-REVENUES> 6,523
<CGS> 2,221
<TOTAL-COSTS> 2,221
<OTHER-EXPENSES> 10,967
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40
<INCOME-PRETAX> (6,262)
<INCOME-TAX> 100
<INCOME-CONTINUING> (6,362)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,362)
<EPS-PRIMARY> (.056)
<EPS-DILUTED> (.056)
</TABLE>
