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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[XANNUAL]REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 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
[LOGO OF RED BRICK(R)]
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)
REGISTRANTS TELEPHONE NO., INCLUDING AREA CODE: (408) 399-3200
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT:
Common Stock, $.0001 par value
Preferred Share Purchase Rights
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of February 28, 1998, was approximately $64,769,340. Shares of
Common Stock held by each officer and director have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
As of February 28, 1998, there were 12,478,650 shares of the Registrants
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to stockholders
in connection with the Annual Meeting of Stockholders to be held May 15, 1998,
are incorporated by reference into Part III.
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RED BRICK SYSTEMS, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
INDEX
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PART I
Item 1. Business............................................................................. 1
Item 2. Properties........................................................................... 17
Item 3. Legal Proceedings.................................................................... 17
Item 4. Submission of Matters to a Vote of Security Holders.................................. 17
Item 4a. Executive Officers of the Registrant................................................. 17
PART II
Item 5. Market for Registrants Common Stock and Related Stockholder Matters.................. 19
Item 6. Selected Consolidated Financial Data................................................. 19
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations. 20
Item 8. Consolidated Financial Statements and Supplementary Data............................. 28
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 49
PART III
Item 10. Directors and Executive Officers of the Registrant................................... 49
Item 11. Executive Compensation............................................................... 49
Item 12. Security Ownership of Certain Beneficial Owners and Management....................... 49
Item 13. Certain Relationships and Related Transactions....................................... 49
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..................... 50
Signatures.................................................................................... 53
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PART I
The discussion in this report contains forward-looking statements that
involve risks and uncertainties. The statements contained in this report that
are not purely historical are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, including statements regarding
the Company's expectations, beliefs, intentions or strategies regarding the
future. All forward-looking statements included in this document are based on
information available to the Company on the date hereof, and the Company
assumes no obligation to update any such forward-looking statement. 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 this item under the heading "Risk Factors
That May Affect Future Results" as well as those discussed elsewhere in this
item or this report, and the risks discussed in the Company's Securities and
Exchange Commission filings.
ITEM 1. BUSINESS
OVERVIEW
Red Brick Systems, Inc. ("Red Brick" or the "Company") designs, develops,
markets and supports data warehousing software. The Company's flagship
product, Red Brick Warehouse, is a high performance, client/server relational
database management system ("RDBMS") software product specifically designed
for data warehousing, data mart, data mining, and on-line analytical
processing ("OLAP") applications. The Company assists customers in designing
and building data warehouse solutions. The Company's software enables IT
professionals and business managers to implement quickly and manage
effectively data warehouse applications and provides decision makers with easy
access to critical information necessary to make more informed decisions.
The Company's products comprise a suite of data warehouse RDBMS servers,
data mining software, data warehouse administration tools and connectivity
software designed to enable organizations to implement data warehouse
solutions across their organizations. The Company's products today incorporate
the three main components of a data warehouse: load processing, warehouse data
management and query processing. In August 1997, the Company purchased in-
process technology that includes data transformation and data analysis
capabilities. The Company is currently working to integrate the in-process
technology into Red Brick Warehouse to create an end-to-end data warehouse
platform.
The Company's client/server based products are designed to support open
industry standards, which provides its customers maximum flexibility in
selecting computing environments and data warehouse tools. The Company markets
its software and related services primarily through a direct sales
organization and through value-added resellers, system integrators, consulting
partners, hardware partners and distributors worldwide. The Company's
customers include: 360 Communications Company, AT&T, Barnes & Noble,
BellSouth, Blue Cross Blue Shield Association Federal Employees Program,
Catalina Marketing, Estee Lauder, Goodyear Tire and Rubber Company, Hewlett-
Packard, Holiday Hospitality Corporation, Mobil Oil, NASA, Pepsi-Cola Company,
Reuters Information Technology, Sara Lee Corporation, Tenneco Packaging, Tufts
Associated Health Plans, and WorldCom.
INDUSTRY BACKGROUND
Business enterprises continually strive to improve the efficiency and
effectiveness of their operations in today's increasingly competitive global
business environment. The pace and complexity of business decision making has
increasingly become a greater challenge for organizations. Decision making
authority has generally become more distributed throughout all levels of an
organization, creating a need by more people to access information used for
making critical business decisions. In adapting to this new business
environment,
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organizations have implemented computer systems and technologies that increase
efficiency through automating transaction processing.
On-line transaction processing ("OLTP") systems are used to automate those
business functions that generate records that can be processed and stored
electronically, such as automatic teller machines, reservation centers and
telephone calls. In today's organizations, many thousands of these
transactions may occur every second of every day, generating vast amounts of
business data. This dramatic increase in the quantity of transaction data has
led to the development of RDBMS technologies designed and optimized for
collecting and storing transaction data.
Organizations seek to make faster, more accurate and more confident business
decisions by effectively using the vast amount of data generated by these OLTP
systems. However, organizations have discovered limitations in using the same
OLTP system for both transaction processing and decision support. For example,
OLTP systems maintain only recent operating data on-line, making real-time
analysis of historical data very difficult. In addition, organizations
maintain separate OLTP systems for each specific business function, such as
purchasing, inventory management and point of sale transactions, making cross-
functional analysis of information contained in these separate databases
problematic. Furthermore, to process hundreds or thousands of transactions per
second, the transaction processing systems store data in formats designed for
transaction performance rather than for use by business people for decision
support. Finally, conducting analysis and transaction processing on the same
system substantially degrades the OLTP systems' performance, jeopardizing the
execution of routine business transactions that are critical to organizations.
As a result, organizations have found it difficult to utilize OLTP systems for
decision support.
To enable more effective decision making, organizations have established
separate, dedicated systems for decision support. However, these organizations
have encountered limitations in applying traditional RDBMS technologies, which
have been optimized for OLTP applications, as their decision support
databases. For example, OLTP RDBMSs have been designed to process thousands of
small, predetermined structured updates every second. Business analysis
applications, on the other hand, require performing relatively few, highly
unstructured, ad-hoc, read-intensive queries per minute. In addition, OLTP
RDBMS technologies have been optimized to access and update a small number of
records with every transaction, whereas a single query for business analysis
could require the access and retrieval of millions of records. OLTP RDBMSs are
optimized for continual collection and processing of transactional data,
whereas decision support systems require a methodology more focused on
extraction and analysis of data. OLTP RDBMSs are unable to store effectively
and manage the vast amounts of historical and cross-functional data required
by a decision support application. For all of the above reasons, it is
difficult to pose and answer business questions using traditional OLTP RDBMS
applications.
To utilize transaction data effectively for better decision making,
organizations require a RDBMS optimized for decision support and maintained
separately from OLTP RDBMSs. These separate RDBMSs, referred to as data
warehouses, must contain weeks, months, and even years of summary and detailed
historical business data that can amount to gigabytes and terabytes of
information necessary for analysis and decision making.
SOLUTION
The Company designs, develops, markets and supports Red Brick Warehouse, an
RDBMS software product optimized to meet the new requirements of data
warehouse, data mart, data mining, and OLAP applications. The Company believes
it was the first to provide an open database product designed specifically for
these applications. The Company has capitalized on more than ten years of
experience in decision support systems and technologies to assist customers in
designing and building data warehouse solutions.
The Company's current products incorporate the three main components of a
data warehouse: load processing, warehouse data management and query
processing. Load processing refers to the loading of information from
disparate OLTP RDBMSs into the data warehouse RDBMS. Warehouse data management
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consists of the administration and management of very large databases for
decision support applications across a network of data warehouses. Query
processing enables users to rapidly retrieve and analyze critical business
information for decision making.
Load Processing--Simplify Data Load Processing and Improve Data Load
Performance. A significant problem for the information technology or MIS
department of an organization is loading data into the warehouse, indexing it
for access, ensuring its quality and performing other operations, such as
summarizing sales by region, during a short period of time when users are not
on the system. The Company's Red Brick Warehouse simplifies and accelerates
this critical process. The Company's load processing subsystem typically
offers load speeds significantly faster than competing products, while at the
same time automatically building indices and summarizations and verifying data
integrity.
Warehouse Data Management--Cost Effectively Store and Manage Very Large
Amounts of Data. Data warehouse solutions typically store very large amounts
of data, are oriented by time, and require periodic, large updates. The
Company's tools and technologies make managing the warehouse simple and cost
effective. Red Brick Warehouse is based on a modular storage model and
provides simplified administrative interfaces and systems management functions
optimized for very large data warehouse environments. The Company's tools and
technologies enable features such as disk failure management, implementation
of backup and restore procedures, movement of data throughout the warehouse
network and end user administration and monitoring.
Query Processing--Quickly and Easily Analyze Large Volumes of Business
Information. Red Brick Warehouse is designed to provide easy, cost effective
access to either a single data warehouse or networked data warehouses of
information for tens to thousands of users. The Company believes that its
solution can substantially improve the quality and timeliness of an
organization's decision making. The Company's solution specifically addresses
the three key aspects required to ensure effective business analysis: posing
questions easily, typically getting answers fast and ensuring that the
underlying data is of the highest quality. The Company's solution can process
business questions significantly faster than traditional OLTP RDBMSs, and
often provides greater performance advantages for more complex questions. The
solution also offers query functions, called RISQL, that allow business
questions to be easily posed and processed and specialized functions that
verify data integrity.
Faster Time to Implementation. The Company capitalizes on more than ten
years of decision support expertise to assist customers in rapidly developing
and implementing Red Brick data warehouse solutions. The Company's
professional services organization focuses on developing data warehouse
database designs for customers, rather than on providing more general
integration services. An understandable, extensible database design is a major
factor in the success of a data warehouse. To further accelerate time to
production, the Company provides language tools that enable quick query
development. In certain industry segments, the Company offers "quick start"
solution kits that include prepackaged designs and business questions that can
be quickly tailored to meet specific customer needs. Finally, the Company's
Partners and Value Extended Reseller ("PaVER") program, which consists of more
than seventy-five companies that support Red Brick Warehouse, gives the
customer the flexibility to choose best of class tools to complete their
client/server data warehouse implementations.
PRODUCTS
The Company provides a suite of data warehouse RDBMS products including data
mining software, data warehouse connectivity software and administration tools
designed to enable organizations to implement data warehouse solutions across
their organizations. Customers are able to access their data warehouses
through private networks and over the world wide web. The Company's products
have been designed to address the three main elements of a data warehouse:
load processing, warehouse data management and query processing. The Company's
products are generally available on industry-leading UNIX platforms, including
Digital, Hewlett-Packard, IBM, and Sun, and on Windows NT. Pricing of the
Company's products depends on a number of
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factors, including the size of the computer system, number of named users and
number of processors. The Company's software products include:
RDBMS Products. The RDBMS products are based on the Red Brick Warehouse
technology and include:
. Red Brick Warehouse. Red Brick Warehouse is an RDBMS product
specifically designed to meet the needs and requirements of a data
warehouse environment. The target environment for Red Brick Warehouse is
symmetric multi-processing server systems, typically at the division or
profit center level within an organization. The Red Brick Warehouse 5.0
release features advances in performance, scalability, and functionality
including data mining functionality fully integrated into the data
warehouse RDBMS engine. Red Brick Warehouse 5.1 was released in January
1998. This release offers new features designed to increase
productivity, reduce overall cost of ownership, and decrease
complexities for data warehouse administration and users. Substantially
all of the Company's installations to date have been with the Red Brick
Warehouse product.
. Red Brick Warehouse for Windows NT. Red Brick Warehouse for Windows NT
is an RDBMS product designed for data warehouse and data mart
applications running on Intel-based Windows NT servers.
. Red Brick Warehouse for Workgroups. Red Brick Warehouse for Workgroups
is a version of the Red Brick Warehouse product designed to be
implemented on single processor systems, typically at the workgroup
level within an organization.
Each of the Company's three RDBMS products can work together in a networked
configuration.
Connectivity Software. The Company offers connectivity software to provide
efficient and effective client/server access to Red Brick Warehouse, ensuring
maximum flexibility in selecting computing environments, as well as
complementing existing investments in information technology. These products
include:
. Red Brick ODBC. Red Brick ODBC is a connectivity software product that
is installed on client machines connected to Red Brick RDBMS and
provides complete access to the Red Brick Warehouse in accordance with
Open Database Connectivity specifications.
Administration Tools. These tools are designed for IT professionals and
business managers within organizations to implement their data warehouse
applications effectively and include:
. Red Brick Vista. Red Brick Vista was released in January 1998 and is a
comprehensive, server-integrated solution for the computation and
management of aggregates, a method of improving performance by pre-
calculating summary information.
. Auto Aggregate Load Option. Auto Aggregate Load Option provides the
capability to create summary records for incoming OLTP data
automatically, and is a tool for accepting or rejecting incoming records
based on pre-determined criteria. This product is now incorporated into
Red Brick Vista.
. RISQL Reporter. RISQL Reporter allows organizations to cope with batch
reporting needs by quickly generating formatted "business intelligence"
reports to enhance the use and understanding of query results. This
product is now incorporated into Red Brick Warehouse 5.1.
. SQL-BackTrack(TM) for Red Brick Warehouse. In January 1998 the Company
began shipping SQL-BackTrack(TM) for Red Brick Warehouse, a backup and
recovery system designed specifically for Red Brick. SQL-BackTrack(TM)
provides for fast, easy, and safe recovery of data warehouse data in the
event of a system failure. This product replaces Backup/Restore.
. Enterprise Control & Coordination. Enterprise Control & Coordination
enables the management of networked data warehouses with integrated and
seamless control and coordination of data across any number of data
warehouses in any location. This product is now incorporated into Red
Brick Warehouse 5.1.
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. Parallel Table Management Utility. Parallel Table Management Utility
allows better utilization of multi-processor hardware systems for data
loading, performs data conversion, index building and verification of
referential integrity, and handles unexpected failure in the middle of
multi-tape load processes, allowing efficient and effective recovery.
. Red Brick Warehouse Administrator. Red Brick Warehouse Administrator is
a graphical Windows-based client tool designed for database
administrators to manage general Red Brick Warehouse 5.1 administration
tasks with an emphasis on segmentation assistance. This product is
integrated with Red Brick Warehouse 5.1, which was released in January
1998.
A typical initial purchase by a customer includes the purchase of one or two
RDBMS product licenses and two or more of the administration tools offered by
the Company. While the tools are not required in an initial data warehouse
implementation, organizations realize the benefits gained by using these tools
in managing and optimizing their data warehouses as they begin to bring their
data warehouse implementations into production and as the number, size and
complexity of their data warehouse implementations grow. Customers are
required to purchase connectivity software, as well as first-year maintenance,
with Red Brick Warehouse, and many customers also purchase new computer
hardware and consulting services from third parties when implementing a data
warehouse. The Company often sells a customer additional data warehouse
applications as the customer implements additional data warehouse systems
across the organization.
TECHNOLOGY
The Company has developed core proprietary technologies that effectively
address the three key components of data warehousing: load processing,
warehouse data management and query processing. The Company has also purchased
in-process technologies from CMG Information Services, Inc. (CMGI) and its
subsidiary, Engage Technologies, Inc. (Engage), for future development efforts
aimed at building a completely integrated data warehouse platform. The
Company's products include the following technologies:
STARindex and STARjoin. STARjoin is a critical technology for Red Brick
Warehouse performance. With STARjoin, multiple relational tables may be joined
at one time in a fast, single-pass operation as compared to conventional
technologies that join tables one pair at a time, requiring the creation of
many temporary tables for complex queries. The STARjoin technology allows Red
Brick Warehouse to join two or more tables in a single step. A typical query
in a Red Brick Warehouse application will join more than five tables in a
single step. The STARjoin algorithm uses the STARindex to accelerate join
processing. The STARindex relates rows in the various tables of a database
using a compact, easily-maintained structure. The STARindex is completely
transparent to end-users and is created and maintained by the database
administrator like any other standard B-Tree index used in most relational
database products.
Parallel Query. Red Brick Warehouse includes complete parallel query
processing technology. On parallel hardware systems, each query is
automatically divided into multiple sub-parts, each of which is processed at
the same time on different processors, which improves query performance time.
Segmented Storage. The Company's Segmented Storage architecture allows
tables and indexes to be distributed intelligently across the many disks that
comprise a large data warehouse. As a result, the database is better
organized, easier to manage, more reliable and provides improved performance.
The ability to manage the sub-components of a very large data warehouse
separately makes the management of terabyte-sized warehouses achievable.
Pipelined Parallel Load. The Load Data function is designed to perform
complete load processing. The loader not only places row data into a target
database table, but also performs data format conversions, referential
integrity checking and multiple index building as one concurrent, integrated
operation. The parallel loader uses an Adaptive Pipeline Parallel technology
that allows each row being loaded to move through a set of steps, with a
different processor performing each step.
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Aggregate Advisor and Query Re-Write. The Aggregate Advisor management and
navigation system can automatically notify warehouse administrators of
appropriate aggregation strategies based on actual warehouse usage, lessening
the amount of time it takes to maintain the warehouse and design an
aggregation strategy. The Query Re-Write capability automatically alters
queries submitted to the warehouse to use available aggregate tables without
requiring the end user to know that the aggregates exist. This allows
administrators to alter aggregation strategies without having to re-train
users or migrate changes to hundreds or thousands of workstations.
RISQL Extensions. Structured Query Language ("SQL") has long been
established as the standard for relational database access. The Company has
implemented a rich set of SQL extensions, called RISQL (Red Brick Intelligent
SQL), which allow Red Brick Warehouse users to ask many practical business
questions that cannot be asked with SQL alone. These RISQL extensions allow
the server to directly process queries involving rankings, moving averages,
running totals and a variety of other important business measures. Using RISQL
extensions, most business queries can be completely processed by the server,
thus eliminating the need for client-side post processing.
TARGETindex. Based in part on bit-mapped index technologies, TARGETindex
provides for very fast selection of groups from large, multi-attribute lists,
such as targeting a micro market from a large customer list.
Fast Group Calculations. Red Brick Warehouse contains technology to process
group calculations in memory. Specialized data structures are used to store
the group results in memory, eliminating significant disk input/output and
processing time.
Dynamic Optimization. Red Brick Warehouse takes a fundamentally different
approach than traditional OLTP RDBMSs to query optimization, using Dynamic
Optimization to repeatedly re-evaluate its query execution strategy while the
query is running to produce substantially better performance.
On Demand Parallel. The Company's On-Demand Parallel query processing
includes special technology that adapts and changes the degree of parallelism
used to dynamically achieve maximum throughput, enhancing optimized
performance in changing multi-user environments with varying workloads.
Integrated Data Mining. Red Brick Data Mine Option is server-based software
fully integrated into the Red Brick Warehouse RDBMS engine. It is used to read
very large volumes of data--hundreds of millions of rows and hundreds of
attributes--to find patterns, trends, and relationships that would be
difficult to find with traditional drill-down querying techniques. Using
models based on these relationships, users are better able to predict the
impact of decisions on their customers, businesses, and markets.
Continually Adaptive Indexing. Red Bricks Continually Adaptive Indexing
extends TARGETindex technology to provide indexes which automatically and
continually adapt to the data that is being indexed. Red Brick Warehouse
automatically selects the optimal index type on a per value, not per index
basis, which enables considerable speed and efficiency gains.
Hybrid Hash Join. Red Bricks Hybrid Hash Join includes sophisticated
optimizations such as full sub-join recursion (needed to efficiently handle
very large joins), role reversal (needed to efficiently join dissimilarly
sized tables) and bit filtering (needed to improve hash join efficiency). For
the end user, Red Bricks advanced hash join can more quickly process queries
against complex schemas.
TARGETjoin. Red Brick Warehouse 5.1 introduces TARGETjoin, a new join
algorithm. TARGETjoin accelerates complex decision support queries through its
parallel bitmap join technology.
CUSTOMERS AND MARKETS
To date, the Company has issued more than 250 software licenses to customers
in a variety of industries. The Company's customers include: 360
Communications Company, AT&T, Barnes & Noble, BellSouth, Blue
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Cross Blue Shield Association Federal Employees Program, Catalina Marketing,
Estee Lauder, Goodyear Tire and Rubber Company, Hewlett-Packard, Holiday
Hospitality Corporation, Mobil Oil, NASA, Pepsi-Cola Company, Reuters
Information Technology, Sara Lee Corporation, Tenneco Packaging, Tufts
Associated Health Plans, and WorldCom.
SALES AND MARKETING
The Company markets its products and services primarily through its direct
sales force and professional services organization. The Company employs highly
skilled engineers and technically proficient sales persons capable of serving
the sophisticated needs of its customers' information and business management
staffs. The Company has domestic sales or support staff located in Arkansas,
California, Colorado, Connecticut, Delaware, Florida, Georgia, Illinois,
Indiana, Maryland, Massachusetts, Michigan, Missouri, New Hampshire, New
Jersey, New Mexico, New York, Ohio, Pennsylvania, Texas, Utah, Virginia, and
Washington, and international offices near London, England, and in Sydney,
Australia, and Tokyo, Japan. In addition to its direct sales efforts, the
Company utilizes advertising, direct mail and public relations programs,
participates in industry trade shows and organizes seminars to promote the
adoption of its products and methodologies.
The Company provides customers maximum flexibility and choice in building
data warehouse applications, and has established a "PaVER" (Partner and Value-
Extended Reseller) Program to foster relationships with third parties whose
products and services are often used in conjunction with Red Brick Warehouse.
The PaVER program provides Red Brick Warehouse customers the ability to
utilize existing technologies or select from a broad group of front-end tools
when implementing data warehouse systems. The Company has more than 75 vendors
in its PaVER Program. During 1996, the Company implemented its PaVER Gold
Program, a technical certification initiative designed to provide Red Brick
Warehouse users with a choice of software products that exploit the
specialized decision support capabilities of Red Brick Warehouse. In the PaVER
Gold program, partners have committed to tight interoperability between their
software products and Red Brick Warehouse, to support future releases of Red
Brick Warehouse within a specified amount of time after each release, and to
establish reciprocal technical support links with the Company to quickly
resolve technical issues with joint customers.
The Company recently expanded its reseller program in the United States,
Canada, Europe, and Asia/Pacific Rim. One of the objectives of the expanded
program is to teach resellers how to identify market opportunities and use the
Company's products, including RDBMS products, connectivity software and
administration tools, to build and deliver data warehouse applications.
Revenues from indirect channels were approximately 15% and 12% of total
revenue in 1997 and 1996, respectively. The Company believes that such
resellers could develop applications for targeted markets, such as healthcare,
manufacturing, finance and banking, insurance, legal, telecommunications and
retail. The Company offers the resellers discounts on products and training,
and field level assistance from the Company's direct sales force.
International revenues consist of export revenues and revenues from the
Company's Australasia subsidiary. The Company's international revenues for the
years ended December 31, 1997, 1996, and 1995, were 17%, 10%, and 8% of total
revenues, respectively. The Company intends to continue to expand its
international operations and to enter additional international markets.
The Company has a captive lease program that operates under the name of Red
Brick Capital to provide customers with financing options for the Company's
products and services. In connection with this program, the Company entered
into a services agreement with Integrated Lease Management ("ILM"), a non-
affiliated leasing group, to provide lease management and lease financing
services. The agreement can be renewed in successive twelve-month periods.
Under the lease program, Red Brick Capital assigns, on a non-recourse basis,
the software finance agreement executed between Red Brick Capital and the end
user customer to certain funders arranged by ILM.
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In July 1997, the Company appointed Anthony Layzell as Vice President,
Marketing. In January 1998, the Company promoted Mr. Layzell to Senior Vice
President, Sales and Marketing and appointed Lawrence Howard as Vice
President, North American Sales, reporting to Mr. Layzell. Also, in January
1998, Alexander Wilson, who had been serving as the Company's Vice President,
Worldwide Sales, resigned from the Company to pursue other interests. During
the past several months, there has been significant turnover in the Company's
direct sales force. This transition in sales and marketing management, as well
as the turnover in the sales force, may have an adverse effect on the
Company's operating results for the quarter ending March 31, 1998, and the
year ending December 31, 1998.
As of December 31, 1997, the Company's sales and marketing staff consisted
of 109 employees. The Company's total expenses for sales and marketing for
fiscal 1997 were approximately $27.0 million.
MAINTENANCE AND SERVICES
The Company believes that providing superior customer service and
implementation expertise is critical for customer success. The Company's
strategy is to deliver technology and services that enable its customers and
partners to implement data warehouse applications quickly. Most of the
Company's customers currently have maintenance agreements that entitle them to
technical support, training and periodic upgrades. The Company also offers
additional training and consulting services on a fee basis.
Technical Support. The Company has established a centralized corporate
technical service group that is supported by the consulting and field
engineering groups. The Company provides customers with a comprehensive array
of services, including software updates, documentation updates, telephone
support, product maintenance, emergency response and access to a product
enhancement request database. The Company offers support programs that include
up to 24 hours a day, 7 days a week telephone support.
Training. The Company offers customer training courses on Red Brick
Warehouse products and database design. Regularly scheduled courses are
offered at the Company's headquarters in Los Gatos, California. Individual
customer courses are provided at the customers facilities.
Consulting. During 1997, the Company significantly expanded its consulting
services organization. The Company offers a variety of solution-oriented
consulting services delivered either by specialists from the Company or
through a network of third-party consultants trained on Red Brick Warehouse.
These services include data warehouse design and modeling, data preparation,
data loading, installation, implementation, systems maintenance and upgrading.
RESEARCH AND DEVELOPMENT
The Company has made substantial investments in research and development.
The Company believes that its future performance will depend in large part on
its ability to maintain and enhance its current product line, develop new
products that achieve market acceptance, maintain technological
competitiveness and meet an expanding range of customer requirements. The
Company intends to expand its existing product offerings and to introduce new
products for the data warehouse software market. Although the Company expects
that certain of its new products will be developed internally, the Company
may, based on timing and cost considerations, acquire technology or products
from third parties.
On August 29, 1997, the Company executed a technology purchase agreement
with CMGI and Engage, whereby the Company acquired the in-process source code
and related documentation to the Engage software technology "Engage.Fusion"
and "Engage.Discover," and such products' shared, object-oriented, metadata
facility, all of which are currently technology under development. The Company
plans to use this acquired in-process technology in its future development
efforts aimed at building a completely integrated data warehouse platform. In
the third quarter of 1997 the Company took a charge of approximately $11.0
million for in-process technology based upon an independent appraisal. The
Company paid CMGI $9.5 million in cash and issued to
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CMGI 238,160 shares of unregistered common stock. At the time of the purchase,
the acquired in-process technology had not yet reached technological
feasibility and did not have alternative future uses.
The Company currently plans to release new versions of its Red Brick
Warehouse periodically and to continue to develop new administration tools to
be used with Red Brick Warehouse; however, there can be no assurance such new
versions or administration tools will be released. These potential new
versions and administration tools, as well as the products to be developed
based on the acquired in-process technology, are subject to significant
technical risks. The Company may experience delays in the commencement of
commercial shipments of potential new versions, administration tools, and new
products resulting in delay or loss of product revenues. If the potential new
versions of Red Brick Warehouse or the potential new application tools do not
achieve market acceptance, or the Company is unable, for technological or
other reasons, to develop, introduce and sell such versions, application
tools, or new products in a timely manner, the Company's business, operating
results and financial condition will be materially adversely affected.
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 in the past discovered software errors in certain of
its new products after their introduction. When the Company discovers a
software error in a product, the Company's customer service and research and
development organizations typically work with the customer in an attempt to
resolve the problem. In most cases, the Company can provide a solution over
the phone. Occasionally, a Company representative may visit a customer site to
assist the customer in solving the problem. 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, administration tools, or new products after commencement of
commercial shipments, resulting in loss of or delay in market acceptance,
which could have a material adverse effect upon the Company's business,
operating results and financial condition.
As of December 31, 1997, the Company's research and development staff
consisted of 76 employees. The Company's total expenses for research and
development for fiscal 1997 were $10.0 million. To date, the Company's
development efforts have not resulted in any capitalized software development
costs.
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, Informix Corporation, Sybase,
Inc., International Business Machines Corporation, and NCR Corporation
(Teradata). In addition, because there are relatively low barriers to entry
for certain components within the software market, the Company expects
additional competition from other established and emerging companies if the
data warehouse market continues to develop and expand. The Company believes
that the principal competitive factors affecting its market include first-to-
market product capabilities, product performance, price, support of industry
standards, ease of use, and customer and technical support and service.
Although the Company believes that its products currently compete favorably
with respect to such factors, there can be no assurance that the Company can
maintain its competitive position against current and potential competitors,
especially those with significantly greater financial, marketing, service,
support, technical and other resources.
Most of the Company's competitors have longer operating histories,
significantly greater financial, technical, marketing and other resources than
the Company, 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 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.
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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.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
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 has filed provisional patent applications in the
United States with respect to certain aspects of its software. None of these
patents have been issued and there can be no assurance that a patent or
patents will be issued pursuant to any of these applications or that, if
granted, such patent or patents would survive a legal challenge to its
validity or provide significant protection to the Company. 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. Although the Company has not been notified that the Company's
products infringe the proprietary rights of third parties, 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 material adverse effect upon the Company's business,
operating results and financial condition.
The Company relies upon certain software that it licenses from third
parties, including software that is integrated with the Company's internally
developed software and used in Red Brick Warehouse to perform key functions.
There can be no assurance that these third-party software licenses will
continue to be available to the Company on commercially reasonable terms. The
loss of, or inability to maintain, any such software licenses could result in
delays or reductions of shipments until equivalent software could be
developed, identified, licensed and integrated, which would materially
adversely affect the Company's business, operating results and financial
condition.
EMPLOYEES
As of December 31, 1997, the Company had a total of 291 employees, of which
274 were based in the United States, 4 were based in the United Kingdom, 3
were based in Canada, 5 were based in Japan, and 5 were based in Australia. Of
the total, 109 were engaged in sales and marketing, 76 were in research and
development, 59 were in customer service organizations, and 47 were in
finance, administration, and operations. As noted above, there has been
transition in the Company's sales and marketing management, as well as
significant
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turnover in the direct sales force. This transition may have an adverse effect
on the Company's operating results for the quarter ending March 31, 1998, and
for the fiscal year ending December 31, 1998. The Company's future performance
depends in significant part upon the continued service of its key technical,
sales and senior management personnel, none of whom is bound by an employment
agreement. The loss of the services of one or more of the Company's key
employees could have a material adverse effect on the Company's business,
operating results, and financial condition. The Company's future success also
depends on its continuing ability to attract, train, and retain highly
qualified technical, sales, and managerial personnel. 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. None of the Company's employees is
represented by a labor union. The Company has not experienced any work
stoppages and considers its relations with its employees to be good.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to the other information in this report, the following risk
factors should be considered carefully in evaluating the Company and its
business:
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 enabling 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 adverse impact on operating results 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 (loss) 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. The
Company's operating results were below the expectations of financial analysts
and investors for the quarter ended March 31, 1997, resulting in a significant
decrease in the Company's stock price. The Company's operating results may be
below analysts and investors expectations in some future quarters. 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.
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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, Informix, Sybase, IBM, and
NCR/Teradata. In addition, because there are relatively low barriers to entry
in some components of the software market, the Company expects additional
competition from other established and emerging companies as 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.
Intense competition in the database market in which the Company competes may
put pressure on the Company to reduce prices on certain products, particularly
where certain vendors offer significant discounts in an effort to recapture or
gain market share. In addition, the bundling of software products for
promotional purposes or as a long-term pricing strategy by certain of the
Company's competitors could have the effect over time of significantly
reducing the prices that the Company can charge for its products. Any such
price reductions could have a material adverse effect on the Company's
business, results of operations or financial condition if the Company cannot
offset these price reductions with a corresponding increase in sales volumes.
Sales and Marketing Repositioning. The Company has implemented changes in
the sales and marketing organizations, including changes to the sales and
marketing management, an increased focus on partnership relationships and
indirect sales, and positioning the Company as a leading provider of an
integrated high-performance data warehouse platform. Although such changes are
intended to enhance overall revenues, such changes could materially and
adversely affect the sales process and revenues. In January 1998, the Company
promoted Anthony Layzell to Senior Vice President, Sales and Marketing and
appointed Lawrence Howard as Vice President, North American Sales, reporting
to Mr. Layzell. Also, in January 1998, Alexander Wilson who had been serving
as the Company's Vice President, Worldwide Sales, decided to leave the Company
and there has been significant turnover in the Company's direct sales force.
The Company believes there may be a transition period before the new sales
management team and sales representatives become fully productive. The Company
may make other management and organization changes in the future.
Organizational and management changes are intended to enhance productivity and
competitiveness; however, such changes may not produce the desired results and
could have a material adverse affect on productivity, expenses and revenues,
particularly over the next several quarters. As a result, the Company's
operating results over the next several quarters may be less predictable than
in the past.
Potential Volatility of Stock Price. The trading price of the Company's
Common Stock is highly volatile, trading as high as $60.75 and as low as
$5.38, since the Company's initial public offering in January 1996, 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
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technology companies. Market fluctuations may adversely affect the market
price of the Company's Common Stock. There can be no assurance that trading
prices of the Company's common stock will be sustained.
Dependence on New Products and Rapid Technological Change; Feasibility of
In-Process Technology. 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.
The Company is currently working to integrate the in-process technology it
acquired from Engage into Red Brick Warehouse to create a completely
integrated data warehouse platform. This development effort involves complex
tasks and may take several quarters to complete. There can be no assurance
that the Company will be able to complete the development of such an end-to-
end data warehouse platform in a timely basis, or at all, that such platform
will operate as expected, or that the Company will be able to successfully
market and license such platform. The occurrence of any of these events would
have a material adverse effect on the Company's business, operating results,
and financial condition.
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 material
adverse effect on 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 agreement. The Company has
experienced transition at the executive management level. In September 1997,
Robert C. Hausmann, who had been serving as the Company's Vice President,
Finance and Administration, Chief Financial Officer, and Secretary, decided to
leave the Company to pursue other interests. In December 1997 the Company
appointed Margaret Brauns as Vice President, Finance, Chief Financial Officer,
and Secretary. In addition, there have been several changes in the sales and
marketing management, as noted above. The Company believes that there may be a
transition period before the new management team becomes fully productive. If
so, the Company's operating results could be materially adversely affected.
The loss of the services of one or more of the Company's key employees in the
future could have a material adverse effect on the Company's business,
operating results, and financial condition. The Company's future success also
depends on its continuing ability to attract, train, and retain highly
qualified technical, sales, and managerial personnel. The Company plans to
hire a number of additional sales and technical
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personnel in 1998. 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 sales and technical personnel
in 1997 and 1996, the Company experienced difficulty in recruiting a
sufficient number of sales and technical personnel during these 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.
Limited Profitability; Accumulated Deficit; Future Operating Results
Uncertain. As of December 31, 1997, the Company had an accumulated deficit of
$26.5 million. The Company was not profitable in 1997 and was only marginally
profitable in 1996. There can be no assurance that the Company will be
profitable on a quarterly basis or on an annual basis in the future. 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 successfully complete development of
in-process technology acquired, 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.
Product Concentration. Substantially all of the Company's revenues have been
attributable to sales of licenses of Red Brick Warehouse and the related
maintenance and service contracts. This product is currently expected to
account for a significant part of the Company's revenues for the foreseeable
future. As a result, a decline in demand for, or failure to achieve broad
market acceptance of, Red Brick Warehouse as a result of competition,
technological change or otherwise, would have a materially adverse effect on
the business, operating results, and financial condition of the Company. A
decline in sales of Red Brick Warehouse would also have a materially adverse
effect on licensing of other Company products that may be licensed to Red
Brick Warehouse customers. The Company's future financial performance will
depend in part on the successful development, introduction, and customer
acceptance of new and enhanced versions of Red Brick Warehouse and other
products. There can be no assurance that the Company will continue to be
successful in marketing Red Brick Warehouse or any new or enhanced products.
Litigation. On March 25, 1998, two purported class action lawsuits were
filed in the United States District Court for the Northern District of
California by or on behalf of persons who purchased the Company's Common Stock
between January 15, 1997 and April 15, 1997. These actions name as defendants,
among others, the Company and certain of its present and former officers and
directors. The complaints allege various violations of the federal securities
laws and seek unspecified monetary damages. The Company believes both
complaints are without merit and will vigorously defend itself against both
complaints. The pending litigation against the Company and any future
litigation against the Company or its employees, regardless of the outcome,
may result in substantial costs and expense to the Company and significant
diversion of effort by the Company's technical and management personnel. Any
such litigation could have a material adverse effect on the Company's
business, operating results or 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 and existing customers expanding their use of 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.
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Interoperability. The Company's results will also depend on the ability of
its products to interoperate with existing and future leading, industry-
standard application software products intended to be used in connection with
RDBMSs. Failure to meet existing or future interoperability requirements of
certain independent vendors marketing such applications in a timely manner
could adversely affect the market for the Company's products. Certain leading
applications may not be interoperable with Red Bricks RDBMS until certain
features are added to the Company's RDBMS, which may never occur.
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. For example, in both the second and third quarters of
1997, one customer accounted for 16% and 12% of total revenue for the quarter,
respectively, and in the fourth quarter of 1997, two transactions accounted
for 43% of the software license revenue. There can be no assurance that any
customer or reseller will continue to purchase the Company's products. The
loss of a major customer or reseller or any reduction in orders by such
customers or resellers, including reductions due to market or competitive
conditions, would have a material adverse effect on the Company's business,
financial condition, and results of operations.
Year 2000. The Company has designed and tested the latest versions of its
products to be Year 2000 compliant. There can be no assurances however, that
the Company's current products do not contain undetected errors or defects
associated with year 2000 date functions that may result in material costs to
the Company. Some commentators have stated that a significant amount of
litigation will arise out of year 2000 compliance issues. Because of the
unprecedented nature of such litigation, it is uncertain whether or to what
extent the Company may be affected by such issues. Although the Company is not
aware of any material operational issues or costs associated with preparing
its internal systems for the year 2000, there can be no assurances that the
Company will not experience serious unanticipated negative consequences and/or
material costs caused by undetected errors or defects in the technology used
in its internal systems.
Expansion of Indirect Channels. An integral part of the Company's strategy
is to further develop a channel of distributors, value added resellers (VARs),
application partners, 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 in developing 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, application partners, 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, application
partners, 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 impacted due to
the lower unit prices the Company expects to receive when selling through
indirect channels.
Management of Changing Business. The Company experienced growth in its
employee base and in its revenue during 1997 and 1996 that placed a 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 material adverse effect on the Company's business, operating
results, and financial condition.
International Operations. The Company's international revenues in 1997 and
1996 accounted for 17% and 10% of total revenues, respectively. The Company
intends to continue to expand its existing 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.
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In order to expand international sales successfully, the Company believes it
may need to 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 operations and financial results could
be significantly affected by factors associated with international operations,
including, without limitation, the general economic conditions in each country
and uncertainties relative to regional economic circumstances, slower adoption
of information technology, changes in foreign currency exchange rates,
political instability in emerging markets and difficulties in staffing and
managing foreign operations, as well as other risks associated with
international activities. 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, unexpected changes in the economic condition of foreign
countries, and the burdens of complying with a wide variety of foreign laws.
There can be no assurance that such factors will not have a material adverse
effect on the Company's future international sales and, consequently, the
Company's results of operations.
Limited Protection of Proprietary Technology; Risks of Infringement. The
Company relies primarily on a combination of copyright and trademark laws,
trade secrets, confidentiality procedures, and contractual provisions to
protect its proprietary technology. For example, the Company licenses rather
than sells its software and requires licensees to enter into license
agreements, which impose certain restrictions on licensees' ability to utilize
the software. In addition, the Company seeks to avoid disclosure of its trade
secrets, including, but not limited to, requiring those persons with access to
the Company's proprietary information to execute confidentiality agreements
with the Company and restricting access to the Company's source code. The
Company seeks to protect its software, documentation, and other written
materials under trade secret and copyright laws, which afford only limited
protection. The Company has filed provisional patent applications in the
United States with respect to certain aspects of its software. None of these
patents have been issued and there can be no assurance that a patent or
patents will be issued pursuant to any of these applications or that, if
issued, such patent or patents would survive a legal challenge to its validity
or provide significant protection to the Company. 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, including any future
products based on in-process technology acquired. 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 consume time, result
in costly litigation, cause product shipment delays, or require the Company to
enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to the
Company, or at all, which could have a material adverse effect on the
Company's business, operating results and financial condition.
The Company relies upon certain software that it licenses from third
parties, including software that is integrated with the Company's internally
developed software and used in Red Brick Warehouse to perform key functions.
There can be no assurance that these third-party software licenses will
continue to be available to the Company on commercially reasonable terms. The
loss of, or inability to maintain, any such software licenses could result in
shipment delays or reductions until equivalent software could be developed,
identified, licensed
16
<PAGE>
and integrated, which would materially adversely affect the Company's
business, operating results and financial condition.
Product Liability. The Company's license agreements with its customers
typically contain provisions designed to limit the Company's exposure to
potential product liability claims. Although the Company has not experienced
product liability claims to date, the license and support of products by the
Company may entail the risk of such claims. A successful product liability
claim brought against the Company could have a material adverse effect on the
Company's business, operating results, and financial condition.
ITEM 2. PROPERTIES
The Company's principal administrative, sales, marketing, support, and
research and development facility is located in Los Gatos, California. The
Company has operating leases for this office space totaling approximately
56,000 square feet that expires in December 2002. The Company believes that
suitable additional or alternative space will be available in the future on
commercially reasonable terms as needed. The Company has an additional
research and development facility in approximately 13,800 square feet in
Andover, Massachusetts. The lease on this facility expires in July 2002. The
Company currently leases other domestic sales offices throughout the United
States, as well as international offices in the United Kingdom, Australia, and
Japan.
ITEM 3. LEGAL PROCEEDINGS
On March 25, 1998, two purported class action lawsuits were filed in the
United States District Court for the Northern District of California by or on
behalf of persons who purchased the Company's Common Stock between January 15,
1997 and April 15, 1997. These actions name as defendants, among others, the
Company and certain of its present and former officers and directors. The
complaints allege various violations of the federal securities laws and seek
unspecified monetary damages. The Company believes both complaints are without
merit and will vigorously defend itself against both complaints.
Other than the event disclosed above, there are no pending material legal
proceedings, other than ordinary routine litigation incidental to the
business, to which the Company or any of its subsidiaries is a party or of
which any of their property is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during
the fourth quarter of fiscal year 1997.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth certain information regarding the executive
officers of the Company as of February 28, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Christopher G. 49 President, Chief Executive Officer and Chairman
Erickson............. of the Board of Directors
Margaret R. Brauns.... 43 Vice President, Finance, Chief Financial Officer
and Secretary
Phillip M. Fernandez.. 37 Senior Vice President, Products and Services
Lawrence L. Howard.... 54 Vice President, North American Sales
Anthony W. Layzell.... 56 Senior Vice President, Sales and Marketing
</TABLE>
Mr. Erickson joined the Company in February 1993 as president and Chief
Executive officer and as a member of the Board of Directors. In September
1995, Mr. Erickson was also elected Chairman of the Board of
17
<PAGE>
the Company. From November 1980 to January 1993, Mr. Erickson was employed by
Tandem Computers Incorporated (Tandem), a manufacturer of computers and
related products, where he served as president of Tandem Telecommunications
Systems and most recently as Vice President and General manager, Tandem,
Telecom Division. Mr. Erickson holds a B.A. in economics from the University
of California, Santa Barbara, and an M.B.A. from the University of California,
Berkeley.
Ms. Brauns joined the Company in December 1997 as Vice President, Finance,
Chief Financial Officer, and Secretary. From May 1990 to October 1997, Ms.
Brauns was employed by Informix Corporation, a database software company, most
recently as Vice President and Treasurer. Ms. Brauns holds a B.A. in liberal
arts from Temple University and an MBA from The Wharton School of the
University of Pennsylvania.
Mr. Fernandez joined the Company in December 1991 as Vice President,
Engineering. In November 1996, Mr. Fernandez was promoted to Senior Vice
President, Products and Services. From March 1989 to November 1991, Mr.
Fernandez was employed by Metaphor Computer Systems, a computer software
company, most recently as Director, Systems Software Development. Mr.
Fernandez holds a B.A. in history from Stanford University.
Mr. Howard joined the Company in January 1998 as Vice President, North
American Sales. From January 1996 to January 1998, Mr. Howard was the
President and Chief Executive Officer of OrbitSoft 2000, Inc., a software
development services company. From January 1995 to January 1996, Mr. Howard
was employed by Ascent Logic Corporation, a systems engineering software
company, as the General Manager, C/S Strategic Business Unit. From March 1994
to January 1995, Mr. Howard was an independent consultant working with various
software companies. From May 1992 to March 1994, Mr. Howard was employed by
Unify Corporation, a client/server software company, as Senior Vice President,
Sales and Marketing. Mr. Howard holds a B.S. in mechanical engineering from
the University of Kansas and an MBA from the University of Florida.
Mr. Layzell joined the Company in July 1997 as Vice President, Marketing,
and in January 1998, was promoted to Senior Vice President, Sales and
Marketing. From July 1996 to June 1997, Mr. Layzell was an independent
consultant. From September 1993 to June 1996, Mr. Layzell was employed by
Andersen Consulting, a provider of consulting services, where he served as
Executive Director/Associate Partner. Prior to that, Mr. Layzell was employed
by James Martin Associates, an application development tool software company,
from June 1989 to August 1993, as products Division/Deputy Group Managing
Director. Mr. Layzell holds advanced certificates in technology, mechanical
and civil engineering from Kingston University in England and is a chartered
professional engineer.
18
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been traded on the Nasdaq National Market
under the symbol REDB since the Company's initial public offering on January
22, 1996. According to the records of the Company's transfer agent, the
Company had approximately 177 stockholders of record as of February 28, 1998.
The following table sets forth the high and low sale price as of the close of
market of the Company's Common Stock in each of the Company's last eight
fiscal quarters.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
FISCAL 1997:
First Quarter............................................... $24.88 $14.00
Second Quarter.............................................. $11.00 $ 5.88
Third Quarter............................................... $11.00 $ 6.63
Fourth Quarter.............................................. $ 9.63 $ 5.38
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
FISCAL 1996:
First Quarter (from January 22, 1996)....................... $53.75 $18.00
Second Quarter.............................................. $60.75 $33.50
Third Quarter............................................... $35.25 $19.00
Fourth Quarter.............................................. $27.50 $18.75
</TABLE>
The Company has not paid any cash dividends since its inception and does not
intend to pay any cash dividends in the foreseeable future.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995 1994 1993
-------- ------- ------- -------- --------
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE
DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue................ $ 43,315 $36,035 $20,605 $ 8,502 $ 2,564
Income (loss) from
operations.................. (18,717) 1,537 579 (1,416) (2,862)
Net income (loss)............ (18,023) 3,818 308 (1,481) (2,935)
Basic earnings (loss) per
share (1)................... (1.55) 0.37 0.22 n/a n/a
Diluted earnings (loss) per
share (1)................... (1.55) 0.30 0.04 n/a n/a
Shares used to compute basic
earnings (loss) per share
(1)......................... 11,663 10,357 1,407 n/a n/a
Shares used to compute
diluted earnings (loss) per
share (1)................... 11,663 12,643 8,635 n/a n/a
BALANCE SHEET DATA:
Cash and cash equivalents.... $ 12,358 $14,552 $ 2,998 $ 1,958 $ 2,747
Working capital.............. 26,132 40,308 2,613 1,554 3,553
Total assets................. 43,565 53,368 10,977 6,510 4,887
Long-term obligations........ 60 396 1,068 1,131 194
Accumulated deficit.......... (26,530) (8,507) (12,325) (12,633) (11,152)
Total stockholders' equity... 29,482 42,924 3,720 2,262 3,741
</TABLE>
- --------
(1) Prior to 1995, statement of operations data omit the historical net income
per share, as it was not presented in the initial public offering
registration statement pursuant to SEC guidelines. Pro forma net income
per share is presented for 1995. Amounts for 1996 and 1995 have been
restated to comply with FAS 128 and SAB 98. See Note 1 of Notes to
Consolidated Financial Statements.
19
<PAGE>
ITEM 7. 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 "Results of Operations" "--Revenues," "--Cost of
Revenues," "--Operating Expenses," "--Interest and Other Income (Expense),"
"--Provision for (Benefit from) Income Taxes," "--Minority Interest, Net
Income (Loss) and Net Income (Loss) Per Share," and "Liquidity and Capital
Resources" 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 entitled "Risk Factors
That May Affect Future Results," as well as those risks discussed in this
section and elsewhere in this report.
OVERVIEW
The Company designs, develops, markets and supports Red Brick Warehouse, a
high-performance, client/server RDBMS that is specifically designed for data
warehouse applications. The Company was founded in July 1986 as a consulting
company to address the issues associated with gaining access to large data
stores. During the period from inception to late 1989, the Company developed
various tools and technologies intended to address these issues. In late 1989,
the Company began to develop technology for a new RDBMS focused on decision
support and data warehouse applications. The Company made its initial product
shipments of Red Brick Warehouse in December 1991. Since that time, the
Company has released new versions of Red Brick Warehouse periodically, as well
as administration tools that are sold as options to Red Brick Warehouse. The
Company's administration tools assist IT professionals and business managers
within organizations to implement their data warehouse applications
effectively.
At December 31, 1997, the Company had an accumulated deficit of $26.5
million. There can be no assurance that the Company will be profitable on a
quarterly basis or achieve profitability on an annual basis. The Company's
limited operating history makes the prediction of future operating results
difficult. Although the Company experienced significant percentage growth in
revenues during certain periods in the past, 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.
Substantially all of the Company's revenues have been attributable to sales
of licenses of Red Brick Warehouse and the related maintenance and service
contracts. This product is currently expected to account for a significant
part of the Company's revenues for the foreseeable future. As a result, a
decline in demand for or failure to achieve broad market acceptance of Red
Brick Warehouse as a result of competition, technological change or otherwise,
would have a material adverse effect on the business, operating results, and
financial condition of the Company. A decline in sales of Red Brick Warehouse
would also have a material adverse effect on sales of other Company products
that may be sold to Red Brick Warehouse customers. The Company's future
financial performance will depend in part on the successful development,
introduction, and customer acceptance of new and enhanced versions of Red
Brick Warehouse and other products. There can be no assurance that the Company
will continue to be successful in marketing Red Brick Warehouse or any new or
enhanced products.
The Company believes that its products are priced competitively with most of
its competitors' products. Intense competition in the database market in which
the Company competes may put pressure on the Company to reduce prices on
certain products, particularly where certain vendors offer significant
discounts in an effort to recapture or gain market share. In addition, the
bundling of software products for promotional purposes or as a long-term
pricing strategy by certain of the Company's competitors could have the effect
over time of
20
<PAGE>
significantly reducing the prices that the Company can charge for its
products. Any such price reductions could have a material adverse effect on
the Company's business, results of operations or financial condition if the
Company cannot offset these price reductions with a corresponding increase in
sales volumes.
OUTLOOK
The Company believes that a preference for integrated platforms and
solutions is emerging among data warehouse customers. As the data warehousing
market continues to develop and expand, it has attracted many vendors to enter
the market. The Company believes this proliferation of vendors and products
seems to be elongating the sales cycle and complicating the customer's
decision process regarding the implementation and maintenance of data
warehousing products. The Company believes that, based on its market analysis,
customers want a fully integrated data warehousing solution that provides
customers the ability to cleanse and transform data, load data into the
warehouse and perform decision support analysis on the data in the warehouse.
In order to address this perceived market shift, the Company acquired
certain in-process technology from Engage, a subsidiary of CMGI, in August
1997. This technology provides Red Brick with the technological base necessary
to develop a fully integrated data warehouse platform. The Company continues
development work based on the acquired technology. The Company has redirected
its marketing efforts towards positioning the Company as a leading provider of
an integrated, high-performance data warehouse platform.
The development effort required for this technology involves complex tasks
and may take several quarters to complete. There can be no assurance that the
Company will be able to complete the development of such an end-to-end data
warehouse platform on a timely basis, or at all, or that such platform will
operate as expected, or that the Company will be able to successfully market
and license such platform. The partial or complete failure of the Company to
achieve these product development and marketing goals would have a material
adverse effect on the Company's business, operating results, and financial
condition.
RESULTS OF OPERATIONS
REVENUES
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------
1997 CHANGE 1996 CHANGE 1995
------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Software license....................... $29,234 0% $29,242 86% $15,742
Percentage of total revenues........... 67% 81% 76%
Maintenance and service................ $14,081 107% $ 6,793 40% $ 4,863
Percentage of total revenues........... 33% 19% 24%
Total revenues....................... $43,315 20% $36,035 75% $20,605
</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. Through December 31, 1997, the Company recognized
revenue in accordance with the American Institute of Certified Public
Accountants Statement of Position ("SOP") No. 91-1, 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. In 1997, the American Institute of
Certified Public Accountants issued SOP No. 97-2, "Software Revenue
Recognition." SOP 97-2 will be effective for the
21
<PAGE>
Company beginning in fiscal 1998. The Company will recognize its revenue for
1998 and beyond in compliance with the new SOP. The Company is evaluating the
requirements of the new SOP and the effects, if any, on the Company's current
revenue recognition policy.
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
enabling data warehouse applications, and typically has a selling price in
excess of $100,000. Software license revenues were flat from 1996 to 1997. The
Company's software license revenue in the first quarter of 1997 was
significantly less than financial analysts' expectations when license revenue
declined 31% for the quarter ended March 31, 1997, from that of the same
period in the prior year and declined 56% from the sequential quarter.
Software license revenue increased over the comparable period in the prior
year 15% and 11% for the quarters ended June 30, 1997 and September 30, 1997,
respectively and was flat for the quarter ended December 31, 1997. In both the
second and third quarters of 1997, one customer accounted for 16% and 12% of
total revenue for the quarter, respectively. In the fourth quarter of 1997,
two transactions accounted for 43% of the software license revenue. There can
be no assurance that the Company will continue to receive such significant
customer orders in the future.
The increase in software license revenue in 1996 from 1995 was primarily
attributable to an increase in the number of units sold.
The Company intends to continue to enhance its current software products, as
well as to develop new products. The Company expects that prior growth rates
of the Company's software license revenues, particularly those growth rates
experienced in years prior to 1997, will not be sustainable in the future. See
Risk Factors That May Affect Future Results in Item 1.
The Company's indirect channels accounted for approximately 15% and 12% of
total revenue in 1997 and 1996, respectively. The Company is currently
investing, and intends to continue to invest, significant resources in
developing indirect channels, which could adversely affect the Company's
operating results if the Company's efforts do not generate additional license
revenues. There can be no assurance that the Company will be able to attract
distributors, VARs and system integrators that will be able to market the
Company's products effectively and will be qualified to provide timely and
cost-effective customer support and service. The inability to recruit
important distributors, VARs or system integrators could adversely affect the
Company's results of operations. In addition, if the Company is successful in
selling its products through this channel, the Company expects that any
material increase in the Company's indirect sales as a percentage of total
revenues will adversely affect the Company's average selling prices and gross
margins due to the lower unit prices that the Company receives when selling
through indirect channels.
Maintenance and Service Revenues. The growth in maintenance and service
revenues in 1997 and 1996 is primarily attributable to the renewal of
maintenance contracts after the initial one-year term and additional
professional services engagements. The Company has invested considerable
resources enhancing its consulting staff and consulting capabilities. As a
result, the Company received several significant consulting assignments during
1997. The Company expects that prior growth rates of the Company's maintenance
and service revenues will not be sustainable in the future.
For the years ended December 31, 1997 and 1996, sales to no one customer
accounted for more than 10% of total revenues. For the year ended December 31,
1995, sales to one customer accounted for 21% of total revenues. 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.
22
<PAGE>
The Company's international revenues for the years ended December 31, 1997,
1996, and 1995, were 17%, 10%, and 8% of total revenues, respectively. The
Company intends to continue to expand its international operations and to
enter additional international markets.
COST OF REVENUES
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------
1997 CHANGE 1996 CHANGE 1995
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Software license.......................... $1,503 32% $1,136 66% $ 685
Percentage of total revenues.............. 3% 3% 3%
Maintenance and service................... $8,438 151% $3,357 108% $1,615
Percentage of total revenues.............. 19% 9% 8%
Total cost of revenues.................... $9,941 121% $4,493 95% $2,300
Percentage of total revenues.............. 23% 12% 11%
</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 cost of software licenses in 1997 over 1996 is
primarily related to increased shipping costs as the Company expanded
internationally, increased printing and duplication costs as its products
become more complex to include more functionality and are ported to more
operating systems, and royalties to third parties related to increased sales
of the data mining products. These increases in cost of software licenses were
partially offset by decreases in the amount of royalties the Company paid to
Sybase in 1997 due to the termination of the license agreement. The increase
in cost of software license revenues in 1996 over 1995 reflected the higher
volume of product shipped. The Company believes that the cost of software
license revenues, particularly royalties to third party vendors, will increase
in dollars and may increase as a percentage of revenues during 1998.
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 has increased each year from the year ended
December 31, 1995 through the year ended December 31, 1997 as a result of
increased personnel-related costs as the Company continued to expand its
customer service organizations to support the increase in service revenue. In
1997, the Company sought to expand its consulting capabilities in response to
perceived customer needs. The Company believes that the cost of maintenance
and service revenues will increase in dollars and may increase as a percentage
of revenues in the future as the Company continues to build its customer
service organizations.
OPERATING EXPENSES
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------
1997 CHANGE 1996 CHANGE 1995
------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Sales and marketing.................... $26,955 32% $20,410 85% $11,011
Percentage of total revenues........... 62% 57% 53%
Research and development............... $ 9,960 59% $ 6,256 24% $ 5,033
Percentage of total revenues........... 23% 17% 24%
General and administrative............. $ 4,192 48% $ 2,839 69% $ 1,682
Percentage of total revenues........... 10% 8% 8%
In-process technology.................. $10,984 * $ 500 * $ --
Percentage of total revenues........... 25% 1% *
Total operating expenses............... $52,091 74% $30,005 69% $17,726
Percentage of total revenues........... 120% 83% 86%
</TABLE>
- --------
* Not meaningful
23
<PAGE>
Sales and Marketing. Sales and marketing expenses consisted primarily of
personnel-related costs, including sales commissions for all personnel
involved in the sales process, as well as promotional expenses including
design and printing of collateral, educational seminars, trade shows, and
advertising. Sales and marketing expenses increased in 1997 over 1996
primarily due to increased staffing of the Company's sales and marketing
operations, costs associated with the infrastructure of the Company,
educational seminars to generate leads, and design and other fees related to
the Company's efforts to reposition itself as a leading provider of an
integrated high-performance end-to-end data warehouse solution. The 1996 over
1995 increase in sales and marketing expenses were primarily due to the
expansion of the Company's sales operations and increased marketing
activities, including promotional expenses. The Company believes that such
expenses will increase in dollar amount and may increase as a percentage of
revenues 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, development
equipment costs, including depreciation, and amortization of the intangible
asset related to the acquisition of the Engage software technology (See "In-
Process Technology" below.) The increase in research and development expenses
in 1997 over 1996 was primarily attributable to the increased staffing of
software engineers and the purchase of software licenses required to expand
and enhance the Company's product line. The increase in 1996 over 1995
research and development expenses primarily related to increased staffing of
software engineers. The Company believes that research and development
expenses will continue to increase in dollar amount in the future and may
increase as a percentage of total revenue.
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 December 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 operations.
General and Administrative. General and administrative expenses consisted
primarily of personnel costs for finance and general management, fees for
professional services, and the provision for the allowance for doubtful
accounts. The increase in general and administrative expenses in 1997 and 1996
over the prior years was primarily attributable to increased staffing and
professional fees necessary to manage and support the 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 and adds infrastructure.
In-Process Technology. On August 29, 1997, the Company executed a technology
purchase agreement with CMGI and Engage whereby the Company acquired the
source code and related documentation to the Engage software technology
"Engage.Fusion" and "Engage.Discover," and such products' shared, object-
oriented, metadata facility, all of which are currently technology under
development. In the third quarter of 1997 the Company recorded a charge of
approximately $11.0 million for in-process technology based upon an
independent appraisal. The Company paid CMGI $9.5 million in cash and issued
to CMGI 238,160 shares of unregistered common stock. The acquired in-process
technology had not yet reached technological feasibility and did not have
alternative future uses. The Company estimates that a total investment of
approximately $4,800,000 in research and development over the next fifteen
months will be required to complete the in-process research and development.
The Company is currently working to integrate the in-process technology it
acquired from Engage into Red Brick Warehouse to create an end-to-end data
warehouse platform. This development effort involves complex tasks and may
take several quarters to complete. There can be no assurance that the Company
will be able to complete the development of such an end-to-end data warehouse
platform on a timely basis, or at all, that such platform will operate as
expected, or that the Company will be able to successfully market and license
such platform. The occurrence of any of these events would have a material
adverse effect on the Company's business, operating results, and financial
condition.
24
<PAGE>
In the second quarter of 1996 the Company acquired in-process technology
associated with a $500,000 licensing arrangement. At the time of acquisition,
the acquired in-process technology had not yet reached technological
feasibility and did not have alternative future uses.
INTEREST AND OTHER INCOME (EXPENSE)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1997 CHANGE 1996 CHANGE 1995
------ ------ ------ ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest and other income (expense), net..... $1,767 17% $1,509 * $(128)
</TABLE>
- --------
* Not meaningful
Interest and other income (expense) primarily represents interest income
earned on the Company's cash, cash equivalents, and short-term investments.
Interest and other income for 1997, 1996 and 1995 was $1,891,000, $1,743,000,
and $94,000, respectively. The increase in interest and other income in 1997
from 1996 primarily relates to compounding of interest on higher cash and
investments balances throughout the year prior to the use of cash to purchase
certain assets and technology from Engage. Interest and other income increased
during 1996 due to the investment of the proceeds received from the Company's
initial public offering. Interest and other expense for 1997, 1996 and 1995
was $124,000, $234,000, and $222,000, respectively. The decrease in interest
and other expense in 1997 over 1996 is primarily due to paying down capital
lease lines.
The Company has experienced virtually no gains or losses on foreign currency
translation since substantially all of its international sales to date have
been billed and collected in U.S. dollars. The Company pays the expenses of
its international operations in local currencies and does not engage in
hedging transactions with respect to such obligations.
PROVISION FOR (BENEFIT FROM) INCOME TAXES
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1997 CHANGE 1996 CHANGE 1995
------ ------ ----- ------ ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Provision for (benefit from) income taxes...... $1,203 * $(687) * $143
</TABLE>
- --------
* Not meaningful
The 1997 income tax provision of $1,203,000 includes approximately $203,000
in current income taxes, consisting principally of foreign withholding taxes
and other foreign income taxes, and a $1,000,000 deferred tax provision to
establish a valuation allowance with respect to the net deferred tax assets.
The 1996 income tax benefit reflected the original recognition of the
$1,000,000 in deferred tax assets. The Company has provided a full valuation
allowance against its net deferred tax assets at December 31, 1997 due to
uncertainties surrounding its realization.
After adjusting for the deferred tax assets, the tax provisions recorded in
1997, 1996 and 1995 have primarily consisted of foreign withholding taxes,
current foreign income taxes and domestic minimum taxes.
As of December 31, 1997, the Company had federal and state net operating
loss carryforwards of approximately $12.0 million and $5.5 million,
respectively, and federal and state research credit carryforwards of $650,000
and $450,000, 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 1999
through 2012.
25
<PAGE>
MINORITY INTEREST, NET INCOME (LOSS), AND EARNINGS (LOSS) PER SHARE
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1997 CHANGE 1996 CHANGE 1995
------------ ---------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Minority Interest....... $ 130 53% $ 85 * $ --
Percentage of total
revenues............... * * *
Net income (loss)....... $ (18,023) * $ 3,818 1,140% $ 308
Percentage of total
revenues............... (42%) 11% 1%
Basic earnings (loss)
per share.............. $ (1.55) * $ 0.37 68% $ 0.22
Diluted earnings (loss)
per share.............. $ (1.55) * $ 0.30 650% $ 0.04
</TABLE>
- --------
* Not meaningful
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Working capital............................................. $26,132 $40,308
Cash and cash equivalents and short-term investments........ $26,909 $35,151
</TABLE>
Working capital decreased at December 31, 1997 from that at December 31,
1996, primarily due to decreases in cash related to the acquisition of in-
process technology and other assets from CMGI, and increases in deferred
revenue and accrued expenses.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996 1995
------- -------- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Cash provided by (used in) operating activities... $ 1,083 $ (158) $ 796
Cash used in investing activities................. $(5,338) $(22,357) $(112)
Cash provided by financing activities............. $ 2,061 $ 34,069 $ 356
</TABLE>
For the year ended December 31, 1997, net cash provided by operating
activities resulted primarily from an increase in deferred revenue, partially
offset by the net loss adjusted for non-cash items, including the in-process
technology. For the year ended December 31, 1996, net cash used in operating
activities resulted primarily from an increase in accounts receivable and
deferred tax asset partially offset by increases in accrued expenses and
compensation and deferred revenue, and by net income adjusted for non-cash
items. For the year ended December 31, 1995, net cash provided by operations
was primarily from net income adjusted for non-cash items and increases in
accrued expenses and compensation, deferred revenue, and accounts payable
partially offset by an increase in accounts receivable.
For the year ended December 31, 1997, the Company's investing activities
consisted of the acquisition of certain assets and in-process technology and
purchases of property and equipment, offset by net sales of investment grade,
interest-bearing securities. For the year ended December 31, 1996, the
Company's investing activities consisted of purchases of investment grade,
interest-bearing securities, as well as purchases of property and equipment.
The Company's 1995 investing activities consisted primarily of purchases of
property and equipment. The Company expects that its capital expenditures will
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 year ended December 31,
1997, was primarily from the issuance of common stock partially offset by
principal payments on capital lease obligations. The cash provided by
financing activities during the year ended December 31, 1996, was primarily
from the initial public offering in January 1996. The cash provided by
financing activities during the year ended December 31, 1995,
26
<PAGE>
was primarily from the sale of preferred and common stock, partially offset by
principal payments made on capital lease obligations.
The Company believes that its current cash balance and the expected 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 twelve months. Thereafter, the Company may find it necessary to
obtain additional equity or debt 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.
YEAR 2000 COMPLIANCE
The Company is aware of the issues associated with the programming code in
existing computer systems as the Year 2000 approaches. The "Year 2000 problem"
is pervasive and complex as virtually every computer operation will be
affected in some way by the rollover of the two-digit year value to 00. The
issue is whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail. Management is in the process of working with its software vendors to
affirm that the Company is prepared for the Year 2000. Management does not
anticipate that the Company will incur significant operating expenses or be
required to invest heavily in computer systems improvements to be Year 2000
compliant. However, significant uncertainty exists concerning the potential
costs and effects associated with any Year 2000 compliance. The Company
believes that its current products, on all platforms, are Year 2000 compliant
by design. Any Year 2000 compliance problem of either the Company or its
customers could materially adversely affect the Company's business, results of
operations, financial condition and prospects.
The Company has designed and tested the latest versions of its products to
be Year 2000 compliant. There can be no assurances however, that the Company's
current products do not contain undetected errors or defects associated with
year 2000 date functions that may result in material costs to the Company.
Some commentators have stated that a significant amount of litigation will
arise out of year 2000 compliance issues. Because of the unprecedented nature
of such litigation, it is uncertain whether or to what extent the Company may
be affected by such issues. Although the Company is not aware of any material
operational issues or costs associated with preparing its internal systems for
the year 2000, there can be no assurances that the Company will not experience
serious unanticipated negative consequences and/or material costs caused by
undetected errors or defects in the technology used in its internal systems.
27
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
RED BRICK SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........................... 29
Consolidated Balance Sheets as of December 31, 1997 and 1996................ 30
Consolidated Statements of Operations for the Years ended December 31, 1997,
1996, and 1995............................................................. 31
Consolidated Statements of Stockholders' Equity for the Years ended December
31, 1997, 1996, and 1995................................................... 32
Consolidated Statements of Cash Flows for the Years ended December 31, 1997,
1996, and 1995............................................................. 33
Notes to Consolidated Financial Statements.................................. 34
The following financial statement schedule of the Registrant is filed as
part of this report:
Schedule II--Valuation and Qualifying Accounts............................ 48
</TABLE>
All other schedules are omitted because they are not applicable or the
required information is shown in the Consolidated Financial Statements or
notes thereto.
28
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Red Brick Systems, Inc.
We have audited the accompanying consolidated balance sheets of Red Brick
Systems, Inc. as of December 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1997. Our audits also included
the financial statement schedule listed in the Index at Item 14(a). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Red Brick Systems, Inc. at December 31, 1997 and 1996, and the consolidated
results of its operations and its cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
Ernst & Young LLP
San Jose, California
January 13, 1998
29
<PAGE>
RED BRICK SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
-------- -------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents................................. $ 12,358 $14,552
Short-term investments.................................... 14,551 20,599
Accounts receivable, net of allowances of $1,553 in 1997
and $958 in 1996......................................... 12,291 13,106
Prepaid expenses and other current assets................. 955 1,213
Deferred tax assets....................................... -- 850
-------- -------
Total current assets.................................... 40,155 50,320
Property and equipment, net................................. 2,677 2,693
Intangible assets, net...................................... 361 --
Other assets................................................ 372 205
Deferred tax assets......................................... -- 150
-------- -------
Total assets............................................ $ 43,565 $53,368
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable.......................................... $ 518 $ 316
Accrued expenses.......................................... 3,719 2,565
Accrued compensation...................................... 2,031 2,191
Deferred revenue.......................................... 7,370 4,180
Capital lease obligations due within one year............. 385 760
-------- -------
Total current liabilities............................... 14,023 10,012
Capital lease obligations................................... 60 396
Minority interest........................................... -- 36
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.0001 par value; 2,000 shares
authorized; no shares outstanding........................ -- --
Common stock, $.0001 par value; 20,000 shares authorized;
12,233 and 11,346 shares issued and outstanding at
December 31, 1997 and 1996, respectively................. 1 1
Additional paid-in capital................................ 56,055 51,570
Accumulated deficit....................................... (26,530) (8,507)
Deferred compensation..................................... -- (36)
Translation adjustment.................................... 26 4
-------- -------
29,552 43,032
Notes receivable from stockholders........................ (70) (108)
-------- -------
Total stockholders' equity.............................. 29,482 42,924
-------- -------
Total liabilities and stockholders' equity.............. $ 43,565 $53,368
======== =======
</TABLE>
See accompanying notes to Consolidated Financial Statements
30
<PAGE>
RED BRICK SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Revenues:
Software license................................. $ 29,234 $29,242 $15,742
Maintenance and service.......................... 14,081 6,793 4,863
-------- ------- -------
Total revenues................................. 43,315 36,035 20,605
Cost of revenues:
Software license................................. 1,503 1,136 685
Maintenance and service.......................... 8,438 3,357 1,615
-------- ------- -------
Total cost of revenues......................... 9,941 4,493 2,300
-------- ------- -------
Gross margin.................................. 33,374 31,542 18,305
Operating expenses:
Sales and marketing.............................. 26,955 20,410 11,011
Research and development......................... 9,960 6,256 5,033
General and administrative....................... 4,192 2,839 1,682
In-process technology............................ 10,984 500 --
-------- ------- -------
Total operating expenses....................... 52,091 30,005 17,726
-------- ------- -------
Income (loss) from operations................. (18,717) 1,537 579
Interest and other income (expense), net........... 1,767 1,509 (128)
-------- ------- -------
Income (loss) before provision for (benefit
from) income taxes and minority interest....... (16,950) 3,046 451
Provision for (benefit from) income taxes.......... 1,203 (687) 143
-------- ------- -------
Income (loss) before minority interest.......... (18,153) 3,733 308
Minority interest in net loss of consolidated
subsidiary........................................ 130 85 --
-------- ------- -------
Net income (loss).............................. $(18,023) $ 3,818 $ 308
======== ======= =======
Basic earnings (loss) per share.................... $ (1.55) $ 0.37 $ 0.22
======== ======= =======
Diluted earnings (loss) per share.................. $ (1.55) $ 0.30 $ 0.04
======== ======= =======
Shares used to compute basic earnings (loss) per
share............................................. 11,663 10,357 1,407
======== ======= =======
Shares used to compute diluted earnings (loss) per
share............................................. 11,663 12,643 8,635
======== ======= =======
</TABLE>
See accompanying notes to Consolidated Financial Statements
31
<PAGE>
RED BRICK SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE NOTES
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE TOTAL
----------------- -------------- PAID-IN ACCUMULATED DEFERRED TRANSLATION FROM STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT COMPENSATION ADJUSTMENT STOCKHOLDERS EQUITY
-------- ------- ------ ------ ---------- ----------- ------------ ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1994............. 5,450 $ 1 1,378 $-- $15,018 $(12,633) $-- $-- $(124) $ 2,262
Issuance of
common stock.... -- -- 220 -- 70 -- -- -- (70) --
Exercise of
stock options... -- -- 1,017 -- 250 -- -- -- -- 250
Repurchase of
common stock.... -- -- (59) -- (12) -- -- -- -- (12)
Sale of
preferred stock
on exercise of
warrants........ 413 -- -- -- 859 -- -- -- -- 859
Deferred
compensation.... -- -- -- -- 55 -- (55) -- -- --
Amortization of
deferred
compensation.... -- -- -- -- -- -- 6 -- -- 6
Issuance of
common stock
warrants in
connection with
the sale of note
receivable...... -- -- -- -- 30 -- -- -- -- 30
Note receivable
payment......... -- -- -- -- -- -- -- -- 17 17
Net income...... -- -- -- -- -- 308 -- -- -- 308
-------- ------ ------ ---- ------- -------- ---- ---- ----- --------
Balance at
December 31,
1995............. 5,863 1 2,556 -- 16,270 (12,325) (49) -- (177) 3,720
Conversion of
preferred stock
to common stock. (5,863) (1) 5,863 1 -- -- -- -- -- --
Net exercise of
warrants........ -- -- 264 -- -- -- -- -- -- --
Issuance of
common stock,
net of issuance
costs........... -- -- 2,070 -- 33,684 -- -- -- -- 33,684
Exercise of
stock options,
net of
repurchases..... -- -- 217 -- 244 -- -- -- -- 244
ESPP
distribution.... -- -- 90 -- 1,372 -- -- -- -- 1,372
Sale of common
stock on
exercise of
warrants........ -- -- 286 -- -- -- -- -- -- --
Amortization of
deferred
compensation.... -- -- -- -- -- -- 13 -- -- 13
Translation
adjustment...... -- -- -- -- -- -- -- 4 -- 4
Note receivable
payment......... -- -- -- -- -- -- -- -- 69 69
Net income...... -- -- -- -- -- 3,818 -- -- -- 3,818
-------- ------ ------ ---- ------- -------- ---- ---- ----- --------
Balance at
December 31,
1996............. -- -- 11,346 1 51,570 (8,507) (36) 4 (108) 42,924
Exercise of
stock options,
net of
repurchases..... -- -- 435 -- 566 -- -- -- -- 566
ESPP
distribution.... -- -- 214 -- 2,146 -- -- -- -- 2,146
Issuance of
common stock for
purchase of
technology...... -- -- 238 -- 1,773 -- -- -- -- 1,773
Amortization of
deferred
compensation.... -- -- -- -- -- -- 36 -- -- 36
Translation
adjustment...... -- -- -- -- -- -- -- 22 -- 22
Note receivable
payment......... -- -- -- -- -- -- -- -- 38 38
Unrecognized
(gain) loss on
investments..... -- -- -- -- -- -- -- (0)
Net loss........ -- -- -- -- -- (18,023) -- -- -- (18,023)
-------- ------ ------ ---- ------- -------- ---- ---- ----- --------
Balance at
December 31,
1997............. -- $ -- 12,233 $ 1 $56,055 $(26,530) $-- $ 26 $ (70) $ 29,482
======== ====== ====== ==== ======= ======== ==== ==== ===== ========
</TABLE>
See accompanying notes to Consolidated Financial Statements
32
<PAGE>
RED BRICK SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1996 1995
-------- -------- ------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................ $(18,023) $ 3,818 $ 308
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation................................... 1,692 1,433 857
Amortization................................... 45 -- --
Deferred taxes................................. 1,000 (1,000) --
In-process technology.......................... 10,984 -- --
Minority interest in subsidiary................ (36) 36 --
Other.......................................... -- -- 36
Changes in assets and liabilities:
Accounts receivable.......................... 815 (7,595) (2,871)
Prepaid expenses and other current assets.... 258 (920) (219)
Accounts payable............................. 202 (342) 495
Accrued expenses and compensation............ 956 2,247 1,318
Deferred revenue............................. 3,190 2,165 872
-------- -------- ------
Net cash provided by (used in) operating
activities................................ 1,083 (158) 796
Cash flows from investing activities:
Purchases of short-term investments.............. (22,295) (50,906) --
Proceeds from sales of short-term investments.... 28,343 30,307 --
Acquisition of property and equipment............ (1,676) (1,748) (85)
Acquisition of certain assets.................... (9,543) -- --
Deposits and other assets........................ (167) (10) (27)
-------- -------- ------
Net cash used in investing activities...... (5,338) (22,357) (112)
Cash flows from financing activities:
Proceeds from issuance of common stock, net of
issuance costs.................................. 2,712 35,300 320
Principle payments on capital lease obligations.. (711) (1,271) (713)
Other............................................ 60 40 749
-------- -------- ------
Net cash provided by financing activities.. 2,061 34,069 356
-------- -------- ------
Net increase (decrease) in cash and cash
equivalents....................................... (2,194) 11,554 1,040
Cash and cash equivalents at beginning of year..... 14,552 2,998 1,958
-------- -------- ------
Cash and cash equivalents at end of year........... $ 12,358 $ 14,552 $2,998
======== ======== ======
SUPPLEMENTAL SCHEDULES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest......................................... $ 90 $ 233 $ 222
Income taxes..................................... $ 163 $ 114 $ 54
SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING
ACTIVITIES
Property and equipment acquired under capital lease
financings........................................ $ -- $ 385 $1,082
Common stock issued in purchase of certain assets
and technology.................................... $ 1,773 $ -- $ --
</TABLE>
See accompanying notes to Consolidated Financial Statements
33
<PAGE>
RED BRICK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Red Brick Systems, Inc. (the Company), a Delaware corporation, was
originally incorporated in California in July 1986. The Company designs,
develops, markets and supports a high performance client/server relational
database management system and related software and services specifically
designed for data warehouse applications.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, as well as Red Brick Systems
Australasia Pty. Ltd. ("RBA"). All significant intercompany accounts and
transactions have been eliminated.
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,
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 are related 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.
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 stock owned by PSG at a
pre-determined price based on 1998 revenue for the joint venture, not to
exceed $5 million.
Foreign Currency Translation
The functional currency of the Company's wholly owned subsidiaries is the
U.S. dollar. Subsidiary financial statements are remeasured into U.S. dollars
for consolidation. Foreign currency translation gains and losses are included
in other income (expense) and were immaterial for all periods presented. The
functional currency of RBA is the Australian dollar. Translation gains or
losses are shown as a component of stockholders' equity.
Cash, Cash Equivalents, and Short-Term Investments
Management determines the appropriate classifications of debt securities at
the time of purchase. All of the Company's debt securities are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses reported in a separate component of
stockholders' equity. The fair value of the Company's available for sale
securities is based on quoted market prices at the balance sheet dates. As of
December 31, 1997 and 1996, unrealized gains or losses on such investments
were not significant. Realized gains and losses and declines in value judged
to be other-than-temporary on available-for-sale securities are included in
interest income. The cost of securities sold is based on the specific
identification method. Interest on securities classified as available-for-sale
is included in interest income.
34
<PAGE>
RED BRICK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
All cash equivalents, by contractual maturity, mature in three months or
less. Short-term investments mature in three to fifteen months. The fair value
of the Company's investments held at December 31, 1997 and 1996, is summarized
as follows:
<TABLE>
<CAPTION>
FAIR VALUE AT
DECEMBER 31,
---------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Money market.............................................. $ 37 $ 52
Corporate bonds and notes................................. 6,115 15,412
Commercial paper.......................................... 5,757 12,195
Certificates of deposit................................... 3,001 --
Government debt securities................................ 8,211 4,200
International bond........................................ 999 750
------- -------
Total investments....................................... $24,120 $32,609
======= =======
</TABLE>
The following is a reconciliation of the Company's investments to the
balance sheet classifications:
<TABLE>
<CAPTION>
FAIR VALUE AT
DECEMBER 31,
---------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Amounts included in cash and cash equivalents............. $ 9,569 $12,010
Short-term investments.................................... 14,551 20,599
------- -------
Total investments....................................... 24,120 32,609
Demand deposits........................................... 2,789 2,542
------- -------
Total cash, cash equivalents, and short-term
investments............................................ $26,909 $35,151
======= =======
</TABLE>
At December 31, 1997, $16,997,000 of the investments were due in one year or
less, with the remainder due in one year to fifteen months.
Depreciation and Amortization
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, generally three to five years. Assets acquired
under capital leases and leasehold improvements are amortized using the
straight-line method over the shorter of the estimated useful lives of the
assets or the terms of the leases.
Intangible Assets
Intangible assets related to the technology purchase agreement with CMGI and
Engage in August 1997, include an assembled workforce and goodwill. The
intangible assets are being amortized on a straight-line basis over periods
ranging from 2 to 3 years. Accumulated amortization was approximately $45,000
at December 31, 1997.
Revenue Recognition
The Company recognizes revenue in accordance with the American Institute of
Certified Public Accountants' Statement of Position No. 91-1, "Software
Revenue Recognition." Revenue from product licensing and the portion of
royalty revenues not subject to future obligations is generally recognized
after
35
<PAGE>
RED BRICK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
execution of a licensing agreement and shipment of the product, provided that
no significant vendor obligations remain and the resulting receivable is
deemed collectible by management. Maintenance and service revenue includes
maintenance, training, and consulting. Maintenance revenue is recognized
ratably over the term of the contract. Service revenues, primarily consulting
and training, are recognized at the time the service is performed. Revenue
under software development agreements is recognized using the percentage-of-
completion method based on the ratio that incurred costs bear to total
estimated costs.
In 1997, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) No. 97-2, "Software Revenue Recognition." SOP 97-2
will be effective for the Company beginning in fiscal 1998. SOP 97-2
supersedes SOP 91-1, and addresses software revenue recognition matters
primarily from a conceptual level and does not include specific implementation
guidance. Detailed implementation guidelines have not yet been issued. The
Company is evaluating the requirements of the new SOP and potential
implementation guidelines and the effects, if any, on the Company's current
revenue recognition policy.
Warranty
The Company provides for the costs of warranty when specific problems are
identified. The Company has not experienced significant warranty claims to
date.
Software Development Costs
Software development costs have been accounted for in accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs
of Computer Software to be Sold, Leased or Otherwise Marketed" ("FAS 86").
Under the standard, capitalization of software development costs begins upon
the establishment of technological feasibility, subject to net realizable
value considerations. In the Company's case, capitalization would begin upon
completion of a working model as the Company does not prepare detail program
designs as part of the development process. As of December 31, 1997, such
capitalizable costs were insignificant. Accordingly, the Company has charged
all such costs to research and development expenses in the accompanying
statements of operations.
Accounting for Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock-based awards because, as
discussed below, the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation," ("FAS 123") requires use of option valuation models that
were not developed for use in valuing employee stock-based awards. Under APB
25, the Company generally recognizes no compensation expense with respect to
such awards.
Advertising Costs
The Company expenses advertising costs as they are incurred. Advertising
expenses for 1997, 1996 and 1995 were $1,164,000, $668,000, and $349,000,
respectively.
Earnings (Loss) Per Share
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement
No. 128, "Earnings Per Share" ("FAS 128"). FAS 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings
per share. Unlike primary earnings per share, basic earnings per share
excludes any
36
<PAGE>
RED BRICK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. Also in 1997, the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 98 ("SAB 98"). SAB 98 affected the
treatment of certain stock and warrants ("cheap stock") issued within a one-
year period prior to an initial public offering. Earnings (loss) per share
amounts for all periods have been presented and where appropriate, restated to
conform to the FAS 128 and SAB No. 98 requirements.
The following table sets forth the computation of basic and diluted earnings
(loss) per share.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
------------- ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Numerator:
Net income (loss).................... $ (18,023) $ 3,818 $ 308
============= ============ ===========
Denominator:
Weighted average common shares
outstanding......................... 11,663 10,357 1,407
------------- ------------ -----------
Denominator for basic earnings (loss)
per share........................... 11,663 10,357 1,407
Effect of dilutive securities:
Employee stock options and warrants.. -- 1,644 979
Convertible preferred stock.......... -- 337 5,450
Unvested outstanding shares.......... -- 305 799
------------- ------------ -----------
Dilutive potential common shares....... -- 2,286 7,228
------------- ------------ -----------
Denominator of diluted earnings (loss)
per share--adjusted weighted-average
shares and assumed conversions........ 11,663 12,643 8,635
============= ============ ===========
Basic earnings (loss) per share........ $ (1.55) $ 0.37 $ 0.22
============= ============ ===========
Diluted earnings (loss) per share...... $ (1.55) $ 0.30 $ 0.04
============= ============ ===========
</TABLE>
For additional disclosures regarding the outstanding preferred stock, the
employee stock options, and the warrants, see Note 6--Stockholders Equity.
Options to purchase 246,462, 40,217, and 140,899 shares of common stock were
outstanding at December 31, 1997, 1996, and 1995, respectively, but were not
included in the computation of diluted earnings (loss) per share because the
options exercise price was greater than the average market price of the common
shares and, therefore, the effect would be antidilutive.
Additionally, potential common shares of 1,081,945, using the treasury stock
method, were not included in the computation of diluted loss per share for
1997 because the Company had a loss for the period and, therefore, the effect
would be antidilutive.
CONCENTRATIONS
Credit Risk/Customer
The Company operates in one business segment, the development and licensing
of data warehousing software, which it sells to various companies across
several industries. The Company performs ongoing credit evaluations of its
customers and generally requires no collateral. A relatively small number of
customers and
37
<PAGE>
RED BRICK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 revenues for
the foreseeable future. The loss of a major customer or reseller would
adversely affect operating results. In 1997 and 1996, sales to no one customer
accounted for more than 10% of total revenues. In 1995, one customer accounted
for 21% of total revenues.
Product
Substantially all of the Company's revenues have been attributable to sales
of Red Brick Warehouse and the related maintenance and service contracts. This
product is currently expected to account for a significant part of the
Company's license revenues for the foreseeable future. As a result, a decline
in demand for, or failure to achieve broad market acceptance of, Red Brick
Warehouse would adversely affect operating results.
RECENTLY ISSUED ACCOUNTING STANDARDS
Comprehensive Income
In June 1997, the FASB released Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("FAS 130"). FAS 130 establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general purpose financial statements and is
effective for fiscal years beginning after December 15, 1997. The Company
believes that adoption of FAS 130 will not have a material impact on the
Company's consolidated financial statements.
Segment Information
In June 1997, the FASB released Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("FAS 131"). FAS 131 will change the way companies report selected segment
information in annual financial statements and also requires those companies
to report selected segment information in interim financial reports to
stockholders. FAS 131 is effective for fiscal years beginning after December
15, 1997. The Company has not yet reached a conclusion as to the appropriate
segments, if any, it will be required to report to comply with FAS 131.
2. NOTE RECEIVABLE SALE
In September 1995, the Company recognized product revenue of $1,710,000 and
recorded deferred maintenance revenue of $90,000 in connection with a license
agreement with efficient market services, inc. ("ems"), a related party. The
license agreement stated that if the Company granted a similar license for an
equivalent application to A.C. Nielsen, who was a major provider of data to
ems and a stockholder of ems, then ems could elect to terminate the agreement
and cease making future payments. The event that caused the cancellation
privilege was under the control of the Company and the Company believed that
the likelihood of cancellation was remote. As part of this transaction, the
Company recorded a long-term note receivable. In December 1995, the Company
sold, on a non-recourse basis, the remaining balance on the note receivable of
$1,652,830 to Comdisco, Inc. ("Comdisco") for approximately $1,362,136 and
issued a warrant valued at $30,000 to purchase shares of the Company's common
stock. The Company recorded a loss on sale of the note receivable of $320,694,
which was included in general and administrative expenses. In addition, the
Company signed a remarketing agreement with Comdisco that provided that the
Company would assist Comdisco on a best efforts basis in the remarketing of
the software under license to ems should ems default on the note. The Company
sold the note receivable primarily to provide cash for operations.
38
<PAGE>
RED BRICK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consist of the following.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-------------------
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Computer equipment and software....................... $ 5,218 $ 3,846
Furniture and equipment............................... 1,455 1,240
Leasehold improvements................................ 616 567
--------- ---------
7,289 5,653
Less accumulated depreciation and amortization........ 4,612 2,960
--------- ---------
$ 2,677 $ 2,693
========= =========
</TABLE>
4. PURCHASED TECHNOLOGY
On August 29, 1997, the Company executed a technology purchase agreement
with CMGI and Engage whereby the Company acquired the in-process source code
and related documentation to certain software technology. In the third quarter
of 1997 the Company recorded a charge of approximately $11.0 million for in-
process technology based upon an independent appraisal. The Company paid CMGI
$9.5 million in cash and issued to CMGI 238,160 shares of unregistered common
stock. The acquired in-process technology had not yet reached technological
feasibility and did not have alternative future uses.
The Company acquired in-process technology associated with a $500,000
licensing arrangement during the second quarter of 1996. At the time of
acquisition, the acquired in-process technology had not yet reached
technological feasibility and did not have alternative future uses.
5. COMMITMENTS AND CONTINGENCIES
Capital and Operating Leases
The Company leases its facilities under operating leases expiring at various
dates through March 2005. In addition to base rent, the Company is responsible
for certain taxes, utilities, and maintenance costs.
The Company leases certain equipment under noncancelable lease agreements
that are accounted for as capital leases. Equipment under capital lease
arrangements, and included in property and equipment, aggregated approximately
$3,032,000 and $3,579,000 at December 31, 1997 and 1996, respectively. Related
accumulated amortization was approximately $2,627,000 and $2,338,000 at
December 31, 1997 and 1996, respectively. The capital leases are secured by
the related equipment, and the Company is required to maintain liability and
property damage insurance.
39
<PAGE>
RED BRICK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Future minimum lease payments under noncancelable operating leases and
capital leases are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------
CAPITAL OPERATING
LEASES LEASES
------- ---------
(IN THOUSANDS)
<S> <C> <C>
1998....................................................... $429 $1,731
1999....................................................... 61 1,810
2000....................................................... -- 1,780
2001....................................................... -- 1,736
2002....................................................... -- 1,643
2003 and thereafter........................................ -- 168
---- ------
Total minimum lease payments .............................. 490 $8,868
======
Less amount representing interest.......................... 45
----
Present value of minimum lease payments.................... 445
Less current obligations................................... 385
----
Long-term obligations...................................... $ 60
====
</TABLE>
Total rental expense for 1997, 1996, and 1995 was approximately $1,804,000
$1,005,000, and $515,000, respectively.
Contingencies
From time to time, the Company may be a party to litigation and claims
incident to the ordinary course of its business. Although the results of
litigation and claims cannot be predicted with certainty, the Company believes
that the final outcome of such matters will not have a material adverse effect
on the Company's financial position, results of operations, or cash flows.
6. STOCKHOLDERS' EQUITY
Initial Public Offering
On January 23, 1996, the Company commenced its initial public offering and
its Common Stock began trading on the NASDAQ National Market under the symbol
REDB. The Company sold 2,070,000 shares in the offering and generated
approximately $33.7 million of cash net of underwriting discounts and
commissions and other offering costs. Upon completion of the offering, all
outstanding shares of Series A, Series B, Series C, and Series D Preferred
Stock (a total of approximately 5,863,000 shares) were converted into shares
of Common Stock on a one-for-one basis.
Preferred Stock
The Company's Certificate of Incorporation authorizes 2,000,000 shares of
preferred stock. The Board of Directors has the authority to issue the
preferred stock in one or more series and to fix the rights, preferences,
privileges, and restrictions thereof, including dividend rights, dividend
rates, conversion rights, voting rights, terms of redemption, redemption
prices, liquidation preferences, and the number of shares constituting any
series or the designation of such series without further vote or action by the
stockholders.
40
<PAGE>
RED BRICK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Warrants
In February 1993 and November 1993, the Company sold warrants to purchase
908,805 shares of Series D preferred stock at an exercise price of $2.08 per
share. In connection with the Company's initial public offering, such warrants
became warrants to purchase common stock. In 1995, warrants to purchase
340,465 shares of Series D preferred stock were exercised. Warrants to
purchase 378,834 shares of the Company's common stock were exercised in
connection with the initial public offering of the Company's common stock in
January 1996. At December 31, 1997, warrants to purchase 189,506 shares of
common stock were outstanding, of which the majority expire in November 1998.
In December 1995, as part of the sale of the ems note receivable, the
Company issued a warrant to Comdisco for the purchase of the Company's common
stock and recorded additional expense of $30,000. The number of shares to be
issued under the warrant agreement is 15,556 at an exercise price of $18 per
share. At December 31, 1997, the warrant to purchase 15,556 shares of common
stock was outstanding and expires January 22, 1999.
Notes Receivable from Stockholders
During January 1994 and February 1995, certain officers of the Company were
provided cash advances totaling $194,488 for the purpose of purchasing the
Company's common stock. The underlying full recourse notes are due in January
1998 and February 1999, bear interest at 5.32% and 7.96% per annum,
respectively, and are secured by the purchased common stock. The common stock
sold in January 1994 and February 1995 vests at a rate of 25% one year after
the commencement date (January 1, 1993 and January 1, 1995, respectively) and
ratably over thirty-six months thereafter. Unvested shares may be repurchased
by the Company within 60 days of termination. As of December 31, 1997, a total
of 40,570 shares of this common stock is unvested.
Common Stock
At December 31, 1997, common stock was reserved for issuance as follows (in
thousands):
<TABLE>
<S> <C>
Stock options........................................................ 3,012
Warrants............................................................. 205
Purchase Plan........................................................ 197
-----
3,414
=====
</TABLE>
Stockholders Rights Plan
On July 21, 1997, the Board of Directors of the Company declared a dividend
of one preferred share purchase right (a "Right") for each outstanding share
of Common Stock, par value $0.0001 per share, outstanding on August 25, 1997.
Each Right entitles the registered holder to purchase from the Company one
one-thousandth of a share of Series A Junior Participating Preferred Stock,
par value $0.0001 per share, of the Company, at a price of $65.00 per one one-
thousandth of a Preferred Share, subject to adjustment. The rights are not
exercisable until a person or group of affiliated or associated persons makes
or intends to make an announcement to acquire beneficial ownership of 15% or
more of the Company's outstanding shares of Common Stock. The Rights will
expire on July 20, 2007, unless extended.
7. STOCK-BASED COMPENSATION PLANS
1995 Stock Option Plan
The Company's 1995 Stock Option Plan (the "1995 Plan") was adopted by the
Board of Directors on September 20, 1995, as the successor to the 1991 Stock
Option Plan (the "1991 Plan"). Under the 1995 Plan,
41
<PAGE>
RED BRICK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
employees (including officers) and independent consultants may, at the
discretion of the Plan Administrator, be granted options to purchase shares of
Common Stock at an exercise price not less than 85% of the fair market value
of such shares on the grant date. Non-employee members of the Board of
Directors are eligible solely for automatic option grants under the 1995 Plan.
Post-IPO options are exercisable upon vesting. Pre-IPO options granted under
the 1991 Plan are immediately exercisable for all the option shares
outstanding; however, any unvested shares purchased under the Plan are subject
to repurchase by the Company at the original exercise price per share upon the
employees cessation of service. At December 31, 1997, a total of 91,223 shares
are subject to repurchase. Options expire ten years from the date of grant
(five years in certain instances). The options generally vest at a rate of 25%
one year after the date of grant and ratably over thirty-six months
thereafter.
The Company has entered into agreements with certain officers of the Company
that provide for acceleration of vesting of certain option shares or
restricted stock as if the officer remained employed for up to an additional
two years in the event the officer's employment is involuntarily terminated
following certain acquisitions or changes in control of the Company.
At December 31, 1997, the maximum number of common shares available under
the 1995 Plan was approximately 386,000. The 1995 Plan also incorporates
special provisions (such as stock appreciation rights) which may be provided
in the future as additional employee benefits without requiring shareholder
approval.
In 1995, the Company granted options to purchase 133,750 shares of common
stock at $8.00 per share outside of the 1995 Plan. In 1997, the Company
granted options to purchase 100,000 shares of common stock at $8.13 per share
and 120,000 at $7.56 per share outside of the 1995 Plan. These options vest at
a rate of 25% one year after the date of grant and ratably over thirty-six
months thereafter. At December 31, 1997, options to purchase 247,500 shares of
common stock outside of the 1995 Plan were outstanding.
Supplemental Stock Option Plan
The Company's Supplemental Stock Option Plan (the "Supplemental Plan") was
adopted by the Board of Directors on March 19, 1997. Under the Supplemental
Plan, employees (excluding officers) and independent consultants may, at the
discretion of the Plan Administrator, be granted non-statutory stock options
to purchase shares of common stock at an exercise price not less than 85% of
the fair market value of such shares on the grant date. Non-employee members
of the Board of Directors are not eligible for grants under the Supplemental
Plan. Options granted under the Supplemental Plan generally vest at a rate of
25% one year after the date of grant and ratably over thirty-six months
thereafter. The Supplemental Plan will in all events terminate on March 18,
2007. An aggregate of 600,000 shares of common stock have been reserved for
issuance under the Supplemental Plan. In 1997, the Company granted options to
purchase 521,750 shares of common stock, net of cancellations, at a range of
$6.63 to $10.06 per share that vest 100% one year after date of grant. At
December 31, 1997, options to purchase 521,750 shares of common stock were
outstanding under the Supplemental Plan.
Repricing
In April 1997, the Company offered employees, excluding executive officers,
the option to exchange options to purchase 489,775 shares of common stock with
an aggregate exercise price of $10,782,088 for new options to purchase 489,775
shares with an exercise price of $6.00 per share and an aggregate exercise
price of $4,193,475. All options that were repriced began vesting six months
after the vesting start date under the original terms of the option grant.
In July 1996, the Company offered employees, excluding executive officers,
the option to exchange options to purchase 164,450 shares of common stock with
an aggregate exercise price of $7,093,288 for new options to purchase 164,450
shares of Common Stock with an exercise price of $25.50 per share and an
aggregate exercise
42
<PAGE>
RED BRICK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
price of $2,938,650. All options that were repriced generally began vesting
three months after the vesting start date under the original terms of the
option grant.
A summary of the Company's stock option activity, and related information
for the years ended December 31, 1997, 1996, and 1995 follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------ ----------------- ------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE OPTIONS EXERCISE OPTIONS EXERCISE
(000) PRICE (000) PRICE (000) PRICE
------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding--beginning of
year.................... 1,875 $ 8.50 1,696 $ 2.94 1,766 $ 0.22
Options granted.......... 2,225 $ 8.02 728 $ 27.94 1,307 $ 3.83
Options exercised........ (465) $ 1.17 (224) $ 1.09 (1,237) $ 0.26
Options canceled......... (1,009) $ 15.35 (325) $ 28.14 (140) $ 0.59
------ ----- ------
Outstanding--end of year. 2,626 $ 6.75 1,875 $ 8.50 1,696 $ 2.94
====== ===== ======
Exercisable at end of
year.................... 815
======
</TABLE>
Employee Stock Purchase Plan
In 1995, the Board of Directors and stockholders approved an Employee Stock
Purchase Plan (the "Purchase Plan"). The Purchase Plan is intended to qualify
under Section 423 of the Internal Revenue Code and is administered over
offering periods of 24 months each, with purchases occurring at six-month
intervals. Under the Purchase Plan, eligible employees are entitled to
purchase shares at 85% of the lower of fair market value of the common stock
at the beginning of the 24-month offering period or on the applicable semi-
annual purchase date. Under the Purchase Plan, 196,640 shares of common stock
are reserved for issuance under the plan at December 31, 1997. Under the
Purchase Plan, 213,636, 89,724, and no shares were issued in 1997, 1996, and
1995, respectively. The weighted average fair values of shares granted under
the Purchase Plan during 1997 and 1996 were $5.87 and $7.59, respectively.
Accounting for Stock-Based Compensation
Pro forma information regarding net income (loss) per share is required by
FAS 123, and has been determined as if the Company had accounted for its
employee stock-based awards granted subsequent to December 31, 1994, under the
fair value method of that Statement. The fair value for these awards was
estimated at the date of grant using the minimum value method prior to the
Company's initial filing with the SEC in connection with the IPO and,
subsequently to the IPO, the Black-Scholes options pricing model. The Black-
Scholes option valuation model was developed for use in estimating the fair
value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock-based awards have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock-based awards.
43
<PAGE>
RED BRICK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The weighted average fair value of options granted in 1997 and 1996 was
$4.82 and $15.13, respectively. The weighted average fair value of purchase
rights granted under the Purchase Plan in 1997 and 1996 was $5.87 and $7.59,
respectively. The fair value of the Company's stock-based awards to employees
was estimated using no expected dividends and the following weighted-average
assumptions:
<TABLE>
<CAPTION>
OPTIONS PURCHASE PLAN
------------------------------- --------------
JAN. 1- SEPT. 27-
SEPT. 26, DEC. 31,
1997 1996 1995 1995 1997 1996
---- ---- --------- --------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Expected life (years)........... 5 5 5 5 0.50 0.50
Expected volatility............. 0.65 0.55 0.00 0.55 1.04 0.79
Risk-Free Interest Rate......... 6.19% 6.18% 5.69% 5.69% 6.03% 5.08%
</TABLE>
If compensation cost for the employee stock-based awards was determined
based on the fair value at the grant date for awards in 1997, 1996 and 1995,
consistent with the provisions of FAS 123, the Company's net income (loss) and
net income (loss) per share for the twelve months ended December 31, 1997,
1996 and 1995 would have been adjusted to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1997 1996 1995
--------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Pro forma net income (loss).. $ (24,155) $ 1,268 $ 199
Pro forma earnings (loss) per
share:
Basic...................... $ (2.07) $ 0.13 $ 0.14
Diluted.................... $ (2.07) $ 0.10 $ 0.02
</TABLE>
Because FAS 123 is applicable only to options granted subsequent to December
31, 1994, its pro forma effects will not be fully reflected until the year
2000. In addition the effects of applying FAS 123 for providing pro forma
disclosures are not likely to be representative of the effects on reported net
income (loss) for future years.
Exercise prices for options outstanding as of December 31, 1997, and
weighted-average remaining contractual life is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- --------------------------
NUMBER WEIGHTED AVERAGE NUMBER
OUTSTANDING REMAINING WEIGHTED EXERCISABLE WEIGHTED
RANGE OF AT 12/31/97 CONTRACTUAL LIFE AVERAGE AT 12/31/97 AVERAGE
EXERCISE PRICES (000) (YEARS) EXERCISE PRICE (000) EXERCISE PRICE
- --------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.16 -- $ 0.32........ 262 6.54 $ 0.21 262 $ 0.21
$ 0.80 -- $ 1.20........ 64 6.35 $ 0.89 64 $ 0.89
$ 1.92 -- $ 2.80........ 24 7.44 $ 2.24 24 $ 2.24
$ 4.80 -- $ 7.20........ 1,270 9.14 $ 6.27 313 $ 5.93
$ 7.25 -- $10.06........ 926 9.61 $ 8.68 87 $ 8.03
$18.00 -- $25.25........ 80 8.48 $19.55 65 $19.73
----- ---- ------ --- ------
$ 0.16 -- $25.25........ 2,626 8.77 $ 6.75 815 $ 4.91
===== ==== ====== === ======
</TABLE>
44
<PAGE>
RED BRICK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. EMPLOYEE BENEFIT PLAN
In October 1991, the Company adopted a plan to provide retirement and
incidental benefits for its employees, known as the Red Brick Systems 401(k)
Retirement Savings Plan. As allowed under Section 401(k) of the Internal
Revenue Code, the plan provides tax-deferred salary deductions for eligible
employees. Employees are eligible to participate after a sixty day service
requirement. Participants may make salary deferral contributions to the plan
of up to 20% of their compensation. The plan permits for company
contributions; however, none have been made as of December 31, 1997.
9. INCOME TAXES
The components of the provision for (benefit from) income taxes consist of
the following:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-------------------
1997 1996 1995
------ ------ ----
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal............................................. $ -- $ 75 $ 98
State............................................... -- 86 28
Foreign............................................. 203 152 17
------ ------ ----
Total current..................................... 203 313 143
------ ------ ----
Deferred:
Federal............................................. 900 (900) --
State............................................... 100 (100) --
Foreign............................................. -- -- --
------ ------ ----
Total deferred.................................... 1,000 (1,000) --
------ ------ ----
Provision for (benefit from) income taxes....... $1,203 $ (687) $143
====== ====== ====
</TABLE>
The difference between the provision for (benefit from) income taxes and the
amount computed by applying the federal statutory income tax rate of 34% to
income (loss) before provision for (benefit from) income taxes is explained
below:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
---------------------
1997 1996 1995
------- ------ ----
(IN THOUSANDS)
<S> <C> <C> <C>
Income tax (benefit) computed at the federal stat-
utory rate....................................... $(5,763) $1,036 $153
State taxes....................................... -- 86 28
Foreign taxes..................................... 203 152 --
Losses for which no tax benefit was recognized.... 1,981 -- --
Tax benefits of net operating loss carryforwards.. -- (1,015) (773)
Adjustment of the valuation allowance............. 1,000 (1,000) 717
In-process research & development................. 3,734 -- --
Other............................................. 48 54 18
------- ------ ----
Provision (benefit) for income taxes............ $ 1,203 $ (687) $143
======= ====== ====
</TABLE>
45
<PAGE>
RED BRICK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The 1997 income tax provision of $1,203,000 includes approximately $203,000
in current income taxes, consisting principally of foreign withholding taxes
and other foreign income taxes, and a $1,000,000 deferred tax provision to
establish a valuation allowance with respect to the net deferred tax assets.
The 1996 income tax benefit reflected the original recognition of the
$1,000,000 in deferred tax assets. The Company has provided a full valuation
allowance against its net deferred tax assets at December 31, 1997 due to
uncertainties surrounding their realization.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1997 1996
------- ------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................ $ 4,358 $2,092
Tax credit carryforwards................................ 1,217 618
Reserves and accruals................................... 1,056 703
Intangible assets....................................... 4,233 --
Other................................................... 461 196
------- ------
Total deferred tax assets................................. 11,325 3,609
Valuation allowance....................................... (11,325) (2,609)
------- ------
Net deferred tax assets................................... $ -- $1,000
======= ======
</TABLE>
The valuation allowance increased by $8,716,000 during 1997 and decreased by
$1,583,000 during 1996. Approximately $1,052,000 of the valuation allowance at
December 31, 1997, is attributable to the tax benefits of disqualifying
dispositions of stock received through incentive stock options and the
Company's employee stock purchase plan, the benefit of which will be credited
to additional paid in capital when realized.
At December 31, 1997, the Company has federal and state net operating loss
carryforwards of approximately $12,000,000 and $5,500,000, respectively, and
federal and state tax credit carryforwards of approximately $650,000 and
$450,000, respectively. These carryforwards will expire beginning in the years
1999 through 2012. Utilization of approximately $1,500,000 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.
10. RELATED PARTY REVENUES
During 1995, the Company recorded revenue of approximately $1,720,000 for
sales to ems. ems is a related party of the Company due to the fact that
venture capital funds affiliated with Asset Management Associates 1989, L.P.
and Menlo Ventures IV, L.P., two principal stockholders of the Company at the
time of the transactions, were also principal stockholders of ems. Gross
margins realized on related party transactions have not been materially
different from the gross margins realized on similar types of transactions
with unaffiliated customers.
46
<PAGE>
RED BRICK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
11. EXPORT REVENUES
The Company markets its products in the United States and foreign countries
through its sales personnel, value added resellers, and subsidiaries. Sales
between geographic areas are accounted for at prices that provide a profit and
are in accordance with the rules and regulations of the respective governing
authorities. Total export revenues by geographic region for the three years
ended December 31, 1997 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Asia Pacific......................................... $ 3,732 $ 901 $ 596
Europe .............................................. 1,202 1,253 --
Other ............................................... 2,438 1,504 1,084
------- ------ ------
$ 7,372 $3,658 $1,680
======= ====== ======
</TABLE>
12. SUBSEQUENT EVENTS (UNAUDITED)
On March 25, 1998, two purported class action lawsuits were filed in the
United States District Court for the Northern District of California by or on
behalf of persons who purchased the Company's Common Stock between January 15,
1997 and April 15, 1997. These actions name as defendants, among others, the
Company and certain of its present and former officers and directors. The
complaints allege various violations of the federal securities laws and seek
unspecified monetary damages. The Company believes both complaints are without
merit and will vigorously defend itself against both complaints.
47
<PAGE>
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING END
OF PERIOD ADDITIONS DEDUCTIONS OF PERIOD
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
receivable
Year ended December 31, 1995... $125 $545 $ -- $ 670
Year ended December 31, 1996... $670 $519 $(231)(1) $ 958
Year ended December 31, 1997... $958 $658 $ (63)(1) $1,553
</TABLE>
- --------
(1) Uncollectible accounts written off
48
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item relating to the Company's directors
and nominees and disclosure relating to compliance with Section 16(a) of the
Securities Exchange Act of 1934 is included under the captions "Election of
Directors" and "Compliance with Section 16(a) of the Securities Exchange Act
of 1934" in the Company's Proxy Statement for the 1998 Annual Meeting of
Stockholders and is incorporated herein by reference. The information required
by this item relating to the Company's executive officers is included under
the caption "Executive Officers of the Registrant" in Part I of the Report on
Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is included under the caption
"Executive Compensation and Related Information" in the Company's Proxy
Statement for the 1998 Annual Meeting of Stockholders and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included under the caption "Stock
Ownership of Certain Beneficial Owners and Management" in the Company's Proxy
Statement for the 1998 Annual Meeting of Stockholders and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included under the caption "Certain
Relationships and Related Transactions" in the Company's Proxy Statement for
the 1998 Annual Meeting of Stockholders and is incorporated herein by
reference.
49
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report
1) All financial statements
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INDEX TO FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Auditors..................... 29
Consolidated Balance Sheets........................................... 30
Consolidated Statements of Operations................................. 31
Consolidated Statements of Stockholders Equity........................ 32
Consolidated Statements of Cash Flows................................. 33
Notes to Consolidated Financial Statements............................ 34
</TABLE>
2) Financial statement schedules
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INDEX TO FINANCIAL STATEMENTS
Financial Statement Schedules
II. Valuation and Qualifying Accounts............................... 48
</TABLE>
All other schedules have been omitted because the required information is
not present or not present in amounts sufficient to require submission of the
schedules, or because the information required is included in the consolidated
financial statements or notes thereto.
The independent auditors report with respect to the above listed financial
statements and schedule appear on page 29 of this report on Form 10-K.
50
<PAGE>
3) Exhibits required by item 601 of Regulation S-K
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT TITLE
----------- -------------
<C> <S>
1.1(1) Form of Underwriting Agreement.
2.1(1) Agreement and Plan of Merger, dated December 7, 1995, effecting
the reincorporation of Red Brick Systems, a California
corporation, into Red Brick Systems, Inc., a Delaware corporation
(the "Company").
3.1(1) Certificate of Incorporation of the Company.
3.2(1) Amended and Restated Certificate of Incorporation of the Company
filed in connection with the reincorporation of the Company.
3.3(1) Form of Amended and Restated Certificate of Incorporation of the
Company filed on January 26, 1996.
3.4(1) Amended and Restated Bylaws of the Company adopted on October 18,
1995.
3.5(5) Amended and Restated Bylaws of the Company adopted on July 21,
1997.
3.6(6) Form of Certificate of Designation of Series A Junior
Participating Preferred Stock filed on July 22, 1997 in connection
with the Company's adoption of Rights Agreement.
4.1(1) Amended and Restated Investor Rights Agreement, dated November 5,
1993, among the Company and the investors and founders named
therein, as amended.
4.2(1) Specimen Certificate of the Company's Common Stock.
4.3(6) Rights Agreement, dated as of July 21, 1997, between the Company
and Harris Trust and Savings Bank, including the Form of
Certificate of Designation of Series A Junior Participating
Preferred Stock, Form of Rights Certificate and Summary of Rights
to Purchase Preferred Shares attached thereto as Exhibits A, B,
and C, respectively.
5.1(1) Opinion of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP, counsel to the Company.
10.1(1) Form of Indemnification Agreement entered into between the Company
and its directors and officers.
10.3(1)(2) 1995 Stock Option Plan.
10.4(1)(2) Employee Stock Purchase Plan.
10.8(1) Loan Modification Agreement between Silicon Valley Bank and the
Company, dated May 1, 1995.
10.9(1) Lease Agreement, dated October 24, 1994, between the Company and
Alberto Oaks Investors, regarding the space located at 485 Alberto
Way, Los Gatos, California, as amended.
10.10(1) Note and Warrant Purchase Agreement, dated March 11, 1992, among
the Company and the lenders named therein, as amended.
10.12(1) Note and Warrant Purchase Agreement, dated February 17, 1993,
among the Company and the lenders named therein, as amended.
10.15(1) Form of Stock Purchase Agreement, dated January 24, 1994, used to
sell Common Stock to certain officers of the Company.
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT TITLE
----------- -------------
<C> <S>
10.16(1) Form of Stock Purchase Agreement, dated February 14, 1995, used to
sell Common Stock to certain officers of the Company.
10.17(1)(3) End User Software License Agreement No. 94-159, dated June 30,
1994, and Related Product Order and Financing Agreement, dated
September 26, 1995, between efficient market services, inc. and
the Company.
10.20(1)(2) 1995 Executive Bonus Program, as amended.
10.21(1) Assignment Agreement, dated December 18, 1995, between the Company
and Comdisco, Inc.
10.22(1) Third Amendment of Lease, dated October 10, 1995, between the
Company and Alberto Oaks Investors, Ltd.
10.23(4) Loan Modification Agreement between Silicon Valley Bank and the
Company, dated April 30, 1996.
10.24(7) Technology Purchase Agreement dated as of August 29, 1997, by and
among the Company, CMGI, and Engage.
10.25(2) Officers Severance Plan and Summary Plan Description adopted
November 15, 1995.
10.26(2) Supplemental Stock Option Plan adopted March 19, 1997.
10.27 Fourth Amendment of Lease, dated November 25, 1997, between the
Company and Alberto Oaks Investors, Ltd.
10.28(2) 1998 Executive Compensation Plan, as amended.
10.29 Termination of Loan Agreement between Silicon Valley Bank and the
Company dated December 29, 1997.
16.1(1) Letter regarding change in certifying accountant.
21.1 List of Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP, independent auditors.
27.1 Financial Data Schedule.
</TABLE>
- --------
(1) Incorporated by reference to the exhibit of the same number filed with
Company's Form S-1 Registration Statement (Reg. No. 33-97430) declared
effective by the Securities and Exchange Commission on January 22, 1996.
(2) Compensatory plan or arrangement.
(3) Confidential treatment has been requested as to certain portions of these
exhibits. Omitted portions have been filed separately with the Securities
and Exchange Commission.
(4) Incorporated by reference from the Company's Form 10-K for the year ended
December 31, 1996.
(5) Incorporated by reference from the Company's Form 10-Q for the quarter
ended June 30, 1997.
(6) Incorporated by reference from the Company's Form 8-A filed in July 1997.
(7) Incorporated by reference from the Company's Form 8-K filed in September
1997.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of fiscal 1997.
(c) Exhibits. See list of exhibits under "Item 14(a)(3)" above
(d) Financial Statement Schedules. See list of schedules under "Item 14(a)(2)"
above
52
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of
Los Gatos, State of California, on this 30th day of March, 1998.
RED BRICK SYSTEMS, INC.
/s/ Christopher G. Erickson
By___________________________________
Christopher G. Erickson
President, Chief Executive
Officer, and
Chairman of the Board
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed by the following persons on behalf of the registrant and in the
capacity and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Christopher G. Erickson President, Chief Executive March 30, 1998
____________________________________ Officer, and Chairman of the
Christopher G. Erickson Board (Principal Executive
Officer)
/s/ Margaret R. Brauns Vice President, Finance, March 30, 1998
____________________________________ Chief Financial Officer
Margaret R. Brauns (Principal Financial And
Accounting Officer), and
Secretary
/s/ Thomas H. Bredt Director March 30, 1998
____________________________________
Thomas H. Bredt
/s/ Andrew K. Ludwick Director March 30, 1998
____________________________________
Andrew K. Ludwick
/s/ John F. Shoch Director March 30, 1998
____________________________________
John F. Shoch
/s/ John E. Warnock Director March 30, 1998
____________________________________
John E. Warnock
</TABLE>
53
<PAGE>
EXHIBIT 10.25
OFFICERS SEVERANCE PLAN
AND
SUMMARY PLAN DESCRIPTION
The Red Brick Systems, Inc. Officers Severance Plan (the "Plan") is primarily
designed to provide eligible officers of Red Brick Systems, Inc. (the "Company")
whose employment is terminated as a result of a work force reduction or job
elimination with financial assistance while they are seeking new employment
opportunities. The Plan is also intended to satisfy, where applicable, the
obligations of the Company under the Federal Worker and Retraining Notification
("WARN") Act. The Plan is effective for eligible officers whose employment is
terminated on or after November 15, 1995.
This Plan is designed to be an "employee welfare benefit plan," as defined in
Section 3(1) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"). This Plan is governed by ERISA and, to the extent applicable, the
laws of the State of California. This document constitutes both the official
plan document and the required summary plan description under ERISA.
I. ELIGIBILITY
You will generally be eligible for severance benefits under the Plan if:
. you are an officer of the Company in the U.S.;
. your active employment is involuntarily terminated as a result of
work force reduction or job elimination during the term of the Plan;
. you execute the General Release of All Claims, a copy of which is
attached, within the prescribed number of days following your date of
termination, as set forth in the attached General Release of All
Claims; and
. you are not in one of the excluded categories listed below.
You are not eligible for severance benefits under this Plan if:
---
. you voluntarily terminate employment, unless such voluntary
termination occurs after you receive notice of an involuntary
termination which would otherwise qualify you for severance benefits
and the Plan Administrator determines, in its sole discretion, that
your earlier voluntary termination is in the best interests of the
Company;
. you are employed by, or are offered continued employment with, a
successor employer which directly or indirectly acquires (i) all or
any portion of the assets or operations of the Company or any
subsidiary, (ii) all or any portion of the outstanding capital stock
of the Company, or (iii) fifty percent (50%) or more of the capital
stock of any subsidiary of the Company;
. you are dismissed for a reason other than work force reduction or
job elimination (including, but not limited to, poor performance,
violation of Company policy or procedures, insubordination,
misconduct, the unauthorized use or disclosure of confidential
information or trade secrets of the Company or any subsidiary),
whether or not you already received notice of an involuntary
termination which would otherwise qualify you for severance benefits;
. you are a temporary or seasonal employee or work for the Company
solely as an independent contractor, consultant or agent;
. you are covered by any other severance or separation pay plan or
arrangement with the Company or by an employment agreement with the
Company;
1
<PAGE>
. you die before you receive any or all of your severance benefits
under the Plan; or
. you are on a leave of absence (including disability leave), except
to the extent the Plan Administrator decides, in its sole discretion,
to provide you with severance benefits upon your involuntary
termination.
II. HOW THE PLAN WORKS
If you are eligible for severance benefits under the Plan, you will receive
those benefits in installments during the Company's regular payroll periods.
The amount of your severance pay will generally be determined in accordance with
the guidelines set forth below on the basis of your Salary level measured as of
the effective date of your termination of active employee status:
Severance Guidelines
Six (6) months of Salary for officers other than the Chief Executive
Officer.
Twelve (12) months of Salary for the Company's Chief Executive
Officer.
. Salary generally means your base salary at your date of termination
and does not include, for example, bonuses, overtime compensation,
incentive pay, shift premiums or differentials, compensation
associated with employee stock options, reimbursements, sales
commissions or expense allowances.
. The Plan Administrator may, as it deems appropriate and in its sole
discretion, authorize severance benefits in an amount different from
the guideline amount. Under certain circumstances, the Plan
Administrator may, in its sole discretion, waive or modify, with
respect to one or more classes of employees, the eligibility
requirements for severance benefits or modify the method of
calculating their severance benefits.
. If you are rehired by the Company during the period that you are
otherwise eligible to receive severance pay, each remaining severance
installment paid to you shall be reduced by fifty percent (50%) of the
severance amount that you would otherwise receive had you not been
rehired, as previously determined pursuant to the guidelines set forth
above.
. When an eligible employee's termination is deemed covered by the WARN
Act, the benefit payable under the Plan shall be reduced (but not
below zero) by an amount equal to sixty (60) days pay.
If you are an eligible employee, you will also receive the following benefits:
. You will receive a lump sum payment for accrued and unused vacation
time (through your termination date) in your final paycheck.
. Your existing group health coverage (and, if applicable, the existing
group health coverage of your eligible dependents) offered by the
Company will be extended through the end of the month in which your
termination date occurs. Effective as of the first day of the
following month, you may then be eligible to elect temporary
continuation coverage of the Company's group health plan pursuant to
your rights under the Consolidated Omnibus Budget Reconciliation Act
of 1985, as amended ("COBRA"). If you (and, if applicable, your
dependents) elect COBRA continuation coverage, you will be required to
pay the entire cost of such coverage. You and your eligible
dependents will be provided with a COBRA election form and notice
which describes your rights to continuation coverage under COBRA.
2
<PAGE>
III. CHANGE IN CONTROL BENEFITS
You shall be eligible for the benefits set forth in this Paragraph III if you
meet the eligibility criteria set forth in Paragraph II above, as modified in
this Paragraph. Should your employment be voluntarily or involuntarily
terminated following a Change in Control, then unless you accept a position with
the acquirer you shall be entitled to the following benefits:
. Twelve (12) months of Salary and
. Accelerated vesting of unvested shares, plus accelerated
exercisability of options not yet exercisable, as if you remained employed for
one additional year following the Change in Control. The foregoing shall apply
to all shares you purchased and options you hold under the Company's 1995 Stock
Option Plan or 1991 Stock Option Plan, but shall not apply to any shares or
options covered by any other severance arrangement or accelerated vesting
arrangement.
Change in Control shall mean a Corporate Transaction or Change in Control, as
such terms are defined pursuant to the Company's 1995 Stock Option Plan. If
eligible, you shall be entitled to the benefits set forth in this Paragraph III
in addition to the benefits set forth in Paragraph II above.
IV. OTHER IMPORTANT INFORMATION
Plan Administration. As the Plan Administrator, the Company has full
discretionary authority to administer and interpret the Plan, including
discretionary authority to determine eligibility for benefits under the Plan and
the amount of benefits (if any) payable per participant. The Plan Administrator
hereby delegates to the Vice President, Human Resources all of its
administrative duties. Accordingly, the Vice President, Human Resources, on
behalf of the Plan Administrator, has full discretionary authority to carry out
its delegated duties. Any determination by the Vice President, Human Resources
will be final and conclusive upon all persons. The Company, as the Plan
Administrator, will indemnify and hold harmless the Vice President, Human
Resources for carrying out the responsibilities of the Plan Administrator;
provided, however, such person does not act with gross negligence or willful
misconduct.
Benefits. When benefits are due, they will be paid from the general assets of
the Company. The Company is not required to establish a trust to fund the Plan.
The benefits provided under this Plan are not assignable and may be conditioned
upon your compliance with any confidentiality agreement you have entered into
with the Company or upon your compliance with any Company policy or program.
Claims Procedure. If you believe you are incorrectly denied a benefit or are
entitled to a greater benefit than the benefit you receive under the Plan, you
may submit a signed, written application to the Plan Administrator within ninety
(90) days of your termination. You will be notified of the approval or denial
of this claim within ninety (90) days of the date that the Plan Administrator
receives the claim, unless special circumstances require an extension of time
for processing the claim. If your claim is denied, the notification will state
specific reasons for the denial and you will have sixty (60) days from receipt
of the written notification of the denial of your claim to file a signed,
written request for a review of the denial with the Plan Administrator. This
request should include the reasons you are requesting a review, facts supporting
your request and any other relevant comments. Pursuant to its discretionary
authority to administer and interpret the Plan and to determine eligibility for
benefits under the Plan, the Plan Administrator will generally make a final,
written determination of your eligibility for benefits within sixty (60) days of
receipt of your request for review.
3
<PAGE>
Plan Terms. This Plan and the Red Brick Systems, Inc. Severance Plan supersede
any and all prior separation, severance and salary continuation arrangements,
programs and plans which were previously offered by the Company, including offer
letters, but excluding individual letter agreements which address the vesting of
stock options or restricted stock upon an acquisition of the Company.
Plan Amendment or Termination. The Vice President, Human Resources, on behalf
of the Company, reserves the right to terminate or amend the Plan at any time
and in any manner. Because the provisions of the Plan are intended to serve as
mere guidelines for the payment of severance benefits under certain prescribed
circumstances, it is not intended that any employee obtain any vested right to
severance benefits. Accordingly, any termination or amendment of the Plan may
be made effective immediately with respect to any benefits not yet paid, whether
or not prior notice of such amendment or termination has been given to affected
employees.
Taxes. The Company will withhold taxes and other payroll deductions from any
severance payment.
No Right to Employment. This Plan does not provide you with any right to
continue employment with the Company or affect the Company's right, which right
is hereby expressly reserved, to terminate the employment of any individual at
any time for any reason with or without cause.
IV. STATEMENT OF ERISA RIGHTS
As a participant in the Red Brick Systems, Inc. Officers Severance Plan (the
"Plan"), you are entitled to certain rights and protections under the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"). ERISA provides
that all Plan participants shall be entitled to:
1. Examine, without charge, at the Plan Administrator's office, all Plan
documents, including all documents filed by the Plan with the U.S.
Department of Labor.
2. Obtain copies of all Plan documents and other Plan information upon
written request to the Plan Administrator. The Plan Administrator may
make a reasonable charge for the copies.
3. File suit in a federal court, if you, as a participant, request
materials and do not receive them within thirty (30) days of your
request. In such a case, the court may require the Plan Administrator
to provide the materials and to pay you a fine of up to $100 for each
day's delay until the materials are received, unless the materials
were not sent because of reasons beyond the control of the Plan
Administrator.
In addition to creating rights for certain employees of the Company under the
Plan, ERISA imposes obligations upon the people who are responsible for the
operation of the Plan. The people who operate the Plan (called "fiduciaries")
have a duty to do so prudently and in the interest of the Company's employees
who are covered by the Plan.
No one, including your employer or any other person, may fire you or otherwise
discriminate against you in any way to prevent you from obtaining a benefit to
which you are entitled under the Plan or from exercising your rights under
ERISA.
If your claim for a severance benefit is denied or ignored, in whole or in part,
you have a right to file suit in a federal or a state court. If Plan
fiduciaries are misusing the Plan's assets (if any) or if you are discriminated
against for asserting your rights, you may seek assistance from the U.S.
Department of Labor or file suit in a federal court. The court will decide who
will pay court costs and legal fees. If you are successful in your lawsuit, the
court may, if it so decides, order the party you have sued to pay your legal
costs, including attorney fees. However, if you lose, the court may order you
to pay these costs and fees, for example, if it finds that your claim or suit is
frivolous.
If you have any questions about the Plan, this statement or your rights under
ERISA, you should contact the Plan Administrator or the nearest Area Office of
the U.S. Labor-Management Services Administration, Department of Labor.
4
<PAGE>
ADDITIONAL PLAN INFORMATION
---------------------------
<TABLE>
<CAPTION>
<S> <C>
======================================================================================
Name of Plan: Red Brick Systems, Inc. Officers Severance Plan
- --------------------------------------------------------------------------------------
Company Sponsoring Plan: Red Brick Systems, Inc.
485 Alberto Way
Los Gatos, California 95032
- --------------------------------------------------------------------------------------
Employer Identification 77-0145392
Number:
- --------------------------------------------------------------------------------------
Plan Number: 508
- --------------------------------------------------------------------------------------
Plan Year: The calendar year; the first plan year is a short
plan year beginning November 15, 1995 and ending
December 31, 1995
- --------------------------------------------------------------------------------------
Plan Administrator: Red Brick Systems, Inc.
c/o Vice President, Human Resources
485 Alberto Way
Los Gatos, California 95032
(408) 399-3200
- --------------------------------------------------------------------------------------
Agent for Service of Legal Plan Administrator
Process:
- --------------------------------------------------------------------------------------
Type of Plan: Severance Plan/Employee Welfare Benefit Plan
- --------------------------------------------------------------------------------------
Plan Costs: The cost of the Plan is paid by Red Brick Systems, Inc.
======================================================================================================
</TABLE>
5
<PAGE>
EXHIBIT 10.26
RED BRICK SYSTEMS, INC.
SUPPLEMENTAL STOCK OPTION PLAN
------------------------------
ARTICLE ONE
GENERAL PROVISIONS
------------------
I. PURPOSE OF THE PLAN
This Supplemental Stock Option Plan is intended to promote the
interests of Red Brick Systems, Inc., a Delaware corporation, by providing
eligible persons with the opportunity to acquire a proprietary interest, or
otherwise increase their proprietary interest, in the Corporation as an
incentive for them to remain in the service of the Corporation.
Capitalized terms shall have the meanings assigned to such terms in
the attached Appendix.
II. ADMINISTRATION OF THE PLAN
A. Administration of the Plan with respect to all persons eligible to
participate may, at the Board's discretion, be vested in the Board or the
Committee. The members of the Committee may be Board members who are Employees
eligible to receive option grants or direct stock issuances under the Plan or
any stock option, stock appreciation, stock bonus or other stock plan of the
Corporation (or any Parent or Subsidiary).
B. Members of the Committee shall serve for such period of time as the
Board may determine and shall be subject to removal by the Board at any time.
The Board may also at any time terminate the functions of the Committee and
reassume all powers and authority previously delegated to such committee.
C. The Plan Administrator shall, within the scope of its administrative
functions under the Plan, have full power and authority to establish such rules
and regulations as it may deem appropriate for proper administration of the Plan
and to make such determinations under, and issue such interpretations of, the
Plan and any outstanding options thereunder as it may deem necessary or
advisable. Decisions of the Plan Administrator within the scope of its
administrative functions under the Plan shall be final and binding on all
parties who have an interest in the Plan under its jurisdiction or any option
thereunder.
D. Service on the Committee shall constitute service as a Board member,
and members of such committee shall accordingly be entitled to full
indemnification and reimbursement as Board members for their service on such
committee. No member of the Committee shall be liable for any act or omission
made in good faith with respect to the Plan or any option grants made under
the Plan.
1
<PAGE>
III. ELIGIBILITY
A. The persons eligible to participate in the Plan are as follows:
(i) Employees who are not officers or directors of the
Corporation; and
(ii) consultants and other independent advisors who provide
services to the Corporation (or any Parent or Subsidiary).
B. The Plan Administrator shall, within the scope of its administrative
jurisdiction under the Plan, have full authority (subject to the provisions of
the Plan) to determine which eligible persons are to receive option grants, the
time or times when such option grants are to be made, the number of shares to be
covered by each such grant, the time or times at which each option is to become
exercisable and the vesting schedule (if any) applicable to the option shares
and the maximum term for which the option is to remain outstanding.
IV. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of authorized but
unissued or reacquired Common Stock, including shares repurchased by the
Corporation on the open market. The maximum number of shares of Common Stock
which may be issued over the term of the Plan shall not exceed 1,100,000
shares/1/.
B. No one person participating in the Plan may receive options and
separately exercisable stock appreciation rights for more than 100,000 shares of
Common Stock available in the aggregate each calendar year over the term of the
Plan.
C. Shares of Common Stock subject to outstanding options shall be available
for subsequent issuance under the Plan to the extent (i) the options expire or
terminate for any reason prior to exercise in full or (ii) the options are
canceled in accordance with the cancellation-regrant provisions of Article Two.
All shares issued under the Plan shall reduce on a share-for-share basis the
number of shares of Common Stock available for subsequent issuance under the
Plan.
D. Should any change be made to the Common Stock by reason of any stock
split, stock dividend, recapitalization, combination of shares, exchange of
shares or other change affecting the outstanding Common Stock as a class without
the Corporation's receipt of consideration, appropriate adjustments shall be
made to (i) the maximum number and/or class of securities issuable under the
Plan, (ii) the number and/or class of securities for which any one person may be
granted options each calendar year over the term of the Plan, and (iii) the
number
- -----------
/1/ Includes 600,000 shares initially authorized upon adoption of Plan, and a
500,000-share increase approved by the Board on January 5, 1998.
2
<PAGE>
and/or class of securities and the exercise price per share in effect under each
outstanding option in order to prevent the dilution or enlargement of benefits
thereunder. The adjustments determined by the Plan Administrator shall be
final, binding and conclusive.
3
<PAGE>
ARTICLE TWO
OPTION GRANT PROGRAM
--------------------
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; provided, however, that each such document
--------
shall comply with the terms specified below. No Incentive Options may be
granted under the Plan.
A. EXERCISE PRICE.
--------------
1. The exercise price per share shall be fixed by the Plan
Administrator but shall not be less than eighty-five percent (85%) of the Fair
Market Value per share of Common Stock on the option grant date.
2. The exercise price shall become immediately due upon exercise of
the option and shall, subject to the provisions of Section I of Article Three
and the documents evidencing the option, be payable in one or more of the
forms specified below:
(i) cash or check made payable to the Corporation,
(ii) shares of Common Stock held for the requisite period
necessary to avoid a charge to the Corporation's earnings for financial
reporting purposes and valued at Fair Market Value on the Exercise Date,
or
(iii) to the extent the option is exercised for vested shares,
through a special sale and remittance procedure pursuant to which the
Optionee shall concurrently provide irrevocable written instructions to
(a) a Corporation-designated brokerage firm to effect the immediate sale
of the purchased shares and remit to the Corporation, out of the sale
proceeds available on the settlement date, sufficient funds to cover the
aggregate exercise price payable for the purchased shares plus all
applicable Federal, state and local income and employment taxes required
to be withheld by the Corporation by reason of such exercise and (b) the
Corporation to deliver the certificates for the purchased shares directly
to such brokerage firm in order to complete the sale.
Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
B. EXERCISE AND TERM OF OPTIONS. Each option shall be exercisable at
----------------------------
such time or times, during such period and for such number of shares as shall
be determined by the Plan Administrator and set forth in the documents
evidencing the option. However, no option shall have a term in excess of ten
(10) years measured from the option grant date.
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<PAGE>
C. EFFECT OF TERMINATION OF SERVICE.
--------------------------------
1. The following provisions shall govern the exercise of any options
held by the Optionee at the time of cessation of Service or death:
(i) Any option outstanding at the time of the Optionee's
cessation of Service for any reason shall remain exercisable for such
period of time thereafter as shall be determined by the Plan
Administrator and set forth in the documents evidencing the option, but
no such option shall be exercisable after the expiration of the option
term.
(ii) Any option exercisable in whole or in part by the
Optionee at the time of death may be subsequently exercised by the
personal representative of the Optionee's estate or by the person or
persons to whom the option is transferred pursuant to the Optionee's will
or in accordance with the laws of descent and distribution.
(iii) During the applicable post-Service exercise period, the
option may not be exercised in the aggregate for more than the number of
vested shares for which the option is exercisable on the date of the
Optionee's cessation of Service. Upon the expiration of the applicable
exercise period or (if earlier) upon the expiration of the option term, the
option shall terminate and cease to be outstanding for any vested shares for
which the option has not been exercised. However, the option shall,
immediately upon the Optionee's cessation of Service, terminate and cease to
be outstanding to the extent it is not exercisable for vested shares on the
date of such cessation of Service.
(iv) Should the Optionee's Service be terminated for
Misconduct, then all outstanding options held by the Optionee shall
terminate immediately and cease to be outstanding.
(v) In the event of a Corporate Transaction, the provisions of
Section II of this Article Two shall govern the period for which the
outstanding options are to remain exercisable following the Optionee's
cessation of Service and shall supersede any provisions to the contrary
in this section.
2. The Plan Administrator shall have the discretion, exercisable either
at the time an option is granted or at any time while the option remains
outstanding, to:
(i) extend the period of time for which the option is to
remain exercisable following the Optionee's cessation of Service from the
period otherwise in effect for that option to such greater period of time
as the Plan Administrator shall deem appropriate, but in no event beyond
the expiration of the option term, and/or
(ii) permit the option to be exercised, during the applicable
post-Service exercise period, not only with respect to the number of
vested shares of Common Stock for which such option is exercisable at the
time of the Optionee's
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<PAGE>
cessation of Service but also with respect to one or more additional
installments in which the Optionee would have vested under the option had
the Optionee continued in Service.
D. STOCKHOLDER RIGHTS. The holder of an option shall have no stockholder
------------------
rights with respect to the shares subject to the option until such person shall
have exercised the option, paid the exercise price and become a holder of record
of the purchased shares.
E. REPURCHASE RIGHTS. The Plan Administrator shall have the discretion
-----------------
to grant options which are exercisable for unvested shares of Common Stock.
Should the Optionee cease Service while holding such unvested shares, the
Corporation shall have the right to repurchase, at the exercise price paid per
share, any or all of those unvested shares. The terms upon which such
repurchase right shall be exercisable (including the period and procedure for
exercise and the appropriate vesting schedule for the purchased shares) shall
be established by the Plan Administrator and set forth in the document
evidencing such repurchase right.
F. LIMITED TRANSFERABILITY OF OPTIONS. During the lifetime of the
----------------------------------
Optionee, the option shall be exercisable only by the Optionee and shall not
be assignable or transferable other than by will or by the laws of descent and
distribution following the Optionee's death. However, a Non-Statutory Option
may be assigned in accordance with the terms of a Qualified Domestic Relations
Order. The assigned option may only be exercised by the person or persons who
acquire a proprietary interest in the option pursuant to such Qualified
Domestic Relations Order. The terms applicable to the assigned option (or
portion thereof) shall be the same as those in effect for the option
immediately prior to such assignment and shall be set forth in such documents
issued to the assignee as the Plan Administrator may deem appropriate.
II. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. In the event of any Corporate Transaction, each outstanding option
shall automatically accelerate so that each such option shall, immediately
prior to the effective date of the Corporate Transaction, become fully
exercisable for all of the shares of Common Stock at the time subject to such
option and may be exercised for any or all of those shares as fully-vested
shares of Common Stock. However, an outstanding option shall NOT so accelerate
if and to the extent: (i) such option is, in connection with the Corporate
Transaction, either to be assumed by the successor corporation (or parent
thereof) or to be replaced with a comparable option to purchase shares of the
capital stock of the successor corporation (or parent thereof), (ii) such
option is to be replaced with a cash incentive program of the successor
corporation which preserves the spread existing on the unvested option shares
at the time of the Corporate Transaction and provides for subsequent payout in
accordance with the same vesting schedule applicable to such option or (iii)
the acceleration of such option is subject to other limitations imposed by the
Plan Administrator at the time of the option grant. The determination of
option comparability under clause (i) above shall be made by the Plan
Administrator, and its determination shall be final, binding and conclusive.
B. All outstanding repurchase rights shall also terminate automatically,
and the shares of Common Stock subject to those terminated rights shall
immediately vest in full, in the event of any Corporate Transaction, except to
the extent: (i) those repurchase rights are to be
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<PAGE>
assigned to the successor corporation (or parent thereof) in connection with
such Corporate Transaction or (ii) such accelerated vesting is precluded by
other limitations imposed by the Plan Administrator at the time the repurchase
right is issued.
C. The Plan Administrator shall have the discretion, exercisable either
at the time the option is granted or at any time while the option remains
outstanding, to provide for the automatic acceleration of one or more
outstanding options (and the automatic termination of one or more outstanding
repurchase rights with the immediate vesting of the shares of Common Stock
subject to those rights) upon the occurrence of a Corporate Transaction,
whether or not those options are to be assumed or replaced (or those
repurchase rights are to be assigned) in the Corporate Transaction.
D. Immediately following the consummation of the Corporate Transaction,
all outstanding options shall terminate and cease to be outstanding, except to
the extent assumed by the successor corporation (or parent thereof).
E. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction
had the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to (i) the number and class of
securities available for issuance under the Plan on both an aggregate and per
Optionee basis following the consummation of such Corporate Transaction and
(ii) the exercise price payable per share under each outstanding option,
provided the aggregate exercise price payable for such securities shall remain
- --------
the same.
F. Any options which are assumed or replaced in the Corporate Transaction
and do not otherwise accelerate at that time, shall automatically accelerate
(and any of the Corporation's outstanding repurchase rights which do not
otherwise terminate at the time of the Corporate Transaction shall
automatically terminate and the shares of Common Stock subject to those
terminated rights shall immediately vest in full) in the event the Optionee's
Service should subsequently terminate by reason of an Involuntary Termination
within twelve (12) months following the effective date of such Corporate
Transaction. Any options so accelerated shall remain exercisable for fully-
vested shares until the earlier of (i) the expiration of the option term or
-------
(ii) the expiration of the one (1)-year period measured from the effective
date of the Involuntary Termination.
G. The Plan Administrator shall have the discretion, exercisable either
at the time the option is granted or at any time while the option remains
outstanding, to (i) provide for the automatic acceleration of one or more
outstanding options (and the automatic termination of one or more outstanding
repurchase rights with the immediate vesting of the shares of Common Stock
subject to those rights) upon the occurrence of a Change in Control or (ii)
condition any such option acceleration (and the termination of any outstanding
repurchase rights) upon the subsequent Involuntary Termination of the
Optionee's Service within a specified period following the effective date of
such Change in Control. Any options accelerated in connection
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<PAGE>
with a Change in Control shall remain fully exercisable until the expiration
or sooner termination of the option term.
H. The grant of options under the Plan shall in no way affect the right
of the Corporation to adjust, reclassify, reorganize or otherwise change its
capital or business structure or to merge, consolidate, dissolve, liquidate or
sell or transfer all or any part of its business or assets.
III. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at any time
and from time to time, with the consent of the affected option holders, the
cancellation of any or all outstanding options under the Plan and to grant in
substitution new options covering the same or different number of shares of
Common Stock but with an exercise price per share based on the Fair Market Value
per share of Common Stock on the new option grant date.
8
<PAGE>
ARTICLE THREE
MISCELLANEOUS
-------------
I. FINANCING
A. The Plan Administrator may permit any Optionee to pay the option
exercise price under the Plan by delivering a promissory note payable in one
or more installments. The terms of any such promissory note (including the
interest rate and the terms of repayment) shall be established by the Plan
Administrator in its sole discretion. Promissory notes may be authorized with
or without security or collateral. In all events, the maximum credit available
to the Optionee may not exceed the sum of (i) the aggregate option exercise
price payable for the purchased shares plus (ii) any Federal, state and local
income and employment tax liability incurred by the Optionee in connection
with the option exercise.
B. The Plan Administrator may, in its discretion, determine that one or
more such promissory notes shall be subject to forgiveness by the Corporation
in whole or in part upon such terms as the Plan Administrator may deem
appropriate.
II. TAX WITHHOLDING
A. The Corporation's obligation to deliver shares of Common Stock upon
the exercise of options under the Plan shall be subject to the satisfaction of
all applicable Federal, state and local income and employment tax withholding
requirements.
B. The Plan Administrator may, in its discretion, provide any or all
holders of Non-Statutory Options under the Plan with the right to use shares
of Common Stock in satisfaction of all or part of the Taxes incurred by such
holders in connection with the exercise of their options. Such right may be
provided to any such holder in either or both of the following formats:
(i) Stock Withholding: The election to have the Corporation
-----------------
withhold, from the shares of Common Stock otherwise issuable upon the
exercise of such Non-Statutory Option, a portion of those shares with an
aggregate Fair Market Value equal to the percentage of the Taxes (not to
exceed one hundred percent (100%)) designated by the holder.
(ii) Stock Delivery: The election to deliver to the
--------------
Corporation, at the time the Non-Statutory Option is exercised, one or
more shares of Common Stock previously acquired by such holder (other
than in connection with the option exercise triggering the Taxes) with an
aggregate Fair Market Value equal to the percentage of the Taxes (not to
exceed one hundred percent (100%)) designated by the holder.
III. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan shall become effective on the Plan Effective Date and options
may be granted under the Plan from and after the Plan Effective Date.
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<PAGE>
B. The Plan shall terminate upon the earliest of (i) March 18, 2007, (ii)
the date on which all shares available for issuance under the Plan shall have
been issued pursuant to the exercise of the options under the Plan or (iii)
the termination of all outstanding options in connection with a Corporate
Transaction. Upon such Plan termination, all options outstanding on such date
shall thereafter continue to have force and effect in accordance with the
provisions of the documents evidencing such options.
IV. AMENDMENT OF THE PLAN
The Board shall have complete and exclusive power and authority to
amend or modify the Plan in any or all respects. However, no such amendment or
modification shall adversely affect the rights and obligations with respect to
options at the time outstanding under the Plan unless the Optionee consents to
such amendment or modification. Notwithstanding the sentence above, the Plan
Administrator may amend an outstanding option to reduce the number of option
shares previously granted to an optionee provided the reduction applies solely
unvested shares or shares which have not yet become exercisable as of the date
of the amendment.
V. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of shares
of Common Stock under the Plan shall be used for general corporate purposes.
VI. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any option under the
Plan and the issuance of any shares of Common Stock upon the exercise of any
option shall be subject to the Corporation's procurement of all approvals and
permits required by regulatory authorities having jurisdiction over the Plan,
the options granted under it and the shares of Common Stock issued pursuant to
it.
B. No shares of Common Stock or other assets shall be issued or delivered
under the Plan unless and until there shall have been compliance with all
applicable requirements of Federal and state securities laws, including the
filing and effectiveness of the Form S-8 registration statement for the shares
of Common Stock issuable under the Plan, and all applicable listing
requirements of any stock exchange (or the Nasdaq National Market, if
applicable) on which Common Stock is then listed for trading.
VII. NO EMPLOYMENT/SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee any right to
continue in Service for any period of specific duration or interfere with or
otherwise restrict in any way the rights of the Corporation (or any Parent or
Subsidiary employing or retaining such person) or of the Optionee, which rights
are hereby expressly reserved by each, to terminate such person's Service at any
time for any reason, with or without cause.
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<PAGE>
APPENDIX
--------
The following definitions shall be in effect under the Plan:
A. BOARD shall mean the Corporation's Board of Directors.
-----
B. CHANGE IN CONTROL shall mean a change in ownership or control of the
-----------------
Corporation effected through either of the following transactions:
(i) the acquisition, directly or indirectly, by any person or
related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under common
control with, the Corporation), of beneficial ownership (within the
meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than
fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities pursuant to a tender or exchange
offer made directly to the Corporation's stockholders which the Board
does not recommend such stockholders to accept, or
(ii) a change in the composition of the Board over a period of
thirty-six (36) consecutive months or less such that a majority of the
Board members ceases, by reason of one or more contested elections for
Board membership, to be comprised of individuals who either (A) have been
Board members continuously since the beginning of such period or (B) have
been elected or nominated for election as Board members during such
period by at least a majority of the Board members described in clause
(A) who were still in office at the time the Board approved such election
or nomination.
C. CODE shall mean the Internal Revenue Code of 1986, as amended.
----
D. COMMITTEE shall mean a committee of one (1) or more Board members
---------
appointed by the Board to administer the Plan.
E. COMMON STOCK shall mean the Corporation's common stock.
------------
F. CORPORATE TRANSACTION shall mean either of the following stockholder-
---------------------
approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities possessing
more than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or
persons different from the persons holding those securities immediately
prior to such transaction; or
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation or
dissolution of the Corporation .
(iii) CORPORATION shall mean Red Brick Systems, Inc., a
-----------
Delaware corporation.
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<PAGE>
G. EMPLOYEE shall mean an individual who is in the employ of the
--------
Corporation (or any Parent or Subsidiary), subject to the control and
direction of the employer entity as to both the work to be performed and the
manner and method of performance.
H. EXERCISE DATE shall mean the date on which the Corporation shall have
-------------
received written notice of the option exercise.
I. FAIR MARKET VALUE per share of Common Stock on any relevant date
-----------------
shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question, as such price is
reported by the National Association of Securities Dealers on the Nasdaq
National Market or any successor system. If there is no closing selling
price for the Common Stock on the date in question, then the Fair Market
Value shall be the closing selling price on the last preceding date for
which such quotation exists.
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing selling price
per share of Common Stock on the date in question on the Stock Exchange
determined by the Plan Administrator to be the primary market for the
Common Stock, as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no closing selling price for
the Common Stock on the date in question, then the Fair Market Value
shall be the closing selling price on the last preceding date for which
such quotation exists.
(iii) For purposes of option grants made on the date the
Underwriting Agreement is executed and the initial public offering price of
the Common Stock is established, the Fair Market Value shall be deemed to be
equal to the established initial offering price per share. For purposes of
option grants made prior to such date, the Fair Market Value shall be
determined by the Plan Administrator after taking into account such factors as
the Plan Administrator shall deem appropriate.
J. INCENTIVE OPTION shall mean an option which satisfies the
----------------
requirements of Code Section 422.
K. INVOLUNTARY TERMINATION shall mean the termination of the Service of
-----------------------
any individual which occurs by reason of:
(i) such individual's involuntary dismissal or discharge by
the Corporation for reasons other than Misconduct, or
(ii) such individual's voluntary resignation following (A) a
change in his or her position with the Corporation which materially
reduces his or her level of responsibility, (B) a reduction in his or her
level of compensation (including base salary, fringe benefits and
participation in corporate-performance based bonus or incentive programs)
by more than fifteen percent (15%) or (C) a relocation of such
individual's
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<PAGE>
place of employment by more than fifty (50) miles, provided and only if
such change, reduction or relocation is effected by the Corporation
without the individual's consent.
L. MISCONDUCT shall mean the commission of any act of fraud,
----------
embezzlement or dishonesty by the Optionee, any unauthorized use or disclosure
by such person of confidential information or trade secrets of the Corporation
(or any Parent or Subsidiary), or any other intentional misconduct by such
person adversely affecting the business or affairs of the Corporation (or any
Parent or Subsidiary) in a material manner. The foregoing definition shall not
be deemed to be inclusive of all the acts or omissions which the Corporation
(or any Parent or Subsidiary) may consider as grounds for the dismissal or
discharge of any Optionee or other person in the Service of the Corporation
(or any Parent or Subsidiary).
M. ACT shall mean the Securities Exchange Act of 1934, as amended.
---
N. NON-STATUTORY OPTION shall mean an option not intended to satisfy the
--------------------
requirements of Code Section 422.
O. OPTIONEE shall mean any person to whom an option is granted under
--------
the Plan.
P. PARENT shall mean any corporation (other than the Corporation) in an
------
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
Q. PERMANENT DISABILITY OR PERMANENTLY DISABLED shall mean the inability
--------------------------------------------
of the Optionee to engage in any substantial gainful activity by reason of any
medically determinable physical or mental impairment expected to result in death
or to be of continuous duration of twelve (12) months or more.
R. PLAN shall mean the Corporation's Supplemental Stock Option Plan, as
----
set forth in this document.
S. PLAN ADMINISTRATOR shall mean the particular entity, whether the
------------------
Committee or the Board, which is authorized to administer the Plan with respect
to one or more classes of eligible persons, to the extent such entity is
carrying out its administrative functions under those programs with respect to
the persons under its jurisdiction.
T. PLAN EFFECTIVE DATE shall mean March 19, 1997.
-------------------
U. SERVICE shall mean the provision of services to the Corporation (or any
-------
Parent or Subsidiary) by a person in the capacity of an Employee, a non-employee
member of the board of directors or a consultant or independent advisor, except
to the extent otherwise specifically provided in the documents evidencing the
option grant.
V. STOCK EXCHANGE shall mean either the American Stock Exchange or the
--------------
New York Stock Exchange.
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<PAGE>
W. SUBSIDIARY shall mean any corporation (other than the Corporation)
----------
in an unbroken chain of corporations beginning with the Corporation, provided
each corporation (other than the last corporation) in the unbroken chain owns,
at the time of the determination, stock possessing fifty percent (50%) or more
of the total combined voting power of all classes of stock in one of the other
corporations in such chain.
X. TAXES shall mean the Federal, state and local income and employment
-----
tax liabilities incurred by the holder of Non-Statutory Options or unvested
shares of Common Stock in connection with the exercise of those options or the
vesting of those shares.
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<PAGE>
Exhibit 10.27
FOURTH AMENDMENT OF LEASE
This Fourth Amendment of Lease (the "Amendment") is dated as of this 25th day of
November, 1997, by and between ALBERTO OAKS INVESTORS, LTD. A California limited
partnership ("Landlord"), and RED BRICK SYSTEMS, INC., a Delaware corporation
("Tenant").
RECITALS
A. Landlord is the landlord and Tenant is the tenant pursuant to that certain
written lease dated October 24,1994 as amended by that First Amendment of
Lease dated May 15, 1995, that Second Amendment of Lease dated July 15, 1995
and that Third Amendment of Lease dated October 10, 1995 (collectively all
referred to herein as the "Lease"), by and between Landlord, as landlord, and
Tenant, as tenant.
B. Pursuant to this Amendment, Landlord and Tenant desire to confirm their
agreements regarding expanding the Premises and extending the Term of the
Lease.
NOW, THEREFORE, in consideration of the mutual promises of the parties hereto,
and other valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties agree as follows:
1. Defined Terms. All capitalized terms used and not defined herein but defined
in the Lease shall have the meanings given to such terms in the Lease.
2. Premises. The existing Premises of 37,672 rentable square feet is known
herein as the "Red Brick Space". The Premises is expanded to include Suites
110, 101 and 102 in the 475 Building (collectively known as the "Expansion
Space A"), Suite 104 in the 475 Building (known as "Expansion Space B") and
Suite 100 in the 485 Building (known as "Expansion Space C"). Expansion Space
A totals 10,728 rentable square feet and is located as shown on Exhibit "A"
attached hereto and made a part hereof. Expansion Space B is 1,866 rentable
square feet and is located as shown on Exhibit "B" attached hereto and made a
part hereof. Expansion Space C is 5,734 rentable square feet and is located
as shown on Exhibit "C" attached hereto and made a part hereof. When
Expansion Space A, Expansion Space B and Expansion Space C are added to the
Premises as set forth herein, the Premises shall contain 56,000 rentable
square feet.
3. Term. The Term of this Lease shall expire on December 31, 2002 instead of on
May 31, 1998 (the "Expiration Date").
4. Possession. Landlord shall deliver possession of Expansion Space A to Tenant
on or after February 1,1998, but no later than June 1,1998. Landlord shall
deliver possession of Expansion Space B to Tenant between March 1, 1998 and
May 1,1998. Landlord shall deliver possession of Expansion Space C to Tenant
on or before December 15, 1997. Landlord shall notify Tenant at least thirty
(30) days in advance of the delivery dates of Expansion Space A and Expansion
Space B.
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<PAGE>
5. Rent. As used in this Amendment, the term "monthly Rent" does not include
Direct Taxes and Operating Expenses. The monthly Rent payable by Tenant for
the Red Brick Space shall increase on June 1, 1998 to $78,357 (calculated at
$2.08 per rentable square foot) and shall continue at that amount until
January 1,1999 when it is increased as set forth below. The monthly Rent
payable by Tenant for Expansion Space A shall be $22,314.24 (calculated at
$2.08 per rentable square foot per month) and shall commence thirty (30) days
after possession thereof is delivered to Tenant in the condition as set forth
below and continue until January 1, 1999 when it is increased as set forth
below. The monthly Rent payable by Tenant for Expansion Space B shall be
$3,881.28 (calculated at $2.08 per rentable square foot per month) and shall
commence thirty (30) days after possession thereof is delivered to Tenant and
continue until January 1,1999 when it is increased as set forth below. The
monthly Rent payable by Tenant for Expansion Space C shall be $11,926.72
(calculated at $2.08 per rentable square foot) and shall commence thirty (30)
days after possession thereof is delivered to Tenant, but no earlier than
January 15, 1998, and shall continue at that amount until January 1,1999 when
it is increased as set forth below.
6. Rent Increases. The monthly Rent for the Premises shall be increased by three
percent (3%) of the amount for the prior month on each January 1st of the
Term.
7. Condition of Expansion Space A. Landlord shall deliver possession of the
Suite 102 portion of Expansion Space A in broom clean condition with all
fixtures and equipment removed from and plumbing and electrical capped off.
Landlord shall not be required to perform any work to Expansion Space B or
Expansion Space C prior to delivery thereof to Tenant.
8. Direct Taxes and Operating Expenses. Beginning on the date the monthly Rent
commences for Expansion Space A, Expansion Space B, Expansion Space C and
beginning on June 1, 1998 for the Red Brick Space, Tenant shall pay its
Percentage Share (as set forth on Exhibit "D", attached hereto and made a
part hereof) of the Direct Taxes and Operating Expenses as defined in
Addendum A and Addendum B of the Lease, without deduction for the Base Year
amounts of same.
9. Security Deposit. The Security Deposit shall be increased to a total of
$115,000 by the following amounts and on the following dates: an additional
$22,000 on the date Landlord delivers possession of Expansion Space A, an
additional $4,000 on the date Landlord delivers possession of Expansion Space
B and an additional $30,000 on June 1,1998.
10. Tenant Improvement Allowance. Landlord shall provide an allowance of
$115,000 which may be drawn down by Tenant at any time over the Term as
follows. Within fifteen (15) days of the date Tenant submits draw requests
to Landlord together with copies of paid invoices, permits (if applicable)
and lien releases for any alterations, additions or improvements completed
by Tenant in the Premises, Landlord shall pay such draw requests up to a
cumulative total of $1 15,000.
11. Restoration of Alterations. Landlord acknowledges that Landlord may not
require Tenant to remove any and all alterations, additions or improvements
made by Tenant to the Premises at the end of the Term, if such alterations,
additions or improvements were
2
<PAGE>
made by Tenant prior to the date of execution of this Amendment.
12. Option to Extend Term. The following paragraph shall replace the first
paragraph in its entirety of Article 12 of Addendum B of the Lease,
"Provided that (a) Tenant is not then in default under the terms of the
Lease at the time Tenant exercises its Option to Extend Term (as defined
below) or at the commencement of the Option Term (as defined below) and (b)
Tenant provides Landlord with written notice thereof at least one hundred
eighty (180) days in advance, Tenant shall have the option ("Extension
Option") to extend the Term of this Lease for one (1) additional period of
five (5) years (the "Extension Term"), commencing upon the last day of the
Term of this Lease (the "Termination Date"). The Extension Term shall be on
all of the terms and conditions of this Lease, except that the monthly Rent
due hereunder shall be adjusted to the Market Rent, including periodic
increases, if any." The remaining three paragraphs of Section 12 of Addendum
B shall remain unchanged.
13. Assignment and Subletting. Landlord agrees that its right to terminate the
portion of the Premises described in Tenant's notice to sublet or assign is
waived if the portion so specified in Tenant's notice (the "Sublet Portion")
is (a) twenty-five percent (25%) or less of the rentable square feet of the
Premises or (b) for a sublease term of no longer than one year less than the
Term. Further, Landlord agrees, solely in the instance of subparagraph (a),
that Landlord's portion of the Bonus Rent for the Sublet Portion shall be
reduced by fifty percent (50%).
14. Option to Cancel. Provided that (a) Tenant is not then in default under the
terms of the Lease at the time Tenant exercises its Option to Cancel (as
defined below) and (b) Tenant provides Landlord with written notice thereof
at least one hundred eighty (180) days in advance of the cancellation date
selected, Tenant shall have the option ("Cancellation Option") to cancel
this Lease, effective on any day after August 31, 2001 that is the last day
of a month (the "Effective Date"). As consideration for this Cancellation
Option, Tenant shall pay to Landlord a cancellation fee equal to the
following amounts as determined by the Effective Date: six (6) months of
the then current monthly Rent if the Effective Date is on or before April
30, 2002 or four (4) months of monthly Rent is the Effective Date is after
April 30, 2002. Tenant shall pay such cancellation fee to Landlord on or
before the Effective Date.
15. Parking. Tenant shall be permitted to utilize its Percentage Share of
parking spaces in the Project and to designate a portion of its parking
spaces for exclusive use of Tenant's visitors.
16. Signage. Tenant, at Tenant's sole expense, shall have the right to rename
the Project and to display such name, along with Tenant's company name and
logo on all existing signage located in the Project or to install new
signage subject to Landlord's prior reasonable approval and subject to
applicable city ordinances.
17. Lease in Effect. Landlord and Tenant acknowledge and agree that the Lease,
as hereby amended, remains in full force and effect in accordance with its
terms. To the extent that any provision of this Amendment shall conflict
with the Lease as in effect prior to the date hereof, this Amendment shall
prevail.
3
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Amendment to be effective
as of the day and year first above written.
LANDLORD:
ALBERT OAKS INVESTORS, LTD.,
a California limited partnership
By: Cypress Properties Incorporated,
a California corporation
By: /s/ Frank J. Pokigo
-------------------
Its: VP / CFO
--------
TENANT:
RED BRICK SYSTEM S, INC.,
a Delaware corporation
By: Tom R. Blankenship
------------------
Its: Director, I/S & Operations
--------------------------
4
<PAGE>
Exhibit 10.28
1998 Executive Compensation Plan
This 1998 Executive Compensation Plan (the "Plan") is entered into between
Participant ("Plan Participant") and Red Brick Systems, Inc. ("Red Brick" or
the "Company"). The Red Brick Systems 1998 Executive Compensation Plan as
defined in this document, is effective January 1, 1998, and will remain in
effect until December 31, 1998. This Plan supersedes, cancels, and replaces all
other plans for Executives. The Company reserves the right to modify this Plan
at any time. Nothing in this Plan shall be construed as a commitment or
guarantee of employment for any specified period of time. Red Brick Systems
reserves the right to modify this Plan.
The Plan consists of the following components:
1. Base Salary
2. MBO Bonus
3. Company Profit Bonus
4. Total Revenue Bonus
5. Year-end Bonus
These components, together, comprise the executive's total compensation paid by
the Company. None of these components are guaranteed to the executive, and as
such cannot be construed as any type of contract for employment.
Each executive will receive this "1998 Executive Compensation Plan" document, as
well as an individualized "Plan Summary" document, which will outline each
component of the executive's total target compensation, with Company profit and
total revenue goals.
BASE SALARY:
Every executive receives a salary, paid out in semi-monthly payments. The
Company's compensation philosophy provides for pay at comparatively competitive
or near-competitive rates with the Company's market for products and people.
The Company also follows a pay-for-performance guideline as part of this
compensation philosophy. As such, the Company provides for yearly performance
appraisals in which the executive is given a written review by their immediate
manager (CEO or Board of Directors).
MBO BONUS:
At the beginning of the fiscal year and/or quarter the Chief Executive Officer
of the company will work with each vice president to establish three to seven
performance objectives for each fiscal quarter for each officer and vice
president. The Company's Board of Directors will establish the quarterly
performance objectives for the CEO. Each objective will include a specific,
measurable result and will be given a weighted value based on the effort
required by the executive to reach the objective, as well as the objective's
impact on the Company's business. The MBO Bonus amount the executive will be
eligible to earn is outlined on the attached individualized "Plan Summary"
document.
The MBO bonus will be earned on the date that a participant's performance is
reviewed against the set MBO goals for the preceding quarter. To be eligible to
earn the MBO bonus, a participant must be continuously employed by the Company
on the review date. If a participant ceases to be employed by the Company for
any reason prior to the review date, then he or she will not be eligible to earn
or receive any part of the MBO bonus under this plan.
The review date will be within fifteen (15) days after the end of each fiscal
quarter. The CEO will review the performance of each vice president and officer
for the preceding quarter against the set MBO goals for
1
<PAGE>
that quarter. The Board of Directors will review the performance of the CEO
for the preceding quarter against his MBO goals for that quarter. The CEO or
Board of Directors will then determine in sole discretion what, if any, MBO
bonus to award the participant.
At the end of each fiscal quarter, the Company may modify the performance
objectives of any participant for the remaining fiscal quarters of the year if
at its sole discretion it is deemed necessary to do so.
The MBO bonus earned by the participant will be paid no later than thirty (30)
days after the review date.
COMPANY PROFIT BONUS:
A profit bonus will be earned at the end of each fiscal quarter based on
achievement of the quarterly operating profit objective set for that quarter, as
approved by the Board of Directors. The profit bonus amount the executive will
be eligible to earn is outlined on the attached individualized "Plan Summary"
document.
If the profit objective is met, but the department that the executive manages
has exceeded its quarterly expense budget, the profit bonus will not be paid to
that individual. If the profit objective is not met, the executive is not
eligible to earn or receive any Company Profit Bonus under this Plan.
If the Plan Participant's quarterly budget under review is exceeded due to
authorized headcount by the CEO of the Company, the Plan Participant is still
eligible to earn his or her quarterly profit bonus. The headcount which is
outside of the Plan must be authorized by the CEO within the first thirty (30)
days of the quarter.
Profit achievement will be calculated based on unaudited revenue recognized by
the Company under its revenue recognition policies and unaudited expense
recognized by the Company under its expense recognition policies, both in
accordance with generally accepted accounting principles.
TOTAL REVENUE BONUS:
A total revenue bonus will be earned at the end of each fiscal quarter based on
the achievement of the quarterly overall revenue objective set for that quarter,
as approved by the Board of Directors. The targeted total revenue bonus amount
the executive will be eligible to earn at 100% of goal is outlined on the
attached individualized "Plan Summary" document.
If the total revenue objective is met, but the department that the executive
manages has exceeded its quarterly expense budget, the total revenue bonus will
not be paid to that individual. If the total revenue objective is not met, the
executive is not eligible to earn or receive any part of the Total Revenue Bonus
under this Plan.
If the Plan Participant's quarterly budget under review is exceeded due to
authorized headcount by the CEO of the Company, the Plan Participant is still
eligible to earn his or her quarterly total revenue bonus. The headcount which
is outside of the Plan must be authorized by the CEO within the first thirty
(30) days of the quarter.
Total revenue achievement will be calculated based on unaudited revenue
recognized by the Company under its revenue recognition policies, in accordance
with generally accepted accounting principles.
Executives covered under this Plan are eligible for an additional amount of
Total Revenue bonus in the event the Company exceeds its quarterly total revenue
goal. The amount of additional bonus is calculated based on the following
schedule:
Company achieves 105% of goal = additional 2% of executive's base salary
Company achieves 110% of goal = additional 4% of executive's base salary
Company achieves 115% of goal = additional 6% of executive's base salary
2
<PAGE>
In the event the Company exceeds its quarterly total revenue goal by an amount
that exceeds 115%, the CEO may at his sole discretion make additional
recommendations for raised bonus levels.
Orders will be both designated by the CEO before the beginning of the quarter
and audited by the CEO after the end of the quarter. Orders counted toward a
quarterly bonus that are in excess of revenues of that quarter will always be
deducted from revenues and orders counted toward bonus in the subsequent
quarter. If any portion of the bonus is paid on an order that does not
materialize, the appropriate amount of bonus will be retracted from the most
recently paid bonus or deducted from the next quarter's bonus, based on the
CEO's recommended course of action.
The profit and revenue objectives attached to this document may be modified
during the year by approval of the Board of Directors.
The profit and total revenue bonuses will be earned on the date that profit and
revenue information for the preceding fiscal quarter is reported to the Board of
Directors of the Company. To be eligible to earn the profit and the total
revenue bonus, a participant must be continuously employed by the Company on the
earning date. If a participant ceases to be employed by the Company for any
reason prior to the earning date, then he or she will not earn or receive any
profit or total revenue bonus under this Plan.
The profit and total revenue bonuses will be paid to participant within thirty
(30) days of the date earned.
YEAR-END BONUS:
A year-end bonus will be earned by participants at the end of the fiscal year,
based on attainment of the 1998 Revenue and Profit goals, as approved by the
Board of Directors. The year-end bonus amount the executive will be eligible to
earn is outlined on the attached individualized "Plan Summary" document.
The year-end bonus will be paid no later than thirty (30) days after the end of
the fiscal year. If the year-end objectives are not met by the Company, the
executive is not eligible to earn or receive any year-end bonus payment.
The Company may amend, modify, suspend or terminate the 1998 Executive
Compensation Plan at any time and for any reason upon fifteen (15) days written
notice to each participant. In particular and without limiting the foregoing,
the Plan has been implemented under the assumption that the Company will attempt
to achieve its 1998 Operating Plan, as presented to the Board of Directors. If
the Company's operating results are materially different from the results
forecasted in the Operating Plan, the Company expects that it would modify the
Plan to be consistent with changes to the Company's revised financial forecast.
Nothing in this Plan alters the "at-will" employment relationship between
participants and the Company. This means that either the participant or the
Company may terminate the employment relationship at any time, for any reason,
with or without cause or advanced notice.
This agreement constitutes the entire agreement between the Company and the
participants regarding the terms of the Plan and supersedes all contrary verbal
or written representations that may have been made or which may be made to
participants. Any prior agreements between the Company and the participants
covering compensation arrangements are hereby superseded in their entirety and
shall be of no further force or effect.
3
<PAGE>
I HAVE READ AND ACCEPT THE TERMS OF THE RED BRICK SYSTEMS 1998 EXECUTIVE
COMPENSATION PLAN.
- -----------------------------------------------
Signature of Plan Participant
- -----------------------------------------------
Print Name of Plan Participant
- -----------------------------------------------
Date
- -----------------------------------------------
Signature of Company/BOD Representative
- -----------------------------------------------
Print Name of Company/BOD Representative
- -----------------------------------------------
Date
4
<PAGE>
Exhibit 10.29
December 29, 1997
Via Registered Mail
Silicon Valley Bank
1731 Embarcadero Road, Suite 220
Palo Alto, CA 94303
Attention: Mr. Michael K. Devery
Dear Mr. Devery
Following up on our recent conversations, this letter is to confirm that
Red Brick Systems, Inc. ("Red Brick") desires to terminate that certain Amended
and Restated Business Loan Agreement between Red Brick and Silicon Valley Bank
("SVB") dated as of April 30, 1997 ("Loan Agreement"). As of the date of this
letter all Indebtedness (as defined in the Loan Agreement) of Red Brick to SVB
under the Loan Agreement has been performed in full.
Please indicate SVB's consent to terminate the Loan Agreement effective as
of the date of this letter by signing both copies of this letter in the space
below and returning one fully executed original to my attention.
We have appreciated SVB's support of Red Brick. If you have any questions,
please contact me directly at 408-399-7924.
Very truly yours,
Red Brick Systems, Inc.
By: /s/ Margaret Brauns
------------------------------------------
Margaret Brauns
Vice President and Chief Financial Officer
Agreed to and Accepted as of December 29, 1997
Silicon Valley Bank
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
STATE OR OTHER PERCENT OF VOTING
JURISDICTION OF SECURITIES OWNED
NAME INCORPORATION BY REGISTRANT
- ---- --------------- -----------------
<S> <C> <C>
Red Brick Foreign Sales Corporation........... Barbados 100%
Red Brick Japan Co., Ltd. .................... Japan 100%
Red Brick Systems Australasia Pty. Ltd. ...... Australia 50.1%
Red Brick Systems (UK) Limited................ England 100%
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-532 and 333-25597) pertaining to the 1995 Stock Option Plan,
Employee Stock Purchase Plan, Supplemental Plan, and Options Under Written
Compensation Agreements of Red Brick Systems, Inc., of our report dated
January 13, 1998, with respect to the consolidated financial statements and
schedule of Red Brick Systems, Inc., included in the Annual Report (Form 10-K)
for the year ended December 31, 1997.
Ernst & Young LLP
San Jose, California
March 27, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 12,358
<SECURITIES> 14,551
<RECEIVABLES> 13,794
<ALLOWANCES> 1,503
<INVENTORY> 0
<CURRENT-ASSETS> 40,155
<PP&E> 7,289
<DEPRECIATION> 4,612
<TOTAL-ASSETS> 43,565
<CURRENT-LIABILITIES> 14,023
<BONDS> 0
0
0
<COMMON> 56,056
<OTHER-SE> (26,574)
<TOTAL-LIABILITY-AND-EQUITY> 43,565
<SALES> 43,315
<TOTAL-REVENUES> 43,315
<CGS> 9,941
<TOTAL-COSTS> 9,941
<OTHER-EXPENSES> 52,091
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 124
<INCOME-PRETAX> (16,820)
<INCOME-TAX> 1,203
<INCOME-CONTINUING> (18,023)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,023)
<EPS-PRIMARY> (1.55)
<EPS-DILUTED> (1.55)
</TABLE>
