<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1998
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______ to _______
Commission file number: 0-27310
RED BRICK SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0145392
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
485 ALBERTO WAY
LOS GATOS, CALIFORNIA 95032
(Address of principal executive offices, including zip code)
(408) 399-3200
(Registrant's Telephone No., including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days:
Yes X No
--------- ---------
As of October 31, 1998, there were 12,577,156 shares of the Registrant's Common
Stock outstanding.
================================================================================
1
<PAGE>
RED BRICK SYSTEMS, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets
As of September 30, 1998 and December 31, 1997.................. 3
Unaudited Condensed Consolidated Statements of Operations
For the Three Months and Nine Months Ended
September 30, 1998 and 1997..................................... 4
Unaudited Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1998 and 1997........... 5
Notes to Unaudited Condensed Consolidated Financial Statements.. 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS....................................... 9
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................ 29
SIGNATURES................................................................ 30
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
RED BRICK SYSTEMS, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,357 $ 12,358
Short-term investments 9,775 14,551
Accounts receivable, net 6,443 12,291
Prepaid expenses and other current assets 1,238 955
----------- ----------
Total current assets 24,813 40,155
Property and equipment, net 3,734 2,677
Intangible assets, net 224 361
Deposits and other assets 399 372
----------- ----------
Total assets $ 29,170 $ 43,565
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 353 $ 518
Accrued expenses 3,378 3,719
Accrued compensation 2,343 2,031
Deferred revenue 6,895 7,370
Capital lease obligations due within one year 163 385
----------- ----------
Total current liabilities 13,132 14,023
Capital lease obligations 21 60
Commitments and contingencies
Stockholders' equity:
Common stock 1 1
Additional paid-in capital 57,562 56,055
Accumulated deficit (41,536) (26,530)
Accumulated other comprehensive income 4 26
----------- ----------
16,031 29,552
Notes receivable from stockholders (14) (70)
----------- ----------
Total stockholders' equity 16,017 29,482
----------- ----------
Total liabilities and stockholders' equity $ 29,170 $ 43,565
=========== ==========
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements
3
<PAGE>
RED BRICK SYSTEMS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------- ----------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Software license $ 3,893 $ 8,143 $ 11,860 $ 19,189
Maintenance and service 4,154 3,546 13,296 9,434
-------------- -------------- -------------- --------------
Total revenues 8,047 11,689 25,156 28,623
-------------- -------------- -------------- --------------
Cost of revenues:
Software license 710 449 1,457 1,139
Maintenance and service 2,534 2,210 7,616 6,164
-------------- -------------- -------------- --------------
Total cost of revenues 3,244 2,659 9,073 7,303
-------------- -------------- -------------- --------------
Gross margin 4,803 9,030 16,083 21,320
-------------- -------------- -------------- --------------
Operating expenses:
Sales and marketing 6,051 5,772 19,061 19,813
Research and development 2,887 2,354 9,503 7,130
General and administrative 1,022 863 3,104 3,019
In-process technology -- 10,984 -- 10,984
-------------- -------------- -------------- --------------
Total operating expenses 9,960 19,973 31,668 40,946
-------------- -------------- -------------- --------------
Loss from operations (5,157) (10,943) (15,585) (19,626)
Interest and other income, net 284 437 992 1,398
-------------- -------------- -------------- --------------
Loss before provision for income taxes
and minority interest (4,873) (10,506) (14,593) (18,228)
Provision for income taxes 123 100 413 305
-------------- -------------- -------------- --------------
Loss before minority interest (4,996) (10,606) (15,006) (18,533)
Minority interest -- 64 -- 96
-------------- -------------- -------------- --------------
Net loss $ (4,996) $ (10,542) $ (15,006) $ (18,437)
============== ============== ============== ==============
Basic loss per share $ (0.40) $ (0.90) $ (1.20) $ (1.61)
============== ============== ============== ==============
Diluted loss per share $ (0.40) $ (0.90) $ (1.20) $ (1.61)
============== ============== ============== ==============
Shares used to compute basic loss per share 12,541 11,719 12,473 11,463
============== ============== ============== ==============
Shares used to compute diluted loss per share 12,541 11,719 12,473 11,463
============== ============== ============== ==============
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements
4
<PAGE>
RED BRICK SYSTEMS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (15,006) $ (18,437)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 1,461 1,269
Amortization 137 --
In-process techology -- 10,984
Minority interest in subsidiary -- (36)
Changes in assets and liabilities:
Accounts receivable 5,848 5,365
Prepaid expenses and other current assets (283) 418
Accounts payable (165) 716
Accrued expenses and compensation (29) 717
Deferred revenue (475) 553
Net cash provided by (used in)
operating activities (8,512) 1,549
------------- ------------
Cash flows from investing activities:
Purchases of short-term investments (10,658) (18,990)
Proceeds from sales of short-term investments 15,434 25,978
Acquisition of property and equipment (2,413) (1,109)
Acquisition of certain assets and technology -- (9,543)
Deposits and other assets (27) (96)
------------- ------------
Net cash provided by (used in)
investing activities 2,336 (3,760)
------------- ------------
Cash flows from financing activities:
Proceeds from issuance of common stock 1,507 2,662
Proceeds from notes receivable 56 33
Principal payments on capital lease obligations (366) (555)
Change in other accumulated comprehensive income (22) (13)
Net cash provided by financing activities 1,175 2,127
------------- ------------
Net decrease in cash and cash equivalents (5,001) (84)
Cash and cash equivalents at beginning of period 12,358 14,552
------------- ------------
Cash and cash equivalents at end of period $ 7,357 $ 14,468
============ ============
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements
5
<PAGE>
RED BRICK SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
---------------------
The unaudited condensed consolidated financial statements included herein
reflect all adjustments, consisting only of normal recurring accruals, which in
the opinion of management are necessary to fairly present the Company's
consolidated financial position, results of operations, and cash flows for the
periods presented. These financial statements should be read in conjunction
with the Company's audited consolidated financial statements included in the
Company's fiscal year 1997 Annual Report on Form 10-K. The consolidated results
of operations for the three and nine months ended September 30, 1998, are not
necessarily indicative of the results to be expected for any subsequent period
or for the entire fiscal year ending December 31, 1998.
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, 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.
Certain prior period amounts have been reclassified to conform to the 1998
presentation.
2. Net Loss Per Share
------------------
In February 1997, the Financial Accounting Standards board issued Statement
No. 128, "Earnings per Share" ("SFAS 128"), which is effective for both interim
and annual financial periods ended after December 15, 1997. SFAS 128 replaced
the previously reported 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 dilutive effects of options, warrants and
convertible securities. Due to the Company's losses for each period presented,
diluted loss per share does not include stock options as they are antidilutive.
Diluted earnings per share is similar to the previously reported fully diluted
earnings per share. All earnings per share amounts presented have been, where
necessary, restated to conform to the SFAS 128 requirements.
3. Recent Pronouncements
---------------------
As of January 1, 1998, the Company adopted 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; however, the adoption of FAS 130 had no material impact on the
Company's net loss or stockholders' equity. Total comprehensive loss for the
three and nine month periods ended September 30, 1998, amounted to approximately
$5.0 million and $15.0 million, respectively. Total comprehensive loss for the
three and nine-month periods ended September 30, 1997, amounted to approximately
$10.6 million and $18.5 million, respectively.
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("FAS 131"). FAS 131 changes 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
6
<PAGE>
stockholders. 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.
In October 1997, the American Institute of Certified Public Accountants issued
Statement of Position No. 97-2, "Software Revenue Recognition" ("SOP 97-2"),
which superseded SOP 91-1 and provides guidance on generally accepted accounting
principles for recognizing revenue on software transactions. SOP 97-2 requires
that revenue recognized from software arrangements be allocated to each element
of the arrangement based on the relative fair values of the elements, such as
software products, upgrades, enhancements, post contract customer support,
installation, or training. Under SOP 97-2, the determination of fair value is
based on objective evidence which is specific to the vendor. If such evidence
of fair value for each element of the arrangement does not exist, all revenue
from the arrangement is deferred until such time that evidence of fair value
does exist or until all elements of the arrangement are delivered. SOP 97-2 was
amended in February 1998 by Statement of Position 98-4 ("SOP 98-4") "Deferral of
the Effective Date of a Provision of SOP 97-2" which deferred for one year the
specification of what was considered vendor specific objective evidence of fair
value for the various elements in a multiple element arrangement. The Company
has adopted the provisions of these SOPs as of January 1, 1998.
4. Litigation
----------
On March 25, 1998, certain Red Brick stockholders acting on behalf of
themselves and other persons who purchased Red Brick's common stock between
January 15, 1997 and April 15, 1997, filed two purported class action lawsuits
in the United States District Court for the Northern District of California. On
May 28, 1998, the Court consolidated the two lawsuits into one action. On
September 2, 1998, the plaintiffs filed an Amended Class Action Complaint for
the consolidated action (the "Amended Complaint"). The Amended Complaint names
as defendants, among others, Red Brick and certain of its present and former
officers and directors. The complaint alleges violations of the federal
securities laws and seeks unspecified monetary damages. Red Brick believes that
the Amended Complaint is without merit and, on October 7, 1998, Red Brick filed
a motion to dismiss the complaint. A hearing on the motion to dismiss is
tentatively scheduled for December 15, 1998. The pending litigation against Red
Brick, and any future litigation against Red Brick or its employees, may result
in substantial costs and expenses to Red Brick, even if Red Brick prevails in
its case or settles the litigation. Such costs may include a significant
diversion of time and effort by Red Brick's technical and management personnel.
Red Brick could be materially adversely affected by an unfavorable resolution of
such litigation. Depending on their breadth and timing, pending litigation and
any future litigation against Red Brick could have a material adverse effect on
Red Brick's business, future results of operation, cash flows, or financial
condition.
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.
5. Purchase of Certain Assets and Technology
-----------------------------------------
On August 29, 1997, the Company executed a technology purchase agreement
with CMG Information Services, Inc., a Delaware corporation ("CMGI") and its
wholly owned subsidiary Engage Technologies, Inc., a Delaware corporation
("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 were then 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 independent appraisal. The Company paid
CMGI $9.5 million in cash and issued to CMGI 238,160 shares of unregistered
common stock. As of the time of its acquisition, the
7
<PAGE>
acquired technology had not yet reached technological feasibility and did not
have alternative future uses.
6. Royalties
---------
In July 1998, the Company signed a five-year, mutual reseller and cross-
licensing agreement with Engage, including its parent company CMGI and CMGI's
majority-owned subsidiaries. The cross-license is royalty bearing for the
Engage products that are sublicensed by the Company. The terms of the
agreement require the Company to pay Engage minimum nonrefundable royalties
during the years 1998 through 2000. See also Note 9.
In addition, the Company is obligated to make minimum license royalty payments
under the terms of its developer/reseller agreement with BMC Software, Inc.
("BMC"). The license is royalty bearing for the products that are sublicensed
by the Company. The Company is required to make these minimum royalty payments
during the years 1998 through 1999.
7. Red Brick Australasia Pty. Ltd.
-------------------------------
Prior to September 16, 1998, the Company held a controlling interest in Red
Brick Australasia Pty. Ltd., ("RBA") and RBA's financial results were
consolidated with the Company's financial statements. On September 16, 1998,
the Company terminated the joint venture agreement between the Company and
Productivity Software Group Limited ("PSG") dated July 1, 1996, sold capital
shares of RBA to PSG and entered into an International Distributor Agreement
with RBA. The Company currently holds ordinary shares in RBA equivalent to
approximately 10% of the fully diluted capitalization of RBA. Accordingly, the
Company will no longer consolidate the financial results of RBA. In addition,
the Company agreed with RBA that RBA, which is majority owned by PSG, would
satisfy its outstanding debt obligations to the Company.
8. Repricing
---------
In August 1998, the Company offered employees, excluding executive officers,
the option to exchange options to purchase 1,038,691 shares of common stock with
an aggregate exercise price of $7,683,236 for new options to purchase 1,038,691
shares with an exercise price of $2.31 per share and an aggregate exercise
price of $2,401,973. All options that were repriced begin vesting six months
after the vesting start date under the original terms of the option grant.
9. Subsequent Events
-----------------
In October 1998, the Company and Engage mutually agreed to terminate the
mutual reseller agreement. In addition, the Company agreed to pay additional
minimum nonrefundable royalties in connection with the cross-licensing
agreement. The total amount of minimum nonrefundable royalties to be paid to
Engage, including amounts from the July agreement in Note 6, is $3.1 million.
As of October 30, 1998 $1.5 million has been paid.
In October 1998, the Company entered into an Agreement and Plan of
Reorganization with Informix Corporation ("Informix") providing for the merger
of the Company with a subsidiary of Informix such that the Company would become
a wholly owned subsidiary of Informix. Under the terms of the agreement, upon
the consummation of the merger, each share of the Company's common stock will be
exchanged for 0.6 share of Informix common stock. The transaction will be
accounted for as a purchase. Consummation of the merger is conditional on
regulatory and stockholder approval and the satisfaction of other closing
conditions.
8
<PAGE>
RED BRICK SYSTEMS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion in this report contains forward-looking statements that involve
risks and uncertainties including, without limitation, statements made in the
sections entitled "Results of Operations --Revenues", "--Cost of Revenues",
"--Operating Expenses", "--Interest and Other Income (Expense)", "--Provision
for Income Taxes", "--Minority Interest, Net Loss and Net Loss Per Share",
"Liquidity and Capital Resources", "Year 2000 Compliance", and "Risk Factors
That May Affect Future Results" 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.
RESULTS OF OPERATIONS
REVENUES
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------------- -------------------------------------------
1998 CHANGE 1997 1998 CHANGE 1997
------------- ----------- ------------ ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
(dollars in thousands)
Software license $ 3,893 (52%) $ 8,143 $ 11,860 (38%) $ 19,189
Percentage of total revenues 48% 70% 47% 67%
Maintenance and service $ 4,154 17% $ 3,546 $ 13,296 41% $ 9,434
Percentage of total revenues 52% 30% 53% 33%
Total revenues $ 8,047 (31%) $ 11,689 $ 25,156 (12%) $ 28,623
</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." In 1997, the
American Institute of Certified Public Accountants issued SOP No. 97-2,
"Software Revenue Recognition," which is effective for the Company beginning in
fiscal 1998. In October 1997, the American Institute of Certified Public
Accountants issued Statement of Position No. 97-2, "Software Revenue
Recognition" ("SOP 97-2"), which superseded SOP 91-1 and provides guidance on
generally accepted accounting principles for recognizing revenue on software
transactions. SOP 97-2 requires that revenue recognized from software
arrangements be allocated to each element of the arrangement based on the
relative fair values of the elements, such as software products, upgrades,
enhancements, post contract customer support, installation, or training. Under
SOP 97-2, the determination of fair value is based on objective evidence which
is specific to the vendor. If such evidence of fair value for each element of
the arrangement does not exist, all revenue from the arrangement is deferred
until such time that evidence of fair value does exist or until all elements of
the arrangement are delivered. SOP 97-2 was amended in February 1998 by
Statement of Position 98-4 ("SOP 98-4") "Deferral of the Effective Date of a
Provision of SOP 97-2" which deferred for one year the specification of what was
considered vendor specific objective evidence of fair value for the various
elements in a multiple
9
<PAGE>
element arrangement. The Company has adopted the provisions of these SOPs as of
January 1, 1998.
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. Software license revenues decreased for the three and
nine month periods ended September 30, 1998, compared to the three and nine
month periods ended September 30, 1997, primarily because of the decline in
sales in the U.S. market due to the increased competition in this market.
International sales, which have lower average selling prices, increased
especially in Japan. Average selling prices in 1998 decreased from the average
selling prices in 1997.
Maintenance and Service Revenues. The growth in maintenance and service
revenues for the three and nine month periods ended September 30, 1998, compared
to the same periods in the prior year, was primarily attributable to the renewal
of maintenance contracts and additional professional services engagements. Due
to reduced license sales in the U.S., which are a primary factor in generating
consulting and service revenue, the Company anticipates that prior growth rates
of the Company's maintenance and service revenues and margins may not be
sustainable in the future.
For the three and nine month periods ended September 30, 1998, there were no
sales to any one customer that accounted for 10% or more of total revenues. For
the three-month period ended September 30, 1997, sales to HBS International,
Inc., accounted for 12% of total revenues. For the nine-month period ended
September 30, 1997, there were no sales to any one customer that accounted for
10% or more of total revenues. The Company expects that licenses of its
products to a limited number of customers and resellers may 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, could have a material adverse effect on the Company's
business, financial condition, and results of operations.
The Company's international revenues for the three and nine month periods
ended September 30, 1998, were 21% and 17% of total revenues, respectively. The
Company's international revenues for the three and nine month periods ended
September 30, 1997, were 13% and 14% of total revenues, respectively. In the
third quarter of 1998, the Company reduced its controlling interest in its
Australasia subsidiary to approximately ten percent of the subsidiary's fully
diluted capitalization. Accordingly, the Company will no longer consolidate the
financial results of this subsidiary. RBA's revenues for the three and nine
month periods ended September 30, 1998 and 1997, which were consolidated with
the Company's financial statements, were not material. As the Company continues
to strengthen its international presence, fluctuations in international revenues
may occur. The Company intends to continue to evaluate its international
operations and may enter additional international markets.
10
<PAGE>
COST OF REVENUES
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------------- -------------------------------------------
1998 CHANGE 1997 1998 CHANGE 1997
------------- ----------- ------------ ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
(dollars in thousands)
Software license $ 710 58% $ 449 $ 1,457 28% $ 1,139
Percentage of total revenues 9% 4% 6% 4%
Maintenance and service $ 2,534 15% $ 2,210 $ 7,616 24% $ 6,164
Percentage of total revenues 31% 19% 30% 22%
Total cost of revenues $ 3,244 22% $ 2,659 $ 9,073 24% $ 7,303
Percentage of total revenues 40% 23% 36% 26%
</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. Cost of software license revenues increased for the three and nine
month periods ended September 30, 1998 compared to the same periods ended
September 30, 1997, primarily due to increases in cost of royalties related to
minimum royalty obligations.
Cost of Maintenance and Service Revenues. Cost of maintenance and service
revenues consisted primarily of personnel-related costs incurred in providing
support, consulting services and training to customers. Cost of maintenance and
service revenues for the three and nine month periods ended September 30, 1998,
increased over such costs for the same periods ended September 30, 1997, as a
result of increased personnel-related costs as the Company continued to expand
its customer service and consulting organizations. The Company believes that
the cost of maintenance and service revenues may increase in dollar amount and
may increase as a percentage of maintenance and service revenues in the future
as the Company continues to build its customer service and consulting
organizations.
OPERATING EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------------- -------------------------------------------
1998 CHANGE 1997 1998 CHANGE 1997
------------- ----------- ------------ ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
(dollars in thousands)
Sales and marketing $ 6,051 5% $ 5,772 $ 19,061 (4%) $ 19,813
Percentage of total revenues 75% 49% 76% 69%
Research and development $ 2,887 23% $ 2,354 $ 9,503 33% $ 7,130
Percentage of total revenues 36% 20% 38% 25%
General and administrative $ 1,022 18% $ 863 $ 3,104 3% $ 3,019
Percentage of total revenues 13% 8% 12% 11%
In-process technology $ -- * $ 10,984 $ -- * $ 10,984
Percentage of total revenues * 94% * 38%
Total operating expenses $ 9,960 (50%) $ 19,973 $ 31,668 (23%) $ 40,946
Percentage of total revenues 124% 171% 126% 143%
- ----------------------------
* Not meaningful
</TABLE>
Sales and Marketing. Sales and marketing expenses consisted primarily of
personnel-related costs, including sales commissions, as well as promotional
expenses including advertising, public relations, seminars, and trade shows.
Sales and marketing expenses increased slightly for the three-month period ended
September 30, 1998, compared to the three-month period ended September 30,
11
<PAGE>
1997, primarily due to increased facilities and support costs associated with
the opening of new sales offices. Sales and marketing expenses decreased for the
nine month period ended September 30, 1998, compared to the same period ended
September 30, 1997, mainly due to personnel attrition which resulted in
decreases in personnel-related costs. The Company believes that sales and
marketing expenses may increase in dollar amount and may increase as a
percentage of total 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, and depreciation of
development equipment. The increase in research and development expenses for
the three and nine month periods ended September 30, 1998, from the same periods
ended September 30, 1997, was primarily attributable to the increased staffing
of software engineers required to expand and enhance the Company's product line,
work on the development of the in-process technology acquired, and the expensing
of technology and software that had not met technological feasibility. In
accordance with SFAS No. 86, the Company capitalizes eligible computer software
costs upon the achievement of technological feasibility, subject to net
realizable value considerations. The Company has defined technological
feasibility as completion of a working model. As of September 30, 1998, such
capitalizable costs were insignificant. Accordingly, the Company has charged
all such costs to research and development expense in the accompanying condensed
consolidated statements of operations. The Company believes that research and
development expenses may continue to increase in dollar amount and may increase
as a percentage of total revenues in the future as the Company continues to work
on the in-process technology acquired from Engage and to update and expand its
product line.
General and Administrative. General and administrative expenses consisted
primarily of personnel costs for finance and general management, as well as
insurance and professional expenses. General and administrative expenses
increased for the three and nine-month periods ended September 30, 1998,
compared to the three and nine month periods ended September 30, 1997. These
increases were primarily due to increased legal fees primarily related to
shareholder litigation. The Company believes that general and administrative
expenses may increase in dollar amount and may increase as a percentage of total
revenues.
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 were then 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 independent appraisal. The Company paid CMGI
$9.5 million in cash and issued to CMGI 238,160 shares of unregistered common
stock. As of the time of its acquisition, the acquired technology had not yet
reached technological feasibility and did not have alternative future uses.
In September 1998, the Company made first customer shipments of a new product
called Red Brick Formation, which is an ETML tool. Red Brick Formation is the
first product that Red Brick has delivered to market derived from the technology
it acquired from Engage. Subsequent to the acquisition of this technology, the
Company invested approximately $5.2 million to develop Red Brick Formation. Red
Brick Formation is a new product in its first commercial version, and it has not
yet proved that it meets customer requirements or that it is sufficient in terms
of functionality, performance, or reliability to be generally salable and to
contribute in a material way to the Company's revenues. Failure of the Red
Brick Formation product to operate as expected, or failure of the Company to
successfully market and license the product, could have a material adverse
effect on the Company's business, operating results, and financial condition.
Additionally, the Company is still working on its development plan for the
"Engage.Discover" portion of the acquired technology.
12
<PAGE>
The Company estimates that significant additional investment will be required to
complete this in-process research and development.
INTEREST AND OTHER INCOME (EXPENSE)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------------- -------------------------------------------
1998 CHANGE 1997 1998 CHANGE 1997
------------- ----------- ------------ ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
(dollars in thousands)
Interest and
other income, net $ 284 (35%) $ 437 $ 992 (29%) $ 1,398
Percentage of total revenues 4% 4% 4% 5%
</TABLE>
Interest and other income, net, primarily represented interest income earned
on the Company's cash, cash equivalents, and short-term investments. Interest
and other income, net, decreased during the three and nine month periods ended
September 30, 1998, compared to the year earlier period primarily because of the
decrease in cash and cash equivalents and short-term investments.
PROVISION FOR INCOME TAXES
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------------- -------------------------------------------
1998 CHANGE 1997 1998 CHANGE 1997
------------- ----------- ------------ ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
(dollars in thousands)
Provision for income taxes $ 123 23% $ 100 $ 413 35% $ 305
</TABLE>
The income tax provisions for the nine months ended September 30, 1998 and
1997, of $413,000 and $305,000, respectively, are attributable to current income
taxes, and consist principally of foreign withholding taxes and other foreign
income taxes and state minimum taxes. No income tax benefits have been
recognized for the losses incurred in the first nine months of 1998 and 1997.
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 to 2012.
MINORITY INTEREST, NET LOSS AND NET LOSS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------------- -------------------------------------------
1998 CHANGE 1997 1998 CHANGE 1997
------------- ----------- ------------ ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
(dollars in thousands)
Minority Interest $ -- * $ 64 $ -- * $ 96
Percentage of total revenues * 1% * *
Net loss $ (4,996) 53% $ (10,542) $ (15,006) 19% $(18,437)
Percentage of total revenues (62%) (90%) (60%) (64%)
Basic loss per share $ (0.40) 56% $ (0.90) $ (1.20) 25% $ (1.61)
Diluted loss per share $ (0.40) 56% $ (0.90) $ (1.20) 25% $ (1.61)
- ----------------------------
* Not meaningful
</TABLE>
13
<PAGE>
Net loss per share for the nine-month period ended September 30, 1998 was
primarily the result of the revenue shortfall for the nine months ended
September 30, 1998. Software license revenues for the nine months ended
September 30, 1998, decreased from the year earlier period, during which time
the Company's expense levels decreased. As noted in "Risk Factors" below, the
Company's expense levels are relatively fixed and are based, in part, on
expectations regarding future revenues.
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1998 CHANGE 1997
---------------------- ------------------- -------------------
(dollars in thousands)
<S> <C> <C> <C>
Working capital $ 11,791 (55%) $ 26,132
Cash and cash equivalents and short-term investments $ 17,132 (36%) $ 26,909
</TABLE>
Working capital decreased at September 30, 1998 compared to that at December
31, 1997, primarily due to a decrease in cash, short-term investments, and
accounts receivable.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------------------------------------------------
1998 CHANGE 1997
---------------------- ------------------- -------------------
(dollars in thousands)
<S> <C> <C> <C>
Cash provided by (used in) operating activities $ (8,512) * $ 1,549
Cash provided by (used in) investing activities $ 2,336 * $ (3,760)
Cash provided by financing activities $ 1,175 (45%) $ 2,127
- ------------------------------------------------
* Not meaningful
</TABLE>
For the nine months ended September 30, 1998, net cash used in operating
activities resulted primarily from the net loss adjusted for non-cash items,
partially offset by the decrease in accounts receivable due to decreased
revenues. For the nine months ended September 30, 1997, net cash provided by
operating activities resulted primarily from a decrease in accounts receivable
and increases in accrued expenses and compensation, accounts payable, and
deferred revenue partially offset by the net loss adjusted for non-cash items
including the in-process technology.
For the nine months ended September 30, 1998 and 1997, the Company's investing
activities consisted of net sales of investment grade, interest-bearing
securities, offset by purchases of property and equipment. Capital expenditures
were $2.4 million for the nine months ended September 30, 1998, compared to $1.1
million for the nine months ended September 30, 1997.
The cash provided by financing activities during the nine months ended
September 30, 1998 and 1997, was primarily from the issuance of common stock
through the Company's employee stock purchase plan and stock option plans,
partially offset by principal payments on capital lease obligations.
The Company has experienced a reduction in license revenues, has experienced
continued losses from operations and has used substantial cash in operating
activities. 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 successfully market and license such products. The Company believes
that its current cash and investment balances are sufficient to meet
anticipated working capital and capital expenditure requirements through at
least December 31, 1998. Thereafter, the Company's ability to meet its goals
above will depend upon the ability of management to raise additional capital
to fund operations, increase revenues
14
<PAGE>
by introducing new products and increasing marketing efforts, and reduce
spending. The Company may not be able to raise additional capital, increase
revenues or reduce spending. The Company's inability to raise additional
capital, increase revenues or reduce spending would have a material adverse
affect on the Company's financial condition and results of operations.
YEAR 2000 COMPLIANCE
The Company is aware of the issues associated with existing computer systems
as the Year 2000 approaches. Year 2000 issues are 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 question 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. In 1996, the Company began a complete Year 2000
compliance review for all products then shipping. The Company has extended this
review to new products developed and released since that time. The Company also
extended this review to the in-process technology acquired in 1997 from Engage
and the SQL-Backtrack for Red Brick Warehouse product that was co-developed with
a third party.
The Company defines Year 2000 compliance for its products as follows:
. Internal formats: Products store and manage all dates internally in full
----------------
four-digit year format;
. Calculations and conversions: Date calculations are performed correctly.
----------------------------
All operations are performed on whole dates, and conversions between
internal formats and external representations are implemented correctly. No
date value can cause improper operation. Year 2000 is recognized as a leap
year;
. Implicit century representation: All product features and interfaces have
-------------------------------
explicit mechanisms to indicate unambiguously how to interpret two-digit
years; and
. User interfaces: When displayed in a user interface, dates are presented
---------------
with four digits.
The Company's internal review established that all of its products on all
supported platforms are Year 2000 compliant by design. This compliance has been
confirmed by appropriate testing. The Company has incorporated ongoing testing
for compliance into its standard test suites used to qualify new or updated
product releases before shipment. The Company regularly provides formal
statements of compliance to existing and prospective customers.
Despite design review and ongoing testing, the Company's products may contain
undetected errors or defects associated with Year 2000 date handling. Known or
unknown errors or defects in the Company's products could result in delay or
loss of revenue, diversion of development resources, damage to the Company's
reputation, and increased service and warranty costs. Any of these conditions
could materially adversely affect the Company's business, operating results or
financial condition. 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, the Company is uncertain whether or to
what extent it may be affected by such issues.
Year 2000 issues may also affect the computer systems used internally by the
Company to manage and operate its business. The Company recently completed
assessing its current systems and working with its software vendors to confirm
that systems purchased by the Company are prepared for Year 2000 issues. The
Company is not currently aware of any material costs or operational issues
associated with Year 2000 issues affecting its internal systems. The Company
does not believe that it will incur significant operating expenses or be
required to invest heavily in computer systems improvements to be Year 2000
compliant. Specifically, the Company estimates such costs will not exceed
$60,000, of which $46,000 has been spent through November 4, 1998. However, the
Company may experience significant
15
<PAGE>
unanticipated problems and costs caused by undetected errors or defects in
internal systems. The worst-case scenario if such problems occur would be the
Company's inability to ship products and record revenue. The Company does not
currently have any information concerning the Year 2000 compliance status of its
customers or prospective customers. If current or future customers fail to
achieve Year 2000 compliance or if they divert technology expenditures
(especially technology expenditures that were reserved for data warehousing-
related software and services) to address Year 2000 compliance issues, the
Company's business, results of operation, or financial condition could be
materially adversely affected.
The Company has funded its Year 2000 activities from available cash and has
not separately accounted for these costs in the past. To date, these costs have
not been material. The Company will incur additional costs for administrative,
customer support, internal IT, and product engineering activities to address
ongoing internal and product-related Year 2000 issues. In addition, the Company
may experience problems and costs with Year 2000 compliance that could
materially adversely affect its business, results of operations and financial
condition. The Company has not yet fully developed a contingency plan to address
situations that may result if it is unable to achieve Year 2000 readiness of
critical operations. The cost of developing and implementing such a plan may
itself be material. Finally, the Company is also subject to external forces that
might generally affect industry and commerce, such as utility or transportation
company Year 2000 compliance failures and related service interruptions.
16
<PAGE>
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
In the past, Red Brick's quarterly operating results have varied
significantly. Red Brick's quarterly results may also vary significantly in the
future. A number of factors are likely to cause these variations, including:
. Increased competition;
. Size and timing of significant orders;
. Timing of new product announcements and pricing policy changes by Red Brick
and its competitors;
. Market acceptance of new and enhanced versions of Red Brick's products;
. Customer uncertainty about Red Brick's financial condition and business
prospects;
. Changes in operating expenses;
. Changes in personnel;
. Changes in the mix of direct and indirect sales;
. Foreign currency exchange rates; and
. General economic factors.
Red Brick currently operates with virtually no order backlog because its
software products typically are shipped shortly after orders are received. Red
Brick derives a substantial portion of its revenues from licenses of Red Brick
Warehouse. The average selling price for Red Brick Warehouse has declined from
more than $150,000 in 1997 to as low as $80,000 in recent quarters. As a result
of these factors, the timing of the receipt and shipment of a single order can
have a significant impact on Red Brick's revenues and results of operations for
a particular period. Historically, Red Brick recognized a substantial portion of
its revenues in the last month of a quarter and, frequently, in the last two
weeks of a quarter. Since product revenues in any quarter are substantially
dependent on orders booked and shipped in that quarter, Red Brick cannot predict
with any significant degree of certainty its revenues for any future quarter.
Red Brick experiences difficulty in predicting product revenues for several
other reasons, including:
. The market for data warehouse software products is rapidly evolving;
. Red Brick's sales cycle, which may last many months, varies substantially
from customer to customer; and
17
<PAGE>
. Red Brick 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, Red Brick believes that period-to-period
comparisons of its results of operations are not necessarily meaningful.
Therefore, investors should not rely on such comparisons as indications of Red
Brick's future performance.
Red Brick's expense levels are relatively fixed and are based, in part, on
expectations as to future revenues. Consequently, if revenue levels fall below
Red Brick's expectations, Red Brick's net income (loss) will be adversely
affected because only a small portion of Red Brick's expenses vary with its
revenues. Red Brick's operating results were below the expectations of financial
analysts and investors for the quarters ended March 31, 1997, and June 30, 1998.
As a result, Red Brick experienced a significant decrease in the price of its
common stock. Red Brick's operating results may be below analysts' and
investors' expectations in some future quarters as well. Red Brick's failure to
meet such expectations would likely have a material adverse effect on the price
of Red Brick's common stock.
Red Brick business historically experiences significant seasonal fluctuations
largely due to customer buying patterns. In recent years, demand for Red Brick
software products and services was weaker in the quarters ending in March and
September. Red Brick expects this seasonal pattern to continue.
FAILURE TO CLOSE MERGER
Red Brick, Informix Corporation, and a wholly-owned subsidiary of Informix,
have entered into an Agreement and Plan of Reorganization dated October 7, 1998.
This merger agreement proposes that Red Brick merge with a wholly-owned
subsidiary of Informix and thereby become a wholly-owned subsidiary of Informix
("the Merger"). The Merger will not be completed unless the conditions
contained in the merger agreement are met, including:
. Approval of the merger agreement by Red Brick's stockholders;
. Approval of or lack of objection to the merger agreement by applicable
regulatory authorities;
. Each representation and warranty made by Informix and Red Brick must be
materially accurate;
. Certain events specified in the merger agreement must occur;
. Certain events specified in the merger agreement must not occur;
. Informix and Red Brick must satisfy their respective covenants specified in
the merger agreement; and
. Red Brick must complete audits of its financial results for the first three
calendar quarters of 1998 and the nine months ended September 30, 1998 and
the results of the audits must not differ materially from the financial
results disclosed by Red Brick for those periods in its applicable
quarterly reports on Form 10-Q.
18
<PAGE>
If the Merger does not close, such failure will have a material adverse
effect on Red Brick's business, financial condition and results of operations
because the announcement of the Merger and Red Brick's efforts to close the
Merger will have materially reduced its cash position and is likely to:
. Disrupt Red Brick's sales and marketing efforts;
. Delay orders for Red Brick products and services;
. Increase the concerns of current and potential customers and employees
regarding Red Brick's financial condition and business prospects;
. Increase employee turnover;
. Damage employee morale and productivity; and
. Divert the attention of Red Brick management.
EFFECT OF DECREASED CASH AND WORKING CAPITAL
In each quarter of 1998 and the year ended December 31, 1997, Red Brick has
experienced losses from its operations. These losses caused a significant
decline in Red Brick's cash balances and working capital. Due to these operating
losses and decreasing cash position, market analysts raised concerns about Red
Brick's stability and its ability to support its products. Red Brick's existing
and prospective customers, who typically rely on market analysts for purchase
advice, have raised similar concerns. As a result, Red Brick has experienced
delays in orders and corresponding reductions in revenue. If the Merger is not
consummated, Red Brick expects that such concerns will continue in future
periods and this, in turn, will cause additional delays and lost revenue. In
addition, Red Brick's decreased cash position has affected its ability to
recruit and retain certain employees. If the Merger is not consummated, Red
Brick expects that these conditions will continue to affect the stability of the
employee base in future quarters.
Red Brick incurred a loss for the 1997 fiscal year and has incurred quarterly
losses since the first quarter of 1998. These losses have been primarily caused
by reduced license revenues. As a result, Red Brick has used substantial amounts
of cash to fund operations. If the Merger is not consummated, Red Brick's future
success will depend on its ability to enhance its current products and to
develop and introduce new products on a timely basis that are accepted by
customers. Red Brick believes that its current cash and investment balances are
sufficient to meet anticipated working capital and capital expenditure
requirements through at least December 31, 1998. Thereafter, Red Brick will have
to raise additional capital to fund operations, increase revenues from existing
and/or new products and/or reduce spending. Red Brick may not be able to raise
additional capital, increase revenues or reduce spending. Red Brick's inability
to raise additional capital, increase revenues or reduce spending would have a
material adverse effect on Red Brick's financial condition and results of
operations.
COMPETITION
The market for Red Brick's products is intensely competitive and subject to
rapid change. Red Brick primarily encounters competition from large public
companies, including Oracle, Informix, Sybase, IBM, and NCR/Teradata. In
addition, there are relatively low barriers to entry in some components of the
software market. As a result, Red Brick expects additional competition from
other established and emerging companies as the data warehouse software market
continues to develop and expand. With the introduction in the third quarter of
1998 of Red Brick Formation, Red Brick expects to encounter competition from a
new category of vendors, including Ardent and Informatica.
19
<PAGE>
Many of Red Brick's competitors have one or more of the following competitive
advantages over Red Brick:
. Longer operating history;
. Significantly greater financial, technical, marketing, sales, distribution
and other resources;
. Significantly greater name recognition;
. Larger installed base of customers;
. Better established relationships with current and potential customers of
Red Brick;
. Greater knowledge of the relational database industry; and
. Capabilities to offer customers a single vendor solution.
As a result of these advantages, Red Brick's competitors may be able to
respond more quickly to new or emerging technologies and changes in customer
requirements. They may also be able to devote greater resources to the
development, promotion and sale of their products than Red Brick can to its
products. In addition, current and potential competitors have established, or
may establish, cooperative relationships among themselves or with third parties
to increase their ability to address customer needs. Accordingly, new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. Red Brick also expects that competition will increase
as a result of software industry consolidations. If competition increases, Red
Brick is likely to experience product price reductions, reduced gross margins
and loss of market share. Any of those effects could materially adversely affect
Red Brick's business, operating results and financial condition. Due to these
factors, Red Brick may be unable to compete successfully against its current and
future competitors.
POTENTIAL SELLING PRICE EROSION
In the second and third quarters of 1998, Red Brick received many orders for
Red Brick Warehouse with a lower selling price than in past periods. As a
result, the average selling price in these quarters was as low as $80,000. In
1997, the average selling price for Red Brick Warehouse was in excess of
$150,000. This decline in average selling price had an adverse impact on Red
Brick's operating results for the second and third quarters of 1998. Many
factors affect Red Brick's average selling price and have contributed to its
decline, including the following:
. Orders have shifted from higher-priced Unix versions of Red Brick
Warehouse to the lower-priced Windows NT version;
. Increased distribution through indirect channels, both internationally and
domestically, resulting in lower realized prices; and
. Intense competition, including significant price discounts and the bundling
of multiple software products by competitors.
Red Brick expects these trends to continue and to experience continued
decreases in the average selling prices of Red Brick Warehouse in future
quarters. In addition, the Red Brick Formation product introduced in the third
quarter of 1998 has a lower price than Red Brick Warehouse. Unless Red Brick can
offset price reductions with a corresponding increase in sales volumes,
continued
20
<PAGE>
declining prices are likely to have a material adverse effect on Red Brick's
business, operating results, and financial condition.
SALES AND MARKETING REPOSITIONING
Red Brick has implemented several changes in its sales and marketing
management and strategies. In July 1998, Anthony Layzell, who had been serving
as Red Brick's Senior Vice President, Sales and Marketing, left Red Brick. As a
result, Christopher Erickson, President, CEO, and Chairman, assumed
responsibility for the international sales organization and Paul Rodwick was
promoted to Vice President, Marketing. Red Brick has also made several recent
changes within the senior sales management team. In addition, Red Brick has
experienced significant turnover within its sales organization. Red Brick
believes there may be a transition period before the new sales management team
and sales representatives become fully productive. Furthermore, Red Brick may
make other management and organizational changes in the future. Red Brick has
also implemented changes to its sales and marketing strategies, including an
increased focus on partnership relationships and indirect sales and the re-
positioning of Red Brick as a leading provider of integrated data warehouse
products and services. Red Brick intends these management and strategic changes
to enhance its productivity and competitiveness in the marketplace. However, if
Red Brick's changes fail to produce the desired results, they could materially
adversely affect Red Brick's productivity, expenses and revenues, particularly
over the next several quarters. In addition, Red Brick's operating results over
the next several quarters may be less predictable than in the past.
POTENTIAL VOLATILITY OF STOCK PRICE
Historically, the market price of Red Brick's common stock has been highly
volatile. Since Red Brick's initial public offering in January 1996, the closing
prices for Red Brick common stock have been as high as $60.75 and as low as
$1.88. The market price of the common stock may fluctuate significantly in
response to a number of factors, including:
. Quarterly variations in operating results;
. Announcements of technological innovations or new products by Red Brick or
its competitors;
. Changes in financial estimates by securities analysts;
. Changes in market valuations of database or data warehousing companies; and
. Additions or departures of key personnel.
In addition to the above factors, the stock market has experienced volatility,
often unrelated to operating performance, that particularly affected market
prices of equity securities of many high technology companies. Such market
fluctuations may adversely affect the market price of Red Brick's common stock.
The market price of Red Brick's common stock may experience significant
fluctuations in the future.
DEPENDENCE ON NEW PRODUCTS AND RAPID TECHNOLOGICAL CHANGE; FEASIBILITY OF IN-
PROCESS TECHNOLOGY
The market for Red Brick's software is characterized by rapid technological
change, frequent new product introductions and evolving industry standards. The
introduction by competitors of products embodying new technologies and the
emergence of new industry standards can render Red Brick's existing products
obsolete and unmarketable. Red Brick's future success depends on a number of
factors, including its ability to:
21
<PAGE>
. Enhance its current products;
. Develop and introduce new products that keep pace with technological
developments and emerging industry standards on a timely basis;
. Market and sell effectively its new and enhanced products; and
. Address the increasingly sophisticated needs of its customers.
In September 1998, Red Brick made the first customer shipments of Red Brick
Formation, a data Extraction, Transformation, Movement and Loading tool. Since
Red Brick Formation is a new product in its first commercial version, it has not
yet proved that it is sufficient in terms of functionality, performance or
reliability to meet customer requirements or that it will be generally salable.
As a result, Red Brick does not know if Red Brick Formation will contribute in a
material way to Red Brick's revenues. The failure of Red Brick Formation to
operate as expected could have a material adverse effect on Red Brick's
business, operating results and financial condition.
In July 1998, Red Brick announced its intention to build and market analytic
application products in addition to its Red Brick Warehouse and Red Brick
Formation product lines. However, Red Brick may be unable to:
. Develop and market successfully analytic application products;
. Develop successfully other product enhancements or new products that
respond to technological change or evolving industry standards;
. Avoid difficulties that could delay or prevent the successful development,
introduction and marketing of new products and product enhancements; or
. Meet the requirements of the marketplace and achieve market acceptance for
its new products and product enhancements.
Any potential new products or product enhancements would likely have
significant technical risks. If the commencement of commercial shipments of new
products and enhancements is delayed, Red Brick could experience loss, or delays
in receipt, of product revenues. Red Brick may fail, 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. Such failure could have a material adverse effect on its
business, operating results and financial condition.
Complex software products, such as those offered by Red Brick, may contain
undetected errors or failures when first introduced or when new versions are
released. Red Brick has previously discovered software errors in certain of its
new products after their introduction. Although Red Brick has not experienced
any material adverse effects on resulting from any such errors to date, its
products may contain errors. The discovery of errors in its products could
result in a loss of, or delay in, market acceptance of that product. In turn,
such losses or delays could have a material adverse effect on Red Brick's
business, operating results and financial condition.
DEPENDENCE UPON KEY PERSONNEL; NEED TO RETAIN SALES AND TECHNICAL PERSONNEL
Red Brick's future performance depends significantly upon the continued
service of its key technical, sales and senior management personnel. However,
none of these personnel is bound by an employment agreement with Red Brick. Red
Brick has also experienced transition at the executive management level. In July
1998, Red Brick formed an "Office of the President" to be occupied by two
individuals:
22
<PAGE>
(1) Christopher G. Erickson, President, CEO and Chairman of the
Board, and (2) Phillip M. Fernandez, who was recently promoted to the newly
created position of Executive Vice President and Chief Operating Officer. Also
in July 1998, Margaret R. Brauns resigned her positions as Red Brick's Vice
President, Finance and Administration, Chief Financial Officer and Secretary. As
a result, Red Brick appointed Kristi L. Smith as Vice President, Finance, Chief
Financial Officer, and Secretary. Red Brick also appointed Ron Barale as Vice
President, Platform Products Group, and Andrew Priest as Vice President,
Solutions and Services. In addition, there have been several changes in the
sales and marketing management, as noted above. Red Brick believes that there
may be a transition period before the new management team becomes fully
productive. The delays and associated costs caused by such transition could
materially adversely affect operating results. The loss of the services of one
or more of Red Brick's key employees in the future could have a material adverse
effect on Red Brick's business, operating results and financial condition.
Red Brick's future success also depends on its continuing ability to attract
and retain highly qualified technical, sales and managerial personnel.
Competition for such personnel is intense and Red Brick has lost significant
numbers of technical, sales and management personnel in recent periods. Also, as
noted above, the pendancy of the Informix Merger may result in increased
employee attrition. Red Brick may be unable to retain the remaining key
technical, sales and managerial employees. Additionally, Red Brick may be unable
to attract, assimilate or retain other highly qualified technical, sales and
managerial personnel in the future. Because of the complexity of RDBMS
technology and the differences between on-line transaction processing systems
and data warehouse systems, Red Brick has experienced a time lag between the
date technical and sales personnel are hired and the date such personnel become
fully productive. Red Brick expects to experience similar time lags in the
future. Red Brick's failure to retain existing employees or to hire additional
personnel on a timely basis in the future could have a material adverse effect
on its business, operating results and financial condition.
LIMITED PROFITABILITY; ACCUMULATED DEFICIT; FUTURE OPERATING RESULTS UNCERTAIN
As of September 30, 1998, Red Brick had an accumulated a deficit of $41.5
million. Red Brick had a $5.0 million loss in the third quarter of 1998 and a
$15.0 million loss for the nine month period ended September 30, 1998. In
addition, Red Brick was not profitable in 1997. Red Brick may fail to become
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 Red Brick's products;
. The level of product and price competition;
. Red Brick's success in expanding its direct sales force and indirect
distribution channels;
. Red Brick's ability to complete the development of in-process technology
acquired;
. Red Brick's ability to develop and market new products;
. Red Brick's ability to control costs while executing a new product plan;
and
. General economic conditions.
PRODUCT CONCENTRATION
Red Brick derives substantially all of its revenues from two sources: (1)
sales of licenses of Red Brick Warehouse, and (2) related maintenance and
service contracts. Red Brick expects the Red Brick Warehouse product to continue
to account for a significant part of Red Brick's revenues for the foreseeable
future, even though it introduced a new product, Red Brick Formation, in the
third
23
<PAGE>
quarter of 1998. Competition, technological change or other factors could
lead to a decline in demand for Red Brick Warehouse or result in a failure of
Red Brick Warehouse to achieve broad market acceptance. Such decline or failure
would have a material adverse effect on the business, operating results and
financial condition of Red Brick. A decline in sales of Red Brick Warehouse
would also materially adversely affect the licensing of other Red Brick products
to Red Brick Warehouse customers. Red Brick's future financial performance will
depend in part on the successful development, introduction, and customer
acceptance of new products and enhancements to existing products. As a result of
these factors, the marketing of Red Brick Warehouse and other Red Brick products
may not be successful.
LITIGATION
On March 25, 1998, certain Red Brick stockholders acting on behalf of
themselves and other persons who purchased Red Brick's common stock between
January 15, 1997 and April 15, 1997, filed two purported class action lawsuits
in the United States District Court for the Northern District of California. On
May 28, 1998, the Court consolidated the two lawsuits into one action. On
September 2, 1998, the plaintiffs filed an Amended Class Action Complaint for
the consolidated action (the "Amended Complaint"). The Amended Complaint names
as defendants, among others, Red Brick and certain of its present and former
officers and directors. The complaint alleges violations of the federal
securities laws and seeks unspecified monetary damages. Red Brick believes that
the Amended Complaint is without merit and, on October 7, 1998, Red Brick filed
a motion to dismiss the complaint. A hearing on the motion to dismiss is
tentatively scheduled for December 15, 1998. The pending litigation against Red
Brick, and any future litigation against Red Brick or its employees, may result
in substantial costs and expenses to Red Brick, even if Red Brick prevails in
its case or settles the litigation. Such costs may include a significant
diversion of time and effort by Red Brick's technical and management personnel.
Red Brick could be materially adversely affected by an unfavorable resolution of
such litigation. Depending on their breadth and timing, pending litigation and
any future litigation against Red Brick could have a material adverse effect on
Red Brick's business, future results of operation, cash flows, 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. Red Brick's future financial performance will depend
to a large extent on two conditions: (1) continued growth in the number of
organizations adopting data warehouses, and (2) existing Red Brick customers
expanding their use of data warehouses. The data warehouse market, however, may
not continue to grow and its customers may not expand their use of data
warehouses. A failure of the data warehouse market to grow, or slower growth
than Red Brick currently anticipates, could have a material adverse effect on
Red Brick's business, operating results, and financial condition.
OPERABILITY WITH INDEPENDENT PRODUCTS
Red Brick's operating results depend upon the ability of its products to
operate with related products of certain independent vendors, including leading,
industry standard relational database management systems ("RDBMS") and
application software products. If Red Brick fails to meet existing or future
requirements for operating with related products in a timely manner, demand for
Red Brick's products could be materially adversely affected. The ability of
certain leading applications to operate with Red Brick's RDBMS depends on the
addition of certain features to Red Brick's RDBMS. However, Red Brick may never
be able to make such additions. The new Red Brick product, Red Brick Formation,
depends on its ability to operate with commercial RDBMS products sold by Oracle
and other companies. Development and support of Red Brick Formation requires
that Red Brick obtain and maintain licenses to these third-party RDBMS products.
Since Oracle and
24
<PAGE>
other RDMBS product vendors are among Red Brick's main competitors, Red Brick
may not be able to obtain and maintain the software licenses necessary to
continue to develop and support these products.
CUSTOMER CONCENTRATION
Red Brick depends upon a relatively small number of customers and resellers
for a significant percentage of its revenues. Red Brick expects that customer
and reseller licenses of its products may account for most of its future
revenue. For example, in the first quarter of 1998, sales to two customers each
accounted for 10% of total revenue. In the fourth quarter of 1997, two
transactions accounted for 31% of total revenue. Existing customers and
resellers may not continue to purchase Red Brick's products. The loss of a
major customer or reseller or any reduction in orders by such customers or
resellers could have a material adverse effect on Red Brick. As a result, Red
Brick's business, financial condition, and results of operations would be
materially adversely affected.
YEAR 2000 COMPLIANCE
Red Brick is aware of the issues associated with existing computer systems as
the Year 2000 approaches. Despite design review and ongoing testing, Red
Brick's products may contain undetected errors or defects associated with Year
2000 date handling. Known or unknown errors or defects in Red Brick's products
could result in delay or loss of revenue, diversion of development resources,
damage to Red Brick's reputation, and increased service and warranty costs. Any
of these conditions could have a material adverse effect on Red Brick's
business, operating results or financial condition. 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, Red
Brick is uncertain whether or to what extent it may be affected by such issues.
In addition, Year 2000 issues may also affect the computer systems used
internally by Red Brick to manage and operate its business. Red Brick is not
currently aware of any material costs or operational issues associated with Year
2000 issues affecting its internal systems. However, Red Brick may experience
significant unanticipated problems and costs caused by undetected errors or
defects in internal systems. The worst-case scenario if such problems occur
would be Red Brick's inability to ship products and record revenue. Red Brick
does not currently have any information concerning the Year 2000 compliance
status of its customers or prospective customers. If current or future customers
fail to achieve Year 2000 compliance or if they divert technology expenditures
(especially technology expenditures that were reserved for data warehousing-
related software and services) to address Year 2000 compliance issues, Red
Brick's business, results of operation, or financial condition could be
materially adversely affected. Refer to "Management's Discussion and Analysis of
Financial Condition and Results of Operations Year - 2000 Compliance."
EXPANSION OF INDIRECT CHANNELS
An integral part of Red Brick's business strategy is to further develop a
channel of distributors, value added resellers (VARs), application partners and
system integrators and to increase the proportion of Red Brick's customers
licensed through this indirect channel. Red Brick is currently investing
significant resources into developing this channel and intends to continue this
process. This investment of resources could adversely affect Red Brick operating
results if Red Brick's efforts do not generate significant license revenues. Red
Brick may be unable to attract or retain distributors, VARs, application
partners, or system integrators who are able to market Red Brick's products
effectively, while providing capable, timely and cost-effective customer support
and service. Red Brick's failure to recruit or retain capable distributors,
VARs, application partners, or system integrators could have a material adverse
effect on its results of operations. In addition, if Red Brick is successful in
selling products through this channel, Red
25
<PAGE>
Brick's gross margins will be reduced due to the lower unit prices Red Brick
expects to receive when selling through indirect channels.
MANAGEMENT OF CHANGING BUSINESS
Red Brick's employee base and revenue grew during 1997. In 1998 Red Brick's
customer base has continued to grow. This growth has strained Red Brick's
management systems and resources. Consequently, Red Brick implemented and
expanded upon a number of financial and management controls, reporting systems
and procedures. Red Brick must continue to improve its financial and management
controls, reporting systems and procedures on a timely basis in order to compete
effectively and to manage future growth. Additionally, Red Brick must implement
new systems as necessary and expand, train, and manage its employee work force.
Ultimately, Red Brick may not be able to manage this change in its business
successfully. Red Brick's failure to do so could have a material adverse effect
on Red Brick's business, operating results, and financial condition.
INTERNATIONAL OPERATIONS
Red Brick's international revenues for the nine month periods ended September
30, 1998 and 1997, were 17% and 14% of total revenues, respectively. In order to
expand international sales successfully, Red Brick believes it may need to
establish additional foreign operations, hire additional personnel, and recruit
additional international resellers and distributors. These tasks will require
significant management attention and financial resources. This use of resources
could have an adverse effect on Red Brick's business, operating results, and
financial condition.
Red Brick's operations and financial results could also be significantly
affected by many factors associated with international operations, including:
. General economic conditions in each country where Red Brick sells its
products;
. Uncertainties relative to regional economic circumstances;
. Slower adoption of information technology by foreign countries;
. Changes in foreign currency exchange rates;
. Political instability in emerging markets;
. Difficulties in staffing and managing foreign operations; and
. Other risks associated with international activities.
Additional uncertainty inherent in Red Brick's international business
activities generally include risks such as:
. 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;
26
<PAGE>
. Potentially adverse tax consequences including restrictions on the
repatriation of earnings;
. Weaker intellectual property protection in foreign countries;
. Unexpected changes in the economic condition of foreign countries; and
. The burdens of complying with a wide variety of foreign laws.
Some or all of the above risks may seriously have a material adverse effect on
Red Brick's future international sales and operating results.
LIMITED PROTECTION OF PROPRIETARY TECHNOLOGY; RISKS OF INFRINGEMENT
Red Brick relies on a combination of legal and operational protections for its
proprietary technology. These consist primarily of the following: (1) reliance
on copyright and trademark laws, and (2) the maintenance of trade secrets,
confidentiality procedures and certain contractual provisions. For example, Red
Brick licenses rather than sells its software and requires licensees to enter
into license agreements. License agreements impose certain restrictions on the
licensees' abilities to use the software. In addition, Red Brick employs various
measures to avoid disclosure of its trade secrets, including a requirement that
persons with access to Red Brick's proprietary information execute
confidentiality agreements with Red Brick. Furthermore, Red Brick takes steps to
restrict access to its source code. Although Red Brick seeks to protect its
software, documentation and other written materials under trade secret and
copyright laws, such laws afford only limited protection. Red Brick has filed
three patent applications and other provisional patent applications in the
United States Patent and Trademark Office ("PTO") with respect to certain
aspects of its software. To date, the PTO has not issued any patents to Red
Brick and it may never issue any patents to Red Brick. Even if the PTO issues
one or more patents to Red Brick, Red Brick cannot guarantee that the patent or
patents would survive a legal challenge as to their validity or that they would
provide significant protection to Red Brick. Despite Red Brick's efforts to
protect its proprietary rights, unauthorized parties may attempt to copy aspects
of Red Brick's products or to obtain and use information that Red Brick regards
as proprietary. Red Brick does not know the extent to which piracy of its
software products exists. However, Red Brick expects software piracy to be a
persistent problem, especially given the difficulties of policing such piracy.
In addition, the laws of some foreign countries do not protect Red Brick's
proprietary rights as well as the laws of the United States. For these reasons,
Red Brick's means of protecting its proprietary rights may be inadequate.
Additionally, Red Brick's competitors could develop similar technology
independently. Moreover, it is possible that third parties would claim
infringement of their intellectual property rights by Red Brick with respect to
current or future products, including any future products based on technology
acquired from other companies. Red Brick expects that software product
developers will increasingly be subject to infringement claims due to at least
two developments: (1) the growth in the number of products and competitors in
Red Brick's industry segment, and (2) the overlapping functionality of products
in different industry segments. Any such claims, with or without merit, could:
. Be time consuming;
. Result in costly litigation;
. Cause delays in product shipments; and
. Require Red Brick to enter into royalty or licensing agreements.
Such royalty or licensing agreements, if required, may not be available on
terms acceptable to Red Brick, or at all. Their unavailability would have a
material adverse effect on Red Brick's business, operating results and financial
condition.
27
<PAGE>
Red Brick relies upon certain software that it licenses from third parties.
Red Brick integrates the third party software into its own internally developed
software and uses it to perform key functions in such products as Red Brick
Warehouse and Red Brick Formation. These third-party software licenses may not
continue to be available to Red Brick on commercially reasonable terms. The loss
of, or inability to maintain, any such software licenses could result in delayed
or reduced shipments. This situation could last until equivalent software could
be developed, identified, licensed and integrated. Such a situation would be
likely to seriously harm Red Brick's business, operating results and financial
condition.
PRODUCT LIABILITY
Red Brick's license agreements with its customers typically contain provisions
designed to limit the Company's exposure to potential product liability claims.
Although Red Brick has not experienced product liability claims to date, the
license and support of products by Red Brick may entail the risk of such claims.
A successful product liability claim brought against Red Brick could have a
material adverse effect on Red Brick's business, operating results, and
financial condition.
28
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 27.1: Financial Data Schedule (EDGAR version only)
Exhibit 27.2: Restated Financial Data Schedule (EDGAR version
only)
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the three months ended
September 30, 1998.
29
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 13, 1998 RED BRICK SYSTEMS, INC.
(Registrant)
By: /s/ Kristi L. Smith
-----------------------------------
Kristi L. Smith
Vice President, Finance, Chief Financial
Officer and Secretary
(Duly authorized officer and principal
financial and accounting officer)
30
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JUL-01-1998 JAN-01-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 7,357 7,357
<SECURITIES> 9,775 9,775
<RECEIVABLES> 7,920 7,920
<ALLOWANCES> 1,477 1,477
<INVENTORY> 0 0
<CURRENT-ASSETS> 24,813 24,813
<PP&E> 8,078 8,078
<DEPRECIATION> 4,344 4,344
<TOTAL-ASSETS> 29,170 29,170
<CURRENT-LIABILITIES> 13,022 13,022
<BONDS> 0 0
0 0
0 0
<COMMON> 57,562 57,562
<OTHER-SE> (41,546) (41,546)
<TOTAL-LIABILITY-AND-EQUITY> 29,170 29,170
<SALES> 8,047 25,156
<TOTAL-REVENUES> 8,047 25,156
<CGS> 3,244 9,073
<TOTAL-COSTS> 3,244 9,073
<OTHER-EXPENSES> 9,960 31,668
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 6 30
<INCOME-PRETAX> (4,873) (14,593)
<INCOME-TAX> 123 413
<INCOME-CONTINUING> (4,996) (15,006)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,996) (15,006)
<EPS-PRIMARY> (0.40) (1.20)
<EPS-DILUTED> (0.40) (1.20)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> JUL-01-1997 JAN-01-1997
<PERIOD-END> SEP-30-1997 SEP-30-1997
<CASH> 14,468 14,468
<SECURITIES> 13,611 13,611
<RECEIVABLES> 8,953 8,953
<ALLOWANCES> 1,212 1,212
<INVENTORY> 0 0
<CURRENT-ASSETS> 37,465 37,465
<PP&E> 6,762 6,762
<DEPRECIATION> 4,229 4,229
<TOTAL-ASSETS> 40,885 40,855
<CURRENT-LIABILITIES> 11,764 11,764
<BONDS> 0 0
0 0
0 0
<COMMON> 56,006 56,006
<OTHER-SE> (27,028) (27,028)
<TOTAL-LIABILITY-AND-EQUITY> 40,855 40,855
<SALES> 11,689 28,623
<TOTAL-REVENUES> 11,689 28,623
<CGS> 2,659 7,303
<TOTAL-COSTS> 2,659 7,303
<OTHER-EXPENSES> 19,973 40,946
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 27 93
<INCOME-PRETAX> (10,442) (18,132)
<INCOME-TAX> 100 305
<INCOME-CONTINUING> (10,542) (18,437)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (10,542) (18,437)
<EPS-PRIMARY> 0.90 1.61
<EPS-DILUTED> 0.90 1.61
</TABLE>
