<PAGE>
Final Prospectus
Pursuant to Rule 424(b)(4)
File No. 333-37707
PROSPECTUS
[LOGO]
3,334,000 SHARES
COMMON STOCK
All of the 3,334,000 shares of Common Stock offered hereby are being sold by
Information Advantage, Inc. ("Information Advantage" or the "Company"). Prior to
this offering, there has been no public market for the Common Stock of the
Company. See "Underwriting" for information relating to the method of
determining the initial public offering price. The Common Stock has been
approved for quotation on the Nasdaq National Market System under the symbol
"IACO." Of the 3,334,000 shares being sold in the offering, certain affiliates
of the Company will purchase an aggregate of up to 500,000 shares for investment
purposes and not for resale. See "Certain Transactions."
----------------
The Common Stock offered hereby involves a high degree of risk. See "Risk
Factors" commencing on page 6.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO COMPANY
PUBLIC COMMISSIONS (1)
<S> <C> <C> <C>
Per Share............................. $6.00 $0.42 $5.58
Total (2)............................. $20,004,000 $1,400,280 $18,603,720
</TABLE>
(1) Before deducting expenses payable by the Company, estimated at $1,200,000.
(2) The Company has granted to the Underwriters a 30-day option to purchase up
to an additional 500,100 shares of Common Stock solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissions, and Proceeds to
Company will be $23,004,600, $1,610,322 and $21,394,278, respectively. See
"Underwriting."
----------------
The Common Stock is offered by the Underwriters as stated herein, subject to
receipt and acceptance by them and subject to their right to reject any order in
whole or in part. It is expected that delivery of such shares will be made
through the offices of BancAmerica Robertson Stephens, San Francisco,
California, on or about December 22, 1997.
BANCAMERICA ROBERTSON STEPHENS
NATIONSBANC MONTGOMERY SECURITIES, INC.
PIPER JAFFRAY INC.
FIRST ALBANY CORPORATION
The date of this Prospectus is December 17, 1997
<PAGE>
[GRAPHIC]
[Narrative description of the "intelligent enterprise" in front of
background with the Company's logo.]
[Graphic depicting the relationship between the Company's DecisionSuite
product and desktop applications, online analytical processing servers and
distributed data warehouses and data marts.]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF THE
COMPANY, INCLUDING STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS AND THE
IMPOSITION OF PENALTY BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
<PAGE>
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER
TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
UNTIL JANUARY 11, 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Summary........................................................................................ 4
Risk Factors................................................................................... 6
Use of Proceeds................................................................................ 16
Dividend Policy................................................................................ 16
Capitalization................................................................................. 17
Dilution....................................................................................... 18
Selected Consolidated Financial Data........................................................... 19
Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 20
Business....................................................................................... 29
Management..................................................................................... 42
Certain Transactions........................................................................... 51
Principal Stockholders......................................................................... 54
Description of Capital Stock................................................................... 57
Shares Eligible for Future Sale................................................................ 59
Underwriting................................................................................... 61
Legal Matters.................................................................................. 63
Experts........................................................................................ 63
Additional Information......................................................................... 63
Index to Consolidated Financial Statements..................................................... F-1
</TABLE>
----------------
The Company intends to furnish to its stockholders annual reports containing
audited consolidated financial statements examined by its independent public
accountants and quarterly reports containing unaudited financial statements for
each of the first three quarters of each fiscal year.
As used in this Prospectus, each fiscal year of the Company is identified by
the calendar year in which it ends. Thus, references to "fiscal year 1997" or
"fiscal 1997" shall mean the fiscal year ended January 31, 1997.
DecisionSuite Server-TM- and the Company's logo are trademarks of the
Company and DecisionSuite-Registered Trademark- and Information
Advantage-Registered Trademark- are registered trademarks of the Company. All
other trademarks, service marks or trade names referred to in this Prospectus
are the property of their respective owners.
The address of the Company's principal executive offices is 7905 Golden
Triangle Drive, Suite 190, Eden Prairie, Minnesota 55344-7227 and its telephone
number is (612) 833-3700. Unless otherwise indicated, all references in this
Prospectus to the "Company" or "Information Advantage" refer to Information
Advantage, Inc., a Delaware Corporation, and its predecessor Information
Advantage, Inc., a Minnesota Corporation.
3
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING "RISK FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS PROSPECTUS
CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE
COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE,
BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS" AND ELSEWHERE IN THIS
PROSPECTUS.
THE COMPANY
Information Advantage, Inc. (the "Company") develops, markets and supports
enterprise scalable on-line analytical processing ("OLAP") software that is
designed to allow a large number of users to access and analyze large amounts of
data to make quicker and more informed business decisions. The Company's
server-based solution, DecisionSuite, provides powerful, robust and flexible
analysis processing capabilities that transform raw data into meaningful
information from a wide range of desktop and Internet platforms. Through the use
of an advanced architecture, the Company designed DecisionSuite to accommodate
terabytes of data and thousands of active users, although to date, only a
limited number of customers have deployed DecisionSuite in such environments.
DecisionSuite enables organizations to push effective decision making to all
levels of users thereby creating an "intelligent enterprise," one capable of
quickly identifying and reacting to market opportunities. DecisionSuite supports
many popular UNIX operating systems and employs relational database technology,
allowing it to access most popular databases, data warehouses and data marts.
In order to compete effectively in today's global environment, businesses
must quickly identify and respond to changing market conditions and are,
therefore, dependent upon their ability to rapidly collect, organize, access and
analyze large amounts of data. Organizations are now collecting not only
internal financial and operational data, but are also collecting large amounts
of historical data on their customers, suppliers and other external sources. At
the same time, to more quickly react to changing business conditions, many
organizations have been flattening their organizational structures and
empowering employees at all levels to make decisions, creating a need by more
people to access the vast amounts of business data collected each day and to
perform complex computational analysis on this data. To meet these challenges,
organizations have implemented a number of technology solutions, including data
warehouses and data marts, query and reporting tools and OLAP applications.
According to IDC, an independent industry analyst, the information access
segment of the data warehousing market alone is estimated to be growing from
$664 million in 1996 to $1.4 billion in 2000.
Although many of today's query and reporting tools, desktop OLAP solutions
and non-relational server-based OLAP solutions successfully address some of the
market requirements, these technologies fall short of effectively delivering
enterprise scalable OLAP capabilities. The Company's relational server-based
OLAP solution, DecisionSuite, supports large data sets, thousands of active
users, and simple as well as complex analysis. Moreover, DecisionSuite is
designed for efficient and cost effective deployment and maintenance, and
compliance with industry standards, thereby enabling integration with hardware
and software from a variety of vendors.
Substantially all of the Company's revenues are derived from sales of
DecisionSuite and related services. The Company licenses DecisionSuite to
customers primarily in targeted industries such as retail, consumer packaged
goods, financial services, insurance, telecommunications and healthcare. The
Company sells its products primarily through direct sales. The Company has
direct sales offices in twelve states, Canada, the United Kingdom and Germany,
and has established strategic relationships in South Africa, the Netherlands and
Japan. The Company also utilizes strategic partners to sell its products,
including solution development partners, such as IBM and DynaMark, sales
affiliates, such as EDS and Cambridge Technology Group, and marketing partners,
such as HP and Sun. The Company was formed in 1992 and, accordingly, has a
limited operating history and capitalization.
To complement its advanced product offerings, the Company offers worldwide
training, consulting and support services to its customers directly through its
customer services group and indirectly through its solution development partners
and sales affiliates. The Company's training and consulting services consist of
technical support, education, implementation, prototyping workshops and other
advanced services. The Company also provides its customers with an extensive
array of ongoing support services, including software updates, documentation
updates, telephone support and product maintenance.
4
<PAGE>
THE OFFERING
<TABLE>
<CAPTION>
Common Stock Offered by the Company.......... 3,334,000 shares
<S> <C>
Common Stock to be Outstanding after
the Offering............................... 14,952,325 shares(1)
Use of Proceeds.............................. For repayment of certain indebtedness,
general corporate purposes (primarily working
capital and, to a lesser extent, expansion of
the Company's sales, marketing and customer
support infrastructure), and potential
acquisitions. See "Use of Proceeds."
Nasdaq National Market Symbol................ IACO
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
PERIOD FROM NINE MONTHS
APRIL 14, 1992 ENDED
(INCEPTION) TO YEARS ENDED JANUARY 31, OCTOBER 31,
JANUARY 31, ------------------------------------------ --------------------
1993 1994 1995 1996 1997 1996 1997
--------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues........................... $ 1,751 $ 4,348 $ 3,817 $ 5,642 $ 11,746 $ 8,414 $ 17,501
Loss from operations............... (2,326) (1,147) (4,312) (3,795) (8,380) (4,980) (5,867)
Net loss........................... (2,377) (1,201) (4,395) (3,789) (8,476) (5,020) (5,956)
Pro forma net loss per share (2)... $ (0.84) $ (0.52)
Shares used in computing pro forma
net loss per share (2)........... 10,103 11,518
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 31, 1997
---------------------------------------
AS
ACTUAL PRO FORMA(3) ADJUSTED(4)
--------- ------------- -------------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital........................................................ $ (615) $ (615) $ 15,905
Total assets........................................................... 12,965 12,965 27,219
Total liabilities...................................................... 12,238 12,238 9,088
Convertible redeemable preferred stock................................. 24,410 -- --
Stockholders' equity (deficit)......................................... (23,683) 727 18,131
</TABLE>
- ----------------
(1) Based on the number of shares outstanding as of October 31, 1997. Excludes
(i) 2,257,113 shares subject to outstanding options as of October 31, 1997
at a weighted average exercise price of approximately $1.55 per share, (ii)
warrants to purchase 143,419 shares at a weighted average exercise price of
$2.91 per share, (iii) warrants to purchase 30,000 shares at $5.00 per
share, and (iv) 1,307,871 shares reserved for issuance under the Company's
stock plans. See "Management--1997 Equity Incentive Plan," "--1997 Employee
Stock Purchase Plan" and Notes 8 and 9 of Notes to Consolidated Financial
Statements.
(2) See Note 2 of Notes to Consolidated Financial Statements for an explanation
of the method used to determine the number of shares used in computing pro
forma net loss per share.
(3) Reflects the conversion of outstanding Preferred Stock into Common Stock and
the exercise of warrants to purchase 454,565 shares of Common Stock upon
completion of the offering.
(4) Adjusted to reflect the sale of shares of Common Stock by the Company at the
initial public offering price of $6.00 per share and the application of the
estimated net proceeds therefrom. See "Use of Proceeds" and
"Capitalization."
----------------
UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS (I) ASSUMES
NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION, (II) REFLECTS A
1-FOR-2 1/2 REVERSE STOCK SPLIT THAT WAS EFFECTED ON DECEMBER 3, 1997 AND, (III)
REFLECTS, EXCEPT IN THE CONSOLIDATED FINANCIAL STATEMENTS, THE CONVERSION OF ALL
OUTSTANDING SHARES OF PREFERRED STOCK INTO COMMON STOCK AND THE EXERCISE OF
WARRANTS TO PURCHASE 454,565 SHARES OF COMMON STOCK UPON COMPLETION OF THE
OFFERING.
5
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing shares of the Common Stock offered hereby. This
Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors" and elsewhere in this Prospectus.
LIMITED OPERATING HISTORY; LACK OF PROFITABILITY
The Company was formed in 1992. Accordingly, the Company's prospects must be
considered in light of the risks and difficulties frequently encountered by
companies in the early stage of development, particularly companies in new and
rapidly evolving markets. To address these risks, the Company must, among other
things, respond to competitive developments, continue to attract, retain and
motivate qualified personnel, and continue to enhance and improve its products.
The Company has incurred net operating losses in each quarter since inception
and it is possible that the Company will not generate sufficient net income to
fully utilize its net operating loss carryforwards before they begin to expire
in 2007. As of October 31, 1997, the Company had an accumulated deficit of $26.4
million. The Company expects to incur additional net losses. The Company's
operating losses have been due in part to the commitment of significant
resources to the Company's technical support, research and development and sales
and marketing organizations. The Company expects to continue to devote
substantial resources in these areas and as a result will need to recognize
significant quarterly revenues to achieve profitability. In particular, the
Company intends to continue hiring a significant number of sales and research
and development personnel over the balance of fiscal 1998 and beyond. Future
operating results will depend on many factors, including, among others, demand
for and acceptance of the Company's products and services, including ongoing
acceptance of maintenance and other services purchased by existing customers,
the level of product and price competition, the ability of the Company to
control costs and to develop, market and deploy new products, the ability of the
Company to expand its direct sales force and indirect distribution channels both
domestically and internationally, the Company's success in attracting and
retaining key personnel, market acceptance of OLAP products and the ability of
the Company to successfully integrate technologies and businesses it may acquire
in the future. Although the Company's revenues have increased in recent periods,
there can be no assurance that the Company's revenues will grow in future
periods or, if they do grow, that they will grow at past rates, or that the
Company will ever become profitable. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
FLUCTUATIONS IN OPERATING RESULTS
The Company's limited operating history and the susceptibility of the
Company's operating results to significant fluctuations makes the prediction of
future operating results unreliable and the Company believes that
period-to-period comparisons of its operating results are not necessarily
meaningful and should not be relied upon as indications of future performance.
The Company's operating results have in the past, and will in the future, vary
significantly due to factors such as demand for the Company's products, the size
and timing of significant orders and their fulfillment, the number, timing and
significance of product enhancements and new product announcements by the
Company and its competitors, changes in pricing policies by the Company or its
competitors, customer order deferrals in anticipation of enhancements or new
products offered by the Company or its competitors, the ability of the Company
to develop, introduce and market new and enhanced versions of its products on a
timely basis, changes in the Company's level of operating expenses and its
ability to control costs, budgeting cycles of its customers, product life
cycles, software defects and other product quality problems, hiring needs and
personnel changes, changes in the Company's sales incentive plans, changes in
the mix of domestic and international revenues, the level of international
expansion, foreign currency exchange rate fluctuations, performance of indirect
channel partners, changes in the mix of indirect channels through which the
Company's products are offered, the impact of consolidation by competitors and
indirect channel partners
6
<PAGE>
and general domestic and international economic and political conditions. A
significant portion of the Company's revenues have been, and the Company
believes will continue to be, derived from a limited number of orders placed by
large organizations. The timing of such orders and their fulfillment have
caused, and are expected to continue to cause, material fluctuations in the
Company's operating results, particularly on a quarterly basis. A significant
portion of the Company's revenues are derived from existing customers. To the
extent that such customers no longer require new licenses or ongoing support,
the Company's business, financial condition and operating results could be
materially adversely affected. The Company has, from time to time, 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.
In addition, the Company does not operate with a large order backlog because its
software products are typically shipped shortly after orders are received, which
makes product revenues in any quarter substantially dependent on orders booked
and shipped throughout that quarter. Accordingly, revenues for any future
quarter are difficult to predict. The Company expects that as international
sales increase as a percentage of total sales it will experience weaker demand
for DecisionSuite during the summer months. Product revenues are also difficult
to forecast because the market for OLAP applications is rapidly evolving, and
the Company's sales cycle, which may last from six to twelve months or more,
varies substantially from customer to customer. The Company's expense level and
plans for expansion, including its plan to significantly increase its sales and
marketing and research and development efforts, are based in significant part on
the Company's expectations of future revenues and are relatively fixed in the
short-term. Consequently, if revenue levels are below expectations, operating
results are likely to be adversely and disproportionately affected. In addition,
the Company expects that sales derived through indirect channels, which are more
difficult to forecast and generally have lower gross margins than direct sales,
will increase as a percentage of total revenues. See "--Expansion of Indirect
Channels."
Based upon all of the factors described above, the Company believes that its
quarterly revenues, expenses and operating results are likely to vary
significantly in the future, that period-to-period comparisons of its operating
results are not necessarily meaningful and that, in any event, such comparisons
should not be relied upon as indications of future performance. Accordingly, the
Company has limited ability to forecast future revenues, and it is likely that
in some future quarter the Company's operating results will be below the
expectations of public market analysts and investors. In the event that
operating results are below expectations, or in the event that adverse
conditions prevail or are perceived to prevail generally or with respect to the
Company's business, the price of the Company's Common Stock would be materially
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
LENGTHY SALES AND IMPLEMENTATION CYCLES
The licensing of the Company's products by its customers typically involves
a significant commitment of capital and other resources, and are therefore
subject to delays frequently associated with customers' internal procedures to
approve large capital expenditures and to test and accept new technologies that
affect key operations. For these and other reasons, the sales cycle associated
with the licensing of the Company's products is typically six to twelve months
and subject to a number of significant risks that are beyond the Company's
control, including customers' budgetary constraints and internal acceptance
reviews. Because of the lengthy sales cycle and the large size of customers'
orders, if revenues forecasted from a specific customer for a particular quarter
are not realized in that quarter, the Company's operating results for that
quarter could be materially adversely affected. In addition, the time required
to deploy the Company's products can vary significantly with the needs of each
customer and the complexity of a customer's data processing needs. Accordingly,
deployment of the Company's products is generally a process that extends for
several months and may involve a pilot implementation, successful completion of
which is typically a prerequisite for full-scale deployment. In situations
involving a pilot implementation, revenue recognition is deferred until
execution of a final license and the other prerequisites for revenue recognition
have been fulfilled. The Company has experienced difficulty implementing
DecisionSuite in the past due to the complexity of customer requirements. The
Company generally relies upon internal resources to implement its products.
There can be no assurance that the Company will not experience delays in the
implementation of orders in the future or that third parties will be able to
7
<PAGE>
successfully install the Company's products. Any delays in the implementation of
DecisionSuite could have a material adverse effect on the Company's business,
operating results and financial condition. In addition, any significant delay in
the implementation of DecisionSuite could cause a customer to reject the
Company's software, which could impair the Company's reputation and have a
material adverse effect on the Company's business, operating results and
financial condition. See "--Fluctuations in Operating Results," "--Dependence on
Service Revenues," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Business--Sales and Marketing" and "--Customer
Support."
COMPETITION
The market in which the Company competes is intensely competitive, highly
fragmented and characterized by rapidly changing technology and evolving
standards. The Company's current and prospective competitors offer a variety of
planning and analysis software solutions and generally fall within three
categories: (i) vendors of desktop OLAP software such as Cognos and Business
Objects; (ii) vendors of multidimensional OLAP software such as Oracle
(Express), Arbor Software, Seagate (Holos) and SAS; and (iii) vendors of
OLAP/relational database software such as MicroStrategy and Platinum Technology
(Prodea). The Company has experienced and expects to continue to experience
increased competition from current and potential competitors, many of whom have
significantly greater financial, technical, marketing and other resources than
the Company. Such competitors may be able to respond more quickly to new or
emerging technologies and changes in customer requirements or devote greater
resources to the development, promotion and sales of their products than the
Company. Also, certain current and potential competitors, including companies
such as Microsoft, IBM, Sybase and Informix, may have greater name recognition
or more extensive customer bases that could be leveraged. These companies could
integrate competing OLAP/relational database software with other widely accepted
products resulting in a loss of market share for the Company. The Company
expects additional competition as other established and emerging companies enter
into the OLAP software market and new products and technologies are introduced.
Increased competition could result in price reductions, fewer customer orders,
reduced gross margins, longer sales cycles and loss of market share, any of
which would materially adversely affect the Company's business, operating
results and financial condition.
Current and potential competitors may make strategic acquisitions or
establish cooperative relationships among themselves or with third parties,
thereby increasing their ability to address the needs of the Company's
prospective customers. The Company's current or future indirect channel partners
may establish cooperative relationships with current or potential competitors of
the Company, thereby limiting the Company's ability to sell its products through
particular distribution channels. Accordingly, it is possible that new
competitors or alliances among current and new competitors may emerge and
rapidly gain significant market share. Such competition could materially
adversely affect the Company's ability to obtain new licenses, and maintenance
and support renewals for existing licenses, on terms favorable to the Company.
Further, competitive pressures may require the Company to reduce the price of
DecisionSuite, which would 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, and the failure to do so would have a material adverse effect upon
the Company's business, operating results and financial condition.
DEPENDENCE ON GROWTH OF MARKET FOR OLAP APPLICATIONS AND ACCEPTANCE OF THE WEB
Although demand for DecisionSuite has grown in recent years, the market for
OLAP software applications is still emerging and there can be no assurance that
it will continue to grow or that, even if the market does grow, businesses will
adopt the Company's products. Because a significant portion of the Company's
revenues are derived from existing customer upgrades, the failure of such
upgrades to occur due to the lack of continued adoption of OLAP applications by
its installed customer base, would have a material adverse effect on the
Company's business, operating results and financial condition. The Company has
spent, and intends to continue spending, considerable resources educating
potential customers about DecisionSuite and its functions and on-line analytical
processing generally. However, there can be no assurance that such expenditures
will enable
8
<PAGE>
DecisionSuite to achieve any additional degree of market acceptance, and if the
market for DecisionSuite 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. Historically, the software
industry has experienced significant periodic downturns, often in connection
with, or in anticipation of, declines in general economic conditions during
which management information systems budgets often decrease. As a result, the
Company's business, operating results and financial condition may in the future
reflect substantial fluctuations from period to period as a consequence of
patterns and general economic conditions in the software industry.
In addition, the success of the Company may be dependent on the acceptance
of the use of the World Wide Web as a means to disseminate information. The
Company has had limited large-scale deployment of its products for use on the
Web. If customers determine that the Company's products are not scalable or are
otherwise inadequate for Web-based use, or do not provide adequate security for
the dissemination of information over the Web, or if for any other reason
customers fail to accept the Company's products for use on the Web, the
Company's business, operating results and financial condition could be
materially adversely affected. See "Business--Industry Background," "--Customers
and Applications," "--Products and Technology" and "--Sales and Marketing."
LIMITED LARGE-SCALE DEPLOYMENT
The Company believes that DecisionSuite can accommodate terabytes of data
and thousands of active users; however, to date, the Company has had only a
limited number of customers who have deployed DecisionSuite in such
environments. If the Company's customers cannot successfully implement
large-scale deployments or determine for any other reason that the Company's
products cannot accommodate large-scale enterprise applications, or that such
products are not required or appropriate for such widespread use, the Company's
reputation and competitive advantage will be materially adversely affected,
which would, in turn, have a material adverse affect on the Company's business,
operating results and financial condition.
RAPID TECHNOLOGICAL CHANGE AND NEW PRODUCTS
The market for the Company's products is characterized by rapid
technological change, frequent new product introductions and enhancements,
uncertain product life cycles, changing customer demands and evolving industry
standards. The introduction of products embodying new technologies and the
emergence of new industry standards can render existing products obsolete and
unmarketable. The Company has focused its efforts on products that run on UNIX
operating systems and has not developed a product that runs on Windows NT or any
other operating system. As more of the Company's customers adopt Windows NT for
their businesses, the Company will need to develop a Windows NT version of
DecisionSuite. The development of a Windows NT product would require a
substantial investment of resources by the Company, and there is no assurance
that such a product could be introduced on a timely or cost effective basis or
at all. The Company believes that its future success will depend in large part
on its ability to support popular operating systems and databases, and on its
ability to maintain and improve its current product line and to develop new
products on a timely basis that achieve market acceptance, maintain
technological competitiveness and meet an expanding range of customer
requirements. As a result of the complexities inherent in OLAP, major new
products and product enhancements can require long development and testing
periods. In addition, customers may delay their purchasing decisions in
anticipation of the general availability of new or enhanced versions of the
Company's products. As a result, significant delays in the general availability
of such new releases or significant problems in the installation or
implementation of such new releases could have a material adverse effect on the
Company's business, operating results and financial condition. There can be no
assurance that the Company will be successful in developing and marketing, on a
timely and cost effective basis, product enhancements or new products that
respond to technological change, evolving industry standards or customer
requirements, that the Company will not experience difficulties that could delay
or prevent the successful development, introduction or marketing of these
enhancements or that the Company's new products and product enhancements will
achieve market acceptance. See "Business--Research and Development."
9
<PAGE>
PRODUCT AND CUSTOMER CONCENTRATION
Substantially all of the Company's revenues to date have been attributable
to the DecisionSuite line of products and related services and are currently
expected to account for substantially all of the Company's revenues for the
foreseeable future. The Company's future operating results are dependent upon
continued market acceptance of DecisionSuite and enhancements to these products.
Consequently, a decline in the demand for, or market acceptance of,
DecisionSuite as a result of competition, technological change or other factors,
would have a material adverse effect on the Company's business, operating
results and financial condition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business--Products and
Technology."
A relatively small number of customers have accounted for a significant
percentage of the Company's revenues. In fiscal 1996, MasterCard International
Incorporated accounted for 13.6% of total revenues. In fiscal 1997, Tandy
Corporation accounted for 10.3% of total revenues. The Company expects that it
will continue to be dependent upon a limited number of new and existing
customers for a significant portion of its revenues in future periods, and such
customers are expected to vary from period to period. As a result, the failure
by the Company to successfully sell its products or services to one or more
targeted new or existing customers in any particular period, or the deferral or
cancellation of orders by one or more of these customers, could have a material
adverse effect on the Company's business, operating results and financial
condition. The loss of a major customer, or any reduction in orders by such
customer, including reductions due to market or competitive conditions, would
have a material adverse effect on the Company's business, operating results and
financial condition.
DEPENDENCE ON SERVICE REVENUES
The Company licenses software and provides related services, which consist
of maintenance, support, training, consulting and implementation. Total license
revenues and service revenues have increased from year to year. Service revenues
represented 52.2%, 52.4% and 44.7% of total revenues for the fiscal years ended
January 31, 1995, 1996 and 1997, respectively, and 43.1% and 48.1% for the
nine-month periods ended October 31, 1996 and 1997. The Company anticipates that
service revenues will continue to represent a significant percentage of total
revenues. To a large degree, the level of service revenues is dependent upon the
ongoing acceptance of maintenance contracts by the Company's growing installed
customer base. If service revenues are less than anticipated, the Company's
operating results could be materially adversely affected. The Company's ability
to increase its service revenues will depend in large part on its ability to
increase the scale of its services organization, including its ability to
successfully recruit and train a sufficient number of qualified service
representatives. There can be no assurance that the Company will be able to
successfully expand its service organization. In addition, there can be no
assurance that the Company will be successful in implementing its strategy or
that such products will achieve market acceptance, the failure of which could
have a material adverse effect on its business, operating results and financial
condition. See "--Dependence on Key Personnel" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
EXPANSION OF INDIRECT CHANNELS
The Company intends to expand its relationships with strategic partners and
to increase the proportion of the Company's customers licensed through these
indirect channels. The Company's indirect channels have accounted for less than
25% of total revenues to date. There can be no assurance that the Company will
continue to be represented by any of its indirect channels. The Company is
currently investing, and intends to increasingly invest in the future,
significant resources to develop this channel, which could adversely affect the
Company's operating results if the Company's efforts do not generate significant
license revenues. There can be no assurance that the Company will be able to
attract strategic partners 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 failure to recruit strategic partners could adversely
affect the Company's results of operations. The Company's ability to achieve
revenue growth in the future will depend in large part on its success in
maintaining
10
<PAGE>
and establishing additional relationships with strategic partners. In addition,
if it is successful in selling products through this channel, the Company's
gross margins will be negatively affected due to the lower unit prices that the
Company expects to receive when selling through indirect channels. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview" and "Business--Sales and Marketing."
RISKS ASSOCIATED WITH INTERNATIONAL SALES AND OPERATIONS
During fiscal years 1995, 1996 and 1997, the Company derived 24.8%, 10.7%
and 9.5% of its total revenues, respectively, from sales outside the United
States. The Company anticipates that for the foreseeable future a significant
portion of its revenues will be derived from sources outside the United States.
The Company intends to continue to expand its sales and support operations
outside the United States and to enter additional international markets. In
order to successfully expand international sales, the Company must establish
additional foreign operations, expand its international channel management and
support organizations, hire additional personnel, recruit additional
international resellers and increase the productivity of existing international
resellers. To the extent that the Company is unable to do so in a timely and
cost-effective manner, the Company's growth, if any, in international sales will
be limited, and the Company's business, operating results and financial
condition could be materially adversely affected. The Company also expects to
commit additional resources to customizing its products for selected
international markets and developing international channel sales and support
organizations. In addition, even if international operations are successfully
expanded and the Company's products are successfully customized, there can be no
assurance that the Company will be able to maintain or increase international
market demand for its products. See "Business--Sales and Marketing."
The Company's international operations are generally subject to a number of
risks, including costs of customizing products for foreign countries,
protectionist laws and business practices favoring local competition, dependence
on local vendors, compliance with multiple, conflicting and changing government
laws and regulations, longer sales and payment cycles, import and export
restrictions and tariffs, difficulties in staffing and managing foreign
operations, greater difficulty or delay in accounts receivable collection,
foreign currency exchange rate fluctuations, multiple and conflicting tax laws
and regulations and political and economic instability. To date, a majority of
the Company's revenues and costs have been denominated in U.S. dollars. However,
the Company believes that an increasing portion of the Company's revenues and
costs will be denominated in foreign currencies. Although the Company may from
time to time undertake foreign exchange hedging transactions to cover a portion
of its foreign currency transaction exposure, the Company does not currently
attempt to cover any foreign currency exposure. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
MANAGEMENT OF GROWTH; NEED FOR ADDITIONAL QUALIFIED PERSONNEL
The Company has recently experienced a period of significant revenue growth
and an expansion in the number of its employees, the scope of its operating and
financial systems and geographic area of its operations. From January 31, 1995
to October 31, 1997, the Company has increased its headcount from 75 to 219.
Further significant increases in the number of employees are anticipated in
fiscal 1998 and beyond. For example, the Company currently plans to expand its
sales and marketing services and research and development efforts by, among
other things, significantly increasing the number of employees dedicated to
those areas. This growth has resulted, and will continue to result, in new and
increased responsibilities for management personnel and may place a strain upon
the Company's management, operating financial systems and resources. The Company
expects that planned expansion of international operations will lead to
increased financial and administrative demands, such as increased operational
complexity associated with expanded facilities, administrative burdens
associated with managing an increasing number of relationships with foreign
partners and expanded treasury functions to manage foreign currency risks. The
Company's future operating results will also depend on its ability to further
develop indirect channels to penetrate different and broader markets and expand
its support organization to accommodate growth in the Company's installed base.
The failure of the Company to manage its
11
<PAGE>
expansion effectively could have a material adverse effect on the Company's
business, operating results and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business--Sales and Marketing" and "Management."
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant degree upon the efforts of
certain key management, technical support, sales, marketing, customer support
and research and development personnel. The loss of key personnel could
adversely affect the Company. The Company believes that its future success will
depend in large part upon its continuing ability to attract and retain highly
skilled managerial, sales, marketing, customer support and research and
development personnel. Like other software companies, the Company faces intense
competition for such personnel, and the Company has at times experienced and
continues to experience difficulty in recruiting qualified personnel. There can
be no assurance that the Company will be successful in attracting, assimilating
or retaining qualified personnel in the future. The loss of the services of one
or more of the Company's key individuals, or the failure to attract and retain
additional qualified personnel, could have a material and adverse effect on the
Company's business, operating results and financial condition. See
"Business--Employees" and "Management."
RISK OF SOFTWARE DEFECTS
Software products as complex as those offered by the Company may contain
errors or defects, particularly when first introduced, when new versions or
enhancements are released or when configured to individual customer computing
systems. The Company has in the past encountered system configuration problems
at certain customer sites. Although to date the Company has not experienced
material adverse effects resulting from any such defects or problems, there can
be no assurance that, despite testing by the Company, defects and errors will
not be found in current versions, new versions or enhancements of its products
after commencement of commercial shipments, resulting in loss of revenues or
delay in market acceptance, which could have a material adverse effect on the
Company's business, operating results and financial condition. See "Business--
Research and Development."
LIMITED PROTECTION OF PROPRIETARY TECHNOLOGY; RISKS OF INFRINGEMENT; USE OF
LICENSED TECHNOLOGY
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 its
software pursuant to signed 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 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.
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 many 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.
To date, the Company has not been notified that the Company's products
infringe the proprietary rights of third parties, but 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 data warehouse and data
mart software product
12
<PAGE>
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.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, in less than three years, computer systems and
software used by many companies may need to be upgraded to comply with such
"Year 2000" requirements. Although the Company's products are Year 2000
compliant, the Company believes that the purchasing patterns of customers and
potential customers may be affected by Year 2000 issues as companies expend
significant resources to correct or patch their current software systems for
Year 2000 compliance. These expenditures may result in reduced funds available
to purchase software products such as those offered by the Company, which could
result in a material adverse effect on the Company's business, operating results
and financial condition.
PRODUCT LIABILITY
Although the Company's license agreements with its customers typically
contain provisions designed to limit the Company's exposure to potential product
liability claims, it is possible that such limitation of liability provisions
may not be effective as a result of existing or future laws or unfavorable
judicial decisions. The Company has not experienced any product liability claims
to date, however the sale and support of the Company's products may entail the
risks of such claims which are likely to be substantial in light of the use of
the Company's products in business-critical applications. A product liability
claim brought against the Company could have a material adverse effect on the
Company's business, operating results and financial condition. See
"Business--Products and Technology" and "--Research and Development."
NO PRIOR TRADING MARKET FOR THE COMMON STOCK; POTENTIAL VOLATILITY OF STOCK
PRICE
Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance that an active trading market will develop
or be sustained after this offering. The initial public offering price was
determined by negotiation among the Company and the representatives of the
Underwriters, and may not be indicative of the price that will prevail in the
open market. See "Underwriting" for a discussion of the factors to be considered
in determining the initial public offering price.
The market price of the Common Stock is likely to be highly volatile and may
be significantly affected by factors such as actual or anticipated fluctuations
in the Company's operating results, announcements of technological innovations,
new products or new contracts by the Company or its competitors, developments
with respect to copyrights or proprietary rights, conditions and trends in the
software and other technology industries, adoption of new accounting standards
affecting the software industry, changes in financial estimates by securities
analysts, general market conditions and other factors. In addition, the stock
market has from time to time experienced significant price and volume
fluctuations that have particularly affected the market prices for the common
stocks of technology companies. In the past, following periods of volatility in
the market price of a particular company's securities, securities class action
litigation has often been brought against such company. There can be no
assurance that such litigation will not occur in the future with respect to the
Company. Such litigation could result in substantial costs and a diversion of
management's attention and resources, which could have a material adverse effect
upon the Company's business, operating results and financial condition. See
"Underwriting."
13
<PAGE>
CONTROL OF COMPANY BY EXECUTIVE OFFICERS, DIRECTORS AND FIVE PERCENT
STOCKHOLDERS
Upon the consummation of this offering, the executive officers, directors,
five percent stockholders and their affiliates in the aggregate will
beneficially own approximately 65.74% of the outstanding Common Stock (63.61% if
the Underwriters' over-allotment option is exercised in full). As a result,
these stockholders will be able to exercise control over all matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions. Such concentration of ownership may have the
effect of delaying or preventing a change in control of the Company. See
"Principal Stockholders."
EFFECT OF CERTAIN CHARTER PROVISIONS; ANTITAKEOVER EFFECTS OF CERTIFICATE OF
INCORPORATION, BYLAWS AND DELAWARE LAW
The Company's Certificate of Incorporation, as amended and restated (the
"Certificate of Incorporation"), and Bylaws, as amended ("Bylaws"), contain
certain provisions that may have the effect of discouraging, delaying or
preventing a change in control of the Company or unsolicited acquisition
proposals that a stockholder might consider favorable, including provisions
authorizing the issuance of "blank check" preferred stock, requiring the consent
of holders of at least 80% of the Company's capital stock to amend the
Certificate of Incorporation or Bylaws, eliminating the ability of stockholders
to act by written consent or call a special meeting of stockholders and
providing for a Board of Directors with staggered, three-year terms. In
addition, certain provisions of Delaware law and the Company's 1997 Equity
Incentive Plan (the "Plan") may also have the effect of discouraging, delaying
or preventing a change in control of the Company or unsolicited acquisition
proposals. The antitakeover effect of these provisions may also have an adverse
effect on the public trading price of the Company's Common Stock. See
"Management" and "Description of Capital Stock-- Preferred Stock" and
"--Antitakeover Effects of Provisions of the Certificate of Incorporation,
Bylaws and Delaware Law."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock after the offering
could adversely affect the market price of the Common Stock and could impair the
Company's ability to raise capital through the sale of equity securities. Upon
completion of the offering, the Company will have outstanding 14,952,325 shares
of Common Stock (15,452,425 shares if the Underwriters' over-allotment option is
exercised in full), assuming no exercise of options after October 31, 1997. Of
these shares, the 3,334,000 shares offered hereby (3,834,100 shares if the
Underwriters' over-allotment option is exercised in full) will be freely
tradable without restriction or further registration under the Securities Act of
1933, as amended (the "Securities Act"), unless purchased by "affiliates" of the
Company as that term is defined in Rule 144 under the Securities Act ("Rule
144") described below. The remaining 11,618,325 shares of Common Stock
outstanding upon completion of the offering will be "restricted securities" as
that term is defined in Rule 144.
Restricted shares may be sold in the public market only if registered or if
they qualify for an exemption from the registration under Rule 144, 144(k) or
701 promulgated under the Securities Act. As a result of the contractual
restrictions described below and the provisions of Rules 144, 144(k) and 701,
additional shares will be available for sale in the public market as follows:
(i) 37,327 shares will be eligible for immediate sale on the date of this
Prospectus, (ii) 2,299 shares will be eligible for sale 90 days after the date
of this Prospectus, (iii) 11,144,709 shares will be eligible for sale upon
expiration of lock-up agreements between certain stockholders of the Company and
the representatives of the Underwriters 180 days after the date of this
Prospectus and (iv) 433,990 shares will be eligible for sale thereafter. In
addition to the foregoing, as of October 31, 1997, there were outstanding under
the Plan and its predecessor plan, options to purchase an aggregate of 2,257,113
shares of Common Stock. The shares underlying such options will be eligible for
sale upon expiration of the lock-up provisions contained in the Plan and its
predecessor plan (the "Plan Stand-off Agreements") beginning 180 days after the
date of this Prospectus, subject in certain cases to such shares underlying
outstanding options becoming eligible for sale more than 180 days after the date
of this Prospectus as such options vest. The Company has agreed not to release
shares from the lock-up provisions of the Plan Stand-Off Agreements without the
prior written consent of BancAmerica Robertson Stephens. In addition, the
14
<PAGE>
Company intends to register, following this offering, approximately 3,564,984
shares of Common Stock subject to outstanding options or reserved for issuance
under the Company's stock and option plans. Further, certain stockholders
holding approximately 10,401,890 shares of Common Stock (assuming the exercise
of warrants to purchase 30,000 shares of Common Stock held by holders of
registration rights) are entitled to demand registration of their shares of
Common Stock. By exercising their demand registration rights, such stockholders
could cause a large number of securities to be registered and sold in the public
market, which could have an adverse effect on the market price of the Common
Stock. See "Description of Capital Stock" and "Shares Eligible for Future Sale."
IMMEDIATE AND SUBSTANTIAL DILUTION
The initial public offering price is substantially higher than the book
value per share of the outstanding Common Stock. As a result, investors
purchasing Common Stock in this offering will incur immediate and substantial
dilution. In addition, the Company has issued options to acquire Common Stock at
prices significantly below the initial public offering price. To the extent such
outstanding options are exercised, there will be further dilution. See
"Dilution" and "Shares Eligible for Future Sale."
UNCERTAINTY AS TO USE OF PROCEEDS
The primary purposes of this offering are to increase the Company's equity
capital, to create a public market for the Company's Common Stock and to
facilitate future access to public markets. As of the date of this Prospectus,
the Company has no specific plans to use the net proceeds from this offering
other than for the repayment of indebtedness to a bank, general corporate
purposes, including working capital and expansion of the Company's sales,
marketing and customer support infrastructure, and potential future acquisitions
of businesses, products and technologies that complement the Company's business.
Accordingly, the Company's management will retain broad discretion as to the
allocation of a substantial portion of the net proceeds from this offering.
Pending any such uses, the Company plans to invest the net proceeds in
investment-grade, interest-bearing securities. See "Use of Proceeds."
15
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,334,000 shares of
Common Stock offered hereby, at the initial public offering price of $6.00, are
estimated to be $17.4 million ($20.2 million if the Underwriters' over-allotment
option is exercised in full), after deducting underwriting discounts and
commissions and estimated offering expenses payable by the Company. The primary
purposes of this offering are to increase the Company's equity capital, to
create a public market for the Company's Common Stock and to facilitate future
access to public markets. As of the date of this Prospectus, the Company has no
specific plans to use the net proceeds from this offering other than as set
forth below.
The Company intends to use a portion of the net proceeds for repayment of
all amounts outstanding under a $2.0 million revolving line of credit expiring
in September 1998. In October 1997, the Company borrowed $1.7 million under this
revolving line of credit, bearing an annual interest rate of 1.75% over the
bank's prime lending rate. The Company also expects to use a portion of the net
proceeds for repayment of a $400,000 term loan, bearing interest at 1.75% over
the bank's prime lending rate, undertaken to finance its capital expenditure
commitments. The Company also expects to use a portion of the net proceeds for
repayment of a subordinated promissory note, the outstanding principal balance
of which at October 31, 1997 was $1.1 million, and which bears interest at the
annual rate of 13.5%.
The Company expects to use the remainder of the net proceeds for general
corporate purposes (primarily working capital and, to a lesser extent, expansion
of the Company's sales, marketing and customer support infrastructure).
Furthermore, from time to time the Company expects to evaluate the acquisition
of businesses, products and technologies that complement the Company's business,
for which a portion of the net proceeds may be used. Currently, however, the
Company does not have any understandings, commitments or agreements with respect
to any such acquisitions. Pending use of the net proceeds for the above
purposes, the Company plans to invest the net proceeds in short-term,
interest-bearing, investment-grade obligations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock and does not expect to do so in the foreseeable future. The Company
anticipates that all future earnings, if any, generated from operations will be
retained by the Company to develop and expand its business. Any future
determination with respect to the payment of dividends will be at the discretion
of the Board of Directors and will depend upon, among other things, the
Company's operating results, financial condition and capital requirements, the
terms of then-existing indebtedness, general business conditions and such other
factors as the Board of Directors deems relevant. In addition, the terms of the
Company's credit facility prohibit the payment of cash dividends without the
lender's consent.
16
<PAGE>
CAPITALIZATION
The following table sets forth the total capitalization of the Company as of
October 31, 1997, (i) on an actual basis after giving effect to a subsequent
1-for-2 1/2 reverse stock split, (ii) on a pro forma basis to reflect the
conversion of all outstanding shares of Preferred Stock into Common Stock and
the exercise of warrants to purchase 454,565 shares of Common Stock upon the
closing of this offering and (iii) on such pro forma basis as adjusted to
reflect the sale of the shares of Common Stock offered hereby (at the initial
offering price of $6.00 per share) and the application of the net proceeds
therefrom. See "Use of Proceeds." This table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and Notes thereto
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
OCTOBER 31, 1997
-------------------------------------
ACTUAL PRO FORMA AS ADJUSTED
--------- ------------- -----------
(IN
THOUSANDS)
<S> <C> <C> <C>
Long-term debt, less current portion...................................... $ 1,135 $ 1,135 $ 251
Convertible redeemable preferred stock; $0.01 par value; 22,066,396 shares
authorized, 9,483,334 shares issued and outstanding actual; no shares
authorized, issued or outstanding pro forma and as adjusted............. 24,410 -- --
Stockholders' equity (deficit):
Preferred stock: $0.01 par value, no shares authorized, issued or
outstanding, actual; 5,000,000 shares authorized, no shares issued or
outstanding, pro forma and as adjusted................................ -- -- --
Common stock: $0.01 par value, 60,000,000 shares authorized, 1,680,426
shares issued and outstanding, actual; 60,000,000 shares authorized,
11,618,325 shares issued and outstanding, pro forma, and 14,952,325,
as adjusted (1)....................................................... 17 117 150
Additional paid-in capital.............................................. 2,665 26,975 44,346
Accumulated deficit..................................................... (26,382) (26,382) (26,382)
Cumulative translation adjustment....................................... 17 17 17
--------- ------------- -----------
Total stockholders' equity (deficit).................................... (23,683) 727 18,131
--------- ------------- -----------
Total capitalization.................................................. $ 1,862 $ 1,862 $ 18,382
--------- ------------- -----------
--------- ------------- -----------
</TABLE>
- ------------------------
(1) Excludes 2,257,113 shares subject to outstanding options as of October 31,
1997 at a weighted average exercise price of approximately $1.55 per share,
warrants to purchase 143,419 shares at a weighted average exercise price of
$2.91 per share, and warrants to purchase 30,000 shares at $5.00 per share.
Also excludes 1,307,871 shares reserved for issuance under the Company's
stock plans. See "Management--1997 Equity Incentive Plan," "--1997 Employee
Stock Purchase Plan" and Notes 8 and 9 of Notes to Consolidated Financial
Statements.
17
<PAGE>
DILUTION
The pro forma net tangible book value of the Company's Common Stock as of
October 31, 1997, giving effect to the conversion of all outstanding shares of
Preferred Stock into Common Stock and the exercise of warrants to purchase
454,565 shares of Common Stock upon the closing of this offering, was $727,000,
or approximately $0.06 per share. "Pro forma net tangible book value" per share
represents the amount of total tangible assets of the Company less total
liabilities, divided by the 11,618,325 shares of Common Stock outstanding.
Dilution per share represents the difference between the amount per share paid
by purchasers of shares of Common Stock in the offering made hereby and the pro
forma net tangible book value per share of Common Stock immediately after
completion of the offering. After giving effect to the sale of 3,334,000 shares
of Common Stock in this offering at the initial public offering price of $6.00
per share and the application of the estimated net proceeds therefrom, the pro
forma net tangible book value of the Company as of October 31, 1997 would have
been $18,131,000, or $1.21 per share. This represents an immediate increase in
pro forma net tangible book value of $1.15 per share to existing stockholders
and an immediate dilution of $4.79 per share to purchasers of Common Stock in
the offering. Investors participating in this offering will incur immediate,
substantial dilution. This is illustrated in the following table:
<TABLE>
<CAPTION>
<S> <C> <C>
Initial public offering price per share.......................................................... $ 6.00
---------
Pro forma net tangible book value per share as of October 31, 1997............................. $ 0.06
Increase per share attributable to new investors............................................... 1.15
---------
Adjusted pro forma net tangible book value per share as of October 31, 1997...................... 1.21
---------
Dilution per share to new investors.............................................................. $ 4.79
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis as of October 31, 1997,
the difference between the number of shares of Common Stock purchased from the
Company, the total consideration paid and the average price per share paid by
existing stockholders and by the new investors before deducting the estimated
underwriting discounts and commissions and estimated offering expenses payable
by the Company at the initial offering price of $6.00 per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------- -------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ----------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.............................. 11,618,325 77.7% $ 26,328,134 56.8% $ 2.27
New stockholders(1)................................ 3,334,000 22.3 20,004,000 43.2 6.00
------------ ----- ------------- -----
Totals........................................... 14,952,325 100.0% $ 46,332,134 100.0%
------------ ----- ------------- -----
------------ ----- ------------- -----
</TABLE>
- ------------------------
(1) Excludes 2,257,113 shares subject to outstanding options as of October
31, 1997, at a weighted average exercise price of approximately $1.55 per share,
warrants to purchase 143,419 shares at a weighted average exercise price of
$2.91 per share, and warrants to purchase 30,000 shares at $5.00 per share. Also
excludes 1,307,871 shares reserved for issuance under the Company's stock plans.
To the extent outstanding options are exercised, there will be further dilution
to new investors. See "Management--1997 Equity Incentive Plan," "-- 1997
Employee Stock Purchase Plan" and Notes 8 and 9 of Notes to Consolidated
Financial Statements.
18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and Notes thereto and
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations," which are included elsewhere in this Prospectus. Fiscal 1993 is the
Company's first fiscal year subsequent to its inception and is not a full fiscal
year. The consolidated statement of operations data for the fiscal years ended
January 31, 1993 and 1994 and the consolidated balance sheet data at January 31,
1993, 1994 and 1995 are derived from unaudited consolidated financial statements
not included herein and in the opinion of the Company, include all adjustments,
consisting solely of normal recurring accruals, which are necessary to present
fairly the data for such periods and as of such dates. The consolidated
statement of operations data for the fiscal years ended January 31, 1995, 1996
and 1997 and for the nine months ended October 31, 1997, and the consolidated
balance sheet data at January 31, 1996 and 1997 and October 31, 1997 are derived
from the audited Consolidated Financial Statements included elsewhere in this
Prospectus. The consolidated statement of operations data for the nine months
ended October 31, 1996 are derived from unaudited consolidated financial
statements included elsewhere in this Prospectus and in the opinion of the
Company, include all adjustments, consisting solely of normal recurring
accruals, which are necessary to present fairly the data for such period and as
of such date. The results for interim periods are not necessarily indicative of
results to be expected for the year.
<TABLE>
<CAPTION>
NINE
MONTHS
ENDED
PERIOD FROM APRIL FISCAL YEAR ENDED OCTOBER
14, 1992 JANUARY 31, 31,
(INCEPTION) TO ------------------------------------------ ---------
JANUARY 31, 1993 1994 1995 1996 1997 1996
----------------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
License.................................... $ 213 $ 2,704 $ 1,826 $ 2,686 $ 6,491 $ 4,786
Service.................................... 1,538 1,644 1,991 2,956 5,255 3,628
------- --------- --------- --------- --------- ---------
Total revenues........................... 1,751 4,348 3,817 5,642 11,746 8,414
------- --------- --------- --------- --------- ---------
Cost of revenues:
License.................................... 16 49 72 118 132 94
Service.................................... 1,103 2,266 1,636 2,129 3,308 2,263
------- --------- --------- --------- --------- ---------
Total cost of revenues................... 1,119 2,315 1,708 2,247 3,440 2,357
------- --------- --------- --------- --------- ---------
Gross margin................................. 632 2,033 2,109 3,395 8,306 6,057
------- --------- --------- --------- --------- ---------
Operating expenses:
Sales and marketing........................ 593 1,431 3,406 3,854 11,350 7,407
Research and development................... 495 1,158 2,162 2,089 3,189 2,142
General and administrative................. 1,870 591 853 1,247 2,147 1,488
------- --------- --------- --------- --------- ---------
Total operating expenses................. 2,958 3,180 6,421 7,190 16,686 11,037
------- --------- --------- --------- --------- ---------
Loss from operations......................... (2,326) (1,147) (4,312) (3,795) (8,380) (4,980)
Other income (expense), net.................. (51) (54) (83) 6 (96) (40)
------- --------- --------- --------- --------- ---------
Loss before provision for income taxes....... (2,377) (1,201) (4,395) (3,789) (8,476) (5,020)
Provision for income taxes................... 0 0 0 0 0 0
------- --------- --------- --------- --------- ---------
Net loss..................................... $ (2,377) $ (1,201) $ (4,395) $ (3,789) $ (8,476) $ (5,020)
------- --------- --------- --------- --------- ---------
------- --------- --------- --------- --------- ---------
Pro forma net loss per share(1)............ $ (0.84)
---------
---------
Shares used in computing pro forma net loss
per share(1)............................. 10,103
---------
---------
<CAPTION>
1997
-------------
<S> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
License.................................... $ 9,087
Service.................................... 8,414
-------------
Total revenues........................... 17,501
-------------
Cost of revenues:
License.................................... 107
Service.................................... 5,500
-------------
Total cost of revenues................... 5,607
-------------
Gross margin................................. 11,894
-------------
Operating expenses:
Sales and marketing........................ 12,305
Research and development................... 3,917
General and administrative................. 1,539
-------------
Total operating expenses................. 17,761
-------------
Loss from operations......................... (5,867)
Other income (expense), net.................. (89)
-------------
Loss before provision for income taxes....... (5,956)
Provision for income taxes................... 0
-------------
Net loss..................................... $ (5,956)
-------------
-------------
Pro forma net loss per share(1)............ $ (0.52)
-------------
-------------
Shares used in computing pro forma net loss
per share(1)............................. 11,518
-------------
-------------
</TABLE>
<TABLE>
<CAPTION>
OCTOBER
JANUARY 31, 31, 1997
------------------------------------------------------------- ---------
1993 1994 1995 1996 1997 ACTUAL
----------------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit).................. $ (1,020) $ (544) $ (2,071) $ 1,097 $ (2,102) $ (615)
Total assets............................... 980 1,839 1,599 4,321 5,918 12,965
Total liabilities.......................... 2,167 2,256 3,428 2,791 7,823 12,238
Convertible redeemable preferred stock..... -- 2,337 5,337 12,487 17,410 24,410
Stockholders' equity (deficit)............. (1,193) (2,755) (7,165) (10,957) (19,315) (23,683)
<CAPTION>
PRO FORMA(2)
-------------
<S> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit).................. $ (615)
Total assets............................... 12,965
Total liabilities.......................... 12,238
Convertible redeemable preferred stock..... --
Stockholders' equity (deficit)............. 727
</TABLE>
- --------------------
(1) Pro forma net loss reflects the conversion of all outstanding Preferred
Stock into Common Stock and the exercise of warrants to purchase 454,565
shares of Common Stock upon completion of the offering. See Note 2 of Notes
to Consolidated Financial Statements for an explanation of the method used
to determine the number of shares used in computing pro forma net loss per
share.
(2) Reflects the assumed conversion of outstanding Preferred Stock into Common
Stock and the exercise of warrants to purchase 454,565 shares of Common
Stock upon completion of the offering.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following description of the Company's financial condition and results
of operations should be read in conjunction with the information included
elsewhere in this Prospectus. This description contains certain forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ significantly from the results discussed in the forward-looking
statements as a result of certain of the risk factors set forth below and
elsewhere in this Prospectus.
OVERVIEW
Information Advantage Software, Inc. (the "Company") develops, markets and
supports enterprise scalable OLAP software that is designed to allow a large
number of users to access and analyze large amounts of data to make quicker and
more informed business decisions. The Company's server-based solution,
DecisionSuite, provides powerful, robust and flexible analysis processing
capabilities that transform raw data into meaningful information from a wide
range of desktop and Internet platforms. Through the use of an advanced
architecture, the Company designed DecisionSuite to accommodate terabytes of
data and thousands of active users. DecisionSuite enables organizations to push
effective decision making to all levels of users thereby creating an
"intelligent enterprise," one capable of quickly identifying and reacting to
market opportunities. DecisionSuite supports many UNIX operating systems and
employs relational database technology, allowing it to access most popular
databases, data warehouses and data marts.
To date, all of the Company's revenues have been derived from licenses of
DecisionSuite and related services. The Company expects that sales of
DecisionSuite and related services will continue to account for all of the
Company's revenues for the foreseeable future. The Company's license revenues
are derived from one-time licenses for the right to use DecisionSuite in
perpetuity and are determined on a per server, per named user and database size
basis. The Company's service revenues, which have accounted for approximately
one-half of the Company's total revenues for the past three years, include fees
for maintenance, training and consulting services. The Company anticipates that
service revenues will continue to account for a significant portion of the
Company's total revenues.
Revenues derived from software licenses are recognized upon execution of a
license agreement, delivery of the software product and fulfillment of other
delivery requirements. Revenues from software provided for demonstration or
pilot purposes are not recognized until execution of a license agreement and
fulfillment of other delivery requirements. Revenues derived from maintenance
contracts, which are bundled with the initial licenses, and all revenues from
extended maintenance contracts are deferred and recognized ratably over the term
of the maintenance contract. Revenues from maintenance contracts are included in
service revenues. Revenue from training and consulting services are recognized
as the services are performed. The Company's revenue recognition policy is in
compliance with the provisions of the American Institute of Certified Public
Accountants' Statement of Position 91-1, "Software Revenue Recognition."
The Company licenses its software through its direct sales force and
increasingly through or in conjunction with solution development partners, sales
affiliates and marketing partners. Revenues from indirect sales involving
strategic partners accounted for approximately 18.1%, 11.5%, 12.7% and 14.5% of
the Company's license revenues for fiscal 1995, 1996, 1997 and the nine months
ended October 31, 1997, respectively. The Company intends to expand its
strategic relationships, thereby increasing the revenues generated from indirect
channels as a percentage of total license revenues. The Company intends to
expand its international operations and has committed, and continues to commit,
significant management time and financial resources to developing direct and
indirect international sales and support channels. The Company has international
sales and support offices in Toronto, Canada; London, England; and Koln, Germany
and to date, most of the Company's international revenues have been derived from
the United Kingdom and Canada. Although the Company's personnel related costs
are higher in Europe than they are in the United States, and the Company's
international operations are subject to economic, fiscal and monetary policies
of foreign governments, to date,
20
<PAGE>
these factors have not had a material effect on the Company's results of
operations or liquidity. In addition, because all of the Company's sales have
been denominated in U.S. dollars, the Company has been able to mitigate the
impact of foreign exchange rate changes. There can be no assurance that the
Company will be able to continue to denominate foreign sales in U.S. dollars or
that international operations costs and economic, fiscal and monetary policies
of foreign governments will not in the future have a material adverse effect on
the Company's results of operations or liquidity. See "Risk Factors--Expansion
of Indirect Channels," "--Risks Associated with International Sales and
Operations."
Since inception, the Company has made significant strategic investments in
building an infrastructure to support long-term growth. The Company has nearly
tripled its headcount from 75 at January 31, 1995 to 219 at October 31, 1997,
reflecting personnel increases throughout the Company. As a result, although the
Company's revenues have increased in each of the last seven quarters, the
Company has incurred net losses in each quarter since inception, and had an
accumulated deficit of $26.4 million as of October 31, 1997. The Company expects
to incur additional net losses.
The Company's limited operating history makes the prediction of future
operating results difficult and unreliable. In addition, given its limited
operating history and recent rapid growth, historical growth rates in the
Company's revenues should not be considered indicative of future revenue growth
rates or operating results. There can be no assurance that any of the Company's
business strategies will be successful or that the Company will be able to
achieve profitability on a quarterly or annual basis. See "Risk Factors--Limited
Operating History; Lack of Profitability" and "--Fluctuations in Operating
Results."
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data as a
percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED JANUARY 31, OCTOBER 31,
----------------------------------- ---------------------
1995 1996 1997 1996 1997
----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
License............................... 47.8% 47.6% 55.3% 56.9% 51.9%
Service............................... 52.2 52.4 44.7 43.1 48.1
----------- --------- --------- --------- ---------
Total revenues...................... 100.0 100.0 100.0 100.0 100.0
----------- --------- --------- --------- ---------
Cost of revenues:
License............................... 1.9 2.1 1.1 1.1 0.6
Service............................... 42.9 37.7 28.2 26.9 31.4
----------- --------- --------- --------- ---------
Total cost of revenues.............. 44.8 39.8 29.3 28.0 32.0
----------- --------- --------- --------- ---------
Gross margin............................ 55.2 60.2 70.7 72.0 68.0
----------- --------- --------- --------- ---------
Operating expenses:
Sales and marketing................... 89.2 68.3 96.6 88.0 70.3
Research and development.............. 56.6 37.0 27.2 25.5 22.4
General and administrative............ 22.4 22.1 18.3 17.7 8.8
----------- --------- --------- --------- ---------
Total operating expenses............ 168.2 127.4 142.1 131.2 101.5
----------- --------- --------- --------- ---------
Loss from operations.................... (113.0) (67.2) (71.4) (59.2) (33.5)
Other income (expense), net............. (2.2) 0.0 (0.8) (0.4) (0.5)
----------- --------- --------- --------- ---------
Loss before provision for income
taxes................................. (115.2) (67.2) (72.2) (59.6) (34.0)
Provision for income taxes.............. 0.0 0.0 0.0 0.0 0.0
----------- --------- --------- --------- ---------
Net loss................................ (115.2)% (67.2)% (72.2)% (59.6)% (34.0)%
----------- --------- --------- --------- ---------
----------- --------- --------- --------- ---------
</TABLE>
21
<PAGE>
The following table sets forth, for each component of revenues, the gross
margin associated with such component of revenues for the period indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED JANUARY 31, OCTOBER 31,
------------------------------- --------------------
1995 1996 1997 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Gross margin:
License.............................................. 96.1% 95.6% 98.0% 98.0% 98.8%
Service.............................................. 17.8 28.0 37.1 37.6 34.6
</TABLE>
REVENUES
LICENSE. License revenues are recognized upon execution of a license
agreement and shipment of the product if no other significant obligations
remain, if payments are due within twelve months and collection of the resulting
receivable is probable. License revenues were $1.8 million, $2.7 million and
$6.5 million in fiscal 1995, 1996 and 1997, respectively, representing increases
of 47.1% from fiscal 1995 to fiscal 1996, and 141.7% from fiscal 1996 to fiscal
1997. License revenues were $4.8 million and $9.1 million for the nine months
ended October 31, 1996 and 1997, respectively, representing an increase of
89.8%. The increase in the Company's license revenues in each period was
attributable primarily to greater market acceptance of DecisionSuite which led
to an increase in volume, an increase in the average revenues derived from each
license as the average number of seats per customer has increased, and an
increase in sales headcount. To date, price increases have not had a significant
impact on revenues. The Company does not believe that the historical percentage
growth rates of license revenues will be sustainable or are indicative of future
results.
SERVICE. Service revenues include fees from maintenance contracts, training
and consulting services. Fees for maintenance, training and consulting services
are charged separately from the license of DecisionSuite. Maintenance fees are
for ongoing support and product updates, and are recognized ratably over the
life of the contract. Revenues from training are recognized upon completion of
the related training class. Consulting revenues are recognized when the services
are performed. Service revenues were $2.0 million, $3.0 million and $5.3 million
in fiscal 1995, 1996 and 1997, respectively, representing increases of 48.5%
from fiscal 1995 to fiscal 1996, and 77.8% from fiscal 1996 to fiscal 1997.
Service revenues accounted for 52.2%, 52.4% and 44.7% of the Company's total
revenues in fiscal 1995, 1996 and 1997, respectively. Service revenues were $3.6
million and $8.4 million for the nine months ended October 31, 1996 and 1997,
respectively, representing an increase of 131.9%, and accounting for 43.1% and
48.1% of the Company's total revenues for these periods. In particular,
maintenance revenues accounted for 16.3%, 22.6% and 26.6% of service revenues in
fiscal 1995, 1996 and 1997, respectively, and 25.6% and 25.4% of service
revenues for the nine months ended October 31, 1996 and 1997, respectively. The
Company anticipates that service revenues will continue to account for a
significant percentage of the Company's total revenues and that revenues from
maintenance will increase as a percentage of service revenues as additional
licenses are sold.
INTERNATIONAL REVENUES. International revenues include all revenues other
than from the United States. International revenues from the Company's direct
sales organizations in Europe and export sales to or through strategic partners
in Europe and other areas outside of the United States accounted for 24.8%,
10.7% and 9.5% of total revenues in fiscal 1995, 1996 and 1997, respectively,
and 13.1% and 7.8% for the nine months ended October 31, 1996 and 1997,
respectively. The high percentage of international sales for fiscal 1995 was the
result of a single large consulting contract in the United Kingdom. The Company
expects that international license and related service revenues will continue to
account for a significant portion of its total revenues in the future.
COST OF REVENUES
LICENSE. Cost of license revenues consists primarily of salaries, product
packaging, documentation and production. Cost of license revenues was $72,000,
$118,000 and $132,000 in fiscal 1995, 1996 and 1997, respectively, representing
3.9%, 4.4% and 2.0% of license revenues for these years. Cost of license
revenues was
22
<PAGE>
$94,000 and $107,000 for the nine months ended October 31, 1996 and 1997,
respectively, representing 2.0% and 1.2% of license revenues for these periods.
SERVICE. Cost of service revenues consists primarily of personnel-related
and facilities costs incurred in providing customer support, training and
consulting services, as well as third-party costs incurred in providing training
and consulting services. Cost of service revenues was $1.6 million, $2.1 million
and $3.3 million in fiscal 1995, 1996 and 1997, respectively, representing
82.2%, 72.0% and 62.9% of service revenues for these years. Cost of service
revenues were $2.3 million and $5.5 million for the nine months ended October
31, 1996 and 1997, respectively, representing 62.4% and 65.4% of service
revenues for these periods. The decrease in cost of service revenues as a
percentage of service revenues in fiscal 1996 and 1997 was primarily due to
improved economies of scale of the technical support center and increased
productivity from a significant number of newly hired training, support and
consulting personnel. The increase in cost of service revenues as a percentage
of the related revenues for the nine months ended October 31, 1997, resulted
from the addition of new training, support and consulting personnel over this
period.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses earned by sales and marketing personnel, field
office expenses, travel and entertainment and promotional expenses. Sales and
marketing expenses were $3.4 million, $3.9 million and $11.4 million in fiscal
1995, 1996 and 1997, respectively, and were $7.4 million and $12.3 million for
the nine months ended October 31, 1996 and 1997, respectively. The increase in
sales and marketing expenses was predominantly due to the hiring of additional
sales and marketing personnel and, to a lesser extent, the increase in the
number of sales offices and expanded promotional activities. Sales and marketing
expenses represented 89.2%, 68.3% and 96.6% of total revenues for these periods
in fiscal 1995, 1996 and 1997, respectively, and 88.0% and 70.3% of total
revenues in the nine months ended October 31, 1996 and 1997, respectively. The
changes in sales and marketing expenses as a percentage of total revenues were
primarily due to the timing of hiring additional sales personnel. The Company
expects that sales and marketing expenses will continue to increase in dollar
amounts as the Company continues to hire additional sales and marketing
personnel, establish additional sales offices and increase promotional
activities.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of salaries and benefits of software engineering personnel, payments
to contract programmers and expendable equipment purchases. The Company believes
that a significant level of investment for research and development is required
to remain competitive. Research and development expenses were $2.2 million, $2.1
million and $3.2 million in fiscal 1995, 1996 and 1997, respectively, and were
$2.1 million and $3.9 million for the nine months ended October 31, 1996 and
1997, respectively. These increases were primarily attributable to additional
hiring of research and development personnel. Research and development expenses
represented 56.6%, 37.0% and 27.2% of total revenues in fiscal 1995, 1996 and
1997, respectively, and 25.5% and 22.4% of total revenues for the nine months
ended October 31, 1996 and 1997, respectively. The Company anticipates that it
will continue to devote substantial resources to research and development and
that these expenses will increase in future periods. Because all costs incurred
in the research and development of software products and enhancements to
existing software products have been expensed as incurred, cost of license
revenues includes no amortization of capitalized software development costs. See
Note 2 of Notes to Consolidated Financial Statements.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$853,000, $1.2 million and $2.1 million in fiscal 1995, 1996 and 1997,
respectively, and were $1.5 million and $1.5 million for the nine months ended
October 31, 1996 and 1997, respectively. These increases were predominantly due
to increased staffing and, to a lesser extent, associated expenses necessary to
manage and support the Company's increased scale of operations. General and
administrative expenses represented 22.4%, 22.1% and 18.3% of total revenues in
fiscal 1995, 1996 and 1997, respectively, and 17.7% and 8.8% of total revenues
in the nine months ended
23
<PAGE>
October 31, 1996 and 1997, respectively. The Company believes that its general
and administrative expenses will increase in future periods as a result of an
expansion of the Company's administrative staff to support its growing
operations and as a result of an increase in expenses associated with being a
public company.
OTHER INCOME (EXPENSE), NET. Other income (expense), net, represents
interest earned by the Company on its cash and short-term investments, offset by
interest expense on long-term debt and capitalized leases. See Notes 4 and 5 of
Notes to Consolidated Financial Statements.
PROVISION FOR INCOME TAXES. The Company accounts for income taxes in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." The Company incurred net losses and consequently paid no
federal or state income taxes in fiscal 1995, 1996 and 1997. At January 31,
1997, the Company had approximately $16.0 million in federal net operating loss
carryforwards. The federal net operating loss carryforwards will begin to expire
in the year 2007 if not utilized. In addition, the Tax Reform Act of 1986
contains certain provisions that may limit the net operating loss carryforwards
available for use in any given period upon the occurrence of certain events,
including a significant change in ownership interests. Based upon management's
estimates, the proposed initial public offering will not result in a change of
ownership.
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share" (SFAS No. 128). SFAS No. 128 applies to entities
with publicly held common stock and is effective for financial statements issued
for periods ending after December 15, 1997. Under SFAS No. 128, the presentation
of primary earnings per share is replaced with a presentation of basic earnings
per share. SFAS No. 128 requires dual presentation of basic and diluted earnings
per share for entities with complex capital structures. Basic earnings per share
includes no dilution and is computed by dividing net income (loss) available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflects the potential dilution of
securities that could share in the earnings of an entity, similar to fully
diluted earnings per share. Management believes the adoption of SFAS No. 128
will not have a material effect on the Company's financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" (SFAS No. 130). SFAS No. 130 is effective
for financial statements for fiscal years beginning after December 15, 1997.
This standard defines comprehensive income as the changes in equity of an
enterprise except those resulting from stockholder transactions. All components
of comprehensive income are required to be reported in a new financial
statement. Management believes the adoption of SFAS No. 130 will not have a
material effect on the Company's financial statements.
In June 1997, the Financial Accounting Standards Board also issued Statement
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
(SFAS No. 131). SFAS No. 131 is effective for financial statements for periods
beginning after December 15, 1997. SFAS No. 131 establishes standards for
disclosures about operating segments, products and services, geographic areas
and major customers. Management believes the adoption of SFAS No. 131 will not
have a material effect on the Company's financial statements.
The American Institute of Certified Public Accountants' has approved a new
Statement of Position (SOP), SOP 97-2 which will supersede Statement of Position
91-1, "Software Revenue Recognition." Management has assessed this new statement
and believes that its adoption will not have a material effect on the timing of
the Company's revenue recognition or cause changes to its revenue recognition
policies.
24
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain unaudited consolidated statement of
operations data for the seven quarters ended October 31, 1997, as well as such
data expressed as a percentage of the Company's total revenues for the periods
indicated. This data has been derived from unaudited consolidated financial
statements that, in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of such information when read in conjunction with the Consolidated
Financial Statements and Notes thereto.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------------------
FISCAL YEAR 1997 FISCAL YEAR 1998
------------------------------------------------- ------------------------------------
APR. 30 JULY 31 OCT. 31 JAN. 31 APR. 30 JULY 31 OCT. 31
1996 1996 1996 1997 1997 1997 1997
---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT AS A PERCENTAGE OF TOTAL REVENUES)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
License.......................... $ 1,134 $ 1,819 $ 1,834 $ 1,704 $ 2,138 $ 2,862 $ 4,087
Service.......................... 1,126 1,083 1,419 1,627 2,207 2,941 3,266
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenues................. 2,260 2,902 3,253 3,331 4,345 5,803 7,353
---------- ---------- ---------- ---------- ---------- ---------- ----------
Cost of revenues:
License.......................... 24 34 36 38 36 41 30
Service.......................... 642 735 883 1,048 1,559 1,886 2,055
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total cost of revenues......... 666 769 919 1,086 1,595 1,927 2,085
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross margin....................... 1,594 2,133 2,334 2,245 2,750 3,876 5,268
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating expenses:
Sales and marketing.............. 2,225 2,424 3,252 3,449 3,674 4,153 4,478
Research and development......... 616 651 877 1,045 1,106 1,267 1,544
General and administrative....... 439 515 581 612 485 550 504
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total operating expenses....... 3,280 3,590 4,710 5,106 5,265 5,970 6,526
---------- ---------- ---------- ---------- ---------- ---------- ----------
Loss from operations............... (1,686) (1,457) (2,376) (2,861) (2,515) (2,094) (1,258)
Other income (expense), net........ 17 (28) (30) (55) (23) (17) (49)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Loss before provision for income
taxes............................ (1,669) (1,485) (2,406) (2,916) (2,538) (2,111) (1,307)
Provision for income taxes......... 0 0 0 0 0 0 0
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net loss........................... $ (1,669) $ (1,485) $ (2,406) $ (2,916) $ (2,538) $ (2,111) $ (1,307)
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
AS A PERCENTAGE OF TOTAL REVENUES:
Revenues:
License.......................... 50.2% 62.7% 56.4% 51.2% 49.2% 49.3% 55.6%
Service.......................... 49.8 37.3 43.6 48.8 50.8 50.7 44.4
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenues................. 100.0 100.0 100.0 100.0 100.0 100.0 100.0
---------- ---------- ---------- ---------- ---------- ---------- ----------
Cost of revenues:
License.......................... 1.1 1.2 1.1 1.1 0.8 0.7 0.4
Service.......................... 28.4 25.3 27.2 31.5 35.9 32.5 27.9
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total cost of revenues......... 29.5 26.5 28.3 32.6 36.7 33.2 28.4
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross margin....................... 70.5 73.5 71.7 67.4 63.3 66.8 71.6
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating expenses:
Sales and marketing.............. 98.4 83.5 99.9 103.5 84.5 71.6 60.9
Research and development......... 27.3 22.4 27.0 31.4 25.5 21.8 21.0
General and administrative....... 19.4 17.8 17.9 18.4 11.2 9.5 6.9
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total operating expenses....... 145.1 123.7 144.8 153.3 121.1 102.9 88.8
---------- ---------- ---------- ---------- ---------- ---------- ----------
Loss from operations............... (74.6) (50.2) (73.1) (85.9) (57.9) (36.1) (17.1)
Other income (expense), net........ 0.8 (1.0) (0.9) (1.7) 0.5 0.3 0.7
---------- ---------- ---------- ---------- ---------- ---------- ----------
Loss before provision for income
taxes............................ (73.8) (51.2) (74.0) (87.6) (58.4) (36.4) (17.8)
Provision for income taxes......... 0.0 0.0 0.0 0.0 0.0 0.0 0.0
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net loss........................... (73.8)% (51.2)% (74.0)% (87.6)% (58.4)% (36.4)% (17.8)%
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
25
<PAGE>
The Company's limited operating history and the susceptibility of the
Company's operating results to significant fluctuations makes the prediction of
future operating results unreliable and the Company believes that
period-to-period comparisons of its operating results are not necessarily
meaningful and should not be relied upon as indications of future performance.
The Company's operating results in any given period can vary due to factors such
as demand for the Company's products, the size and timing of significant orders
and their fulfillment, the number, timing and significance of product
enhancements and new product announcements by the Company and its competitors,
changes in pricing policies by the Company or its competitors, customer order
deferrals in anticipation of enhancements or new products offered by the Company
or its competitors, the ability of the Company to develop, introduce and market
new and enhanced versions of its products on a timely basis, changes in the
Company's level of operating expenses, budgeting cycles of its customers,
product life cycles, software defects and other product quality problems, hiring
needs and personnel changes, changes in the Company's sales incentive plans,
changes in the mix of domestic and international revenues, the level of
international expansion, foreign currency exchange rate fluctuations,
performance of indirect channel partners, changes in the mix of indirect
channels through which the Company's products are offered, the impact of
acquisitions of competitors and indirect channel partners, the Company's ability
to control costs and general domestic and international economic and political
conditions. A significant portion of the Company's revenues have been, and the
Company believes will continue to be, derived from a limited number of orders
placed by large organizations, and the timing of such orders and their
fulfillment has caused and are expected to continue to cause material
fluctuations in the Company's operating results, particularly on a quarterly
basis. A significant portion of the Company's revenues are derived from existing
customers. To the extent that such customers no longer require new licenses, or
ongoing support, the Company's business, financial condition and operating
results could be materially adversely affected. The Company has, from time to
time, 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. In addition, the Company does not operate with a large order
backlog because its software products are typically shipped shortly after orders
are received, which makes product revenues in any quarter substantially
dependent on orders booked and shipped throughout that quarter. Accordingly,
revenues for any future quarter are difficult to predict. The Company also
expects that as international sales increase as a percentage of sales it will
experience weaker demand for DecisionSuite during the summer months. Product
revenues are also difficult to forecast because the market for OLAP applications
is rapidly evolving, and the Company's sales cycle, which may last from six to
twelve months or more, varies substantially from customer to customer. The
Company's expense level and plans for expansion, including its plan to
significantly increase its research and development efforts, are based in
significant part on the Company's expectations of future revenues and therefore
are relatively fixed in the short term. If revenue levels are below
expectations, operating results are likely to be adversely and
disproportionately affected because only a small portion of the Company's
expenses vary with its revenues. In addition, the Company expects that sales
derived through indirect channels, which are more difficult to forecast and
generally have lower gross margins than direct sales, will increase as a
percentage of total revenues. See "Risk Factors--Management of Growth; Need for
Additional Qualified Personnel" and "--Expansion of Indirect Channels."
Based upon all of the factors described above, the Company believes that its
quarterly revenues, expenses and operating results are likely to vary
significantly in the future, that period-to-period comparisons of its operating
results are not necessarily meaningful and that, in any event, such comparisons
should not be relied upon as indications of future performance. Accordingly, the
Company has limited ability to forecast future revenues, and it is likely that
in some future quarter the Company's operating results will be below the
expectations of public market analysts and investors. In the event that
operating results are below expectations, or in the event that adverse
conditions prevail or are perceived to prevail generally or with respect to the
Company's business, the price of the Common Stock would be materially adversely
affected.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations to date primarily through the private
sale of equity securities and the use of long-term debt and equipment leases.
The Company has a revolving credit line of $2.0 million and a
26
<PAGE>
$400,000 equipment note with a bank and a $1.1 million term loan with an
equipment lessor. The Company's sources of liquidity at October 31, 1997
consisted principally of cash and cash equivalents of $3.0 million. See Note 4
of Notes to Consolidated Financial Statements.
Net cash used in operating activities was $3.2 million, $3.6 million and
$6.4 million in fiscal 1995, 1996 and 1997, respectively, and $6.3 million for
the nine months ended October 31, 1997. For such periods, net cash used in
operating activities resulted primarily from net operating losses and increases
in prepaid expenses and accounts receivable associated with increases in
revenues, partially offset by increases in accounts payable, accrued liabilities
and deferred revenues.
Since 1995 the Company's investing activities have consisted primarily of
purchases of property and equipment. Capital expenditures, including those under
capital leases, totaled $355,000, $335,000 and $1,078,000 in fiscal 1995, 1996
and 1997, respectively, and $1.2 million for the nine months ended October 31,
1997. Capital leases are used to acquire property and equipment, primarily
computer hardware, for the Company's growing employee base. The Company expects
that its capital expenditures will continue to increase as the Company's
employee base grows. At October 31, 1997, the Company had material commitments
for capital expenditures totaling approximately $400,000, which the Company
financed initially through a bank term loan for a period not to exceed three
years. If amounts are outstanding under such term loan as of the date of
completion of this offering, the Company intends to repay such bank loan from
the proceeds of the offering.
The Company's financing activities provided $3.4 million, $5.4 million and
$6.0 million in fiscal 1995, 1996 and 1997, respectively, and $9.3 million for
the nine months ended October 31, 1997. In fiscal 1995, the cash provided by
financing activities was comprised primarily of $2.5 million received in
connection with the sale of Series A convertible redeemable preferred stock and
$1.0 million in proceeds from notes payable to certain stockholders, offset
partially by principal payments on long-term debt. In fiscal 1996, the cash
provided by financing activities was comprised primarily of $5.1 million
received in connection with the sale of Series B convertible redeemable
preferred stock and $1.0 million in proceeds from notes issued to shareholders,
offset by repayments of notes payable to a bank of $435,000 and principal
payments on long-term debt of $217,000. In fiscal 1997, the cash provided by
financing activities was comprised primarily of $4.9 million received in
connection with the sale of Series C convertible redeemable preferred stock and
$1.5 million in proceeds from long-term debt, offset by principal payments on
long-term debt of $502,000. For the nine month period ended October 31, 1997,
cash provided by financing activities consisted primarily of $6.9 million
received in connection with the sale of Series D convertible redeemable
preferred stock and $2.1 million in borrowings under line of credit and notes
payable, offset by principal payments on long-term debt of $666,000.
Total borrowings under the revolving credit line are limited generally to
the lesser of 70% of eligible accounts receivable or $2.0 million. In October
1997, the Company borrowed $1.7 million under the revolving line, bearing an
annual interest rate of 1.75% over the bank's prime lending rate. The Company
expects to use proceeds from this offering to repay such indebtedness. The
Company's line of credit contains certain financial covenants and restrictions
as to various matters including the Company's ability to pay cash dividends and
effect mergers or acquisitions without the bank's prior approval. The Company is
currently in compliance with such financial covenants and restrictions. The
Company has granted a first priority security interest in substantially all of
its assets as security for its obligations under its credit line which expires
in September 1998.
In addition to its $2.0 million bank line of credit, the Company entered
into a $3.0 million revolving line of credit with certain holders of its
Preferred Stock in December 1997 pursuant to the terms of a Loan and Warrant
Purchase Agreement (the "Loan Agreement"). The Loan Agreement will terminate
upon the earlier of (i) ten days following the closing of this offering or (ii)
May 20, 1998. To date, the Company has not drawn down any funds under the Loan
Agreement. For a further description of the terms of the Loan Agreement, see
"Certain Transactions--Transactions with Directors and Officers and 5%
Stockholders."
On April 12, 1996, the Company issued a subordinated promissory note in
favor of Comdisco, Inc. in the principal amount of $1,500,000, which bears
interest at an annual rate of 13.5% (the "Note"). The Note is due in varying
monthly installments through April 1999. As of October 31, 1997, the outstanding
indebtedness under
27
<PAGE>
the Note was $1,065,000. The Company expects to repay amounts outstanding under
the Note with proceeds from this offering. See Note 5 of Notes to Consolidated
Financial Statements.
The Company believes that the net proceeds from the offering and its
existing cash and cash equivalents will be adequate to meet its cash needs for
at least the next 12 months. Thereafter, the Company may require additional
funds to support its working capital requirements or for other purposes and may
seek to raise such additional funds through public or private equity financing
or from other sources. There can be no assurance that additional financing will
be available at all or that, if available, such financing will be obtainable on
terms favorable to the Company or will not be dilutive.
28
<PAGE>
BUSINESS
The following description of the Company's business should be read in
conjunction with the information included elsewhere in this Prospectus. This
description contains certain forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ significantly from the
results discussed in the forward-looking statements as a result of certain of
the factors set forth below and elsewhere in this Prospectus.
OVERVIEW
Information Advantage, Inc. (the "Company") develops, markets and supports
enterprise scalable OLAP software that is designed to allow a large number of
users to access and analyze large amounts of data to make quicker and more
informed business decisions. The Company's server-based solution, DecisionSuite,
provides powerful, robust and flexible analysis processing capabilities that
transform raw data into meaningful information from a wide range of desktop and
Internet platforms. Through the use of an advanced architecture, the Company
designed DecisionSuite to accomodate terabytes of data and thousands of active
users. DecisionSuite enables organizations to push effective decision making to
all levels of users thereby creating an "intelligent enterprise," one capable of
quickly identifying and reacting to market opportunities. DecisionSuite supports
many UNIX operating systems and employs relational database technology, allowing
it to access most popular databases, data warehouses and data marts.
INDUSTRY BACKGROUND
In order to compete effectively in today's global environment, businesses
must quickly identify and respond to changing market conditions and are,
therefore, dependent upon their ability to rapidly collect, organize, access and
analyze large amounts of data. Organizations are now collecting not only
internal financial and operational data, but are also collecting large amounts
of historical data on their customers, suppliers and other external sources. At
the same time, to more quickly react to changing business conditions, many
organizations have been flattening their organizational structures and
empowering employees at all levels to make decisions. The desire to distribute
decision making throughout all levels of an organization has created a need by
more people to access the vast amounts of business data collected each day. In
addition to data access, organizations also face the challenges of performing
complex computational analysis on the collected data, and disseminating
information broadly to employees, customers, suppliers and others.
To meet these challenges, organizations have implemented a number of
technology solutions, including data warehouses and data marts, query and
reporting tools and OLAP applications. According to IDC, an independent industry
analyst, the information access segment of the data warehousing market alone is
estimated to be growing from $664 million in 1996 to $1.4 billion in 2000. Data
warehouses and data marts are repositories of summarized historical data often
extracted from disparate departmental or enterprise databases. Data warehouses
and data marts store data in a format optimized for analysis and are frequently
implemented in conjunction with query and reporting tools designed to provide
end users with a means to retrieve data and perform certain pre-defined queries
and simple calculations. This level of analysis, however, is limited (for
example, query and reporting tools generally are not designed to perform
time-series analysis such as calculations of the weekly changes in market share
by region) and these tools often require users to understand the technical
aspects of data storage and data structures. As a result, the use of data query
and reporting tools is often limited to highly trained technical users.
In recent years, OLAP solutions have emerged to provide a means to analyze
complex data along a more intuitive set of business rules and dimensions (for
example, profitability analysis by product, channel, geography, customer or
fiscal period). In addition, by insulating the user from the technical aspects
of data storage and data structures, OLAP solutions enable less technically
sophisticated users within an organization to perform their own analysis.
Typically, OLAP solutions also provide more complex computational capabilities,
including sophisticated time-series analysis, as well as ad hoc, drill-down and
interactive analysis (for example, a
29
<PAGE>
marketing manager identifying a market share reduction can drill down to isolate
the problem to a specific product at a specific store).
Today, two primary OLAP architectures exist: desktop OLAP and server-based
OLAP. Desktop OLAP provides a quick, low-cost solution for applications that do
not require complex analytical capabilities and involve small data sets that do
not require frequent updates. Desktop OLAP solutions are designed for a limited
number of active users and are typically used for personal analysis.
Server-based OLAP solutions are better suited for larger data sets and more
complex analysis. Because server-based OLAP does not require the movement of
large amounts of data to the desktop, it provides greater security and reduces
network traffic, thereby accommodating a larger number of active users. One
approach to server-based solutions utilizes proprietary, non-relational,
highly-indexed database technology. This approach is best suited for workgroups
and departments requiring fast access to medium-sized data sets (e.g., tens of
gigabytes of data) but often is not scalable to accommodate a large number of
concurrent users, is not capable of loading, storing or analyzing large amounts
of data (e.g., hundreds of gigabytes to terabytes of data) and cannot
efficiently update data sets on a frequent basis. In addition, these solutions
often require the data to be loaded in a pre-defined structure thereby limiting
the ability to perform ad hoc queries. The second approach to server-based OLAP
employs existing relational database technology. This approach allows access to
larger amounts of data and provides greater flexibility in performing ad hoc
queries than non-relational database technologies.
At the same time OLAP has emerged as a means to collect, organize, access
and analyze large amounts of data, the emergence of client/server and Internet
technologies has enabled organizations to create infrastructures through which
they can disseminate information throughout their enterprise as well as to
external sources. Client/server computing has provided many employees in an
organization with desktop access to critical information resources through
easy-to-use graphical user interfaces. The emergence of Internet technologies
has provided organizations with a less expensive means to reach an even larger
audience in real time and to securely disseminate information not only to
employees, but also to external business affiliates, such as customers,
suppliers and others.
Organizations are seeking ways to extend the benefits of OLAP in order to
empower employees and other users at all levels to make better business
decisions and react faster to market opportunities. To effectively deliver OLAP
capabilities throughout the enterprise, the solution must support large data
sets, thousands of active users, and simple as well as complex analysis.
Moreover, organizations require enterprise OLAP solutions with efficient and
cost effective deployment and maintenance, and compliance with industry
standards, thereby enabling integration with hardware and software from a
variety of vendors.
THE INFORMATION ADVANTAGE SOLUTION
Information Advantage develops, markets and supports enterprise scalable
OLAP software that is designed to allow large numbers of users to access and
analyze large data sets. The Company's relational server-based solution,
DecisionSuite, provides powerful, robust and flexible analysis processing
capabilities that transform raw data into meaningful information from a wide
range of desktop and Internet platforms. Through the use of an advanced
architecture, the Company designed DecisionSuite to accommodate terabytes of
data and thousands of active users. DecisionSuite enables organizations to push
effective decision making to all levels of users thereby creating an
"intelligent enterprise," one capable of quickly identifying and reacting to
market opportunities. Key attributes of the DecisionSuite solution include:
LARGE AMOUNTS OF DATA. DecisionSuite employs relational database technology
which the Company believes is the only available database technology suitable
for supporting large databases (e.g., hundreds of gigabytes to terabytes of
data) or databases that require frequent updates and access to terabytes of
centralized or distributed data. DecisionSuite processes data on the server and
disseminates the derived results to the user.
LARGE NUMBER OF USERS. The DecisionSuite architecture uses sophisticated
partitioning technology to balance the data processing between the database and
the application server. Application partitioning is designed to maximize the
performance and analytical capabilities as the database grows and the number of
30
<PAGE>
concurrent users increases. DecisionSuite's calculation processor is designed to
perform sophisticated business calculations on raw data without overburdening
the relational database with the use of inefficient temporary tables, thereby
increasing the number of users who can concurrently access the data.
POWERFUL ANALYTICAL CAPABILITY. DecisionSuite includes a powerful C++ OLAP
calculation processor that provides comprehensive multidimensional, yet
intuitive, analysis capabilities using advanced formula-based business rules. By
avoiding an overreliance on structured query language ("SQL") for business
calculations, DecisionSuite is designed to provide powerful analytical
capabilities in a scalable architecture. DecisionSuite allows users to join data
from multiple distributed relational databases and create agents that
automatically inform them of changes in market data or from user-defined norms.
MASS DEPLOYMENT FOR THE INTELLIGENT ENTERPRISE. The Company provides for
efficient and cost-effective deployment and maintenance of DecisionSuite by
using a thin-client architecture where minimal application code is deployed to,
and maintained on, the user's desktop. As a result, organizations can more
effectively deploy and support DecisionSuite over thousands of networked users.
OPEN ARCHITECTURE. DecisionSuite was designed to integrate with most
popular tools, databases and platforms provided by other vendors. DecisionSuite
runs on the following server operating systems: HP-UX, Sun Solaris, IBM AIX, NCR
SVR4, SGI IRIX, Sequent DYNIX/ptx and Unisys SVR4; and accesses the following
relational database platforms: Oracle, Red Brick Warehouse, HP--Intelligent
Warehouse, IBM DB2 6000, IBM DB2 Parallel Edition, Informix, NCR Teradata DBS,
Sybase, Sybase IQ and Tandem Non-Stop SQL. As a result, organizations
implementing DecisionSuite can leverage their often significant investment in
existing operating systems and database technologies.
To complement its advanced product offerings, the Company has developed a
highly trained customer support staff with technical competencies in a variety
of areas, including UNIX operating systems, database management, distributed
computing and multidimensional analysis. The Company believes that to enable its
customers to effectively develop and deploy OLAP applications, it must provide
training and consulting services in these and other areas. Accordingly, the
Company has established an extensive customer services group consisting of
technical support, education, implementation, prototyping workshops and other
advanced services (including customized enhancements, content development and
performance assessment).
STRATEGY
The Company's strategy is to establish Information Advantage as the leading
provider of enterprise scalable OLAP software solutions. Key elements of the
Company's strategy include:
EXTEND TECHNOLOGY LEADERSHIP. Since inception, the Company has focused its
research and development efforts on developing core technologies that address
the requirements of data warehousing applications involving large amounts of
data, large numbers of concurrent users, complex analysis and heterogeneous
environments. The Company's solution integrates a number of technologies,
including sophisticated agent technology, flexible information sharing and
dissemination, multidimensional analysis, multi-level security and an
architecture that permits a large number of concurrent users. The Company has
leveraged these technologies to develop DecisionSuite, a proven enterprise
scalable OLAP software solution for the intelligent enterprise. DecisionSuite is
designed to access and analyze terabytes of data. Of the Company's customers,
three are in production, and five are currently building, terabyte-sized
applications. The Company intends to extend its technology leadership by
continuing to devote significant resources to research and development efforts,
and by forming strategic relationships that will enable the Company to further
enhance DecisionSuite's functionality and performance.
EXPAND VERTICAL MARKET FOCUS. The Company targets industries that routinely
collect, organize, access and analyze large amounts of business-critical data.
These industries include retail, consumer packaged goods, financial services,
insurance, telecommunications and the healthcare industries. The Company has
developed significant vertical market expertise through the deployment of
software applications for its customers in these
31
<PAGE>
industries. The Company believes that by focusing on the needs of these specific
industries and by continuing to recruit solution development partners in these
industries, it can improve the efficiency and effectiveness of its sales and
marketing efforts in these vertical markets. The Company intends to continue
leveraging its experience to address the specific needs of organizations in
these industries and to expand to other targeted industries.
EXPAND GLOBAL DISTRIBUTION. The Company sells its products primarily
through direct sales. The Company also uses strategic partners to sell its
products in targeted markets. The Company has direct sales offices in twelve
states, Canada, the United Kingdom and Germany, and has established strategic
relationships in South Africa, Netherlands and Japan. The Company is presently
localizing DecisionSuite for the French and German markets. The Company intends
to expand its direct sales and pre-sales support organizations and to develop
additional strategic relationships both in its existing markets and in other
locations worldwide. To facilitate its international expansion, the Company
anticipates localizing DecisionSuite for additional foreign markets in the
future.
EXPAND STRATEGIC RELATIONSHIPS. The Company's strategy is to supplement its
direct sales organization with strategic relationships, including solution
development partners, sales affiliates and marketing partners. The Company's
solution development partners, such as DynaMark, VIPS and IBM, have developed
industry specific software applications in which DecisionSuite is embedded. The
Company sells its products directly to solution development partners who
integrate and sell solutions to customers. The Company also has relationships
with sales affiliates, such as Cambridge Technology Group, EDS, Ernst & Young
and KPMG, who help identify and qualify sales prospects, work closely with the
Company during the sales and implementation cycles and provide after-market
support. In addition, the Company has strategic relationships with marketing
partners, such as HP, Red Brick, Sun, SPSS and Brio, who provide complementary
marketing programs designed to promote product awareness for DecisionSuite.
These relationships provide additional sales and marketing channels, thereby
enhancing the Company's position as the leading provider of enterprise scalable
OLAP software solutions. The Company's objective is to increase license revenues
from strategic relationships as a percentage of total license revenues, by
enhancing its current strategic relationships and adding additional strategic
partners.
FOCUS ON SUCCESSFUL CUSTOMER IMPLEMENTATION. The Company's strategy is to
deliver technology and services that enable its customers to quickly and cost
effectively implement and maintain applications for the intelligent enterprise.
The Company's success is dependent upon its customers' successful
implementations of its products. The Company believes that its comprehensive
consulting, implementation, support and training services enable customers to
successfully implement DecisionSuite and contribute to customer satisfaction,
strong customer references and long-term relationships. The Company offers
worldwide training, consulting and support services for its customers directly
through its customer services group and indirectly through its solution
development partners and sales affiliates. In addition to its advanced training
and consulting services, the Company provides its customers with an extensive
array of ongoing support services, including software updates, documentation
updates, telephone support and product maintenance. A significant portion of the
Company's revenues each period is derived from upgrades and services provided to
its installed customer base. The Company intends to maintain its focus on
customer success and to continue to invest in support services designed to
ensure such success.
32
<PAGE>
CUSTOMERS AND APPLICATIONS
The following is a list of the Company's customers who have licensed
DecisionSuite, or entered into or renewed maintenance agreements, in the nine
months ended October 31, 1997.
RETAIL
Ahold USA, Inc.
Dayton Hudson Corporation
DFS Group, Ltd.
Dial Corporation
Fabri-Center of America, Inc.
Fingerhut Corporation
Gap Inc.
Longs Drug Stores California, Inc
National Grocers Co., Limited
Neiman-Marcus
Proffitt's Inc.
Quill Corporation
J. Sainsbury PLC (U.K.)
Sears Canada, Inc. (Canada)
Sears Roebuck, & Co.
Shopper's Drug Mart
The Southland Corp.
The Stop & Shop Supermarket Company
Superdrug Stores, PLC (U.K.)
SuperValu
Tandy Corporation
Dayton Hudson Corporation, Target
Stores Division
Tupperware Corporation
Tyson Foods, Inc.
The Warehouse Ltd. (New Zealand)
Wearguard Corporation
PACKAGED GOODS
Birds Eye Walls, Inc. (U.K.)
Brunswick Corporation
ConAgra Frozen Foods
Dominick's Fine Foods
Land O'Lakes, Inc.
Nabisco, Inc.
The Quaker Oats Company
Sara Lee Corporation/Sara Lee Meats
Van Den Bergh Foods (U.K.)
FINANCIAL SERVICES
Banc One Services Corporation
DynaMark, Inc.
Fidelity Investments
Green Tree Financial Corporation
Honor Technologies, Inc.
MasterCard International Incorporated
NOVUS Services, Inc.
Strong Capital Management, Inc.
T. Rowe Price Investment
Technologies, Inc.
HEALTH CARE
Fairview Health Systems
MCC Behavioral Care
Owen Healthcare, Inc.
TheraTx, Inc.
United HealthCare Corporation
VIPS (a division of First Data Corp.)
INSURANCE
Cigna-Intercorp, Inc.
Medical Service Bureau of Idaho/Blue Shield of
Idaho
Liberty Health
Northland Insurance Company
The Northwestern Mutual Life Insurance Company
The Prudential Insurance Company of America
The St. Paul Fire and Marine Insurance Company
TECHNOLOGY/TELECOMMUNICATIONS
60 DEG. Communications Company
Aerial Communications, Inc.
APAC Teleservices, Inc.
CCC Information Services, Inc.
Pacific Bell Communications
Pacific Bell Video Services
PrimeStar Partners, LP
Silicon Graphics Inc.
GOVERNMENT
Inland Revenue (U.K.)
State of Washington Department of
Social and Health Services
Utah Courts
United States Customs Service
University of California, Berkeley
MANUFACTURING
Amgen, Inc.
The Goodyear Tire and Rubber Company
Mattel, Inc.
Minnesota Mining and Manufacturing Company
Polaroid Corporation
Rockwell International Corporation
Snap-On Tools Company
OTHER
Acxiom Corporation
The Automobile Association (U.K.)
Cargill, Inc.
Dana Computer Corporation
Electronic Data Systems Corporation
Excel Corporation
Federal Express Corporation
IBM Consumer Driven Solutions
KPMG Peat Marwick, LLP
Northwest Airlines, Inc.
NTT Data (Japan)
Oshawa Holdings Limited (Canada)
Perseco
The Reader's Digest Association, Inc.
Regie Media Belge S.A. (Netherlands)
33
<PAGE>
DecisionSuite can be used across a range of industries and is typically used
in three types of applications: (a) customer analysis, including applications
for analyzing customer buying patterns, database marketing and campaign
management; (b) product analysis, including sales analysis, inventory management
and promotion management; and (c) operational analysis, including financial
analysis, activity-based costing, forecasting and budgeting. The following
illustrates the variety of ways customers have deployed DecisionSuite:
FINANCIAL SERVICES: An international credit card company sought to
differentiate itself from its competitors by offering its 22,000 member
financial institutions the ability to access and analyze credit card transaction
activity and trends online. The goal was to provide member financial
institutions with customer usage data to facilitate and evaluate target
marketing campaigns. This customer's Oracle database contains approximately 1.6
terabytes of data and uses NCR servers. Because of the number of potential
users, the size of the data warehouse and the fact that over 11 million
transactions are added to the database daily, scalability was paramount.
DecisionSuite was selected to provide the OLAP engine necessary to build this
application. The Company believes that DecisionSuite was chosen because of the
expertise of its support personnel and the proven scalability, security and ease
of use of the product for the end-user. The first application of DecisionSuite
was available for deployment to members within six months of the date
DecisionSuite was selected and now allows the customer's clients to track usage
patterns and focus their efforts accordingly.
INSURANCE: A provider of auto insurance claim software, data and services
sought to offer over 350 auto insurance companies the ability to access and
analyze insurance claim data via the Web as an extranet. This customer uses a
Red Brick database and a Sun server. The Company believes that DecisionSuite was
selected primarily for its Web and agent capabilities and its ability to
efficiently manage large amounts of data at a granular level. DecisionSuite
allows the customer's sales associates to analyze the claims data for potential
clients via the Web as a tool in the sales process. Upon complete
implementation, this application will also allow auto insurance companies to
access and analyze the customer's nationwide insurance claim data, including
repair cycle times and amounts paid for vehicle parts, and to compare their
claims resolution performance against industry averages and historical trends.
RETAIL: A multi-billion dollar retailer of electronics with over 6,800
retail stores nationwide sought to deliver online analysis of its consumer and
product data throughout the organization. The customer's warehouse includes
consumer and census data, as well as behavioral and point-of-sale information
from its retail stores. The consumer database alone includes profiles of over
150 million consumers, making the customer's database one of the most
comprehensive marketing databases in the world. This customer uses a Red Brick
database and an HP server. The Company believes that DecisionSuite was selected
for its complex analytical capabilities, its Web accessibility and its ability
to handle terabytes of data. DecisionSuite provides online analysis of the
databases and allows the customer's headquarters to analyze the retail stores'
performance, improve inventory controls and target promotional mailings. In
addition, this customer plans to make this application available to its retail
store managers using a standard Web browser, thereby enabling these teams to
participate in the decision making process to improve the store's performance.
PACKAGED GOODS: A leading packaged food company, with more than 200 brands
and 1,000 products in 85 countries, sought to provide better and faster sales
and product information to its sales representatives. Its application required
not only the ability to access multiple, disparate databases (Red Brick and DB2)
that used IBM servers, but it required the ability to deliver both detailed and
summarized key account information to thousands of users. The client selected
DecisionSuite and has currently deployed the system to approximately 2,500 sales
representatives throughout the organization. Using DecisionSuite, the customer's
sales representatives are now able to access and analyze online product sales
by, among other things, location and season. This enables the customer to
anticipate inventory fluctuations, thereby improving inventory controls, and
provides the sales representatives with timely decision making information, such
as which products are likely to sell and when, that often leads to new business
opportunities.
34
<PAGE>
PRODUCTS AND TECHNOLOGY
The Company's DecisionSuite products are comprised of a server capable of
handling large data sets or large numbers of concurrent users, several desktop
products designed to deliver information to variously skilled end users over
client/server and Internet architectures, and several systems management,
connectivity and database driver modules. The Company also offers an advanced
tool kit for the rapid assembly of custom OLAP applications. The Company's
products are available on most popular UNIX platforms, including HP-UX, Sun
Solaris, IBM AIX, NCR SVR4, SGI IRIX, Sequent DYNIX/ptx and Unisys SVR4, and are
able to access the following databases: Oracle, Red Brick Warehouse,
HP--Intelligent Warehouse, IBM DB2 6000, IBM DB2 Parallel Edition, Informix, NCR
Teradata DBS, Sybase, Sybase IQ and Tandem Non-Stop SQL. The Company designed
DecisionSuite's architecture to be well suited for localization in foreign
markets. The Company licenses its DecisionSuite software for a one-time license
fee determined on a per server, per named user, and database size basis.
THE DECISIONSUITE PRODUCT ARCHITECTURE
[GRAPHIC]
35
<PAGE>
DECISIONSUITE SERVER
The DecisionSuite Server is a multi-user product designed to allow large
numbers of users to access and analyze large data sets. The DecisionSuite Server
delivers enhanced OLAP services including: agent and exception reporting
functions to push personalized information directly to users; security based on
individual, workgroup and enterprise level user privileges; and group or
personal query controls to minimize system performance degradation caused by
either individuals or user groups. DecisionSuite Server augments SQL with an
efficient and sophisticated C++ calculation processor that is scalable to
thousands of active users and terabytes of data. The DecisionSuite Server's
CONCURRENT SESSION MANAGER is designed to add, manage and delete concurrent
processes initiated by requests from multiple users or agents, allowing
customers to scale DecisionSuite across the enterprise. The DecisionSuite
Server's METADATA model centralizes maintenance and isolates users from
technical complexities by mapping database structures and business rules with
intuitive business descriptions, thereby simplifying user interactions with the
system.
DECISIONSUITE DB DRIVERS. DecisionSuite DB Drivers are designed to provide
organizations with the option of connecting DecisionSuite to target relational
databases with either native drivers or ODBC drivers. Each DB Driver accounts
for the unique SQL syntax and query optimizer of each target database while
allowing organizations to easily switch database vendors' products independently
of deployed DecisionSuite applications. DecisionSuite provides DB Drivers for
Oracle, Red Brick Warehouse, HP-- Intelligent Warehouse, IBM DB2 6000, IBM DB2
Parallel Edition, Informix, NCR Teradata DBS, Sybase, Sybase IQ, and Tandem
Non-Stop SQL.
DISTRIBUTED OLAP ENGINE. DecisionSuite's OLAP Engine uses distributed
processing technology to maximize user concurrency and analytical functionality.
In particular, the Company's calculation processor performs sophisticated
business analysis on raw data without overburdening the database with use of
inefficient temporary tables. This capability enables intensive application
processing to be off-loaded from the database so that organizations can
effectively scale to large numbers of users. This capability also allows support
of hundreds of business calculations and functions that are not currently
supported in SQL.
ENTERPRISE OLAP SERVICES. DecisionSuite provides essential services
required for enterprise-scale deployments including:
WORKGROUP SECURITY. The partitioned, server software design of
DecisionSuite allows additional levels of security provided by an
application server account. In this manner, users with similar
requirements are easily added to the system without risk of improper
information access. Reports, report components and database views are
secured at personal, workgroup and enterprise levels.
COLLABORATION. The Company's use of object technology enables report
data and logic to be shared among users. Each report contains the data,
assumptions and processing logic so that users can interactively exchange
and build on each other's analysis. This technology facilitates live
information sharing among users of the Company's product.
REPORT CASTING. The Company's use of report template technology allows
power users or information technology personnel to efficiently create a
few report models for thousands of different reports. Each report
template contains the instructions and parameters required to generate a
single request. Upon access, the user profile is used to map the
appropriate parameters into the instruction set at run-time so that each
user receives a personalized report. This capability enables the
administrator to build and maintain a relatively small number of
automatically adapting report templates, rather than tens of thousands of
user specific reports.
AGENTS. The Company's server-centric architecture and multi-user,
multi-tasking server technology allows DecisionSuite users to design
autonomous intelligent agents, the results of which can be shared by
multiple users. These agents are created by users and reside on the
server. The agents also can be
36
<PAGE>
triggered by areas of opportunity or trouble, without affecting desktop
performance. The results of the agents may be delivered in real time to
one or more users via e-mail, pager telephone and the Internet so their
assumptions and results can be explored and challenged, as well as shared
to reduce the use of system resources for repetitive batch processing.
DECISIONSUITE DESKTOPS
DecisionSuite Desktops include an array of products positioned to meet the
varying needs and skill levels of employees in an organization.
WEBOLAP. WebOLAP is intended for all users seeking OLAP capability over the
Internet. This product provides ad hoc reporting and OLAP capability using only
a browser, a DecisionSuite user name and a password. WebOLAP's Universal Access
functionality allows users direct access to the DecisionSuite Server from search
engines for seamless integration into corporate Web sites. WebOLAP's codeless
desktop architecture enables it to be used from any desktop with a Web browser,
without requiring a plug-in or extension, eliminating installation and reducing
administration costs in large user environments. Complete integration with the
DecisionSuite Server also allows WebOLAP users to seamlessly share secure,
interactive reports, and collaborate with co-workers using any DecisionSuite
Desktop.
NEWSLINE. NewsLine is intended for active users to deliver and receive live
information, reports, alerts and intelligent agents. Users of this product can
be alerted to the latest opportunities and problems affecting their business by
software agents that monitor, analyze and filter information 24 hours a day,
seven days a week. For example, users have the ability to drill up, down or
across business dimensions anywhere in the data warehouse then pivot and export
results with a spreadsheet hot-link. NewsLine allows experienced users the
ability to securely view and modify all assumptions underlying the analysis,
including calculations and filters. Users may drag and drop calculations and
filters to review the entire data warehouse. NewsLine has robust business
charting capabilities and can be integrated with external applications,
including operational systems, catalogs and powerful GIS mapping systems.
ANALYSIS. Analysis is intended for power users and provides authoring and
publishing capabilities in addition to all the functionality of NewsLine. This
product allows users to start with a "blank sheet of paper," then point and
click to author and publish filters, calculations, calculation templates,
reports, report templates, distributed intelligent agents, triggers and alerts
as well as navigate throughout the entire data warehouse. Alerts can be directed
and broadcast as "live" interactive reports and as messages via e-mail, pager,
telephone and the Internet. Users are presented information in business terms so
that they can explore gigabytes of information without the technical knowledge
of database structures or SQL.
DECISIONSUITE WORKBENCH
The DecisionSuite Workbench allows database and system administrators to
define, manage and support user profiles, security, and group or personal query
controls, as well as to customize and distribute desktop profiles across the
network. Developers can also use DecisionSuite Workbench to create more
sophisticated intelligent agents, custom applications and add-in functionality,
and to integrate DecisionSuite with operational systems. With DecisionSuite's
thin-client architecture, all applications are centrally managed from the
server, thereby reducing cost of ownership and allowing database and systems
administrators to improve DecisionSuite's efficiency.
DECISIONSUITE CONNECTIONS
DecisionSuite Connections provide connectivity with complementary OLAP and
productivity tools. To date, the Company has developed DecisionSuite Connections
for Microsoft Excel, Lotus 123 and Brio. These connections provide users of
DecisionSuite Desktops with the ability to automatically download data into
desktop tools. For example, Brio Connection provides users with the ability to
generate a small data cube that is automatically downloaded into Brio's OLAP
desktop, enabling the user to perform interactive analysis, formatting and
charting while disconnected from the network.
37
<PAGE>
SALES AND MARKETING
SALES
The Company sells its products in North America and the United Kingdom
primarily through its direct sales and services organizations. 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 California, Colorado, Georgia, Illinois, Massachusetts, Michigan,
Minnesota, New Jersey, New York, Ohio, Texas, Virginia, and international
offices in Toronto, Canada; London, England; and Koln, Germany.
To date, a majority of the Company's sales have been generated from its
direct sales force. The Company intends to supplement its sales efforts by
implementing and supporting its products through a network of solution
development partners, sales affiliates and marketing partners. The Company's
strategic partners are independent organizations that perform some or all of the
following functions: sales and marketing; systems implementation and
integration; software development and customization; and ongoing consulting,
training, service and technical support.
The Company has an ongoing program to recruit major systems integrators and
to train and support them in identifying sales opportunities and implementing
the Company's products. The Company is working with several of these affiliates
to develop additional applications for targeted markets, such as finance and
banking, insurance, telecommunications and retail. The Company offers such sales
affiliates discounts on products and training, a cooperative marketing program,
and field level assistance from the Company's direct sales force. The Company
currently has such a relationship with Cambridge Technology Group, EDS, Ernst &
Young, and KPMG.
The Company believes that its strategic partners have significant influence
over product choices by customers and that its relationships with these partners
are an essential element in its marketing, sales and implementation efforts.
Through its partner network, the Company is able to obtain leads and provide
customers with trained and knowledgeable software professionals who are
available locally to implement its systems as well as provide ongoing service
and support. Some of the Company's strategic partners customize the Company's
solutions to fit individual business needs and develop industry-specific
software applications that integrate with and extend the functionality of the
Company's products. The Company currently has solution development partnerships
with DynaMark, VIPS and IBM.
MARKETING
The Company is focused on building market awareness and acceptance of the
Company and its products as well as on developing strategic partnerships. The
Company has a comprehensive marketing strategy with several key components:
image and awareness building, direct marketing to both prospective and existing
customers, a strong Web presence, broad-scale events with strategic partners and
local marketing with partners. The Company's corporate image strategy includes
trade shows, as well as analyst and press tours. The Company's direct marketing
includes ongoing direct mail efforts to existing and prospective customers. For
prospective customers, the Company also offers seminars to assist them in
selecting enterprise scalable OLAP solutions. Seminars are offered in
conjunction with strategic partners in their local or industry-specific markets.
The Company's Web-based marketing is designed to generate new leads for the
Company. The Company increases product awareness by sponsoring large scale
events and seminars for prospective customers with key industry partners.
Finally, the Company's marketing strategy is designed to take advantage of the
Company's partnership network by including cooperative marketing programs
designed for partners' local markets. The Company's marketing partners include
HP, Red Brick, Sun, SPSS and Brio.
As of October 31, 1997, the Company's sales and marketing organization
consisted of 81 employees compared to 18, 28 and 70 employees at January 31,
1995, 1996 and 1997, respectively.
CUSTOMER SUPPORT
The Company believes that providing superior customer service is critical
for customer success. The Company's strategy is to deliver technology and
services that enable its customers to implement OLAP
38
<PAGE>
applications quickly. Its focused experience in designing and implementing
decision support applications is a significant factor in enabling the Company to
implement this strategy. The Company intends to continue to invest in
specialized training of its personnel to provide superior customer service. Most
of the Company's customers currently have maintenance agreements that entitle
them to technical support and periodic upgrades. The Company also offers
additional training and consulting services on a fee basis.
MAINTENANCE AND TECHNICAL SUPPORT. The Company has established a
centralized corporate maintenance and technical service group that is supported
by the consulting and research and development groups. The Company provides
customers with a comprehensive array of services, including software updates,
documentation updates, telephone support, product maintenance and emergency
response. The annual fee for such services is typically 18% of the list price of
the software products licensed and supported.
EDUCATION. The Company offers a series of business and technical courses to
meet the education and training requirements of all levels of professionals
associated with data warehousing and decision support. These courses are
designed to provide the knowledge, skills and confidence to implement
enterprise-wide decision support and enhance the use of DecisionSuite. The
Company offers several modular courses that can be tailored to specific customer
needs. Education specialists meet with customers to design an education plan to
meet organizational goals. Regularly scheduled courses are offered at the
Company's training facility located in Eden Prairie, Minnesota. End user
customer courses are provided at customers' facilities.
IMPLEMENTATION SERVICES. The Company offers a wide range of customer
services to support the implementation requirements of the DecisionSuite line of
products and promote customer self-sufficiency. The Company utilizes a
proprietary methodology for implementation support, called DecisionPath.
DecisionPath was developed internally and incorporates the Company's extensive
implementation experience. Because of the varying needs of its customers, the
Company offers modular services in the following areas: business application
design; data warehouse architecture design; DecisionSuite implementation;
end-user content and delivery; and DecisionSuite optimization.
DECISIONCENTER. The Company offers a series of prototyping workshops in its
DecisionCenter facility. DecisionCenter is a fully equipped prototyping
environment, staffed with knowledgeable business and technical personnel. Each
workshop utilizes the customer's own data, making the prototyping experience as
realistic as possible. The Company believes that a successful implementation of
new technology can be traced to a successful prototype. These prototype systems
use actual company data to assist the business users in identifying the
questions they need to ask but have been unable to visualize. The time and
effort to set up an evaluation environment can be expensive and fraught with
technical infrastructure complexities. The Company provides its customers with
the training benefits of prototyping but shields them from such complexities.
ADVANCED SERVICES. The advanced services group assists in the initial
development of specific solutions for OLAP applications, including
activity-based costing, forecasting, health care analysis and customer
segmentation. This group often provides consultation in the early stages of
modeling and solution-design, combining their strong, technical OLAP expertise,
their in-depth hands-on experience with APIs, and their proven creativity in
architecture and functionality design. Their solutions address the more complex
needs of enterprise OLAP while also focusing on usability and performance for
the end users. Their extensive experience with the APIs have led to the
development of a series of DecisionSuite extensions. These extensions are
optional programs that offer functionality not otherwise available within the
core DecisionSuite product. Extensions consist of either tools for the system
administrator or for the end user.
As of October 31, 1997, the Company's services organization consisted of 62
employees compared to 23, 26 and 41 employees at January 31, 1995, 1996 and
1997, respectively.
RESEARCH AND DEVELOPMENT
Research and development has provided the foundation for the Company's
success in the marketplace, and the Company intends to continue to make
substantial investments in research and development and related activities to
maintain and enhance its product lines. The Company believes that its future
success will, in large part, depend on its ability to maintain and improve
current products, and to develop new products that meet emerging decision
support needs. Research is focused in three areas: identifying market needs,
designing
39
<PAGE>
applications for these needs and implementing such solutions in a reliable and
easy-to-use fashion. Current development activities are focused on product
enhancements in several key areas: OLAP engine, Windows client delivery systems,
Internet delivery systems, agent technology and forecasting. The development
group infrastructure provides a full suite of documentation, quality assurance,
delivery and support capabilities (in addition to its design and implementation
functions) for the Company's products.
As of October 31, 1997, the Company's research and development organization
consisted of 58 employees compared to 26, 32 and 45 employees at January 31,
1995, 1996 and 1997, respectively. From inception through October 31, 1997 the
Company has spent $13.0 million on research and development. Most of the senior
members of the Company's research and development organization have been
employed by the Company since its inception.
COMPETITION
The market in which the Company competes is intensely competitive, highly
fragmented and characterized by rapidly changing technology and evolving
standards. The Company's current and prospective competitors offer a variety of
planning and analysis software solutions and generally fall within three
categories: (i) vendors of desktop OLAP software such as Cognos and Business
Objects; (ii) vendors of multidimensional OLAP software such as Oracle
(Express), Arbor Software, Seagate (Holos) and SAS; and (iii) vendors of
OLAP/relational database software such as MicroStrategy and Platinum Technology
(Prodea). The Company has experienced and expects to continue to experience
increased competition from current and potential competitors, many of whom have
significantly greater financial, technical, marketing and other resources than
the Company. Such competitors may be able to respond more quickly to new or
emerging technologies and changes in customer requirements or devote greater
resources to the development, promotion and sales of their products than the
Company. Also, certain current and potential competitors, including companies
such as Microsoft, IBM, Sybase and Informix may have greater name recognition or
more extensive customer bases that could be leveraged. These companies could
integrate competing OLAP/relational database software with other widely accepted
products resulting in a loss of market share for the Company. The Company
expects additional competition as other established and emerging companies enter
into the OLAP software market and new products and technologies are introduced.
Increased competition could result in price reductions, fewer customer orders,
reduced gross margins, longer sales cycles and loss of market share, any of
which would materially adversely affect the Company's business, operating
results and financial condition.
Current and potential competitors may make strategic acquisitions or
establish cooperative relationships among themselves or with third parties,
thereby increasing the ability of their products to address the needs of the
Company's prospective customers. The Company's current or future indirect
channel partners may establish cooperative relationships with current or
potential competitors of the Company, thereby limiting the Company's ability to
sell its products through particular distribution channels. Accordingly, it is
possible that new competitors or alliances among current and new competitors may
emerge and rapidly gain significant market share. Such competition could
materially adversely affect the Company's ability to obtain new licenses, and
maintenance and support renewals for existing licenses, on terms favorable to
the Company. Further, competitive pressures may require the Company to reduce
the price of DecisionSuite, which would 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, and the failure to do so would have a material adverse
effect upon the Company's business, operating results and financial condition.
The Company competes on the basis of certain factors, including data
scalability, user scalability, open architecture, analytical capabilities,
product features, product performance, product quality, time to market, ease of
use, customer support and price. The Company believes it presently competes
favorably with respect to each of these factors. However, the Company's market
is still evolving and there can be no assurance that the Company will be able to
compete successfully against current and future competitors, and the failure to
do so successfully will have a material adverse effect upon the Company's
business, operating results and financial condition.
40
<PAGE>
INTELLECTUAL PROPERTY 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 its
software pursuant to signed 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 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. 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 many 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.
To date, the Company has not been notified that the Company's products
infringe the proprietary rights of third parties, but 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 data warehouse and data
mart 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 provides its products to end users under non-exclusive licenses,
which generally are non-transferable and have a perpetual term. The Company
generally licenses its products solely for the customer's internal operations.
The Company also licenses its software on an enterprise-wide basis. The Company
has entered into source code escrow agreements for its products. Generally,
customers are required to obtain separate licenses for the database management
systems they select directly from the RDBMS vendors. Furthermore, customers must
obtain separate licenses for any spreadsheets or other PC tools they use
directly from such other vendors.
EMPLOYEES
As of October 31, 1997, the Company had a total of 219 employees, of which
193 were based in the United States, 19 were based in the United Kingdom, 3 were
based in Canada and 4 in Germany. Of the total, 81 were engaged in sales and
marketing, 58 were in research and development, 62 were in services, and 18 were
in finance, administration and operations. The Company's future performance
depends in significant part upon the continued service of its key technical,
sales and senior management personnel, 6 of whom are bound by employment
agreements. 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.
FACILITIES
The Company's principal administrative, sales, marketing, support, and
research and development facility is located in approximately 36,500 square feet
of space in Eden Prairie, Minnesota. The lease on this office space expires on
June 30, 2002. The Company also leases other domestic sales offices throughout
the United States, as well as international offices in Canada, the United
Kingdom and Germany. The Company believes that suitable additional or
alternative space will be available in the future on commercially reasonable
terms as needed.
LITIGATION
The Company is not currently subject to any material legal proceeding.
41
<PAGE>
MANAGEMENT
BOARD MEMBERS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------ --- ----------------------------------------------------------------------
<S> <C> <C>
Larry J. Ford....................... 56 President, Chief Executive Officer and Director
Richard L. Tanler................... 47 Chairman of the Board and Senior Vice President, Strategic Planning
and Marketing
Donald W. Anderson.................. 44 Vice President and Chief Financial Officer
Mark Furtney........................ 51 Vice President, Engineering
Richard S. Parker................... 41 Vice President, Marketing
Robin L. Pederson................... 38 Vice President, Worldwide Sales
Rory C. (Butch) Terrien............. 37 Senior Vice President, Research and Development
Mary K. Trick....................... 42 Vice President, Customer Services
Fredric R. (Rick) Boswell(1)........ 53 Director
Ronald E.F. Codd(2)................. 42 Director
Promod Haque(1)..................... 49 Director
Donald R. Hollis(1)................. 61 Director
Jay H. Wein(2)...................... 65 Director
William H. Younger, Jr.(2).......... 48 Director
</TABLE>
- --------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
LARRY J. FORD has been President, Chief Executive Officer and Director since
May 1995. From August 1991 to November 1994, Mr. Ford served as Chairman and
Chief Executive Officer of Systems Software Associates, a Chicago-based,
enterprise-wide, vertically integrated applications software company
specifically targeting the manufacturing sector. Prior to August 1991, Mr. Ford
held several executive positions at IBM including President of the Latin America
Division, Vice President of Marketing for mid-range computing, and Vice
President of Information and Telecommunications Systems. Mr. Ford serves as a
director of Telular Corporation, where he serves on the Compensation and Audit
Committees. Mr. Ford holds a B.S. in Mathematics and Economics from Claremont
Men's College.
RICHARD L. TANLER has been Chairman of the Board of Directors and Senior
Vice President, Strategic Planning and Marketing since May 1995. Mr. Tanler is a
founder of the Company and served as President and Chief Executive Officer from
June 1992 through May 1995. Prior to this position, Mr. Tanler served as
Director of Services, Business Unit at Metaphor Computer Systems, Inc., a
software company ("Metaphor"). Mr. Tanler holds a B.S. in Business Quantitative
Systems from Arizona State University.
DONALD W. ANDERSON has been Vice President and Chief Financial Officer since
November 1996. From May 1996 to November 1996, Mr. Anderson served as Vice
President, Finance for the School Product Unit of The Learning Company, Inc., an
educational software company that merged with his previous employer, the
Minnesota Educational Computing Corporation ("MECC"). Mr. Anderson served as
Senior Vice President, Finance and Chief Financial Officer of MECC from August
1988 to May 1996 and held various positions at MECC since he joined MECC in
1980, including Vice President, Operations. Mr. Anderson holds a B.A. in
Accounting from Metropolitan State University.
MARK FURTNEY has been Vice President, Engineering since July 1997. From 1988
to July 1997, Dr. Furtney worked for Cray Research, Inc., a supercomputer
supplier, in a variety of positions, including Senior Director of Technology.
Dr. Furtney holds a Ph.D. in Computer Science from the University of Virginia,
an M.S. in Nuclear Engineering from the Massachusetts Institute of Technology
and a B.S. in Mechanical Engineering from Clarkson University.
42
<PAGE>
RICHARD S. PARKER has been Vice President of Marketing since January 1994.
He is a founder of the Company and served as Director of Marketing from April
1990 through December 1993. From September 1984 to April 1990, Mr. Parker was
employed with Metaphor in a variety of positions, including Director of Data
Management, Marketing Manager and Manager of Business Development for the
Metaphor Consulting Group. Mr. Parker attended the University of Minnesota,
majoring in Business Administration.
ROBIN L. PEDERSON has been Vice President, Worldwide Sales for the Company
since April 1996. From June 1995 to April 1996, Mr. Pederson was Senior Vice
President, Worldwide Sales, Marketing and Support for Great Plains Software,
Inc., a financial applications software company. From October 1990 to June 1995,
Mr. Pederson worked for Banyan Systems, Inc., a network software provider, in a
variety of positions including Vice President, Americas. Mr. Pederson holds a
B.S. in Business Administration from the University of North Dakota.
RORY C. (BUTCH) TERRIEN has been Senior Vice President, Research and
Development since June 1992. Prior to joining the Company, Mr. Terrien was
employed with Metaphor as the Development Manager for the Metaphor Consulting
Group. Mr. Terrien holds a B.S. in both Mechanical Engineering and Computer
Science from Northwestern University and an M.S. in Mechanical Engineering from
the University of Minnesota.
MARY K. TRICK has been Vice President, Customer Services since June 1995.
From November 1992 to July 1995, Ms. Trick was employed by Keane, Inc., a
technical consulting firm, in a variety of positions including Branch Manager
for the Minneapolis Branch. From October 1980 to November 1992, Ms. Trick was
employed by Wang Industries, a hardware and software firm, in a variety of
positions including business consultant, presales, Practice Manager and Services
Director for various regions. Ms. Trick attended the University of Minnesota.
FREDRIC R. (RICK) BOSWELL has been a director of the Company since March
1993. Since April 1989 Dr. Boswell has served as the Executive Vice President of
St. Paul Venture Capital, Inc., a venture capital firm. From September 1985 to
May 1989, Dr. Boswell served as President and Chief Operating Officer of ADC
Telecommunications, Inc., a manufacturer of telecommunications equipment and
systems. Prior to September 1985, Dr. Boswell served as President and Chief
Executive Officer of the E.F. Johnson Company, a manufacturer of components,
equipment and systems for wireless communications. Dr. Boswell has served as a
director of the Telecommunications Industry Association and the Minnesota High
Technology Council and as a member of the Executive Advisory Board of the
National Communications Forum. Dr. Boswell holds a B.S. in electrical
engineering and an M.S. and a Ph.D. in computer engineering from Case Western
Reserve University as well as an M.B.A. from the Harvard Business School.
RONALD E.F. CODD has been a director of the Company since August 1997. Mr.
Codd has worked at PeopleSoft, Inc. since 1991, and has served as the Senior
Vice President of Finance and Administration and Chief Financial Officer. From
March 1989 to August 1991, Mr. Codd served as Corporate Controller of MIPS
Computer Systems, Inc. Mr. Codd holds a B.S. in Accounting from the University
of California, Berkeley and an M.M. from the J.L. Kellogg Graduate School of
Management, Northwestern University.
PROMOD HAQUE has been a director of the Company since March 1993. Dr. Haque
joined Norwest Venture Capital Management, Inc., a venture capital firm, in
November 1990 and is currently a General Partner of Norwest Equity Partners V,
L.P. and a General Partner of Norwest Equity Partners IV, L.P. Dr. Haque
currently serves as a director of Optical Sensors, Inc., Prism Solutions, Raster
Graphics, Inc., Connect, Inc., Transaction Systems Architects, Inc. and several
privately held companies. Dr. Haque holds a B.S.E.E. from the University of
Delhi, India, an M.S.E.E. and a Ph.D.E.E. from Northwestern University, and an
M.M. from the J.L. Kellogg Graduate School of Management, Northwestern
University.
DONALD R. HOLLIS has been a director of the Company since August 1996. Mr.
Hollis is President of DRH Strategic Consulting, Inc., a consulting firm, where
he has been employed since March 1996. Prior to January 1996, Mr. Hollis served
as an Executive Vice President of First Chicago Corporation/First National
43
<PAGE>
Bank of Chicago. Mr. Hollis serves as a director of Deluxe Corporation,
Teltrend, Inc., Open Port Technology and the Cambridge Assessment Center. Mr.
Hollis holds a B.B.A. from Kent State University.
JAY H. WEIN has been a director of the Company since June 1992. Mr. Wein has
worked as an independent investor and business consultant since September 1989.
From June 1992 to May 1995, Mr. Wein served as Chairman of the Board of the
Company. Between July 1974 and August 1989 Mr. Wein served as Managing Partner
of the Minneapolis/St. Paul office at Arthur Andersen & Co. Mr. Wein serves as a
director of Great Hall Investment Funds, Inc. and of several private companies
and non-profit organizations. Mr. Wein holds a B.S.B.A. from the University of
South Dakota.
WILLIAM H. YOUNGER, JR. has been a director of the Company since July 1995.
Since 1992, Mr. Younger has been a general partner of Sutter Hill Ventures, a
California Limited Partnership which is a venture capital management firm. Mr.
Younger currently serves as a director of COR Therapeutics, Inc., Celeritek,
Inc., Oacis Healthcare Systems, Inc. and Forte Software, Inc. Mr. Younger holds
a B.S.E.E. from the University of Michigan and an M.B.A. from Stanford
University.
COMMITTEES
The Audit Committee consists of Messrs. Codd, Wein and Younger. The Audit
Committee makes recommendations to the Board of Directors regarding the
selection of independent accountants, reviews the results and scope of audit and
other services provided by the Company's independent accountants and reviews and
evaluates the Company's audit and control functions.
The Compensation Committee consists of Drs. Boswell and Haque and Mr.
Hollis. The Compensation Committee makes recommendations regarding the Company's
1997 Equity Incentive Plan and makes decisions concerning salaries and incentive
compensation for employees and consultants of the Company.
DIRECTOR COMPENSATION
Directors currently do not receive any cash compensation from the Company
for their services as members of the Board of Directors, although members are
reimbursed for certain expenses in connection with attendance at Board of
Directors and Committee meetings. Messrs. Hollis and Wein also serve as
part-time consultants to the Company for which they have been compensated
separately. Non-employer directors will also receive periodic option grants
under the Company's 1997 Equity Incentive Plan. See "Management--1997 Equity
Incentive Plan."
44
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information with respect to compensation for
the fiscal year ended January 31, 1997 paid by the Company for services to the
Company by the Company's Chief Executive Officer and the Company's four other
highest-paid executive officers whose total salary and bonus for such fiscal
year exceeded $100,000 (collectively, the "Named Executive Officers"):
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
-------------------------------------------------------------
LONG-TERM
COMPENSATION
-------------------
AWARDS
ANNUAL -------------------
COMPENSATION SECURITIES
--------------------- UNDERLYING ALL OTHER
SALARY($) BONUS($) OPTIONS(#) COMPENSATION($)(1)
---------- --------- ------------------- -----------------
<S> <C> <C> <C> <C>
Larry J. Ford ................................... $ 175,000 $ 74,100 0 $ 25,000
President and Chief Executive Officer
Richard L. Tanler ............................... 150,000 42,400 0 0
Chairman and Senior Vice President, Strategic
Planning and Marketing
Robin L. Pederson(2) ............................ 119,423 56,250 172,000 15,612
Vice President, Worldwide Sales
Mary K. Trick ................................... 120,000 29,375 38,000 0
Vice President, Customer Services
Rory C. (Butch) Terrien ......................... 110,000 33,500 28,000 0
Senior Vice President, Research and Development
</TABLE>
- ------------------------
(1) Consists of moving expenses.
(2) Mr. Pederson's employment started on April 18, 1996 at an annual base salary
of $150,000.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth each grant of stock options during the fiscal
year ended January 31, 1997 to each of the Named Executive Officers. No stock
appreciation rights were granted during such fiscal year.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
---------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF STOCK
SECURITIES PERCENT OF TOTAL PRICE APPRECIATION FOR
UNDERLYING OPTIONS GRANTED EXERCISE OPTION TERM($)(4)
OPTIONS TO EMPLOYEES IN PRICE EXPIRATION ----------------------
NAME GRANTED(#)(1) FISCAL 1997(2) ($/SHARE)(3) DATE 5% 10%
- -------------------------------- ------------- ----------------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Larry J. Ford................... 0 -- -- -- -- --
Richard L. Tanler............... 0 -- -- -- -- --
Robin L. Pederson............... 172,000 23.3% $ 1.125 4/19/06 $ 121,691 $ 308,389
Mary K. Trick................... 12,000 1.6 1.125 7/23/06 8,490 21,516
26,000 3.5 1.125 7/26/06 18,395 46,617
Rory C. (Butch) Terrien......... 28,000 3.8 1.125 8/15/06 19,810 50,203
</TABLE>
- ------------------------
(1) Generally, 20% of these options vest on the first anniversary of the date of
grant; an additional 20% of these options vest on October 31, 1997; and an
additional 20% of these options vest on each anniversary of the date of
grant occurring in 1998, 2000 and 2001. These options have a ten year term,
subject to earlier termination in the event of the optionee's cessation of
service with the Company.
45
<PAGE>
(2) Based on an aggregate of 736,120 shares subject to options granted to
employees of the Company under the 1992 Stock Option Plan.
(3) The exercise price may be paid in cash, in shares of the Company's Common
Stock valued at fair market value on the exercise date or any other method
approved by the Board.
(4) The potential realizable value is calculated based on the term of the option
at the time of grant (ten years). Stock price appreciation of 5% and 10% is
assumed pursuant to rules promulgated by the Securities and Exchange
Commission and does not represent the Company's prediction of its stock
price performance. The potential realizable values at 5% and 10%
appreciation are calculated by assuming that the exercise price on the date
of grant appreciates at the indicated rate for the entire term of the option
and that the option is exercised at the exercise price and sold on the last
day of its term at the appreciated price.
OPTION VALUES
The following table sets forth information concerning the unexercised
options that are held by the Named Executive Officers as of the end of fiscal
year 1997. No options were exercised by the Named Executive Officers in fiscal
year 1997. No stock appreciation rights were exercised by the Named Executive
Officers in fiscal year 1997 or were outstanding at the end of that year.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT FY-END(#) FY- END($)(1)
-------------------------- --------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Larry J. Ford.............................................. 147,295 343,687 195,166 455,385
Richard L. Tanler.......................................... 93,738 151,752 126,903 201,071
Robin L. Pederson.......................................... 0 172,000 0 227,900
Mary K. Trick.............................................. 6,000 62,000 7,950 82,150
Rory C. (Butch) Terrien.................................... 39,600 60,400 52,470 80,030
</TABLE>
- ------------------------
(1) Based on the fair market value of the Company's Common Stock at fiscal
year-end (January 31, 1997) ($2.45 per share), less the exercise price
payable for such shares.
STOCK PLANS
1997 EQUITY INCENTIVE PLAN
The Company's 1997 Equity Incentive Plan (the "Plan") was adopted by the
Board on September 23, 1997, subject to stockholder approval. The number of
shares of Common Stock reserved for issuance under the Plan is equal to (i)
1,000,000 plus (ii) 107,871, the aggregate number of shares remaining available
for grants under the Company's 1992 Stock Option Plan (the "Predecessor Plan")
on October 31, 1997. As of February 1 of each year, commencing with the year
1999, the number of shares reserved for issuance under the Plan will be
increased automatically by the lesser of (i) 3.5% of the total number of shares
of Common Stock then outstanding or (ii) 400,000 shares. As of October 31, 1997,
no options had been granted under the Plan. Under the Plan, employees,
non-employee members of the Board ("Outside Directors") and consultants may be
awarded options to purchase shares of Common Stock, stock appreciation rights
("SARs"), restricted shares or stock units (collectively, the "Awards"). Options
may be incentive stock options designed to satisfy Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code") or nonstatutory stock options not
designed to meet such requirements. If restricted shares or shares issued upon
the exercise of options granted under this Plan or the Predecessor Plan are
forfeited, then such shares will again become available for awards under the
Plan. If stock units, options or SARs granted under this Plan or the Predecessor
Plan are forfeited or terminate for any other reason before being exercised,
then the corresponding shares will again become available for awards under the
Plan.
46
<PAGE>
The Plan is administered by the Company's Compensation Committee (the
"Committee"). The Committee has the complete discretion to determine which
eligible individuals are to receive any award, determine the type, number,
vesting requirements and other features and conditions of such award, interpret
the Plan and make all other decisions relating to the operation of the Plan.
The exercise price for non-qualified and incentive stock options granted
under the Plan may not be less than 85% or 100%, respectively, of the fair
market value of the Common Stock on the option grant date and may be paid in
cash or in outstanding shares of Common Stock. Options may also be exercised by
using a cashless exercise method, a pledge of shares to a broker or promissory
note. The payment for the award of newly issued restricted shares will be made
in cash, by promissory note or the rendering of past or future services.
The Committee has the authority to modify, extend or assume outstanding
options and SARs or may accept the cancellation of outstanding options or SARs
in return for the grant of new options or SARs for the same or a different
number of shares and at the same or a different exercise price.
Each Outside Director who first becomes a member of the Board after the date
of the offering will receive a one-time option grant for 8,000 shares of Common
Stock upon taking office. This option grant for 8,000 shares will become
exercisable with respect to 20% of the shares upon the completion of twelve
months of Board service and with respect to the balance of the shares in equal
installments on a monthly basis thereafter for the next four years of service.
Upon the conclusion of each regular annual meeting of the Company's stockholders
held in the 1998 calendar year and thereafter, each Outside Director who will
continue to serve as a Board member will receive an option for 1,600 shares of
Common Stock, except that an Outside Director will not receive an annual grant
for 1,600 shares in the same year he or she received the one-time option grant
for 8,000 shares. The option for 1,600 shares will become exercisable upon the
completion of sixty months of Board service from the grant date. The
exercisability of each 8,000-share or 1,600-share option granted to an Outside
Director will accelerate in the event of the optionee's death, disability or
retirement at age 65 and may accelerate in the event of a Change in Control (as
defined below).
The Board may decide to implement a program that allows an Outside Director
to elect to receive his or her annual retainer payments and meeting fees from
the Company in the form of cash, options, restricted shares, stock units or a
combination thereof. The number and terms of such options, restricted shares or
stock units to be granted to Outside Directors in lieu of annual retainers and
meeting fees will be calculated in a manner determined by the Board.
Upon a Change in Control, an Award will become fully exercisable as to all
shares subject to such Award if such Award is not assumed by the surviving
corporation or its parent and the surviving corporation or its parent does not
substitute such Award with another award of substantially the same terms. In the
event of an involuntary termination within 12 months following a Change in
Control, the vesting of an Award will accelerate, as if the holder of the Award
performed services for the Company for an additional 12 months.
A Change in Control includes (i) a merger or consolidation of the Company
after which the Company's then current stockholders own less than 50% of the
surviving corporation, (ii) sale of all or substantially all of the assets of
the Company, (iii) a proxy contest that results in replacement of more than
one-third of the directors over a 24-month period or (iv) acquisition of 50% or
more of the Company's outstanding stock by a person other than a trustee of any
of the Company's employee benefit plans or a corporation owned by the
stockholders of the Company in substantially the same proportions as their stock
ownership in the Company. In the event of a merger or other reorganization,
outstanding options, SARs, restricted shares and stock units will be subject to
the agreement of merger or reorganization, which may provide for the assumption
of outstanding Awards by the surviving corporation or its parent, for their
continuation by the Company (if the Company is a surviving corporation), for
accelerated vesting and accelerated expiration, for settlement in cash or for
cancellation of the outstanding Awards.
The Board may amend or terminate the Plan at any time. Amendments may be
subject to stockholder approval to the extent required by applicable laws.
47
<PAGE>
1997 EMPLOYEE STOCK PURCHASE PLAN
The Board adopted the Company's 1997 Employee Stock Purchase Plan (the
"Purchase Plan") on September 23, 1997, subject to stockholder approval. A total
of 200,000 shares of Common Stock have been reserved for issuance under the
Purchase Plan. The Purchase Plan is intended to qualify under Section 423 of the
Code. Each calendar year, two overlapping offering periods each with a duration
of 18 months will commence on January 1 and July 1 (except that the first
offering period will commence on the effective date of the offering and end on
June 30, 1999). Each offering period contains three six-month accumulation
periods, with purchases occurring at the end of each six-month accumulation
period. However, the initial accumulation period will begin on the effective
date of the offering and end on June 30, 1998. The Purchase Plan will be
administered by the Committee. Each employee will be eligible to participate if
he or she is employed by the Company for at least 20 hours per week and for more
than five months per year. The Purchase Plan permits each eligible employee to
purchase Common Stock through payroll deductions, which may not exceed 15% of an
employee's compensation. No more than 500 shares may be purchased on any
purchase date. The price of each share of Common Stock purchased under the
Purchase Plan will be 85% of the lower of (i) the fair market value per share of
Common Stock on the date immediately prior to the first date of the applicable
offering period (except that in the case of the first offering period, the price
per share will be the price offered to the public in the offering) or (ii) the
date at the end of the applicable accumulation period. Employees may end their
participation in the Purchase Plan at any time during the accumulation period,
and participation ends automatically upon termination of employment with the
Company.
In the event of a Change in Control, all offering periods and accumulation
periods will terminate and each outstanding purchase right will be exercised.
The Board may amend or terminate the Purchase Plan at any time. However, the
Board may not, without stockholder approval, increase the number of shares of
Common Stock reserved for issuance under the Purchase Plan.
401(K) PLAN
The Company has adopted a 401(k) retirement savings plan referred to as the
"Information Advantage, Inc. Employees 401(k) Plan." This plan is available to
all employees who have attained age 21 and have completed six months of service.
An employee may contribute, on a pre-tax basis, up to 20% of the employee's
wages from the Company to limitations specified under the Internal Revenue Code.
Under the terms of the Information Advantage, Inc. Employees 401(k) Plan, the
Company may match employee contributions up to six percent of the employee's
compensation and may make discretionary profit sharing contributions, but has
not elected to do either. Contributions are allocated to each employee's
individual account and are, at the employee's election, invested in one, all, or
some combination of the investment funds available under this 401(k) plan.
Employee contributions are fully vested and non-forfeitable. Employees will vest
in any Company contributions at the rate of 20% for each year of service.
EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS
The Company has employment contracts and severance agreements in effect with
Richard L. Tanler, Chairman of the Board and Senior Vice President, Strategic
Planning and Marketing; Larry J. Ford, President and Chief Executive Officer;
Robin L. Pederson, Vice President, Worldwide Sales; Rory C. (Butch) Terrien,
Senior Vice President, Research and Development; Donald W. Anderson, Vice
President and Chief Financial Officer; and Richard S. Parker, Vice President,
Marketing. The Company also has severance agreements in effect with Mark
Furtney, Vice President, Engineering; Mary K. Trick, Vice President, Customer
Service; Keith Deane, General Manager --United Kingdom division; and Michael
Gaard, General Manager --Financial Services business unit. Each severance
agreement provides for the acceleration of all unvested stock options of the
officer following a Change in Control if either (i) his or her employment by the
Company is terminated without cause, or (ii) he or she voluntarily terminates
his or her employment as a result of a reduction in authority or responsibility
as an employee of the Company.
48
<PAGE>
The Company and Mr. Tanler are parties to an employment agreement and an
amendment thereto dated June 11, 1992 and April 27, 1995, respectively,
governing his employment with the Company. The agreement sets forth Mr. Tanler's
compensation level and eligibility for salary increases, bonuses, benefits and
option grants under the 1992 Stock Option Plan. Pursuant to the agreement, Mr.
Tanler's employment is voluntary and may be terminated by the Company or Mr.
Tanler at any time with 30 days prior written notice, provided however, that if
the Company terminates Mr. Tanler's employment without cause, Mr. Tanler shall
receive an amount equal to his base salary per month at the end of each of the
six months immediately following the date of termination but in no event shall
he receive any such payments after he gains employment elsewhere. The Company
may immediately terminate Mr. Tanler's employment for cause upon written notice
with no further obligation to Mr. Tanler.
The Company and Mr. Ford are parties to an employment agreement and an
amendment thereto dated April 19, 1995 and May 23, 1995, respectively, governing
his employment with the Company. The agreement sets forth Mr. Ford's
compensation level and eligibility for salary increases, bonuses, benefits and
option grants under the 1992 Stock Option Plan. Mr. Ford's employment with the
Company under the agreement is voluntary and may be terminated by the Company or
Mr. Ford at any time with 30 days prior written notice, provided that if the
Company terminates Mr. Ford's employment for reasons other than cause, the
Company shall pay to Mr. Ford a sum equal to his current base salary for a
period of six months following such termination. Notwithstanding the foregoing,
if Mr. Ford's employment is terminated (for reasons other than cause) due to a
"change in control of the Company" (defined to mean the acquisition by a person
not currently a stockholder of the Company of shares of Company stock
representing more than 50% of the voting power of the outstanding shares), Mr.
Ford shall receive a sum equal to his then current base salary for an additional
12 month period. The Company may terminate Mr. Ford's employment for cause
without notice and without any further obligation to Mr. Ford. The agreement
also provides for full acceleration of vesting of his unvested stock options or
shares if one of the following events shall occur: (i) the sale by the Company
of all or substantially all of its assets and the discontinuance of its
business; or (ii) a change in control of the Company (as previously defined)
resulting in the termination of Mr. Ford's employment with the Company, a
substantial change in the scope of Mr. Ford's employment responsibilities, or
job relocation.
The Company and Mr. Anderson are parties to a letter agreement executed on
November 4, 1996 governing his employment with the Company. The agreement sets
forth Mr. Anderson's compensation level and eligibility for salary increases,
bonuses, benefits and option grants under the 1992 Stock Option Plan. Pursuant
to the agreement, Mr. Anderson is entitled to receive, in the event of
termination of employment for reasons other than cause or if Mr. Anderson is not
employed in a capacity comparable to his then current position due to a change
of ownership of the Company, a sum equal to 12 months of base compensation. The
agreement also provides for accelerated vesting of unvested stock options if a
change of ownership of the Company occurs. If the change of ownership occurs
within the first two years of Mr. Anderson's first day of employment with the
Company and the Company is still privately owned, 75% of the unvested options or
shares shall vest, up to a maximum gain to Mr. Anderson of $1.2 million.
Conversely, if the change of ownership occurs after an initial public offering
of Company shares, all his unvested options shall immediately vest.
The Company and Mr. Parker are parties to an employment agreement dated June
11, 1992 governing his employment with the Company. The agreement sets forth Mr.
Parker's compensation level and eligibility for salary increases, bonuses,
benefits and option grants under the 1992 Stock Option Plan. Pursuant to the
agreement, Mr. Parker's employment is voluntary and may be terminated by the
Company or Mr. Parker at any time with 30 days prior written notice, provided
however, that if the Company terminates Mr. Parker's employment without cause,
Mr. Parker shall receive an amount equal to his base salary per month at the end
of each of the six months immediately following the date of termination, but in
no event shall he receive any such payments after he gains employment elsewhere.
The Company may immediately terminate Mr. Parker's employment for cause upon
written notice with no further obligation to Mr. Parker.
The Company and Mr. Pederson are parties to a letter agreement dated March
6, 1996 governing his employment with the Company. The agreement sets forth Mr.
Pederson's compensation level and eligibility for
49
<PAGE>
salary increases, bonuses, benefits and option grants under the 1992 Stock
Option Plan. Pursuant to the agreement, Mr. Pederson is entitled to receive, in
the event of termination of Mr. Pederson's employment with the Company (for
reasons other than cause) or if Mr. Pederson is not employed in a capacity
comparable to his then current position due to a change in ownership of the
Company, a sum equal to 12 months of base compensation. The agreement also
provides for accelerated vesting of any unvested stock options or shares in the
event of a change in ownership of the Company. If Mr. Pederson is employed by
the acquiring or surviving entity in a capacity comparable to his then current
position, 50% of his unvested stock options or shares shall immediately vest;
the remaining 50% shall vest over the subsequent 24 months at a rate of 50% per
year. Conversely, if Mr. Pederson's employment with the acquiring or surviving
entity is terminated (for reasons other than cause) or if Mr. Pederson is not
retained by such acquiring or surviving entity in a capacity comparable to his
then current position with the Company, all his unvested stock options shall
immediately vest, up to a maximum gain to Mr. Pederson of $4.0 million.
The Company and Mr. Terrien are parties to an employment agreement dated
June 11, 1992 governing his employment with the Company. The agreement sets
forth Mr. Terrien's compensation level and eligibility for salary increases,
bonuses, benefits and option grants under the 1992 Stock Option Plan. Pursuant
to the agreement, Mr. Terrien's employment is voluntary and may be terminated by
the Company or Mr. Terrien at any time with 30 days prior written notice,
provided however, that if the Company terminates Mr. Terrien's employment
without cause, Mr. Terrien shall receive an amount equal to his base salary per
month at the end of each of the six months immediately following the date of
termination but in no event shall he receive any such payments after he gains
employment elsewhere. The Company may immediately terminate Mr. Terrien's
employment for cause upon written notice to Mr. Terrien.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Company's Board was formed in 1993, and
the members of the Compensation Committee are Drs. Boswell and Haque and Mr.
Hollis. None of these individuals was at any time during the year ended January
31, 1997, or at any other time, an officer or employee of the Company. No member
of the Compensation Committee of the Company serves as a member of the board of
directors or compensation committee of any entity that has one or more executive
officers serving as a member of the Company's Board or Compensation Committee.
50
<PAGE>
CERTAIN TRANSACTIONS
TRANSACTIONS WITH DIRECTORS AND OFFICERS AND 5% STOCKHOLDERS
Since the Company's inception, the Company has raised capital primarily
through the sale of its Preferred Stock. In June 1995 the Company sold 3,010,515
shares of Series B convertible redeemable preferred stock at a price of $2.38
per share. In March 1996, the Company sold 1,514,837 shares of Series C
convertible redeemable preferred stock at a price of $3.25 per share. In
February 1997 the Company sold 1,399,992 shares of Series D convertible
redeemable preferred stock at a price of $5.00 per share. The following table
summarizes the shares of Preferred Stock purchased by executive officers,
directors and 5% stockholders of the Company and persons associated with them
since September 1994.
<TABLE>
<CAPTION>
SERIES B SERIES C SERIES D
PREFERRED PREFERRED PREFERRED
INVESTOR STOCK STOCK STOCK
- --------------------------------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Entities affiliated with Norwest Equity Partners(1).............................. 519,665 461,538 501,123
Entities affiliated with St. Paul Venture Capital, Inc.(2)....................... 519,665 183,579 200,000
Pathfinder Venture Capital Fund III(3)........................................... 223,827 61,538 50,000
Entities affiliated with Sutter Hill Ventures(4)................................. 863,469 99,147 197,568
Entities affiliated with Menlo Ventures(5)....................................... 842,105 93,651 100,000
Entities affiliated with Weiss, Peck & Greer(6).................................. -- 615,384 121,049
Donald R. Hollis................................................................. -- -- 40,000
William H. Younger, Jr.(7)....................................................... 59,497 6,621 12,784
Donald W. Anderson............................................................... -- -- 20,000
</TABLE>
- ------------------------
(1) Includes shares purchased by Norwest Equity Partners IV, a Minnesota Limited
Partnership and Norwest Equity Partners V, a Minnesota Limited Partnership.
Dr. Haque is a partner of Itasca Partners and Itasca Partners V, which are
the General Partners of Norwest Equity Partners IV and Norwest Equity
Partners V, respectively.
(2) Includes shares purchased by St. Paul Fire and Marine Insurance Company and
St. Paul Venture Capital IV, L.L.C. Dr. Boswell is the Executive Vice
President of St. Paul Venture Capital, Inc., which is an affiliate of St.
Paul Fire and Marine Company and the managing member of St. Paul Venture
Capital IV, L.L.C.
(3) Messrs. Brian P. Johnson, Andrew J. Greenshields, Gary A. Stoltz, Jack
Ahrens, Eugene Fischer and Ms. Barbara L. Santry are the General Partners of
Pathfinder Venture Capital Fund III.
(4) Includes shares purchased by Sutter Hill Ventures, a California Limited
Partnership, William H. Younger, Jr. and 15 other individuals and entities
associated with Sutter Hill Ventures. Mr. Younger is a General Partner of
Sutter Hill Ventures.
(5) Includes shares purchased by Menlo Ventures VI, L.P. and Menlo Entrepeneurs
Fund VI, L.P. Messrs. H. Dubose Montgomery, Thomas H. Bredt, Douglas C.
Carlisle, John W. Jarve, Michael D. Laufer, M.D. and Ms. Sonja L. Hoel are
the General Partners of MV Management VI, L.P., the General Partner of Menlo
Ventures VI, L.P. and Menlo Entrepeneurs Fund VI, L.P.
(6) Includes shares purchased by WPG Enterprise Fund II, L.P. and Weiss, Peck &
Greer Venture Associates III, L.P. Messrs. Philip Greer, Gill Cogan, Phil
Black and Christopher J. Schaepe and Ms. Ellen Feeney and Ms. Annette
Bianchi are the General Partners of WPG Venture Partners III, L.P., the
General Partner of WPG Enterprise Fund II, L.P. and Weiss, Peck & Greer
Venture Associates III, L.P.
(7) Includes shares purchased by Mr. Younger as Trustee of a living trust.
In addition, Norwest Equity Partners V, L.L.P., St. Paul Venture Capital IV,
L.L.C., Sutter Hill Ventures, Pathfinder Venture Capital Fund III, Menlo
Ventures VI, L.P., Weiss, Peck & Greer Venture Associates III, L.P.,
51
<PAGE>
Larry J. Ford and Ronald E.F. Codd and their affiliated entities will purchase
an aggregate of up to 500,000 shares in this offering.
In April 1996, the Company loaned $70,000 to Richard L. Tanler, the
Company's Chairman of the Board and Senior Vice President of Strategic Planning
and Marketing. In conjunction with the loan, Mr. Tanler issued a promissory note
to the Company for $70,000, bearing interest at the rate of 5.33% per annum,
which note is payable 60 days after demand by the Company. As of October 31,
1997, there had been no payments on the loan and the aggregate indebtedness
under the loan was $76,316.
In August 1996, Donald R. Hollis, a director of the Company, was granted an
option to purchase 8,000 shares of Common Stock at an exercise price of $1.13
per share in conjunction with becoming a director. Also in August 1996, Mr.
Hollis received an option to purchase 2,000 shares of Common Stock at an
exercise price of $1.13 per share in conjunction with entering into a consulting
agreement with the Company.
In July 1997, in connection with the acceptance of an employment offer, Mark
Furtney, the Company's Vice President, Engineering, was granted an option to
purchase 40,000 shares of the Company's Common Stock at an exercise price of
$2.13 per share.
In August 1997, the Company granted Ronald E.F. Codd an option to purchase
8,000 shares of Common Stock at an exercise price of $3.75 per share in
conjunction with becoming a director.
The Company also has granted additional options to certain of its executive
officers. Such options are described further in the Management Section under
"Executive Compensation" and "Option Grants in Last Fiscal Year."
The Company has entered into employment agreements with Messrs. Ford,
Tanler, Anderson, Parker, Pederson and Terrien. See "Management--Employment
Agreements and Change in Control Arrangements."
In December 1997, the Company and certain holders of its outstanding
Preferred Stock (the "Lenders") entered into a Loan and Warrant Purchase
Agreement (the "Loan Agreement") to provide the Company with a source of funds
for its working capital requirements pending completion of the offering. The
Loan Agreement provided the Company with a revolving loan commitment of $3.0
million. Each loan to the Company under the Loan Agreement will bear interest at
the rate of 8.0% per annum, compounded annually, from the date funds are
provided. All unpaid advances received by the Company under the Loan Agreement,
together with accrued interest thereon, will be due and payable upon the earlier
of (i) ten days following the closing date of the offering or (ii) May 20, 1998
(such earlier date being the "Maturity Date"). If amounts outstanding under the
Loan Agreement are not fully paid on the Maturity Date, then the outstanding
unpaid balance will automatically convert on the Maturity Date into shares of
Common Stock at the conversion rate of one share for each $5.00 of principal and
interest then outstanding. To date, the Company has not requested advances from
Lenders. If the Company receives advances under the Loan Agreement, it intends
to pay in cash the outstanding balance of such indebtedness with a portion of
the proceeds received by the Company from the offering rather than having such
sums convert into equity.
In consideration of the revolving loan commitment of the Lenders, the
Company issued warrants to the Lenders to purchase an aggregate of 30,000 shares
of Common Stock at a per share purchase price of $5.00. In the event the Company
requests advances from the Lenders under the Loan Agreement, the Company will be
required to issue additional warrants on a pro rata basis to the Lenders, with
the number of shares subject to such additional warrants equal to 4.0% of the
principal amount of each advance from the Lenders. Shares purchased upon
exercise of the warrants are entitled to certain registration rights. See
"Description of Capital Stock--Registration Rights."
The Company believes that all of the transactions set forth herein were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions, including loans (if any),
between the Company and its officers, directors, and principal stockholders and
their affiliates will be approved by a majority of the Board of Directors,
including a majority of the independent and disinterested
52
<PAGE>
outside directors of the Board of Directors, and will be on terms no less
favorable to the Company than could be obtained from unaffiliated third parties.
INDEMNIFICATION
The Company's Certificate of Incorporation limits the liability of its
directors for monetary damages arising from a breach of their fiduciary duty as
directors, except to the extent otherwise required by the Delaware General
Corporation Law. Such limitation of liability does not affect the availability
of equitable remedies such as injunctive relief or rescission.
The Company's Bylaws provide that the Company shall indemnify its directors
and officers to the fullest extent permitted by Delaware law, including in
circumstances in which indemnification is otherwise discretionary under Delaware
law. The Company has entered into indemnification agreements with its officers
and directors containing provisions that may require the Company, among other
things, to indemnify such officers and directors against certain liabilities
that may arise by reason of their status or service as directors or officers
(other than liabilities arising from willful misconduct of a culpable nature),
to advance their expenses incurred as a result of any proceeding against them as
to which they could be indemnified, and to obtain directors' and officers'
insurance if available on reasonable terms.
53
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to the Company
regarding beneficial ownership of its Common Stock as of October 31, 1997, and
as adjusted to reflect the sale of shares offered hereby and the conversion of
all outstanding shares by Preferred Stock into shares of Common Stock and the
exercise of warrants to purchase 454,565 shares of Common Stock, by (i) each
person who is known by the Company to own beneficially more than five percent of
the Company's Common Stock, (ii) each of the Company's directors, (iii) each of
the Named Executive Officers and (iv) all current executive officers and
directors as a group.
<TABLE>
<CAPTION>
PERCENT BENEFICIALLY
NUMBER OF OWNED(1)(2)(3)
SHARES --------------------
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNED(1)(2) OFFERING OFFERING
- ------------------------------------------------------------------------------- ------------ --------- ---------
<S> <C> <C> <C>
Entities affiliated with Norwest Equity Partners(4)............................ 3,048,700 26.24% 20.39%
2800 Piper Jaffray Tower
222 South Ninth Street
Minneapolis, MN 55402
Entities affiliated with St. Paul Venture Capital, Inc.(5)..................... 2,363,128 20.34 15.80
8500 Normandale Lake Blvd.
Suite 1940
Bloomington, MN 55437
Entities affiliated with Sutter Hill Ventures(6)............................... 1,201,968 10.35 8.04
755 Page Mill Road, Suite A-200
Palo Alto, CA 94304
Pathfinder Venture Capital Fund III(7)......................................... 1,183,093 10.18 7.91
Suite 585, One Corporate Center
7300 Metro Blvd.
Edina, MN 55439
Entities affiliated with Menlo Ventures(8)..................................... 1,035,756 8.91 6.93
3000 Sand Hill Road
Bldg. 4, Suite 100
Menlo Park, CA 94025
Entities affiliated with Weiss, Peck & Greer(9)................................ 736,433 6.34 4.93
555 California Street
Suite 3130
San Francisco, CA 94104
Larry J. Ford(10).............................................................. 229,125 1.94 1.51
Robin L. Pederson.............................................................. 34,400 * *
Richard L. Tanler(11).......................................................... 169,247 1.44 1.12
Mary K. Trick(12).............................................................. 28,000 * *
Rory C. (Butch) Terrien(13).................................................... 65,200 * *
Ronald E.F. Codd(14)........................................................... 0 * *
Fredric R. (Rick) Boswell(5)................................................... 2,363,128 20.34 15.80
Promod Haque(4)................................................................ 3,048,700 26.24 20.39
Donald R. Hollis(15)........................................................... 44,000 * *
Jay H. Wein(16)................................................................ 333,359 2.86 2.22
William H. Younger, Jr.(6)..................................................... 1,201,968 10.35 8.04
All directors and executive officers as a group (14 persons)(17)............... 7,610,256 62.93% 49.33%
</TABLE>
- ------------------------
* Represents beneficial ownership of less than 1% of the outstanding shares
of Common Stock.
54
<PAGE>
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power
with respect to securities. Unless otherwise indicated, the address for
each listed stockholder is c/o Information Advantage Software, Inc., 7905
Golden Triangle Drive, Eden Prairie, Minnesota 55344-7227. To the Company's
knowledge, except as indicated in the footnotes to this table and pursuant
to applicable community property laws, the persons named in the table have
sole voting and investment power with respect to all shares of Common
Stock. The number of shares of Common Stock beneficially owned includes
shares issuable pursuant to warrants and stock options that are exercisable
within 60 days of October 31, 1997.
(2) Assumes no exercise of the Underwriters' over-allotment option. See
"Underwriting."
(3) Percentage of beneficial ownership is based on 11,618,325 shares of Common
Stock outstanding as of October 31, 1997 and 14,952,325 shares of Common
Stock to be outstanding after the closing of this offering. Shares issuable
pursuant to warrants and stock options are deemed outstanding for computing
the percentage of the person holding such warrants or options but are not
deemed outstanding for computing the percentage of any other person.
(4) Excludes shares purchased in connection with this offering. See "Certain
Transactions." Includes 1,930,792 shares held by Norwest Equity Partners
IV, a Minnesota Limited Partnership, 1,117,908 shares held by Norwest
Equity Partners V, a Minnesota Limited Partnership. Dr. Haque is a partner
of Itasca Partners and Itasca Partners V, which are the General Partners of
Norwest Equity Partners IV, a Minnesota Limited Partnership and Norwest
Equity Partners V, a Minnesota Limited Partnership, respectively. Dr. Haque
disclaims beneficial ownership of the shares held by Norwest Equity
Partners IV, a Minnesota Limited Partnership and Norwest Equity Partners V,
a Minnesota Limited Partnership, except to the extent of his pecuniary
interest therein arising from his partnership interests in Itasca Partners
and Itasca Partners V.
(5) Excludes shares purchased in connection with this offering. See "Certain
Transactions." Includes 2,163,128 shares held by St. Paul Fire and Marine
Insurance Company, 200,000 shares held by St. Paul Venture Capital IV,
L.L.C. Dr. Boswell is the Executive Vice President of St. Paul Venture
Capital, Inc., which is an affiliate of St. Paul Fire and Marine Insurance
Company and a managing member of St. Paul Venture Capital IV, L.L.C. Dr.
Boswell disclaims beneficial ownership of the shares held by St. Paul Fire
and Marine Insurance Company and St. Paul Venture Capital IV, L.L.C.
(6) Excludes shares purchased in connection with this offering. See "Certain
Transactions." Includes 716,632 shares of Common Stock held by Sutter Hill
Ventures, a California Limited Partnership ("Sutter Hill"), 78,902 shares
held by Mr. William H. Younger, Jr. as Trustee of a living trust and
406,434 shares held of record for 15 other individuals and entities
associated with Sutter Hill. Mr. Younger is a General Partner of Sutter
Hill and shares voting and investment power with respect to the shares held
by Sutter Hill. Mr. Younger disclaims beneficial ownership of the shares
held by Sutter Hill and the individuals and entities associated with Sutter
Hill, except as to the shares held of record in his name and as to his
partnership interest in Sutter Hill.
(7) Excludes shares purchased in connection with this offering. See "Certain
Transactions." Messrs. Brian P. Johnson, Andrew J. Greenshields, Gary A.
Stoltz, Jack Ahrens, Eugene Fischer and Ms. Barbara L. Santry are the
General Partners of Pathfinder Venture Capital Fund III.
(8) Excludes shares purchased in connection with this offering. See "Certain
Transactions." Includes 1,020,449 shares held by Menlo Ventures VI, L.P.
and 15,307 shares held by Menlo Entrepreneurs Fund VI, L.P. Messrs. H.
Dubose Montgomery, Thomas H. Bredt, Douglas C. Carlisle, John W. Jarve,
Michael D. Laufer, M.D. and Ms. Sonja L. Hoel are the General Partners of
MV Management VI, L.P., the General Partner of Menlo Ventures VI, L.P. and
Menlo Entrepreneurs Fund VI, L.P. These individuals disclaim beneficial
ownership of the shares held by Menlo Ventures VI, L.P. and Menlo
Entrepreneurs Fund VI, L.P., except to the extent of their respective
pecuniary interests therein.
55
<PAGE>
(9) Excludes shares purchased in connection with this offering. See "Certain
Transactions." Includes 334,340 shares of Common Stock held by Weiss, Peck
& Greer Venture Associates III, L.P., and 402,093 shares of Common Stock
held by WPG Enterprise Fund II, L.P. Messrs. Philip Greer, Gill Cogan, Phil
Black and Christopher J. Schaepe and Ms. Ellen Feeney and Ms. Annette
Bianchi are the General Partners of WPG Venture Partners III, L.P., the
General Partner of Weiss, Peck & Greer Venture Associates III, L.P. and WPG
Enterprise Fund II, L.P. These individuals disclaim beneficial ownership of
the shares held by Weiss, Peck & Greer Venture Associates III, L.P. and WPG
Enterprise Fund II, L.P. except to the extent of their respective pecuniary
interests therein.
(10) Excludes shares purchased in connection with this offering. See "Certain
Transactions." Includes 201,125 shares of Common Stock issuable pursuant
to stock options which may be exercised within 60 days after October 31,
1997.
(11) Includes 140,676 shares of Common Stock issuable pursuant to stock options
which may be exercised within 60 days after October 31, 1997.
(12) Includes 18,800 shares of Common Stock issuable pursuant to stock options
which may be exercised within 60 days after October 31, 1997.
(13) Includes 65,200 shares of Common Stock issuable pursuant to stock options
which may be exercised within 60 days after October 31, 1997.
(14) Excludes shares purchased in connection with this offering. See "Certain
Transactions."
(15) Includes 4,000 shares of Common Stock issuable pursuant to stock options
which may be exercised within 60 days after October 31, 1997.
(16) Includes 18,000 shares of Common Stock held in the aggregate by Douglas E.
Wein, Steven L. Wein and Patricia J. Bazany, children of Mr. Wein, over
which Mr. Wein retains voting power.
(17) Includes 475,001 shares of Common Stock issuable pursuant to stock options
which may be exercised within 60 days after October 31, 1997. If the
over-allotment option is exercised in full, the percentage of shares
beneficially owned will be 47.78%.
56
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, the authorized capital stock of the
Company will consist of 60,000,000 shares of Common Stock, $0.01 par value, and
5,000,000 shares of Preferred Stock, $0.01 par value.
COMMON STOCK
As of October 31, 1997, there were 11,618,325 shares of Common Stock
outstanding that were held of record by approximately 72 stockholders. There
will be 14,952,325 shares of Common Stock outstanding (assuming no exercise of
the Underwriters' over-allotment option and assuming no exercise after October
31, 1997 of outstanding options) after giving effect to the sale of the shares
of Common Stock to the public offered hereby and the conversion of the Company's
Preferred Stock into Common Stock at a one-to-one ratio.
The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding Preferred Stock, the holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by the Board of Directors out of funds legally available therefor. See
"Dividend Policy." In the event of the liquidation, dissolution, or winding up
of the Company, the holders of Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities, subject to prior distribution
rights of Preferred Stock, if any, then outstanding. The Common Stock has no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the Common Stock. All
outstanding shares of Common Stock are fully paid and nonassessable, and the
shares of Common Stock to be issued upon completion of this offering will be
fully paid and nonassessable.
PREFERRED STOCK
The Company's Certificate of Incorporation authorizes 5,000,000 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. The issuance
of Preferred Stock may have the effect of delaying, deferring or preventing a
change in control of the Company without further action by the stockholders and
may adversely affect the voting and other rights of the holders of Common Stock.
The issuance of Preferred Stock with voting and conversion rights may adversely
affect the voting power of the holders of Common Stock, including the loss of
voting control to others. At present, the Company has no plans to issue any of
the Preferred Stock.
ANTITAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS
AND DELAWARE LAW
CERTIFICATE OF INCORPORATION AND BYLAWS
The Company's Certificate of Incorporation and Bylaws provide that, upon the
closing of this offering, the Board of Directors will be divided into three
classes of directors, with each class serving a staggered three-year term. The
classification system of electing directors may tend to discourage a third party
from making a tender offer or otherwise attempting to obtain control of the
Company and may maintain the incumbency of the Board of Directors, as the
classification of the Board of Directors generally increases the difficulty of
replacing a majority of the directors. The Certificate of Incorporation and
Bylaws also provide that, effective upon the closing of this offering, all
stockholder actions must be effected at a duly called meeting and not by a
consent in writing. The Company's Certificate of Incorporation and Bylaws do not
permit stockholders of the Company to call a special meeting of stockholders.
Further, provisions of the Certificate of Incorporation and Bylaws provide that
the stockholders may amend certain provisions of the Certificate of
Incorporation or Bylaws only with the affirmative vote of holders of 80% of the
Company's capital stock. These provisions of the Certificate of Incorporation
and Bylaws could discourage potential acquisition proposals and could delay or
prevent a change in control of the Company. These provisions are intended to
enhance the likelihood of continuity and stability in the composition of the
Board of Directors and in the policies formulated by the Board of Directors and
to discourage certain types of transactions that may involve an actual or
threatened change of control of the
57
<PAGE>
Company. These provisions are designed to reduce the vulnerability of the
Company to an unsolicited acquisition proposal. The provisions also are intended
to discourage certain tactics that may be used in proxy fights. However, such
provisions could have the effect of discouraging others from making tender
offers for the Company's shares and as a consequence, they also may inhibit
fluctuations in the market price of the Company's shares that could result from
actual or rumored takeover attempts. Such provisions also may have the effect of
preventing changes in the management of the Company and may have an adverse
effect on the public trading price of the Company's Common Stock. See "Risk
Factors--Effect of Certain Charter Provisions; Antitakeover Effects of
Certificate of Incorporation, Bylaws, and Delaware Law."
DELAWARE TAKEOVER STATUTE
The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203"), which, subject to certain exceptions, prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years following the date that such stockholder
became an interested stockholder, unless: (i) prior to such date, the board of
directors of the corporation approved either the business combination or the
transaction that resulted in the stockholder becoming an interested stockholder;
(ii) upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding those shares owned (x) by persons who are directors and also
officers and (y) by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or (iii) on or subsequent
to such date, the business combination is approved by the board of directors and
authorized at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least 66 2/3% of the outstanding voting
stock that is not owned by the interested stockholder.
Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii) any
sale, transfer, pledge or other disposition of 10% or more of the assets of the
corporation involving the interested stockholder; (iii) subject to certain
exceptions, any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder; (iv)
any transaction involving the corporation that has the effect of increasing the
proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested stockholder; or (v) the receipt by the
interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation. In
general, Section 203 defines an interested stockholder as any entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
REGISTRATION RIGHTS
After this offering, the holders of approximately 10,401,890 shares of
Common Stock (assuming the exercise of warrants to purchase 30,000 shares of
Common Stock held by holders of registration rights) will be entitled to certain
rights with respect to the registration of such shares under the Securities Act.
Under the terms of the agreement between the Company and the holders of such
registrable securities, if the Company proposes to register any of its
securities under the Securities Act, either for its own account or for the
account of other security holders exercising registration rights, such holders
are entitled to notice of such registration and are entitled to include share of
such Common Stock therein. Additionally, such holders are also entitled to
certain demand registration rights pursuant to which they may require the
Company to file a registration statement under the Securities Act at its expense
with respect to their shares of Common Stock, and the Company is required to use
its best efforts to effect such registration. Further, holders may require the
Company to file additional registration statements on Form S-3 at the Company's
expense. All of these registration rights are subject to certain conditions and
limitations, among them the right of the underwriters of an offering to limit
the number of shares included in such registration.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is Norwest Bank
Minnesota, National Association, and its telephone number is (612) 450-4064.
58
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 14,952,325 shares of
Common Stock outstanding. Of this amount, the 3,334,000 shares offered hereby
will be available for immediate sale in the public market as of the date of this
Prospectus. Approximately 11,184,335 additional shares will be available for
sale in the public market following the expiration of 180-day lockup agreements
with the Representatives of the Underwriters or the Company, subject in some
cases to compliance with the volume and other limitations of Rule 144.
<TABLE>
<CAPTION>
APPROXIMATE SHARES
DAYS AFTER DATE OF ELIGIBLE FOR FUTURE
THIS PROSPECTUS SALE COMMENT
- -------------------------------------------- ---------------------- --------------------------------------------
<S> <C> <C>
Upon Effectiveness.......................... 3,371,327 Freely tradable shares sold in offering and
shares salable under Rule 144(k) that are
not subject to 180-day lockup
90 days..................................... 2,299 Shares salable under Rule 144, 144(k) or 701
that are not subject to 180-day lockup.
180 days.................................... 11,144,709 Lockup released; shares salable under Rule
144, 144(k) or 701
Over 180 days............................... 433,990 Restricted securities held for one year or
less
</TABLE>
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least one
year is entitled to sell within any three-month period commencing 90 days after
the date of this Prospectus a number of shares that does not exceed the greater
of (i) 1% of the then outstanding shares of Common Stock (approximately 150,000
shares immediately after the offering) or (ii) the average weekly trading volume
during the four calendar weeks preceding such sale, subject to the filing of a
Form 144 with respect to such sale. A person (or persons whose shares are
aggregated) who is not deemed to have been an affiliate of the Company at any
time during the 90 days immediately preceding the sale who has beneficially
owned his or her shares for at least two years is entitled to sell such shares
pursuant to Rule 144(k) without regard to the limitations described above.
Persons deemed to be affiliates must always sell pursuant to Rule 144, even
after the applicable holding periods have been satisfied.
The Company is unable to estimate the number of shares that will be sold
under Rule 144, since this will depend on the market price for the Common Stock
of the Company, the personal circumstances of the sellers and other factors.
Prior to this offering, there has been no public market for the Common Stock,
and there can be no assurance that a significant public market for the Common
Stock will develop or be sustained after the offering. Any future sale of
substantial amounts of the Common Stock in the open market may adversely affect
the market price of the Common Stock offered hereby.
The Company, its directors, executive officers, stockholders with
registration rights and certain other stockholders and optionholders have agreed
pursuant to the Underwriting Agreement and other agreements that they will not
sell any Common Stock without the prior consent of BancAmerica Robertson
Stephens for a period of 180 days from the date of this Prospectus (the "180-day
Lockup Period"), except that the Company may, without such consent, grant
options and sell shares pursuant to the Company's stock plans.
Any employee of or consultant to the Company who purchased his or her shares
under the 1992 plan or pursuant to a written compensatory plan or contract is
entitled to rely on the resale provisions of Rule 701, which permits
nonaffiliates to sell their Rule 701 shares without having to comply with the
public information, holding period, volume limitation or notice provisions of
Rule 144 and permits affiliates to sell their Rule 701 shares without having to
comply with the Rule 144 holding period restrictions, in each case commencing 90
days after the date of this Prospectus. As of October 31, 1997, the holders of
options exercisable into approximately 2,257,113 shares of Common Stock will be
eligible to sell their shares upon the expiration of the 180-day Lockup Period,
subject in certain cases to vesting of such options.
59
<PAGE>
The Company intends to file a registration statement on Form S-8 under the
Securities Act to register 1,200,000 shares of Common Stock subject to
outstanding stock options or reserved for issuance under the 1997 Plan and the
Purchase Plan within 180 days after the date of this Prospectus, and thereafter
up to 2,364,984 shares of Common Stock subject to outstanding stock options or
reserved for issuance under the 1992 Stock Option Plan; thus permitting the
resale of such shares by nonaffiliates in the public market without restriction
under the Securities Act.
In addition, after this offering, the holders of approximately 10,401,890
shares of Common Stock (assuming the exercise of warrants to purchase 30,000
shares of Common Stock held by holders of registration rights) will be entitled
to certain rights with respect to registration of such shares under the
Securities Act. Registration of such shares under the Securities Act would
result in such shares becoming freely tradeable without restriction under the
Securities Act (except for shares purchased by affiliates of the Company)
immediately upon the effectiveness of such registration. See "Description of
Capital Stock--Registration Rights."
60
<PAGE>
UNDERWRITING
The Underwriters named below, acting through their representatives,
BancAmerica Robertson Stephens, NationsBanc Montgomery Securities, Inc., Piper
Jaffray Inc. and First Albany Corporation (the "Representatives"), have
severally agreed with the Company, subject to the terms and conditions of the
Underwriting Agreement, to purchase the number of shares of Common Stock set
forth opposite their respective names below. The Underwriters are committed to
purchase and pay for all shares if any are purchased. In the event of default by
an Underwriter, the Underwriting Agreement provides that, in certain
circumstances, purchase commitments of the non-defaulting Underwriters may be
increased or the Underwriting Agreement may be terminated.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ---------------------------------------------------------------------------------- ----------
<S> <C>
BancAmerica Robertson Stephens.................................................... 1,333,600
NationsBanc Montgomery Securities, Inc............................................ 916,850
Piper Jaffray Inc................................................................. 916,850
First Albany Corporation.......................................................... 166,700
----------
Total........................................................................... 3,334,000
----------
----------
</TABLE>
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock to the public at the initial public offering
price set forth on the cover page of this Prospectus and to certain dealers at
such price less a concession of not in excess of $0.24 per share, of which $0.10
may be reallowed to other dealers. After the initial public offering, the public
offering price, concession, and reallowance to dealers may be reduced by the
Representatives. No such reduction shall change the amount of proceeds to be
received by the Company as set forth on the cover page of this Prospectus.
The Company has granted to the Underwriters an option, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to 500,100
additional shares of Common Stock at the same price per share as will be paid
for the 3,334,000 shares that the Underwriters have agreed to purchase. To the
extent that the Underwriters exercise such option, each of the Underwriters will
have a firm commitment, subject to certain conditions, to purchase approximately
the same percentage of such additional shares that the number of shares of
Common Stock to be purchased by it shown in the above table represents as a
percentage of the 3,334,000 shares offered hereby. If purchased, such additional
shares will be sold by the Underwriters on the same terms as those on which the
3,334,000 shares are being sold.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters and the Company against certain civil liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the Underwriting Agreement.
Each officer and director who holds shares of the Company, holders
(including such officers and directors) of 11,578,700 shares of Common Stock and
all warrantholders of the Company and optionholders of the Company holding
options exercisable within the 180-day Lockup Period have agreed, for the
180-day Lockup Period, subject to certain exceptions, not to offer to sell,
contract to sell, or otherwise sell (including without limitation in a short
sale), dispose of, loan, pledge or grant any rights with respect to any shares
of Common Stock, any options or warrants to purchase any shares of Common Stock,
or any securities convertible into, exercisable for or exchangeable for shares
of Common Stock owned as of the date of this Prospectus directly by such holders
or with respect to which they have the power of disposition, without the prior
written consent of BancAmerica Robertson Stephens. However, BancAmerica
Robertson Stephens may, in its sole discretion and at any time or from time to
time without notice, release all or any portion of the securities subject to
lock-up agreements.
There are no agreements between the Representatives and any of the Company's
stockholders providing consent by the Representatives to the sale of shares
prior to the expiration of the 180-day Lockup Period.
61
<PAGE>
In addition, the Company has agreed that during the 180-day Lockup Period,
the Company will not, without the prior written consent of BancAmerica Robertson
Stephens, subject to certain exceptions, issue, offer to sell, sell, contract to
sell (including without limitation in a short sale), dispose of, loan, pledge or
grant any rights with respect to any shares of Common Stock, any options or
warrants to purchase any shares of Common Stock or any securities convertible
into, exercisable for or exchangeable for shares of Common Stock other than the
Company's sale of shares in this offering, the issuance of Common Stock upon the
exercise of outstanding options, and the Company's issuance of options and
shares under existing employee stock option and stock purchase plans. See
"Shares Eligible For Future Sale."
The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
Prior to this offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock offered hereby has been determined through negotiations among the Company
and the Representatives. Among the factors considered in such negotiations were
prevailing market conditions, certain financial information of the Company,
market valuations of other companies that the Company and the Representatives
believe to be comparable to the Company, estimates of the business potential of
the Company and the industry in which it competes, an assessment of the
Company's management, its past and present operations, the prospects for, and
timing of, future revenues of the Company, the present state of the Company's
development and other factors deemed relevant. There can be no assurance that an
active trading market will develop for the Common Stock or that the Common Stock
will trade in the public market subsequent to the offering at or above the
initial offering price.
The Representatives have advised the Company that, pursuant to Regulation M
under the Securities Act, certain persons participating in the Offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids which may have the effect of
stabilizing or maintaining the market price of the Common Stock at a level above
that which might otherwise prevail in the open market. A "stabilizing bid" is a
bid for or the purchase of the Common Stock on behalf of the Underwriters for
the purpose of fixing or maintaining the price of the Common Stock. A "syndicate
covering transaction" is the bid for or the purchase of the Common Stock on
behalf of the Underwriters to reduce a short position incurred by the
Underwriters in connection with the Offering. A "penalty bid" is an arrangement
permitting the Representatives to reclaim the selling concession otherwise
accruing to an Underwriter or syndicate member in connection with the Offering
if the Common Stock originally sold by such Underwriter or syndicate member is
purchased by the Representatives in a syndicate covering transaction and has
therefore not been effectively placed by such Underwriter or syndicate member.
The Representatives have advised the Company that such transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
Of the 3,334,000 shares being sold in the offering, certain affiliates of
the Company will purchase an aggregate of up to 500,000 shares for investment
purposes and not for resale. See "Certain Transactions." In addition, the
Underwriters have reserved for sale, at the initial public offering price, up to
5% of the Common Stock offered hereby for certain individuals designated by the
Company who have expressed an interest in purchasing such shares of Common Stock
in the offering. The number of shares available for sale to the general public
will be reduced to the extent such persons purchase such reserved shares. Any
reserved shares not so purchased will be offered by the Underwriters to the
general public on the same basis as other shares offered hereby.
62
<PAGE>
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, Menlo
Park, California. Certain legal matters in connection with the offering will be
passed upon for the Company by Briggs and Morgan, Professional Association,
Minneapolis, Minnesota. Certain legal matters in connection with the offering
will be passed upon for the Underwriters by Brobeck, Phleger & Harrison LLP,
Palo Alto, California.
EXPERTS
The consolidated financial statements as of January 31, 1996 and 1997 and
October 31, 1997 and for each of the three years in the period ended January 31,
1997 and for the nine months ended October 31, 1997 included in this Prospectus
have been so included in reliance on the report of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1
under the Securities Act with respect to the Common Stock offered hereby. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules to the Registration Statement. For
further information with respect to the Company and such Common Stock offered
hereby, reference is made to the Registration Statement and the exhibits and
schedules filed as a part of the Registration Statement. Statements contained in
this Prospectus concerning the contents of any contract or any other document
referred to are not necessarily complete; reference is made in each instance to
the copy of such contract or document filed as an exhibit to the Registration
Statement. Each such statement is qualified by such reference to such exhibit.
The Registration Statement, including exhibits and schedules thereto, may be
inspected without charge at the Commission's principal office in Washington,
D.C., and copies of all or any part thereof may be obtained from such office
after payment of fees prescribed by the Commission. The Commission maintains a
Web site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission
at http://www.sec.gov.
63
<PAGE>
INFORMATION ADVANTAGE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
Report of Independent Accountants..................................................... F-2
<S> <C>
Consolidated Financial Statements:
Consolidated Balance Sheet as of January 31, 1996 and 1997 and October 31, 1997..... F-3
Consolidated Statement of Operations for the Years Ended January 311995, 1996 and
1997 and for the Nine Months Ended October 31, 1996 (Unaudited) and 1997.......... F-4
Consolidated Statement of Stockholders' Equity (Deficit) for the Years Ended January
31, 1995, 1996 and 1997 and for the Nine Months Ended October 31, 1997............ F-5
Consolidated Statement of Cash Flows for the Years Ended January 31, 1995, 1996 and
1997 and for the Nine Months Ended October 31, 1996 (Unaudited) and 1997.......... F-6
Notes to Consolidated Financial Statements.......................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Information Advantage, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' deficit and of cash
flows present fairly, in all material respects, the financial position of
Information Advantage, Inc. and its subsidiaries at January 31, 1996 and 1997
and October 31, 1997, and the results of their operations and their cash flows
for each of the three years in the period ended January 31, 1997 and for the
nine months ended October 31, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
[LOGO]
PRICE WATERHOUSE LLP
Minneapolis, Minnesota
November 13, 1997
F-2
<PAGE>
INFORMATION ADVANTAGE, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JANUARY 31, OCTOBER 31, 1997
--------------------- -------------------------
1996 1997 ACTUAL PRO FORMA
--------- --------- --------- -------------
(UNAUDITED)
(NOTE 2)
ASSETS
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents............. $ 1,939 $ 874 $ 3,011 $ 3,011
Accounts receivable................... 1,562 3,215 6,537 6,537
Receivable from officer............... -- 70 76 76
Prepaid expenses and other current
assets.............................. 112 318 864 864
--------- --------- --------- -------------
Total current assets................ 3,613 4,477 10,488 10,488
--------- --------- --------- -------------
Furniture and equipment................. 611 1,294 2,338 2,338
Other assets............................ 97 147 139 139
--------- --------- --------- -------------
$ 4,321 $ 5,918 $ 12,965 $ 12,965
--------- --------- --------- -------------
--------- --------- --------- -------------
LIABILITIES, REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Line of credit borrowings............. $ -- $ -- $ 1,685 $ 1,685
Current portion--long-term debt....... 275 790 919 919
Accounts payable...................... 419 580 929 929
Accrued expenses...................... 552 1,838 2,682 2,682
Deferred revenue...................... 1,270 3,371 4,888 4,888
--------- --------- --------- -------------
Total current liabilities........... 2,516 6,579 11,103 11,103
--------- --------- --------- -------------
Long-term debt, less current portion.... 275 1,244 1,135 1,135
--------- --------- --------- -------------
Total liabilities................... 2,791 7,823 12,238 12,238
--------- --------- --------- -------------
COMMITMENTS AND CONTINGENCIES (NOTES 6
and 8)
Series A convertible redeemable
preferred stock, $0.01 par value...... 5,337 5,337 5,337 --
Series B convertible redeemable
preferred stock, $0.01 par value...... 7,150 7,150 7,150 --
Series C convertible redeemable
preferred stock, $0.01 par value...... -- 4,923 4,923 --
Series D convertible redeemable
preferred stock, $0.01 par value...... -- -- 7,000 --
Stockholders' equity (deficit):
Common stock, $0.01 par value;
60,000,000 shares authorized;
979,259, 1,059,139, 1,680,426 and
11,618,325 shares issued and
outstanding, respectively........... 10 11 17 117
Additional paid-in-capital............ 847 1,007 2,665 26,975
Cumulative translation adjustments.... 19 19 17 17
Accumulated deficit................... (11,833) (20,352) (26,382) (26,382)
--------- --------- --------- -------------
Total stockholders' equity (deficit).... (10,957) (19,315) (23,683) 727
--------- --------- --------- -------------
$ 4,321 $ 5,918 $ 12,965 $ 12,965
--------- --------- --------- -------------
--------- --------- --------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
INFORMATION ADVANTAGE, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED JANUARY 31, OCTOBER 31,
---------------------------------- --------------------------------
1995 1996 1997 1996 1997
-------- -------- ------------ -------------- ---------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Revenues:
License............................... $ 1,826 $ 2,686 $ 6,491 $ 4,786 $ 9,087
Service............................... 1,991 2,956 5,255 3,628 8,414
-------- -------- ------------ ------ ---------------
Total revenues.................. 3,817 5,642 11,746 8,414 17,501
-------- -------- ------------ ------ ---------------
Cost of revenues:
License............................... 72 118 132 94 107
Service............................... 1,636 2,129 3,308 2,263 5,500
-------- -------- ------------ ------ ---------------
Total cost of revenues.......... 1,708 2,247 3,440 2,357 5,607
-------- -------- ------------ ------ ---------------
Gross margin............................ 2,109 3,395 8,306 6,057 11,894
-------- -------- ------------ ------ ---------------
Operating expenses:
Sales and marketing................... 3,406 3,854 11,350 7,407 12,305
Research and development.............. 2,162 2,089 3,189 2,142 3,917
General and administrative............ 853 1,247 2,147 1,488 1,539
-------- -------- ------------ ------ ---------------
Total operating expenses........ 6,421 7,190 16,686 11,037 17,761
-------- -------- ------------ ------ ---------------
Loss from operations.................... (4,312) (3,795) (8,380) (4,980) (5,867)
Other income (expense):
Interest expense...................... (102) (110) (244) (181) (177)
Interest income....................... 19 116 148 141 88
-------- -------- ------------ ------ ---------------
Total other income (expense).... (83) 6 (96) (40) (89)
-------- -------- ------------ ------ ---------------
Net loss................................ $ (4,395) $ (3,789) $ (8,476) $(5,020) $ (5,956)
-------- -------- ------------ ------ ---------------
-------- -------- ------------ ------ ---------------
Unaudited pro forma net loss per
share................................. $ (0.84) $ (0.52)
------------ ---------------
------------ ---------------
Shares used in computing unaudited pro
forma net loss per share.............. 10,103,410 11,517,811
------------ ---------------
------------ ---------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
INFORMATION ADVANTAGE, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE TOTAL
------------------------ PAID-IN TRANSLATION ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL ADJUSTMENTS DEFICIT DEFICIT
----------- ----------- ----------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 31, 1994..... 973,659 $ 10 $ 841 $ -- $ (3,606) $ (2,755)
Preferred stock issuance
costs..................... -- -- -- -- (17) (17)
Stock options............... 2,000 -- 2 -- -- 2
Translation adjustments..... -- -- -- -- -- --
Net loss.................... -- -- -- -- (4,395) (4,395)
----------- ----------- ----------- ----------- ------- -------
Balance, January 31, 1995..... 975,659 10 843 -- (8,018) (7,165)
Preferred stock issuance
costs..................... -- -- -- -- (26) (26)
Stock options............... 3,600 -- 4 -- -- 4
Translation adjustments..... -- -- -- 19 -- 19
Net loss.................... -- -- -- -- (3,789) (3,789)
----------- ----------- ----------- ----------- ------- -------
Balance, January 31, 1996..... 979,259 10 847 19 (11,833) (10,957)
Preferred stock issuance
costs..................... -- -- -- -- (43) (43)
Stock options............... 79,880 1 160 -- -- 161
Translation adjustments..... -- -- -- -- -- --
Net loss.................... -- -- -- -- (8,476) (8,476)
----------- ----------- ----------- ----------- ------- -------
Balance, January 31, 1997..... 1,059,139 11 1,007 19 (20,352) (19,315)
Preferred stock issuance
costs..................... -- -- -- -- (74) (74)
Stock options............... 187,296 2 905 -- -- 907
Stock purchase warrants
exercised................. 433,991 4 753 -- -- 757
Translation adjustments..... -- -- -- (2 ) -- (2)
Net loss.................... -- -- -- -- (5,956) (5,956)
----------- ----------- ----------- ----------- ------- -------
Balance, October 31, 1997..... 1,680,426 $ 17 $ 2,665 $ 17 $ (26,382) $ (23,683)
----------- ----------- ----------- ----------- ------- -------
----------- ----------- ----------- ----------- ------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
INFORMATION ADVANTAGE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED JANUARY 31, OCTOBER 31,
------------------------------- ------------------------
1995 1996 1997 1997
--------- --------- --------- 1996 ---------
-------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss....................................................... $ (4,395) $ (3,789) $ (8,476) $ (5,020) $ (5,956)
Adjustments to reconcile net loss to net cash used by operating
activities:
Depreciation and amortization................................ 242 193 470 277 1,199
Interest expense converted to preferred stock................ -- 58 -- -- --
Changes in operating assets and liabilities:
Accounts receivable........................................ 256 (801) (1,653) (1,618) (3,322)
Prepaid expenses and other current assets.................. (111) (1) (276) (243) (546)
Accounts payable........................................... 53 15 161 371 349
Accrued expenses........................................... 267 27 1,286 527 844
Deferred revenue........................................... 431 670 2,101 754 1,117
Other...................................................... 71 (18) (50) (22) 8
--------- --------- --------- ------ ---------
Net cash used by operating activities.................... (3,186) (3,646) (6,437) (4,974) (6,307)
--------- --------- --------- ------ ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to furniture and equipment........................... (231) (32) (592) (529) (875)
--------- --------- --------- ------ ---------
Net cash used by investing activities.......................... (231) (32) (592) (529) (875)
--------- --------- --------- ------ ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options........................ 2 4 86 74 217
Proceeds from exercise of stock purchase warrants.............. -- -- -- -- 757
Proceeds from sale of convertible redeemable preferred stock,
net
of expenses.................................................. 2,483 5,067 4,880 4,880 6,926
Proceeds from issuance of notes payable-stockholders........... 1,000 1,000 -- -- --
Borrowings under lines of credit............................... 90 -- -- -- 1,685
Repayments on lines of credit.................................. -- (435) -- -- --
Proceeds from long-term debt................................... -- -- 1,500 1,500 400
Principal payments on long-term debt........................... (170) (217) (502) (279) (666)
--------- --------- --------- ------ ---------
Net cash provided by financing activities...................... 3,405 5,419 5,964 6,175 9,319
--------- --------- --------- ------ ---------
Net (decrease) increase in cash and cash equivalents............. (12) 1,741 (1,065) 672 2,137
Cash and cash equivalents, beginning of period................... 210 198 1,939 1,939 874
--------- --------- --------- ------ ---------
Cash and cash equivalents, end of period......................... $ 198 $ 1,939 $ 874 $ 2,611 $ 3,011
--------- --------- --------- ------ ---------
--------- --------- --------- ------ ---------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for interest......................... $ 105 $ 132 $ 234 $ 171 $ 168
--------- --------- --------- ------ ---------
--------- --------- --------- ------ ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
INFORMATION ADVANTAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 1--ORGANIZATION
Information Advantage develops, markets and supports enterprise scalable
on-line analytical processing software that is designed to allow large numbers
of users to access and analyze large amounts of data to make quick and more
informed business decisions. The Company's relational server-based solution,
DecisionSuite, provides powerful, robust and flexible analysis processing
capabilities that transform raw data into meaningful information from a wide
range of desktop and Internet platforms. The Company also provides a
comprehensive range of related training, consulting and customer support
services.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include accounts of the Company and
wholly-owned subsidiaries operating in the United Kingdom and Germany. All
significant intercompany accounts and transactions have been eliminated.
Information for the nine months ended October 31, 1996 is unaudited. The
information furnished in the unaudited October 31, 1996 statements of operations
and cash flows include all adjustments, consisting only of normal recurring
accruals, which are, in the opinion of management, necessary for a fair
presentation of such financial statements.
REVERSE STOCK SPLIT
On October 8, 1997, the Company's Board of Directors approved a reverse
1-for-2 1/2 stock split which became effective on December 3, 1997. The effect
of the reverse stock split has been reflected for all periods presented in the
accompanying financial statements.
PRO FORMA BALANCE SHEET (UNAUDITED)
If the offering contemplated by this Prospectus is consummated, all of the
convertible redeemable preferred stock outstanding at the closing date will be
converted share for share into 9,483,334 shares of common stock. In addition,
639,739 of the 783,158 stock purchase warrants outstanding as of October 31,
1997 will be exercised automatically and converted into 454,565 shares of common
stock if not exercised prior to the closing of this offering. The unaudited pro
forma balance sheet reflects the conversion of outstanding convertible
redeemable preferred stock and common stock warrants at October 31, 1997 into
shares of common stock.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
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. Actual results could differ from those estimates.
FOREIGN CURRENCY TRANSLATION
All assets and liabilities of the Company's foreign subsidiaries are
translated from local currencies to U.S. dollars at period end rates of
exchange, while the consolidated statement of operations is translated at the
average exchange rates during the period. The functional currency for the
Company's United Kingdom and
F-7
<PAGE>
INFORMATION ADVANTAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
German subsidiaries is the respective local currencies. Translation adjustments
arising from the translation of net assets located outside of the United States
into U.S. dollars are recorded as a separate component of stockholders' equity.
Transaction gains or losses on sales to foreign customers which are denominated
in their local currencies are recorded in the statement of operations. The
Company has not experienced any material transaction gains or losses.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
highly liquid investments purchased with a maturity of three months or less to
be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and cash equivalents are valued at amounts which approximate fair
value. The fair value of all other financial instruments approximates cost as
stated.
REVENUE RECOGNITION AND SIGNIFICANT CUSTOMERS
Revenues derived from software licenses are recognized upon (a) the
execution of a license agreement, (b) delivery of the software product (c)
reasonable assurance of customer acceptance of the software and collectibility
of the receivable, and (d) fulfillment of any other of the Company's contract
obligations. For software provided for demonstration or pilot purposes, or where
significant post-delivery obligations exist, revenues are deferred until
execution of a license agreement and fulfillment of all revenue recognition
requirements. Revenues derived from maintenance contracts which are bundled with
the initial licenses and all revenues from extended maintenance contracts are
deferred and recognized ratably over the term of the maintenance contract.
Revenues from maintenance contracts are included in services revenues. Revenues
from training and consulting services are recognized as the services are
performed. The Company's policy is in compliance with the provisions of the
American Institute of Certified Public Accountants' Statement of Position 91-1,
"Software Revenue Recognition."
Financial instruments which potentially subject the Company to credit risk
consist primarily of accounts receivable. The Company grants credit to customers
in the ordinary course of business. Three different customers accounted for
approximately 20%, 17% and 12%, respectively, of total revenues during 1995.
Different individual customers accounted for approximately 14% and 10% of
revenues during 1996 and 1997, respectively. For the nine months ended October
31, 1997, no single customer accounted for greater than 10% of total revenues.
Receivables from the individual significant customer in 1996 represented
approximately 9% of total receivables at January 31, 1996. As of October 31,
1997, a single customer accounted for 21% of total accounts receivable.
Accounts receivable are stated net of the related allowance for doubtful
accounts of $21, $101 and $101 as of January 31, 1996 and 1997 and October 31,
1997, respectively.
RESEARCH AND DEVELOPMENT
Expenditures for research and software development are expensed as incurred.
Such costs are required to be expensed until the point that technological
feasibility of the product is established and the realizability of any
capitalized costs is determined. Technological feasibility is evidenced by a
working model. The period between achieving technological feasibility and the
general availability to the public of such software has been short.
F-8
<PAGE>
INFORMATION ADVANTAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Consequently, costs otherwise capitalizable after technological feasibility is
achieved have been expensed because they have been insignificant to both total
assets and net loss.
FURNITURE AND EQUIPMENT
Furniture and equipment, including those assets acquired under capital
leases, consists of computers and office equipment, and is depreciated using the
straight-line method over the estimated useful lives of the assets, which
generally range from 3 to 5 years. Significant additions or improvements
extending asset lives are capitalized, while repairs and maintenance are charged
to expense as incurred. Amortization of assets under capital leases is included
in depreciation expense. The amount of leased equipment consists of the
following:
<TABLE>
<CAPTION>
JANUARY 31,
---------------------- OCTOBER 31,
1996 1997 1997
---------- ---------- -----------
<S> <C> <C> <C>
Equipment cost......................................... $ 441 $ 927 $ 1,215
Less: Accumulated amortization......................... (130) (336) (590)
---------- ---------- -----------
$ 311 $ 591 $ 625
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
INCOME TAXES
Income taxes are accounted for on the liability method in accordance with
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes." Under the liability method, deferred tax assets and liabilities
are determined based on the difference between the financial statement and tax
bases of assets and liabilities reduced by a valuation allowance, as necessary.
UNAUDITED PRO FORMA NET LOSS PER SHARE
Unaudited pro forma net loss per share is based on the unaudited pro forma
weighted average number of shares of common stock and common equivalent shares
outstanding for the period. The unaudited pro forma weighted average number of
shares assumes the conversion of the Company's convertible redeemable preferred
stock into 9,483,334 shares of common stock, and the automatic conversion of
convertible preferred stock warrants to 454,565 shares of Common Stock, which
will occur upon completion of the offering. Because of the significant impact of
the assumed conversion on the Company's capital structure and earnings per
share, historical earnings per share have been excluded from the financial
statements. Pursuant to certain Securities and Exchange Commission (SEC) Staff
Accounting Bulletins, all common stock, warrants and options issued by the
Company with exercise prices below the initial public offering (IPO) price
during the 12-month period preceding the date of the initial filing of the
Registration Statement have been included in the calculation of net loss per
share, using the treasury stock method based on the assumed IPO price, as if
they were outstanding for all prior periods presented.
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share" (SFAS No. 128). SFAS No. 128 applies to entities
with publicly held common stock and is effective for financial statements issued
for periods ending after December 15, 1997. Under SFAS No. 128 the presentation
of primary earnings per share is replaced with a presentation of basic earnings
per share. SFAS No. 128 requires dual presentation of basic and diluted earnings
per share for entities with complex capital structures. Basic
F-9
<PAGE>
INFORMATION ADVANTAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
earnings per share includes no dilution and is computed by dividing net income
(loss) available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution of securities that could share in the earnings of an entity,
similar to fully diluted earnings per share. Management believes the adoption of
SFAS No. 128 will not have a material effect on the financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" (SFAS No. 130). SFAS No. 130 is effective
for financial statements for fiscal years beginning after December 15, 1997.
This standard defines comprehensive income as the changes in equity of an
enterprise except those resulting from stockholder transactions. All components
of comprehensive income are required to be reported in a new financial
statement. Management believes the adoption of SFAS No. 130 will not have a
material effect on the Company's financial statements.
In June 1997, the Financial Accounting Standards Board also issued Statement
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
(SFAS No. 131). SFAS No. 131 is effective for financial statements for periods
beginning after December 15, 1997. SFAS No. 131 establishes standards for
disclosures about operating segments, products and services, geographic areas
and major customers. Management believes the adoption of SFAS No. 131 will not
have a material effect on the Company's financial statements.
The American Institute of Certified Public Accountants' has approved a new
Statement of Position (SOP), SOP 97-2 which will supersede Statement of Position
91-1, "Software Revenue Recognition." Management has assessed this new statement
and believes that its adoption will not have a material effect on the timing of
the Company's revenue recognition or cause changes to its revenue recognition
policies.
NOTE 3--FINANCIAL STATEMENT COMPONENTS
Furniture and equipment consists of the following:
<TABLE>
<CAPTION>
JANUARY 31,
-------------------- OCTOBER 31,
1996 1997 1997
--------- --------- -----------
<S> <C> <C> <C>
Computer equipment............................................ $ 785 $ 1,615 $ 2,325
Furniture and office equipment................................ 474 722 1,572
Less: Accumulated depreciation................................ (648) (1,043) (1,559)
--------- --------- -----------
$ 611 $ 1,294 $ 2,338
--------- --------- -----------
--------- --------- -----------
</TABLE>
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
-------------------- OCTOBER 31,
1996 1997 1997
--------- --------- -----------
<S> <C> <C> <C>
Accrued wages and benefits.................................... $ 365 $ 1,294 $ 2,076
Other accrued expenses........................................ 187 544 606
--------- --------- -----------
$ 552 $ 1,838 $ 2,682
--------- --------- -----------
--------- --------- -----------
</TABLE>
NOTE 4--LINE OF CREDIT
The Company has a $2.0 million working capital line of credit with a bank.
Borrowings are limited to the lesser of $2.0 million or 70% of eligible accounts
receivable. Borrowings bear interest at an annual rate of 1.75%
F-10
<PAGE>
INFORMATION ADVANTAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 4--LINE OF CREDIT (CONTINUED)
above the bank's prime rate (8.25% at January 31, and 8.50% at October 31, 1997)
and are collateralized by all of the Company's assets. The agreement expired on
September 3, 1997 and was renewed through September 2, 1998 under substantially
the same terms. Borrowings outstanding under this line at January 31, 1996 and
1997 and October 31, 1997 were $0, $0, and $1,685, respectively. The line of
credit agreement contains certain covenants pertaining to operating results and
certain other financial ratios. At October 31, 1997, the Company was in
compliance with these covenants.
NOTE 5--LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JANUARY 31,
-------------------- OCTOBER 31,
1996 1997 1997
--------- --------- -----------
<S> <C> <C> <C>
Subordinated note payable; bears interest at 13.5% per annum;
due in varying monthly installments through April 1999;
secured by certain Company assets............................ $ -- $ 1,397 $ 1,065
Capital lease obligations; bear interest at 8.0% to 13.5% per
annum; due in varying monthly installments through October
2000......................................................... 382 581 589
Equipment note payable; bears interest at 1.75% above prime
(8.50% at October 31, 1997); due in 30 monthly installments
of $15 through September 3, 2000............................. -- -- 400
Note payable; bears interest at 10% per annum; due in quarterly
installments of $28, plus accrued interest, through June
1997......................................................... 168 56 --
--------- --------- -----------
550 2,034 2,054
Current portion--long-term debt................................ (275) (790) (919)
--------- --------- -----------
$ 275 $ 1,244 $ 1,135
--------- --------- -----------
--------- --------- -----------
</TABLE>
Future payments of long-term debt are as follows:
<TABLE>
<CAPTION>
YEARS ENDING JANUARY 31,
- -------------------------------------------------------------------------------------
<S> <C>
1998................................................................................. $ 363
1999................................................................................. 1,206
2000................................................................................. 694
2001................................................................................. 163
---------
2,426
Less: Amount representing interest................................................... (372)
---------
$ 2,054
---------
---------
</TABLE>
F-11
<PAGE>
INFORMATION ADVANTAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 6--OPERATING LEASES
The Company leases equipment and office space in several facilities under
non-cancelable operating leases which expire on various dates through June 2002.
Rental expense under such leases were $571, $547 and $721, for the years ended
January 31, 1995, 1996 and 1997, respectively and $644 for the nine months ended
October 31, 1997. Future minimum payments under the lease agreements are as
follows:
<TABLE>
<CAPTION>
YEARS ENDING JANUARY 31,
- -------------------------------------------------------------------------------------
<S> <C>
1998................................................................................. $ 474
1999................................................................................. 704
2000................................................................................. 667
2001................................................................................. 373
2002................................................................................. 86
---------
$ 2,304
---------
---------
</TABLE>
NOTE 7--INCOME TAXES
At October 31, 1997, the Company had net operating loss carryforwards of
approximately $20 million for income tax purposes. The net operating loss
carryforwards will begin to expire in 2007. Utilization of these net operating
loss carryforwards in the future by the Company may be limited or deferred
subject to Section 382 of the Internal Revenue Code. No future tax benefit for
such carryforwards or other temporary differences has been recognized since
utilization of such benefits is not presently deemed by management to be more
likely than not based on the weight of available evidence.
Deferred income taxes reflect the 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 liabilities and assets are as follows:
<TABLE>
<CAPTION>
JANUARY 31,
-------------------- OCTOBER 31,
1996 1997 1997
--------- --------- -----------
<S> <C> <C> <C>
Deferred tax liabilities:
Tax depreciation in excess of financial reporting......... $ 36 $ 37 $ --
--------- --------- -----------
Deferred tax assets:
Net operating loss carryforward........................... 3,638 6,284 7,955
Vacation and other accruals............................... 313 851 772
Book depreciation in excess of tax........................ -- -- 89
Research and development credit carryforward.............. -- 48 85
Accounts receivable allowance............................. 8 33 39
Amortization.............................................. 168 49 --
--------- --------- -----------
Total deferred tax assets............................... 4,127 7,265 8,940
--------- --------- -----------
Valuation allowance......................................... (4,091) (7,228) (8,940)
--------- --------- -----------
Total net deferred income taxes........................... $ -- $ -- $ --
--------- --------- -----------
--------- --------- -----------
</TABLE>
F-12
<PAGE>
INFORMATION ADVANTAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 8--CAPITAL STRUCTURE
The Company has the following authorized capital stock: 60,000,000 common
shares, 4,000,000 Series A convertible redeemable preferred shares, 4,000,000
Series B convertible redeemable preferred shares, 1,633,198 Series C convertible
redeemable preferred shares, 1,400,000 Series D convertible redeemable preferred
shares, 4,000,000 Series E convertible redeemable preferred shares, 4,000,000
Series F convertible redeemable preferred shares, 1,633,198 Series G convertible
redeemable preferred shares, and 1,400,000 Series H convertible redeemable
preferred shares (collectively, the Preferred Shares), all of which have $0.01
par value. The Preferred Shares are convertible, at the option of the holder,
into common stock on a share for share basis, have certain voting rights and
provide for certain liquidation preferences. The conversion feature is automatic
upon the closing of an initial public offering of the Company's common stock.
SERIES A CONVERTIBLE REDEEMABLE PREFERRED STOCK
During March 1993, the Company issued 1,558,000 shares of Series A
convertible redeemable preferred stock for $1.50 per share. Total proceeds were
$2,310, net of expenses. As part of this sale, preferred stockholders were
issued warrants to purchase 779,000 shares of common stock at $1.50 per share.
These warrants expire on March 10, 1998. Using an option-pricing model the fair
value of the warrants was immaterial.
During February 1994, the Company completed the sale of an additional
1,999,990 shares of Series A convertible redeemable preferred stock at $1.50 per
share. In anticipation of this sale, certain preferred stockholders had, as of
January 31, 1994, advanced $500 to the Company. In February 1994, these advances
were applied to the purchase price of the shares acquired. Total proceeds from
the sale, including the initial stockholder advances, were $2,983, net of
expenses. Total proceeds from the sales of all shares of Series A convertible
redeemable preferred stock were $5,293, net of expenses, with 3,557,990 shares
outstanding.
SERIES B CONVERTIBLE REDEEMABLE PREFERRED STOCK
During June 1995, the Company completed the sale of 3,010,515 shares of
Series B convertible redeemable preferred stock at $2.375 per share to
substantially all of the preferred stockholders who purchased preferred stock in
February 1994 and several new investors. In anticipation of this sale, certain
preferred stockholders had, as of January 31, 1995, advanced $1,000 to the
Company. Such advances were reflected as notes payable-- stockholders in the
balance sheet at January 31, 1995. Additionally during February 1995, the
Company obtained an additional $1,000 of advances from the preferred
stockholders. As a condition of the advances, such stockholders received
warrants to purchase 294,734 common shares at $2.375 per share for a period of
four years from the date of issuance. Using the fair value method prescribed in
SFAS No. 123, the fair value of the warrants was immaterial. In June 1995, these
advances were applied to the purchase price of the shares acquired. Total
proceeds from the sale were $7,124, net of expenses.
SERIES C CONVERTIBLE REDEEMABLE PREFERRED STOCK
During March 1996, the Company sold 1,514,837 shares of Series C convertible
redeemable preferred stock at $3.25 per share to substantially all existing
preferred stockholders and several new investors. Total proceeds from the sale
were $4,880, net of expenses.
F-13
<PAGE>
INFORMATION ADVANTAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 8--CAPITAL STRUCTURE (CONTINUED)
SERIES D CONVERTIBLE REDEEMABLE PREFERRED STOCK
During February 1997, the Company sold 1,399,992 shares of Series D
convertible redeemable preferred stock at $5.00 per share to both existing and
several new investors. Total proceeds from the sale were $6,926, net of
expenses.
MANDATORY PREFERRED STOCK REDEMPTION
One-fourth of the Series A and E convertible redeemable preferred shares are
subject to redemption during each of the fiscal years from 1998 through 2000,
with the balance to be redeemed during fiscal year 2001. One-fourth of the
Series B and F convertible redeemable preferred shares are subject to redemption
during each of the fiscal years from 2000 through 2002, with the balance to be
redeemed during fiscal year 2003. One-fourth of the Series C and G convertible
redeemable preferred shares are subject to redemption during each of the fiscal
years from 2001 through 2003, with the balance to be redeemed during fiscal year
2004. One-fourth of the Series D and H convertible redeemable preferred shares
are subject to redemption during each of the fiscal years from 2002 through
2004, with the balance to be redeemed during fiscal year 2005. The redemption
price shall equal the per share issuance price plus any unpaid and accumulated
or accrued dividends on the preferred stock. The Preferred Shares are recorded
at redemption value which also is the Preferred Shares liquidation value. In the
event any dividend or distribution is declared or made with respect to the
common stock, a comparable dividend or distribution must be simultaneously
declared or made with respect to the Preferred Shares. There have been no
dividends declared or paid through October 31, 1997.
Future redemptions of the Series A, B, C and D convertible redeemable
preferred shares outstanding as of October 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEARS ENDING JANUARY 31,
- ---------------------------------------------------------------
<S> <C>
1998........................................................... $ 1,334
1999........................................................... 1,334
2000........................................................... 3,122
2001........................................................... 4,353
2002........................................................... 4,768
Thereafter..................................................... 9,499
---------
$ 24,410
---------
---------
</TABLE>
CAPITAL STRUCTURE CHANGES
In September 1997, subject to certain conditions, the Board of Directors
authorized the reincorporation of the Company in Delware, increased the
authorized shares of the Company and designated a par value of $0.01 for common
and convertible redeemable preferred shares. All applicable share data included
in the financial statements has been adjusted to give retroactive effect to such
action. In addition, the Company authorized 5,000,000, $.01 par value preferred
shares to be effective subsequent to the closing of an initial public offering.
F-14
<PAGE>
INFORMATION ADVANTAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 8--CAPITAL STRUCTURE (CONTINUED)
OTHER WARRANTS
In conjunction with certain bank financing activities, the Company issued a
warrant in March 1995 to its bank to purchase 15,000 common shares at $2.00 per
share. The warrant expires on March 30, 2000. In conjunction with certain other
financings in fiscal 1996 and 1997, the Company issued warrants to a different
lender to purchase 33,683 Series B convertible redeemable preferred shares at
$2.375 per share. The warrants expire on September 29, 1999 (13,473 shares) and
November 20, 2000 (20,210 shares). In addition, the Company issued an additional
warrant to this lender in fiscal 1997 to purchase 94,736 Series C convertible
redeemable preferred shares at $3.25 per share, which expires on April 12, 2003.
Using the fair value method prescribed in SFAS No. 123, the fair value of the
warrants was immaterial.
As of October 31, 1997, the Company had outstanding 783,158 stock purchase
warrants at conversion prices ranging from $1.50 to $3.25. Of these, 639,739
warrants will be automatically exercised and converted into 454,565 shares of
common stock if not exercised prior to the closing of this offering.
NOTE 9--STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS
STOCK OPTION PLANS
The Company has a stock incentive plan (the "1992 Stock Option Plan") that
reserves a total of 2,640,000 shares of common stock for issuance of stock
options to employees, officers and directors.
In September 1997, the Company's Board of Directors adopted, subject to
stockholder approval, the 1997 Equity Incentive Plan (the "1997 Plan"). The
number of shares of common stock reserved for issuance under the 1997 Plan is
equal to 1,000,000, plus the number of remaining shares available for grant
under the Company's 1992 Stock Option Plan at the effective date of the
offering. Beginning February 1, 1999 and each year thereafter, the number of
shares reserved for issuance will automatically increase by the lesser of
400,000 shares or 3.5% of the total number of shares of common stock then
outstanding.
The option price for stock options granted is determined by the Company's
Board of Directors on the date of grant. Canceled options are available for
future grant and unvested options issued to employees are canceled when their
employment with the Company terminates. Generally, options granted to employees
vest over a five-year period and expire ten years after the date of grant.
The Company records compensation related to stock options using the
intrinsic value method of APB No. 25. Compensation related to stock options
granted below fair market value through October 31, 1997 approximates $1.1
million. Such compensation is considered deferred compensation and amortized
over the vesting period of the related options.
The Company has adopted the disclosure-only provisions of SFAS No. 123. For
purposes of the pro forma disclosures below, the estimated fair value of the
options is amortized to expense over the options' vesting period. Had
compensation cost for the Company's stock plan been determined based on the
minimum value at the grant date for awards during fiscal years 1996, 1997 and
during the nine months ended October 31, 1997,
F-15
<PAGE>
INFORMATION ADVANTAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 9--STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS (CONTINUED)
consistent with the provisions of SFAS No. 123, the Company's net losses would
have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
JANUARY 31,
-------------------------- OCTOBER 31,
1996 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net loss--as reported............................. $ (3,789) $ (8,476) $ (5,956)
Net loss--pro forma............................... (3,830) (8,595) (6,357)
</TABLE>
The minimum value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in fiscal years 1996, 1997, and for the nine months
ended October 31, 1997, respectively; dividend yield of 0%; risk-free interest
rates of 6.7%, 6.4% and 6.3%; and expected lives of 8.5 years. Volatility
factors are not applicable to non-public companies.
A summary of the stock option activity is as follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
EXERCISE PRICE EXERCISE
OPTIONS PER SHARE PRICE
---------- ----------------- -----------
<S> <C> <C> <C>
Outstanding at January 31, 1994.................... 257,600 $0.875 - $1.125 $ 1.05
Granted............................................ 340,640 $1.125 $ 1.13
Exercised.......................................... (2,000) $0.875 - $1.125 $ 1.10
Canceled........................................... (26,600) $0.875 - $1.125 $ 1.13
----------
Outstanding at January 31, 1995.................... 569,640 $0.875 - $1.125 $ 1.10
Granted............................................ 767,633 $1.125 $ 1.13
Exercised.......................................... (3,600) $0.875 - $1.125 $ 1.03
Canceled........................................... (60,040) $0.875 - $1.125 $ 1.13
----------
Outstanding at January 31, 1996.................... 1,273,633 $0.875 - $1.125 $ 1.10
Granted............................................ 736,120 $1.125 $ 1.13
Exercised.......................................... (79,880) $0.875 - $1.125 $ 1.08
Canceled........................................... (153,220) $0.875 - $1.125 $ 1.13
----------
Outstanding at January 31, 1997.................... 1,776,653 $0.875 - $1.125 $ 1.13
Granted............................................ 719,900 $1.125 - $8.75 $ 2.51
Exercised.......................................... (187,296) $0.875 - $2.125 $ 1.16
Canceled........................................... (52,144) $1.125 - $7.50 $ 1.27
----------
Outstanding at October 31, 1997.................... 2,257,113 $0.875 - $8.75 $ 1.55
----------
----------
</TABLE>
Stock options exercisable at January 31, 1995, 1996 and 1997 and at October
31, 1997 were 112,120, 220,040 and 409,986, and 742,993, respectively. The
weighted-average fair value of options granted during fiscal years 1996 and 1997
during the nine months ended October 31, 1997 using the Black-Scholes
option-pricing model was $0.22, $0.46 and $2.27 per share, respectively.
F-16
<PAGE>
INFORMATION ADVANTAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 9--STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS (CONTINUED)
The following table summarizes information about fixed-price stock options
outstanding at October 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------- OPTIONS EXERCISABLE
WEIGHTED- ------------------------
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTURAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ------------------------------ ----------- --------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$0.875 - $2.125 2,004,213 8.1 $ 1.210 742,993 $ 1.125
$3.750 - $5.625 195,500 9.8 $ 4.000 -- --
$7.50 - $8.75 57,400 9.9 $ 7.750 -- --
----------- -----------
Totals 2,257,113 742,993
----------- -----------
----------- -----------
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
In September 1997, the Board of Directors adopted, subject to stockholder
approval, the Company's 1997 Employee Stock Purchase Plan (the "Purchase Plan").
Under the Purchase Plan, eligible employees may purchase on each purchase date,
as defined, shares of common stock at 85% of its fair market value, up to the
lesser of 500 shares or 15% of the employee's compensation. In addition, 200,000
shares of common stock have been reserved for issuance under the Purchase Plan.
NOTE 10--BENEFIT PLAN
The Company offers its employees a 401(k) savings plan. Eligible employees
may elect to contribute a portion of their salaries up to limits defined by the
Internal Revenue Code. The Company may, at its sole discretion, match up to 6%
of employee contributions. There have been no employer contributions to date.
The Company also offers employees of its subsidiaries in the United Kingdom and
Germany a defined contribution plan. The Company does not offer other
post-retirement or post-employment benefits.
NOTE 11--RELATED PARTY TRANSACTION
At January 31, and October 31, 1997, the Company has a receivable from an
officer in the amount of $70 and $76, respectively. The receivable bears
interest at 5.3%, is secured by 28,572 shares of Company common stock and is due
sixty days after demand by the Company.
NOTE 12--SEGMENT AND GEOGRAPHIC AREAS
The Company operates in one industry segment, the development and marketing
of business analysis software products for data warehouse applications and
related services. International operations include operations in the United
Kingdom and Germany by the Company's wholly-owned subsidiaries. The Company's
subsidiaries in the United Kingdom and Germany sell the Company's software
products and services in Europe.
F-17
<PAGE>
INFORMATION ADVANTAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 12--SEGMENT AND GEOGRAPHIC AREAS (CONTINUED)
The following table presents a summary of operating information and certain
balance sheet information by geographic region:
<TABLE>
<CAPTION>
NINE
FISCAL YEARS ENDED MONTHS
JANUARY 31, ENDED
------------------------------- OCTOBER 31,
1995 1996 1997 1997
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
Revenues:
Domestic operations............................ $ 2,872 $ 5,037 $ 10,629 $ 16,136
International operations....................... 945 605 1,117 1,365
--------- --------- --------- -----------
Consolidated..................................... $ 3,817 $ 5,642 $ 11,746 $ 17,501
--------- --------- --------- -----------
--------- --------- --------- -----------
Net income (loss):
Domestic operations............................ $ (4,404) $ (3,437) $ (7,495) $ (4,966)
International operations....................... 9 (352) (981) (990)
--------- --------- --------- -----------
Consolidated..................................... $ (4,395) $ (3,789) $ (8,476) $ (5,956)
--------- --------- --------- -----------
--------- --------- --------- -----------
Identifiable assets:
Domestic operations............................ $ 1,200 $ 3,809 $ 4,942 $ 11,275
International operations....................... 399 512 976 1,690
--------- --------- --------- -----------
Consolidated..................................... $ 1,599 $ 4,321 $ 5,918 $ 12,965
--------- --------- --------- -----------
--------- --------- --------- -----------
</TABLE>
NOTE 13--NON-CASH TRANSACTIONS
During 1995, 1996, 1997, and during the nine months ended October 31, 1996
and 1997, the Company acquired $124, $303, $486, $340, $288, respectively, of
fixed assets through capital leases.
During 1996, $2 million of notes payable--stockholders was converted to
Series B convertible redeemable preferred stock at $0.95 per share.
F-18
<PAGE>
[LOGO]
