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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FEBRUARY 20, 1998
Date of report (Date of earliest event reported)
INFORMATION ADVANTAGE, INC.
(Exact Name of Registrant as Specified in Charter)
DELAWARE 0-23475 41-1718445
(State or Other (Commission (IRS Employer
Jurisdiction File Number) Identification Number)
of Incorporation)
7905 GOLDEN TRIANGLE DRIVE, SUITE 190, EDEN PRAIRIE, MINNESOTA 55344-7227
(Address of Principal Executive Offices, including Zip Code)
(612) 833-3700
(Registrant's Telephone Number, including Area Code)
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ITEM 5 OTHER EVENTS
Information Advantage, Inc. (the "Company") is filing a Cautionary
Statement pursuant to the Private Securities Litigation Reform Act of 1995
(the "Litigation Reform Act") for use as a readily available written document
to which reference may be made in connection with forward-looking statements,
as defined in the Litigation Reform Act.
ITEM 7 FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(c) Exhibits
99.1 - Cautionary Statement
2
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized on February 20, 1998.
INFORMATION ADVANTAGE, INC.
By: /s/ Donald W. Anderson
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Donald W. Anderson
Chief Financial Officer and
Vice President
3
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
99.1 Cautionary Statement
4
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EXHIBIT 99.1
CAUTIONARY STATEMENT
INFORMATION ADVANTAGE, INC. (THE "COMPANY"), OR PERSONS ACTING ON BEHALF OF
THE COMPANY, OR OUTSIDE REVIEWERS RETAINED BY THE COMPANY MAKING STATEMENTS ON
BEHALF OF THE COMPANY, OR UNDERWRITERS OF THE COMPANY'S SECURITIES, FROM TIME TO
TIME, MAY MAKE, IN WRITING OR ORALLY, "FORWARD-LOOKING STATEMENTS" AS DEFINED
UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 (THE "LITIGATION
REFORM ACT"). THIS CAUTIONARY STATEMENT, WHEN USED IN CONJUNCTION WITH AN
IDENTIFIED FORWARD-LOOKING STATEMENT, IS FOR THE PURPOSE OF QUALIFYING FOR THE
"SAFE HARBOR" PROVISIONS OF THE LITIGATION REFORM ACT AND IS INTENDED TO BE A
READILY AVAILABLE WRITTEN DOCUMENT THAT CONTAINS FACTORS WHICH COULD CAUSE
RESULTS TO DIFFER MATERIALLY FROM SUCH FORWARD-LOOKING STATEMENTS. THESE
FACTORS ARE IN ADDITION TO ANY OTHER CAUTIONARY STATEMENTS, WRITTEN OR ORAL,
WHICH MAY BE MADE, OR REFERRED TO, IN CONNECTION WITH ANY SUCH FORWARD-LOOKING
STATEMENT.
THE FOLLOWING MATTERS, AMONG OTHERS, MAY HAVE A MATERIAL ADVERSE EFFECT ON
THE BUSINESS, FINANCIAL CONDITION, LIQUIDITY, RESULTS OF OPERATIONS OR
PROSPECTS, FINANCIAL OR OTHERWISE, OF THE COMPANY. REFERENCE TO THIS CAUTIONARY
STATEMENT IN THE CONTEXT OF A FORWARD-LOOKING STATEMENT OR STATEMENTS SHALL BE
DEEMED TO BE A STATEMENT THAT ANY ONE OR MORE OF THE FOLLOWING FACTORS MAY CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING STATEMENT
OR STATEMENTS.
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 1999. 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 on-line analytical processing
("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.
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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 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 its server-based line of software products,
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.
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
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to prevail generally or with respect to the Company's business, the price of
the Company's Common Stock would be materially adversely affected.
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
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.
REVENUE RECOGNITION
License agreements executed during any quarter may not meet the Company's
revenue recognition criteria; as a result, the Company may meet or exceed its
forecast of aggregate contracting activity, but not meet its forecast for
license revenues. In addition, Statement of Position ("SOP") 97-2, "Software
Revenue Recognition" was issued in October 1997 and addresses software revenue
recognition matters primarily from a conceptual level and does not include
specific implementation guidance. The SOP supersedes SOP 91-1 and is effective
for transactions entered into for fiscal years beginning after December 15,
1997. Based on its reading and interpretation of SOP 97-2, the Company believes
it is currently in compliance with the final standard. However, detailed
implementation guidelines for this standard have not yet been issued. Once
issued, such detailed implementation guidance could lead to unanticipated
changes in the Company's current revenue accounting practices, and such changes
could be material to the Company's revenues and earnings.
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;
<PAGE>
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 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
<PAGE>
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.
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.
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. Such products and
services 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
<PAGE>
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.
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.
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 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.
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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.
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.
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 1999. 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 expansion effectively could have a
material adverse effect on the Company's business, operating results and
financial condition.
<PAGE>
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.
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.
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 developers will increasingly be subject to infringement
claims as the number of
<PAGE>
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 two 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.
NO PRIOR TRADING MARKET FOR THE COMMON STOCK; POTENTIAL VOLATILITY OF
STOCK PRICE
Prior to the Company's initial public offering in December 1997, there was
no public market for the Common Stock. There can be no assurance that an active
trading market for the Common Stock will develop or be sustained.
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.
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CONTROL OF COMPANY BY EXECUTIVE OFFICERS, DIRECTORS AND FIVE PERCENT
STOCKHOLDERS
The executive officers, directors, five percent stockholders and their
affiliates in the aggregate beneficially own approximately two-thirds of the
outstanding Common Stock. As a result, these stockholders are 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.
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.
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of a substantial number of shares of Common Stock 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. As of
the date hereof, the Company has outstanding 15,508,097 shares of Common Stock.
Of these shares, 3,834,100 shares are 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 11,673,997 outstanding shares of Common Stock are "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 are eligible for immediate sale, (ii) 2,299 shares will be
eligible for sale in March 1998, (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 of the initial public
offering in June 1998 and (iv) 489,662 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 in June 1998, subject in certain cases to such shares
underlying outstanding options becoming eligible for sale 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 Company has registered 1,200,000 shares of
Common Stock, and intends to register approximately 2,364,984 shares of Common
Stock, subject to outstanding options or reserved for
<PAGE>
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.
SUBSTANTIAL DILUTION
The Company has issued options to acquire Common Stock at prices
significantly below the current market price of its Common Stock. To the extent
such outstanding options are exercised, stockholders will incur substantial
dilution.
UNCERTAINTY AS TO USE OF INITIAL PUBLIC OFFERING PROCEEDS
The primary purposes of the Company's initial public offering were 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 hereof, the Company has no specific plans to use the net proceeds from
the initial public offering other than for the repayment of indebtedness,
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 the initial public offering. Pending any such uses, the Company plans to
invest the net proceeds in investment-grade, interest-bearing securities.
