<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
__________________ to ______________________
Commission File Number: 0-26507
SHOWCASE CORPORATION
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1628214
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4115 Highway 52 North, Suite 300
Rochester, Minnesota 55901-0144
(Address of principal executive offices) (Zip Code)
(507) 288-5922
(Registrants's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. YES _____ NO X
---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
10,286,613 Common Shares as of August 6, 1999.
<PAGE>
Table of Contents
SHOWCASE CORPORATION AND SUBSIDIARIES
Report on Form 10-Q
for quarter ended
June 30, 1999
<TABLE>
<CAPTION>
Page
---
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations for the three months ended
June 30, 1999 and 1998................................................................ 2
Consolidated Balance Sheets as of June 30, 1999 and March 31, 1999.................... 3
Consolidated Statements of Cash Flows for the three months ended
June 30, 1999 and 1998................................................................ 4
Notes to Consolidated Financial Statements............................................ 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................. 7
Item 3. Quantitative and Qualitative Disclosure About Market Risks............................ 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................................... 13
Item 2. Charges in Securities and Use of Proceeds............................................. 13
Item 3. Defaults upon Senior Securities....................................................... 13
Item 4. Submission of Matters to a Vote of Security Holders................................... 14
Item 5. Other Information..................................................................... 14
Item 6. Exhibits and Reports on Form 8-K...................................................... 15
</TABLE>
-1-
<PAGE>
SHOWCASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
-------------------
Revenues: 1999 1998
--------- --------
<S> <C> <C>
License fees............................................... $ 6,065 $4,224
Maintenance and support.................................... 3,206 2,161
Professional service fees.................................. 1,234 913
--------- --------
Total revenues........................................... 10,505 7,298
--------- --------
Cost of revenues:
License fees............................................... 1,068 817
Maintenance and support.................................... 824 565
Professional service fees.................................. 1,032 613
--------- --------
Total cost of revenues................................... 2,924 1,995
--------- --------
Gross margin................................................ 7,581 5,303
--------- --------
Operating expense:
Sales and marketing........................................ 5,275 4,387
Product development........................................ 1,163 979
General and administrative................................. 941 736
--------- --------
Total operating expenses................................. 7,379 6,102
--------- --------
Operating income (loss)..................................... 202 (799)
--------- --------
Other income (expense), net:
Interest expenses.......................................... (7) (53)
Interest income............................................ 104 59
Other income (expense), net................................ 1 --
--------- --------
Total other income (expense), net........................ 98 6
--------- --------
Net income (loss) before income taxes....................... 300 (793)
Income taxes................................................ 115 40
--------- --------
Net income (loss)........................................... $ 185 $ (833)
========= ========
Other comprehensive income (loss):
Foreign currency translation adjustment.................... 34 16
Unrealized holding gain (loss) on securities............... 32 (123)
--------- --------
Comprehensive income (loss)................................. $ 251 $ (940)
========= ========
Net income (loss) per share:
Basic...................................................... $ 0.04 $(0.20)
========= ========
Diluted.................................................... $ 0.02 $(0.20)
========= ========
Weighted average shares outstanding used in
computing basic net income (loss) per share................ 4,542 4,190
Weighted average shares outstanding used in
computing diluted net income (loss) per share.............. 8,371 4,190
</TABLE>
See accompanying notes to consolidated financial statements
-2-
<PAGE>
SHOWCASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Assets June 30, 1999 March 31, 1999
------------- --------------
<S> <C> <C>
Current Assets:
Cash................................................................... $ 7,087 $ 8,900
Marketable securities.................................................. 171 139
Accounts receivable, net............................................... 7,349 7,070
Prepaid expenses and other current assets.............................. 1,228 1,059
Deferred income taxes.................................................. 550 550
------------- --------------
Total current assets................................................. 16,385 17,718
------------- --------------
Property and equipment, net............................................. 2,224 2,092
Goodwill, net of accumulated amortization............................... 101 116
------------- --------------
Total assets......................................................... $18,710 $19,926
============= ==============
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable....................................................... $ 1,102 $ 1,373
Accrued liabilities.................................................... 4,338 4,121
Current portion of long-term debt...................................... 5 5
Current portion of obligations under capital leases.................... 123 127
Income taxes payable................................................... -- 295
Deferred revenue....................................................... 10,533 11,646
------------- --------------
Total current liabilities............................................ 16,101 17,567
------------- --------------
Long-term debt, less current portion.................................... 2 2
Capital lease obligations, less current portion......................... 55 85
------------- --------------
Total liabilities.................................................... 16,158 17,654
------------- --------------
Stockholders' equity:
Series A convertible preferred stock; $.01 par value;.................. 5 5
473,757 shares authorized, issued, and outstanding,
total liquidation preference of $2,400
Series B convertible preferred stock; $.01 par value;.................. 9 9
1,777,500 shares authorized, 875,000 issued and outstanding,
total liquidation preference of $3,5000
Common stock, $.01 par value, 10,000,000 shares authorized,............ 45 45
4,527,387 and 4,502,867 shares issued and outstanding
Additional paid-in capital............................................. 6,612 6,452
Accumulated other comprehensive income:
Cumulative translation adjustment..................................... 81 47
Unrealized holding loss on securities................................. (149) (181)
Deferred compensation.................................................. (453) (322)
Accumulated deficit.................................................... (3,598) (3,783)
------------- --------------
Total stockholders' equity........................................... 2,552 2,272
------------- --------------
Total liabilities and stockholders' equity........................... $18,710 $19,926
============= ==============
</TABLE>
See accompanying notes to consolidated financial statements
-3-
<PAGE>
SHOWCASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
------------------
1999 1998
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss).................................................... $ 185 $ (833)
Adjustments to reconcile net income (loss)
to cash provided by (used in) operating activities:
Depreciation and amortization...................................... 197 205
Provision for returns and doubtful accounts, net of returns
and writeoffs.................................................... (90) 45
Deferred compensation amortization................................. 21 --
Changes in operating assets and liabilities, net of effect
of foreign exchange rate changes:
Accounts receivable............................................. (189) 1,571
Prepaid expenses................................................ (169) 61
Income taxes receivable......................................... -- (45)
Accounts payable................................................ (271) (328)
Accrued liabilities............................................. 217 29
Deferred revenue................................................ (1,113) 219
Income taxes payable............................................ (295) 40
------- ------
Net cash provided by (used in) operating activities......... (1,507) 964
------- ------
Cash flows from investing activities:
Purchase of property and equipment................................... (280) (248)
Proceeds from affiliates............................................. -- 12
------- ------
Net cash used in investing activities......................... (280) (236)
------- ------
Cash flows from financing activities:
Proceeds from exercise of stock options.............................. 8 95
Payments on long-term debt........................................... -- (94)
Payments of capitalized lease obligations............................ (34) (42)
------- ------
Net cash used in financing activities......................... (26) (41)
------- ------
Net increase (decrease) in cash....................................... (1,813) 687
Cash, beginning of year............................................... 8,900 5,404
------- ------
Cash, end of year..................................................... $ 7,087 $6,091
======= ======
Supplemental disclosure of cash flow information:
Cash paid during the three months for interest....................... $ 7 $ 53
======= ======
Cash paid during the three months for income taxes................... $ 549 $ 49
======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
-4-
<PAGE>
SHOWCASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Basis of Presentation
The unaudited interim consolidated financial statements include the
accounts of ShowCase Corporation and its wholly owned subsidiaries
(collectively, the "Company") and have been prepared by the Company in
accordance with generally accepted accounting principles, pursuant to the
rules and regulations of the Securities and Exchange Commission.
Accordingly, certain information and footnote disclosures normally included
in the financial statements have been omitted or condensed pursuant to such
rules and regulations. The information furnished reflects, in the opinion
of the management of the Company, all adjustments, consisting primarily of
recurring accruals, considered necessary for a fair presentation of the
financial position and the results of operations.
The Company adopted the provisions of Statement of Position ("SOP") No. 98-
1, Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use; SOP No. 98-5, Reporting on the Costs of Start-Up Activities,
and SOP No. 98-9, Modification of SOP 97-2, Software Revenue Recognition,
with Respect to Certain Transactions, effective April 1, 1999. The
adoption of these pronouncements did not have a material effect on the
Company's operating results.
(2) Net Income (Loss) per Share
Basic income (loss) per share represents net income (loss) divided by the
weighted average number of common shares outstanding during the period.
Diluted income (loss) per share represents net income (loss) divided by the
sum of the weighted average number of common shares outstanding plus shares
derived from other potentially dilutive securities. Potentially dilutive
securities include "in-the-money" fixed stock options and warrants and the
amount of weighted average common shares which would be added by the
conversion of outstanding convertible preferred stock. The number of
shares added for stock options and warrants is determined by the treasury
stock method, which assumes exercise of these options and warrants and the
use of any proceeds from such exercise to repurchase a portion of these
shares at the average market price for the period. When the results of
operations are a loss, other potentially dilutive securities are not
included in the calculation of loss per share.
For the three months ended June 30, 1998, basic loss per share is the same
as diluted loss per share because the effect of the inclusion of other
potentially dilutive securities in the calculation of diluted loss per
share was antidilutive.
The number of option shares excluded from the calculation of potentially
dilutive securities because either the exercise price exceeded the average
market price or their inclusion in a calculation of net loss per share
would have been antidilutive was 758,612 for the three months ended June
30, 1998. The effect of conversion of the Company's convertible preferred
stock was also excluded from the calculation of net loss per diluted share
because the resulting impact would also have been antidilutive for the
three months ended June 30, 1998. At June 30, 1998, the Series A and
Series B convertible preferred stock were convertible into 1,895,028 and
864,198 common shares, respectively.
(3) Deferred Compensation
During the three months ended June 30, 1999, the Company granted to
employees options to purchase 81,000 shares of common stock. The Company
recorded deferred compensation of approximately $153,000, representing the
difference between the deemed value of the common stock
-5-
<PAGE>
SHOWCASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
for accounting purposes and the option exercise price of such options on
the date of grant. The Company accounts for these stock options in
accordance with APB Opinion No. 25, Accounting for Stock Issued to
Employees, and will recognize the deferred compensation cost over the five
year vesting period of options granted.
(4) Initial Public Offering, Increase in Number of Shares of Common Stock
Authorized and Conversion of Preferred Stock
On June 29, 1999, the Company's registration statement for its initial
public offering of 3,000,000 shares of common stock at $9.00 per share was
declared effective by the Securities and Exchange Commission. The closing
of the sale of such shares occurred on July 6, 1999 at which time the
3,000,000 common shares were issued and proceeds, net of the underwriting
discount, of $25,110,000 were received.
On July 6, 1999, the Company increased the number of shares of authorized
common stock to 50,000,000. Also, on July 6, 1999, the outstanding shares
of the Company's Series A and Series B convertible preferred stock were
converted into 1,895,028 and 864,198 shares of common stock, respectively.
-6-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
All statements, trend analysis and other information contained in the
following discussion relative to markets for our products and trends in
revenues, gross margins and anticipated expense levels, as well as other
statements including words such as "anticipate," "believe," "plan," "estimate,"
"expect," "intend" and other similar expressions constitute forward-looking
statements. These forward-looking statements are subject to business and
economic risks and uncertainties, including but not limited to those described
in Exhibit 99.1 to this Quarterly Report on Form 10-Q (this "Report"), as well
as those discussed in our Registration Statement on Form S-1 (File No. 333-
77223) (the "Registration Statement"). Our actual results of operations may
differ materially from those contained in the forward-looking statements. All
forward-looking statements included in this Report are based on information
available to us on the date of this Report, and we assume no obligation to
update these forward-looking statements, or to update the reasons why actual
results could differ from those projected in these forward-looking statements.
Overview
We are the leading provider of fully integrated, end-to-end, business
intelligence solutions for IBM AS/400 customers. Our ShowCase STRATEGY(R)
product suite and related services are designed to enable organizations to
rapidly implement business intelligence solutions that create increased value
from their operational and customer data. The sophisticated data warehousing and
management capabilities of our product suite provides our clients with highly
scalable and tightly integrated solutions. Our products enable enterprise-wide
distribution of information and allow end-user access and analysis through
familiar applications and Internet browsers. We have eight years of experience
delivering business intelligence solutions. Our ShowCase STRATEGY product suite,
introduced in 1996, supports ad hoc information access, enterprise reporting and
analytics.
We were incorporated in 1988, and in 1991, introduced the first Windows-
based query tool for the IBM AS/400, ShowCase VISTA. During the next four years,
we continued to broaden our family of data access products, expand our
comprehensive service and support programs, grow our telesales and indirect
sales channels and invest in marketing and administrative functions. To support
the introduction of the ShowCase STRATEGY product suite in 1996, we created a
direct field sales force and increased our global distribution presence. Our
revenues increased to $10.5 million for the three months ended June 30, 1999
from $7.3 million for the three months ended June 30, 1998. Although our
revenues have increased significantly in recent periods, this growth may not
continue. We intend to continue to invest significant resources in the
development of our product suite, sales and marketing and general and
administrative functions.
Our revenues come from three principal sources: license fees, maintenance
and support and professional service fees. We adopted the provisions of
Statement of Position ("SOP") No. 97-2, Software Revenue Recognition, as amended
by SOP No. 98-4, Deferral of the Effective Date of Certain Provisions of SOP No.
97-2, effective April 1, 1998, and SOP No. 98-9, Modification of SOP No. 97-2,
Software Revenue Recognition, with Respect to Certain Transactions, effective
April 1, 1999. Under SOP No. 97-2, we recognize license revenue when the
software product has been delivered, if a signed contract exists, the fee is
fixed and determinable, collection of resulting receivables is probable and
product returns are reasonably estimable. License fee revenues that are
contingent upon sale to an end user by distributors and other distribution
partners are recognized upon receipt of a report of delivery to the end user.
Maintenance and support fees committed as part of new product license sales and
maintenance resulting from renewed maintenance contracts are deferred and
recognized ratably over the contract period. Professional service revenue is
recognized when services are performed.
-7-
<PAGE>
We sell our products through a direct sales force and through indirect
distribution channels. Direct sales are made by our telesales organization and
direct field sales force in North American and by wholly-owned subsidiaries in
Germany, France, the United Kingdom and Belgium, including its branch office in
the Netherlands. Our distribution partners include IBM, software application
vendors, resellers and distributors located in the United States, Italy,
Switzerland, Mexico, Japan, Australia, Singapore, Hong Kong, Thailand and South
Korea. Sales through indirect channels accounted for approximately 17.8% and
21.1% of license fee revenues for the three months ended June 30, 1999 and 1998,
respectively.
Revenues from clients outside North America represented 31.3% and 46.5% of
total revenue for the three months ended June 30, 1999 and 1998, respectively.
A majority of these sales was derived from European sales. We intend to
continue to expand our international operations and have committed, and will
continue to commit, significant management time and financial resources to
developing direct and indirect international sales channels.
Results of Operations For the Three Months Ended June 30, 1999 and 1998
The following table sets forth certain statement of operations data as a
percentage of total revenues for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
----------------------------
1999 1998
------------ -------------
<S> <C> <C>
As a Percentage of Total Revenues:
Revenues:
License fees............................ 57.7% 57.9%
Maintenance and support................. 30.5 29.6
Professional service fees............... 11.7 12.5
------------ -------------
Total revenues........................ 100.0 100.0
Cost of revenues:
License fees............................ 10.2 11.2
Maintenance and support................. 7.8 7.7
Professional service fees............... 9.8 8.4
------------ -------------
Total cost of revenues................ 27.8 27.3
------------ -------------
Gross margin............................. 72.2 72.7
Operating expenses:
Sales and marketing..................... 50.2 60.1
Product development..................... 11.1 13.4
General and administrative.............. 9.0 10.1
------------ -------------
Total operating expenses.............. 70.2 83.6
------------ -------------
Operating income (loss).................. 1.9 (10.9)
Other income (expense), net.............. 0.9 0.1
------------ -------------
Net income (loss) before income taxes.... 2.9 (10.9)
Income taxes............................. 1.1 0.5
------------ -------------
Net income (loss) 1.8% (11.4)%
============ =============
</TABLE>
-8-
<PAGE>
Revenues
Total revenues. Total revenues increased to $10.5 million for the three
months ended June 30, 1999 from $7.3 million for the three months ended June 30,
1998, representing an increase of 43.9%.
License fees. License fee revenues increased to $6.1 million for the three
months ended June 30, 1999 from $4.2 million for the three months ended June 30,
1998, representing an increase of 43.6%. License fee revenues as a percentage of
total revenues were 57.7% and 57.9% for the three months ended June 30, 1999 and
1998, respectively. This increase in license fee revenues is largely
attributable to an increase in the number of licenses sold by our expanded
direct field sales force.
Maintenance and support. Maintenance and support revenues increased to $3.2
million for the three months ended June 30, 1999 from $2.2 million for the three
months ended June 30, 1998, representing and increase of 48.4%. Maintenance and
support revenues as a percentage of total revenues were 30.5% and 29.6% for the
three months ended June 30, 1999 and 1998, respectively. This increase in
maintenance and support revenues was largely a result of the renewal of
maintenance and support contracts, as well as new maintenance and support
contracts associated with new product licenses.
Professional service fees. Professional service fee revenues increased to
$1.2 million for the three months ended June 30, 1999 from $0.9 million for the
three months ended June 30, 1998, representing an increase of 35.2%.
Professional service revenues as a percentage of total revenues were 11.7% and
12.5% for the three months ended June 30, 1999 and 1998, respectively. This
increase in professional service revenues was largely a result of the services
revenues associated with the sale of new product licenses.
Costs of Revenues
Cost of license fees. Cost of license fees consists primarily of the costs
of product manuals, media, packaging, shipping and royalties paid to third
parties. Cost of license fees increased to $1.1 million for the three months
ended June 30, 1999 from $0.8 million for the three months ended June 30, 1998,
representing 17.6% and 19.3% of total license fees for such periods,
respectively. The increase in cost of license fees in dollar amount was
primarily attributable to the increase in the percentage of revenues from our
Essbase/400 product, for which we pay royalties. Revenues from our Essbase/400
product represented 43.6% and 40.6% of our total license fee revenues for the
three months ended June 30, 1999 and 1998, respectively. We anticipate that cost
of license fees will increase in dollar amount in future periods as license fee
revenues increase. Cost of license fees as a percentage of total license fees
may increase if we enter into additional royalty arrangements or if sales of
Essbase/400 or other products which carry a royalty obligation increase as a
percentage of total license revenues.
Cost of maintenance and support. Cost of maintenance and support revenues
consists primarily of personnel costs associated with providing maintenance and
support services, particularly with respect to Essbase/400. Cost of maintenance
and support revenues increased to $0.8 million for the three months ended June
30, 1999 from $0.6 million for the three months ended June 30, 1998,
representing 25.7% and 26.1% of total maintenance and support revenues for such
periods, respectively. The increase in cost of maintenance and support revenues
in dollar amount was primarily due to the hiring of additional personnel. We
anticipate that cost of maintenance and support will increase in dollar amount
in future periods as maintenance and support revenues increase.
-9-
<PAGE>
Cost of professional service fees. Cost of professional service fees
consists primarily of the costs of providing training and consulting services.
Cost of professional service fees increased to $1.0 million for the three months
ended June 30, 1999 from $0.6 million for the three months ended June 30, 1998,
representing 83.6% and 67.1% of professional service fees for such periods,
respectively. This increase in cost of professional service fees was primarily
due to the expansion of our professional services staff. We anticipate that cost
of professional service fees will increase in dollar amount in future periods as
professional service fee revenues increase.
Operating Expenses
Sales and marketing. Sales and marketing expenses consist primarily of
salaries, benefits, bonuses, commissions and travel and promotional expenses.
Sales and marketing expenses increased to $5.3 million for the three months
ended June 30, 1999 from $4.4 million for the three months ended June 30, 1998,
representing 50.2% and 60.1% of total revenues for such periods, respectively.
The increase in sales and marketing expenses in dollar amount reflected the
hiring of additional sales and marketing personnel and expanded promotional
activities. We anticipate that sales and marketing expenses will increase in
dollar amount in future periods.
Product development. Product development expenses consist primarily of
development personnel compensation and related costs associated with the
development of new products, the enhancement of existing products, quality
assurance and testing. Product development expenses increased to $1.2 million
for the three months ended June 30, 1999 from $1.0 million for the three months
ended June 30, 1998, representing 11.1% and 13.4% of total revenues for such
periods, respectively. This increase in dollar amount was due to expenses
associated with the development of new products and the hiring of additional
personnel. Product development expenses decreased as a percentage of total
revenues primarily due to faster revenue growth. We anticipate that we will
continue to devote substantial resources to product development efforts and that
product development expenses will increase in dollar amount in future periods.
To date, all product development costs have been expensed as incurred.
General and administrative. General and administrative expenses consist
primarily of salaries of executive, financial, human resources and information
services personnel as well as outside professional fees. General and
administrative expenses increased to $0.9 million for the three months ended
June 30, 1999 from $0.7 million for the three months ended June 30, 1998,
representing 9.0% and 10.1% of total revenues for such periods, respectively.
This increase in dollar amount was primarily due to increased staffing and
related expenses necessary to manage and support the expansion of operations.
General and administrative expenses decreased as a percentage of total revenues
primarily due to faster revenue growth. We anticipate that general and
administrative expenses will increase in dollar amount in the future as a result
of increased personnel and infrastructure costs necessary to support the
expansion of operations as well as the increased expenses associated with being
a public company.
Other Income
Other income for the periods ended June 30, 1999 and 1998 consisted
primarily of interest income and interest expenses. Other income increased to
$98,000 for the three months ended June 30, 1999 from $6,000 for the three
months ended June 30, 1998.
-10-
<PAGE>
Provision (Benefit) for Income Taxes
Income taxes increased to $115,000 for the three months ended June 30, 1999
from $40,000 for the three months ended June 30, 1998, primarily due to higher
income from operations.
Liquidity and Capital Resources
Historically, we have funded operations primarily through cash provided by
operations, the sale of equity securities and bank borrowings. Operating
activities used cash of $1.5 million for the three months ended June 30, 1999
and provided cash of $1.0 million for the three months ended June 30, 1998. This
decrease in cash from operating activities was due primarily to a decrease in
deferred revenue offset by improved results of operations.
Investing activities used cash of $280,000 and $236,000 for the three
months ended June 30, 1999 and 1998, respectively. The principal use of cash in
investing activities was for capital expenditures related to the acquisition of
computer equipment and furniture required to support the expansion of our
operations.
Financing activities used cash of $26,000 and $41,000 in the three months
ended June 30, 1999 and 1998, respectively. For the three months ended June 30,
1999, cash used by financing activities consisted primarily of payments on
capitalized lease obligations. For the three months ended June 30, 1998, cash
used by financing activities consisted primarily of long-term debt repayment,
payments under capitalized lease obligations and the receipt of proceeds from
the exercise of stock options.
Our sources of liquidity at June 30, 1999 consisted principally of cash and
marketable securities of $7.3 million. We believe that cash generated from
operations, existing cash and marketable securities, and proceeds, net of the
underwriting discount, of $25.1 million received on July 6, 1999 from our
initial public offering (the "IPO") will be sufficient to fund operations for at
least the next twelve months.
Year 2000
Many currently installed computer systems and software products store dates
using two digits of the calendar year. These date code fields will need to
accept four-digit entries to distinguish 21st century dates from 20th century
dates. This problem could result in system failures or miscalculations causing
disruptions of business operations, including, among other things, a temporary
inability to process transactions, send invoices or engage in other similar
business activities. As a result, many companies' computer systems and software
will need to be upgraded or replaced in order to comply with Year 2000
requirements. The potential global impact of the Year 2000 problem is not known.
If Year 2000 problems are not corrected in a timely manner, they could affect us
and the U.S. and world economies generally.
Even though our current products are Year 2000 compliant, we may lose
potential sales because companies may be diverting resources to assess and fix
their internal systems that may not be Year 2000 compliant.
We have formed a project team to address internal Year 2000 issues. Our
internal financial, manufacturing and other computer systems are being reviewed
to assess and remediate Year 2000 problems. Our assessment of internal systems
includes our information technology, or IT, systems as well as other systems
which include embedded technology in equipment containing microprocessors or
other similar circuitry. Our Year 2000 compliance program includes the following
phases:
-11-
<PAGE>
. identifying systems that need to be modified or replaced;
. carrying out remediation work to modify existing systems or convert to
new systems; and
. conducting validation testing of systems and applications to ensure
compliance.
The amount of remediation work required to address Year 2000 problems is
not expected to be extensive. We have replaced certain of our operational
systems and most of our personal computers in the last several years. We believe
that new equipment and software, including new accounting software to be
installed in 1999, substantially addresses Year 2000 issues. However, we will be
required to modify some of our existing hardware and software in order for our
computer systems to function properly in the year 2000 and thereafter. We
estimate that we will complete our Year 2000 compliance program for all of our
significant internal systems no later than September 30, 1999, at an estimated
cost of $65,000, of which amount we estimate that we have spent approximately
$25,000 to date. There can be no assurance that the estimates are correct or
that actual costs will not be materially greater than anticipated.
In addition, by September 30, 1999, we plan to survey our major suppliers
and evaluate their plans to address potential Year 2000 issues. We will rely
primarily on our suppliers' commitments to accomplish this task although we have
no contractual commitments from these suppliers regarding Year 2000 issues. It
is impossible to fully assess the potential consequences in the event
interruptions from suppliers occur or in the event that there are disruptions in
infrastructure areas as utilities, communications, transportation, banking or
government. Although we have not surveyed our current clients regarding Year
2000 compliance, we are unaware of any reason why a Year 2000 problem
experienced by these clients would have a significant adverse effect on our
operating results.
Based on assessments to date, we believe we will not experience any
material disruptions as a result of Year 2000 problems in internal processes,
information processing, interfaces with major clients or with processing orders
and billing. However, if suppliers or other third-party providers, such as those
providing electricity, water or telephone services, experience difficulties in
providing products or services to us because of their Year 2000 problems, we
believe that the most reasonably likely worst case scenario would be that our
ability to timely ship our products to our clients would be disrupted. This
could result in the loss of current or potential clients which could seriously
harm our business and operating results. In addition, if our IT systems are not
Year 2000 compliant, we would have to devote significant resources to correct
such problems, and we may be unable to process client orders, which could lead
to shipment delays. We have not yet developed a contingency plan to address
these potential issues, but we will assess the need to develop such a plan based
on the outcome of our Year 2000 review. Assuming no major disruption in service
from suppliers or other third-parties, we believe that we will be able to manage
our total Year 2000 transition without any substantial harm to our business and
operating results.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 established methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. SFAS No. 133 will be
effective for us in April 2001. We are currently reviewing the potential impact
of this accounting standard.
-12-
<PAGE>
Item 3. Quantitative and Qualitative Disclosure About Market Risks
There have been no material changes in our market risk during the three
months ended June 30, 1999 from that set forth on page 25 of the Registration
Statement under the heading "Quantitative and Qualitative Disclosure About
Market Risks."
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are not a party to any material legal proceedings.
Item 2. Changes in Securities and Use of Proceeds
We issued and sold during the three months ended June 30, 1999 an aggregate
of 24,520 shares of our common stock to employees upon exercise of outstanding
stock options. The net aggregate consideration received for such shares was
approximately $8,000. The sale and issuance of these securities was deemed to be
exempt from registration under the Securities Act of 1933, as amended (the
"Securities Act"), in reliance on Section 4(2) of the Securities Act as
transactions by an issuer not involving a public offering, where the purchasers
represented their intention to acquire securities for investment purposes only
and not with a view to or for sale in connection with any distribution thereof,
and received or had access to adequate information about us, or Rule 701
promulgated thereunder in that they were offered and sold either pursuant to
written compensatory benefit plans or pursuant to a written contract relating to
employment.
Our registration statement, filed on Form S-1 under the Securities Act
(File No. 333-77223), for the IPO became effective June 29, 1999. The closing of
the sale of shares pursuant to the IPO occurred on July 6, 1999, at which time
we issued 3,000,000 shares of our common stock for an aggregate offering price
of $27.0 million. The managing underwriters for the IPO were Merrill Lynch,
Pierce, Fenner & Smith, U.S. Bancorp Piper Jaffray, Dain Rauscher Wessels and
FAC/Equities. Concurrent with the IPO, our outstanding shares of convertible
preferred stock were automatically converted into shares of common stock.
We received net proceeds from the IPO of approximately $24.4 million after
deducting total estimated expenses of approximately $2.6 million, which included
the underwriting discount of approximately $1.9 million and other estimated
offering expenses of approximately $700,000. We expect to use the net offering
proceeds for general corporate purposes, including the expansion of our direct
sales force, product development and working capital. A portion of the proceeds
may also be used to acquire businesses, products or technologies that are
complementary to ours. There are no current agreements with respect to any
material acquisitions.
Item 3. Defaults Upon Senior Securities
None.
-13-
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
On April 21, 1999, we submitted the following matters to our shareholders
at a special meeting:
1. The shareholders approved and adopted an amendment to our Articles of
Incorporation filed prior to the IPO to lower the minimum price per
share requirement for mandatory conversion of our Series A convertible
preferred stock, with the following vote:
FOR: 7,033,614 AGAINST: 7,500 ABSTENTIONS: 1,200
2. The shareholders approved and adopted an amendment to our Articles of
Incorporation filed prior to the IPO to lower the minimum price per
share requirement for mandatory conversion of our Series B convertible
preferred stock, with the following vote:
FOR: 7,032,954 AGAINST: 7,500 ABSTENTIONS: 1,860
3. The shareholders approved and adopted an amendment and restatement of
our Articles of Incorporation filed following the closing of the IPO,
which, among other things, increased the number of authorized shares
of our capital stock, with the following vote:
FOR: 7,025,514 AGAINST: 14,940 ABSTENTIONS: 1,860
4. The shareholders approved an amendment and restatement of our Bylaws,
which, among other things, created a staggered board of directors,
with the following vote:
FOR: 7,024,104 AGAINST: 14,940 ABSTENTIONS: 3,270
5. The shareholders approved our 1999 Stock Incentive Plan, with the
following vote:
FOR: 7,039,614 AGAINST: 0 ABSTENTIONS: 2,700
6. The shareholders approved our 1999 Employee Stock Purchase Plan, with
the following vote:
FOR: 7,032,614 AGAINST: 7,500 ABSTENTIONS: 2,200
7. The shareholders approved the classification of our directors, with
the following vote:
FOR: 7,024,104 AGAINST: 7,500 ABSTENTIONS: 10,710
Item 5. Other Information
None.
-14-
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27.1 -- Financial Data Schedule
99.1 -- Factors That May Affect Future Operating Results
(b) Reports on Form 8-K:
The Company did not file any Current Report on Form 8-K during the
quarter ended June 30, 1999.
-15-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SHOWCASE CORPORATION
Date: August 13, 1999 By: /s/ Craig W. Allen
----------------------------------
Craig W. Allen
Chief Financial Officer
(Duly authorized officer and
principal financial and accounting
officer)
<PAGE>
EXHIBIT INDEX
-------------
Page
----
27.1 Financial Data Schedule
99.1 Factors That May Affect Future Operating Results
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> MAR-31-1999 MAR-31-2000
<PERIOD-START> APR-01-1998 APR-01-1999
<PERIOD-END> JUN-30-1998 JUN-30-1999
<CASH> 0 7,087
<SECURITIES> 0 171
<RECEIVABLES> 0 8,064
<ALLOWANCES> 0 715
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 16,385
<PP&E> 0 4,314
<DEPRECIATION> 0 2,090
<TOTAL-ASSETS> 0 18,710
<CURRENT-LIABILITIES> 0 16,101
<BONDS> 0 57
0 0
0 14
<COMMON> 0 45
<OTHER-SE> 0 2,493
<TOTAL-LIABILITY-AND-EQUITY> 0 18,710
<SALES> 7,298 10,505
<TOTAL-REVENUES> 7,298 10,505
<CGS> 0 0
<TOTAL-COSTS> 1,995 2,924
<OTHER-EXPENSES> 6,102 7,379
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 53 7
<INCOME-PRETAX> (793) 300
<INCOME-TAX> 40 115
<INCOME-CONTINUING> (833) 185
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (833) 185
<EPS-BASIC> (.20) .04
<EPS-DILUTED> (.20) .02
</TABLE>
<PAGE>
EXHIBIT 99.1
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
From time to time, we, through our management, may make forward-looking
statements reflecting our current views with respect to future events and
financial performance. These forward-looking statements, which may be in
reports filed under the Securities Exchange Act of 1934, as amended, in press
releases and in other documents and materials as well as in written or oral
statements made by or on behalf of ShowCase, are subject to certain risks and
uncertainties, including those discussed below which could cause actual results
to differ materially from historical and anticipated results. The words or
phrases "will likely result," "are expected to," "will continue," "estimate,"
"project," "believe," "expect," "anticipate," "forecast," "intend," "plan" and
similar expressions are intended to identify forward-looking statements within
the meaning of Section 21E of the Exchange Act and Section 27A of the Securities
Act of 1933, as amended, as enacted by the Private Securities Litigation Reform
Act of 1995.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date these statements are made. In
addition, we wish to advise readers that the factors listed below, as well as
other factors could affect our financial or other performance and could cause
our actual results for future periods to differ materially from any opinions or
statements expressed with respect to future periods or events in any current
statement. This discussion of factors is not intended to be exhaustive, but
rather to highlight important risk factors that impact results. General economic
conditions and many other contingencies that may cause our actual results to
differ from those currently anticipated are not separately discussed. We
undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
We have a history of losses and we may not be able to achieve profitability
We incurred net losses from operations of approximately $3.6 million for
the fiscal year ended March 31, 1998 and $559,000 for the fiscal year ended
March 31, 1999. We have also incurred net losses in each quarter beginning with
the quarter ended June 30, 1997 through the quarter ended September 30, 1998.
We expect to continue to incur significant sales and marketing, product
development and general and administrative expenses. In particular, we intend
to substantially increase our direct field sales force, and accordingly increase
our sales and marketing expenses. As a result, we may experience losses and
negative cash flows. If we do achieve profitability, we may not sustain or
increase profitability on a quarterly or annual basis in the future.
Our future operating results may not follow past trends due to many factors
The relatively recent introduction of a substantial portion of our current
product suite and our history of losses make prediction of future results
difficult. In the past, our revenues and operating results have varied
significantly, and we expect these fluctuations to continue. Although our
revenues have grown significantly in recent periods, you should not rely on past
performance as any indication of future growth rates or operating results.
Future operating results will depend on many factors, including:
-1-
<PAGE>
. demand for the IBM AS/400 platform;
. growth of the market for business intelligence solutions;
. demand for and acceptance of our products, product enhancements and
services;
. maintenance and development of our strategic relationships with
application vendors, resellers and distributors;
. the introduction, timing and competitive pricing of products and
services by us and our competitors;
. expansion and rate of success of our direct sales force and indirect
distribution channels both domestically and internationally; and
. attraction and retention of key personnel.
Our quarterly operating results fluctuate significantly and are difficult to
predict
Quarterly operating results. Our operating results have varied and in the
future are likely to vary significantly from quarter to quarter for a number of
reasons, including:
. the size and timing of significant orders;
. the length of our sales cycles and the sales cycles of our distribution
partners;
. the mix of products and services that we sell and the mix between direct
and indirect sales of our products;
. our ability to control costs;
. our ability to introduce new products and enhancements in a timely
manner;
. the rate of success of our international expansion and the effect of
foreign currency exchange rate fluctuations;
. the discovery of software defects; and
. general economic conditions as well as those specific to our customers
and markets.
Revenues. We cannot predict our quarterly revenues with any significant
degree of accuracy for several reasons. We have historically operated with a
low software order backlog because we generally ship our software products
shortly after we receive orders. Accordingly, our product license revenues for
any quarter depend significantly on orders booked and shipped during that
quarter. In recent periods, we have experienced an increase in the average size
of our licenses, and we expect this trend to continue. Moreover, we often
recognize a substantial portion of our quarterly product license revenues in the
last few weeks of a quarter. As a result, delays in booking customer orders can
adversely affect our reported revenues for a particular quarter. Finally, a
significant percentage of our sales are through indirect channels that are less
predictable than sales through our direct sales force.
-2-
<PAGE>
We have often realized a greater percentage of our license revenue and
operating income in our third fiscal quarter than in other quarters due to
client purchasing patterns. In addition, due to seasonal factors, our sales
often tend to slow during the summer months. We expect these trends to
continue.
Product license revenues also vary because the market for our products is
evolving rapidly and because sales cycles, which may last many months, vary
widely from client to client. Sales cycles are affected by many factors,
including:
. our clients' budgetary constraints;
. the timing of our clients' budget cycles;
. our clients' decisions as to whether, and on what scale, to adopt
business intelligence solutions;
. our clients' concerns about the introduction of new products by us or
our competitors; and
. potential downturns in the economy, which may reduce demand for our
products.
Maintenance and support fees depend largely on revenues from our existing
clients and vary with their maintenance and support needs. Professional service
revenues are often unpredictable because they depend in part on the scope of the
services we provide and whether our customers utilize those services.
Expenses. Because we plan to expand our business, we anticipate
substantial increases in operating costs and expenses, including administration,
consulting and training, maintenance and technical support, product development
and sales and marketing expenses. In general, we base our operating expense
budgets on anticipated revenue trends, and we may not be able to reduce these
expenses in the short term. Because our expenses are relatively fixed in the
near term, any shortfall from anticipated revenues or any delay in recognition
of revenues could result in significant variations in quarterly operating
results.
For the foregoing reasons, we believe that quarter-to-quarter comparisons
of our operating results are not a good indication of our future performance.
It is likely that in one or more future quarters, our operating results may not
meet the expectations of analysts and investors. In this event, the price of
our common stock may fall.
The growth of our business depends on the growth of the market for business
intelligence software
All of our revenues to date have been attributable to the sale of business
intelligence software and related maintenance, support, consulting and
professional services. Business intelligence software enables organizations to
transform data from disparate sources into accessible, understandable and useful
information. We expect such software and services to continue to account for
substantially all of our revenues for the foreseeable future. Although demand
for business intelligence software has grown in recent years, we cannot assure
that the market will continue to grow or that, even if the
-3-
<PAGE>
market does grow, businesses will adopt our products. If such growth does not
materialize, our business and operating results would be seriously harmed.
We believe that future growth in the market for business intelligence
software will depend in large part on the growth of e-business--business-to-
business, business-to-employee and business-to-customer communications and
transactions over the Internet, corporate intranets and extranets. E-business
has only recently emerged, and may not continue to grow. Continued grow in e-
business depends on a number of factors, including the Internet's ability to
efficiently handle increased activity and to operate as a fast, reliable and
secure network. Critical issues concerning the commercial use of the Internet,
including data corruption, security, bandwidth availability and quality of
service, remain and may negatively affect the growth of e-business, and
accordingly, the demand for business intelligence software.
If the current levels of use of the IBM AS/400 and IBM's support of the AS/400
do not continue, we may not be able to increase our sales/400
The server components of our products currently operate only on the IBM
AS/400. To date, virtually all of our revenues have been derived from the
AS/400 customer base. Therefore, our ability to increase sales of our products
will depend on the continued use of the AS/400 and the continued support of the
AS/400 by IBM. Instead of using the AS/400, many computer users have
implemented client/server computer systems based on the UNIX or Windows NT
platforms. The current levels of use by AS/400 customers and support of the
AS/400 by IBM may not continue and the use of the AS/400 may not increase in the
future. To develop products that operate on platforms other than the AS/400
would require us to commit a substantial investment of resources, and we may not
successfully introduce these products on a timely or cost-effective basis or at
all.
We may lose existing clients or be unable to attract new clients if we do not
develop new products and enhance our current products
We compete in markets where technology changes rapidly, competitors make
frequent new product introductions and enhancements, products have uncertain
life cycles and customer demands change unexpectedly. Our future success
depends on our ability to satisfy diverse and evolving customer requirements and
achieve market acceptance. It will also depend on our ability to improve and
expand our product line to keep pace with our competitors' product introductions
and technological developments. We cannot be certain that we will be successful
in developing and marketing product enhancements or new products on a timely or
cost-effective basis, or that these products, if developed, will achieve market
acceptance.
As a result of the complexities of business intelligence software, major
new products and product enhancements can require long development and testings
periods. In addition, clients may delay their purchasing decisions in
anticipation of the general availability of new or enhanced versions of our
products and services. We have experienced delays in releasing new products and
product enhancements and may experience similar delays in the future. Delays or
problems in releasing our new products, or significant problems in the
installation or implementation of our products, may cause clients to delay or
cancel purchases or to purchase products from our competitors, which would
seriously harm our business and operating results.
-4-
<PAGE>
If our relationships with distribution partners are not successful and if we
cannot recruit additional distribution partners we may not be able to expand our
sales
In addition to our direct sales force, we rely on distribution partners
including application vendors, resellers and distributors to license and support
our products in the United States and internationally. Our ability to expand
the sales of our products and our future success will depend in part upon
recruiting distribution partners and maintaining successful relationships with
these partners. Our distribution partners may offer products of several
different companies, including, in some cases, products that compete with our
products. In addition, in the future, our distribution partners may develop
products that compete with our products. Our existing and potential
distribution partners may be influenced to scale back or end their relationships
with us by our competitors who may have significantly greater resources and
market clout than we do. These distribution partners may not devote adequate
resources to selling our products. If we are unable to retain our existing
distribution partners or enter into additional relationships, we may have to
devote substantially more resources to the distribution, sale and marketing of
our products and services.
Sales through distribution partners typically are at lower margins for us
than those through direct sales. Therefore, if we are successful in increasing
the amount of sales through our distribution partners our operating margins
could decrease.
Our relationships with Hyperion Solutions Corporation and IBM are important to
our revenue, which would be harmed by a deterioration in these relationships
Maintaining our strategic relationships with Hyperion Solutions Corporation
and IBM is important to our continued success, and a deterioration in or
termination of these relationships could seriously harm our business and
operating results. We have a contractual relationship with Hyperion Solutions
that grants us the exclusive right to distribute its analytical online
processing product, Essbase, as ported by us to the AS/400, subject to limited
distribution rights retained by Hyperion Solutions. Hyperion Solutions has
retained the right, upon twelve months notice, to terminate the exclusivity of
our distribution rights. Furthermore, we must pay Hyperion Solutions minimum
royalty payments, which increase over the term of our license agreement, to
maintain our distribution rights to Essbase/400. The loss of our right to
distribute Essbase/400 would seriously harm our business and operating results.
Finally, our Analyzer and Analyzer for the Web products are based on technology
licensed from Hyperion Solutions under a non-exclusive 1996 license agreement
that expires in January 2001. In order to continue to offer products with the
capabilities provided by our Analyzer and Analyzer for the Web products after
January 2001, we would need to develop the necessary technology internally,
extend or replace our license agreement with Hyperion Solutions or license
technology from a third party. If we are unable to do so, the capabilities of
our product suite would be significantly reduced, which would seriously harm our
business and operating results.
In December 1998, we entered into a new agreement with IBM, which has been
a reseller of some of our products for several years. Under this new agreement,
our products are marketed and sold as IBM products by IBM's software data
management group sales force. This agreement has an initial term of seven
years, and expands the scope of our reseller relationship with IBM. Also, we
have engaged in joint marketing campaigns and research and development projects
with IBM since our inception. We believe our relationship with IBM has been a
significant factor in our success to date, and any deterioration or termination
of this relationship would seriously harm our business and operating results.
-5-
<PAGE>
We need to increase the size of our direct sales force, which has a limited
operating history, to grow our sales
We intend to increase sales of our products by growing our direct sales
force. Because it has only existed since September 1996, our direct field sales
force has a limited operating history and may be unsuccessful in implementing
our strategy of focusing sales efforts on potential clients that will deploy our
product suite on a large scale. Typically, our salespeople have taken
approximately six months from their respective hiring dates to become productive
selling our products. Furthermore, we believe that there is significant
competition for direct sales personnel with the advanced sales skills and
technical knowledge we need. Our inability to hire competent sales personnel,
or our failure to retain them, would seriously harm our business and operating
results.
Our markets are highly competitive which may lead to lower prices, reduced gross
margins and loss of market share
The markets for our products are intensely competitive and subject to
rapidly changing technology. We compete primarily against providers of decision
support software and data warehousing and data mart software. Our competitors
providing business intelligence solutions for AS/400 customers include Silvon
and Infomanager. We also compete with vendors that provide business
intelligence products implemented on Unix or Windows NT platforms and then
connected to the AS/400. These vendors include Brio Technology, Business
Objects, Cognos, Hyperion Solutions, Information Advantage, MicroStrategy,
Microsoft, Oracle, PLATINUM Technology, which has been acquired by Computer
Associates, Sagent Technology and SAS Institute. In addition, enterprise
resource planning software vendors including Baan Company, PeopleSoft and SAP
are beginning to offer decision support and analytical modules primarily to
support the analysis of data from its own operational systems. One or more of
these companies may expand their technologies to support greater business
intelligence functionality. Finally, in the future, IBM may expand the
functionality of the operating system for the AS/400, or of its database
products, to provide some of the functions provided by our products.
Many of our competitors have longer operating histories, significantly
greater financial, technical, marketing or other resources and greater name
recognition than we do. As a result, they may be able to respond more quickly
to new or emerging technologies and changes in customer requirements. Increased
competition may harm our ability to sell additional software and maintenance and
support renewals on terms favorable to us and lead to price cuts, reduced gross
margins and loss of market share, which may seriously harm our business and
operating results.
Our competitors may make strategic acquisitions or establish cooperative
relationships among themselves or other parties that may increase their ability
to meet the needs of our current and potential clients. The business
intelligence software industry has recently experienced consolidation and may
industry analysts expect this trend to continue. This consolidation may provide
our competitors with expanded sales, distribution and marketing capabilities and
broader product offerings. In addition, our current or future distribution
partners may establish cooperative relationships with our competitors, which may
limit our ability to sell our products through various distribution channels.
-6-
<PAGE>
Our lengthy sales cycles can result in uncertainty and delays with regard to our
product licenses and expected revenues
Our clients often take an extended time evaluating our products before
licensing them. The period of time between initial client contact and a
purchase order may span from one month to over twelve months. During this
period, clients may decide not to purchase or may scale down their orders of our
products for various reasons, including:
. reductions in demand for business intelligence solutions;
. new products introduced or announced by competitors;
. price competition;
. decisions to use hardware platforms other than the AS/400 for their
business intelligence solutions;
. changes in our clients' budgets and purchasing priorities; and
. diversion of clients' resources and management's attention to other
information technology issues, including Year 2000 compliance issues.
In addition, we often must provide a significant level of education to our
prospective clients regarding the use and benefit of our products, which may
cause additional delays during the evaluation and acceptance process. These and
other factors make it difficult for us to forecast the timing and recognition of
revenues from sales of our products and services. In recent periods, we have
experienced an increase in the average size of our licenses, and we expect this
trend to continue. This focus on larger licenses will lengthen our average
sales cycle.
We need to expand our management systems and controls to support our anticipated
growth
Our operations are growing rapidly, and we expect this expansion to
continue as we execute our business strategy. Our total number of employees
grew from 125 on March 31, 1996 to 240 on March 31, 1999, and we anticipate
further increases in the number of employees. Sustaining our growth has placed
significant demands on management and our administrative, operational, personnel
and financial resources.
We may not be able to successfully manage our growth which could lead to
customer dissatisfaction. Therefore, the inability to sustain or manage our
growth could seriously harm our business and operating results.
Difficulties presented by international economic, political, legal, accounting
and business factors could negatively affect our business in international
markets
Sales to clients outside North America represent a significant portion of
our revenues. We currently have wholly-owned subsidiaries in Belgium, Germany,
France and the United Kingdom. We plan to expand our existing international
operations and enter into additional international markets, which will require
significant management attention and financial resources. In order to expand
our
-7-
<PAGE>
international operations successfully, we will have to hire additional personnel
and recruit additional international resellers and distributors. Our failure to
do so in a timely manner may limit the growth of our international operations.
We may not be able to maintain or increase international market demand for our
products. In addition, our products must be localized--customized to meet user
needs--in order to be sold in particular foreign countries.
Our international operations also are subject to other inherent risks,
including:
. the impact of recessions in economies outside the United States;
. greater difficulty in collecting accounts receivable and longer
collection periods;
. unexpected changes in regulatory requirements, tariffs or other trade
barriers;
. difficulties and costs in staffing and managing foreign operations;
. weaker intellectual property right protection in some countries;
. potentially adverse tax consequences;
. political and economic instability;
. costs of localizing products for foreign countries;
. the effect of foreign currency exchange rate fluctuations; and
. the burden of complying with a wide variety of foreign laws.
Any of these risks could seriously harm our future international sales and
therefore our business.
Our international revenues and expenses are subject to fluctuations in foreign
currency exchange rates may lead to reduced operating margins
Our international revenues and expenses are denominated in foreign
currencies. The functional currency of each of our foreign subsidiaries is its
local currency. We currently do not engage in foreign exchange hedging
activities. Therefore, our international revenues and expenses currently are
subject to foreign currency fluctuations. Our foreign currency translation gains
and losses have so far been immaterial. However, future fluctuations in
exchange rates between the U.S. dollar and foreign currencies may seriously harm
our business and operating results, particularly our operating margins.
We are currently unable to predict the possible consequences of euro conversion
on our business and operating results
On January 1, 1999, eleven of the fifteen member countries of the European
Union set fixed conversion rates between their existing sovereign currencies and
the euro, the only currency that will be used in the European Union countries
starting July 1, 2002, and adopted the euro as their legal
-8-
<PAGE>
currency. Currently, we are assessing the impact of these events on our company.
In addition to tax and accounting issues, we are considering:
. the technical challenges of adapting our systems to accommodate euro-
denominated transactions;
. the impact on currency exchange costs and currency exchange rate
risk; and
. the impact on existing contracts.
At this early stage, we cannot yet predict the consequences of euro
conversion on our business and operating results.
Our executive officers and key personnel are critical to our business and these
officers and key personnel may not remain with us in the future
Our future success depends on our ability to hire, train, assimilate and
retain highly qualified employees. Competition for these individuals is
intense, and we may not be able to attract, assimilate or retain additional
highly qualified personnel in the future. Because our executive offices are
located in Rochester, Minnesota, with a population of approximately 80,000, we
must frequently recruit qualified employees from outside the vicinity of our
headquarters, which may put us at a competitive disadvantage.
Our success is highly dependent upon the continued service and skills of
key management, technical, sales and marketing personnel, none of whom, except
Patrick Dauga and Kenneth H. Holec, are bound by formal employment agreements.
If we lose the services of any of these key personnel, it may have a negative
impact on our business. Mr. Holec's employment agreement is a year-to-year
agreement which either party may elect not to renew by giving the other party
notice at least 30 days before the termination of any one-year term. Mr. Dauga
may terminate his employment agreement at any time by giving us notice at least
three months before this termiation. We do not maintain life insurance policies
covering any of our employees.
We may face increased competition if we are unable to protect our intellectual
property rights, and we may be subject to intellectual property infringement
claims
Our success and ability to compete depend substantially upon our internally
developed technology. We attempt to protect our software, documentation and
other written materials primarily through a combination of trade secret,
trademark and copyright laws, confidentiality procedures and contractual
provisions, which afford only limited protection. We have one patent issued and
one patent application pending in the United States with respect to aspects of
our software. The pending patent application may not be issued, or, if issued,
it and our previously issued patent may not survive a legal challenge to their
validity or provide us significant protection.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or otherwise obtain and use our
products and technology. Policing unauthorized use of our products is
difficult, particularly in foreign countries where the laws may not protect our
proprietary rights as fully as in the United States. Our means of protecting
our intellectual property rights may not be adequate or our competitors may
independently develop similar technology.
-9-
<PAGE>
We anticipate that software product developers will increasingly be subject
to infringement claims as the number of products and competitors in our industry
segment grows and the functionality of products in different industry segments
overlaps. As a result, we may become involved in these claims from time to
time. Any of these claims, with or without merit, could result in costly
litigation, divert our management's time, attention and resources, delay our
product shipments, or require us to enter into royalty or licensing agreements.
A third party may not be willing to enter into a royalty or licensing agreement
on acceptable terms, or at all. If a claim of product infringement against us
is successful and we fail to obtain a license or to develop or license non-
infringing technology, our business and operating results could be seriously
harmed.
If we discover software defects, we may have product-related liabilities and
marketing difficulties which may lead to a loss of revenue or delay in market
acceptance for our products
Our software products are complex and may contain errors, defects or
failures, especially when first introduced or when new versions are released.
In the past we have discovered software errors in some of our products after
their introduction. Despite extensive testing, we may not be able to detect and
correct errors in products or releases before commencing commercial shipments,
which may result in harm to our reputation and loss of revenue or delay in
market acceptance.
Our license agreements with clients typically contain provisions designed
to limit our exposure to potential product liability claims. Various domestic
and international jurisdictions may not enforce these limitations. Although we
have not experienced any product liability claims to date, we may encounter such
claims in the future. Product liability claims, whether or not successful,
brought against us could have a material adverse effect on our business.
Defending a suit, regardless of its merits, could entail substantial expense and
require the time and attention of key management personnel.
Our products, systems and sales may be subject to Year 2000 problems
Many currently installed computer systems and software products store dates
using only the last two digits of the calendar year. As a result, these systems
may not be able to distinguish whether "00" means 1900 or 2000, which may cause
system failures or erroneous results. We believe our current products are Year
2000 compliant. However, our products operate in complex network environments
and directly or indirectly interact with a number of other hardware and software
systems. Despite preliminary testing, we cannot predict all the possible Year
2000 issues arising from the interaction of our products with older hardware and
software systems. Known or unknown errors associated with this interaction
could result in a delay or loss of revenue, interruption of service,
cancellation of client contracts, diversion of development resources, damage to
our reputation, increased service and warranty costs and litigation. Any of
these outcomes could seriously harm our business and operating results.
We currently cannot predict the extent to which the Year 2000 problem will
affect our clients, strategic partners or suppliers, or the extent to which we
would be vulnerable to any failure by our clients, strategic partners or
suppliers to remediate any Year 2000 issue on a timely basis. The failure of
our major partners or suppliers to convert their systems on a timely basis or to
implement a conversion that is compatible with our systems would seriously harm
our business and operating results. Furthermore, we may lose potential sales of
our products as companies divert information technology, or IT, resources to
solve their Year 2000 problems.
-10-
<PAGE>
We have reviewed our own IT and other technology systems to assess and
remediate any Year 2000 problems. While the amount of remediation work required
to address Year 2000 problems is not expected to be extensive, we will be
required to modify some of our existing hardware and software for our internal
computer systems to function properly in the year 2000 and thereafter.
Concentration of ownership of our company may give some shareholders substantial
influence and may prevent or delay a change in control
Our executive officers and directors, together with their affiliates, in
the aggregate, own over 40% of our outstanding common stock. These
shareholders may be able to exercise substantial influence over all matters
requiring shareholder approval, including the election of directors and approval
of significant corporate transactions. This concentration of ownership may also
have the effect of delaying or preventing a change in control of ShowCase.
Our shareholders may be adversely affected by provisions of our charter
documents and Minnesota law that may discourage an acquisition of our company
Provisions of our articles of incorporation, bylaws and Minnesota law could
make it more difficult for a third party to acquire us, even if doing so would
be beneficial to our shareholders. For instance, our bylaws provide for a
classified board of directors with each class of directors subject to re-
election every three years. This will make it more difficult for third parties
to insert their representatives on our board of directors and gain control of
our company. These provisions could also discourage proxy contests and make it
more difficult for shareholders to elect directors and take other corporate
actions.
The price of our common stock could be highly volatile due to a number of
variables
The trading price of our common stock may fluctuate widely as a result of a
number of factors, including:
. quarterly variations in our operating results;
. technological innovations or new products;
. market perception and customer acceptance of business intelligence
software;
. increased competition;
. disputes concerning intellectual property rights;
. demand for the IBM AS/400 platform;
. general conditions in the software industry; and
. changes in earnings estimates by analysts.
-11-
<PAGE>
In addition, the stock market has experienced extreme price and volume
fluctuations, which have particularly affected the market prices of many
computer software companies and which have often been unrelated to the operating
performance of such companies.
If the holders of our common stock that have registration rights requires us to
register a large number of their shares for sale into the public, the market
price of our common stock and our ability to raise needed capital could be
adversely affected
The holders of 2,759,226 shares of our common stock can require that we
register their shares for sale under the Securities Act of 1933. If these
holders require that we register a large number of securities to be sold in the
public market, these sales could cause the market price for our common stock to
decline. In addition, if we are required to include shares held by these
holders in a company-initiated registration, these sales may have an adverse
effect on our ability to raise needed capital.
-12-
