<PAGE>
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- -------------------------------------------------------------------------------
UNITED STATES
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, 1998
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 000-23997
BRIO TECHNOLOGY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 77-0210797
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
3460 WEST BAYSHORE ROAD
PALO ALTO, CALIFORNIA 94303
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(650) 856-8000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
As of July 27, 1998 there were 14,387,807 shares of the registrant's Common
Stock outstanding.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
BRIO TECHNOLOGY, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 1998
INDEX
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets June 30, 1998 and March
31, 1998....................................................... 3
Condensed Consolidated Statements of Operations--Three Months
Ended June 30, 1998 and 1997................................... 4
Condensed Consolidated Statements of Cash Flows--Three Months
Ended June 30, 1998 and 1997................................... 5
Notes to Condensed Consolidated Financial Statements............ 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk...... 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................... 23
Item 2. Changes in Securities and Use of Proceeds....................... 23
Item 3. Defaults Upon Senior Securities................................. 24
Item 4. Submission of Matters to a Vote of Security Holders............. 24
Item 5. Other Information............................................... 24
Item 6. Exhibits and Reports on Form 8-K................................ 24
Signature....................................................... 25
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
BRIO TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1998 1998
----------- ---------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.............................. $ 29,741 $ 2,647
Accounts receivable, net of allowance.................. 5,596 6,508
Inventories............................................ 400 361
Prepaid expenses and other current assets.............. 1,072 958
-------- --------
Total current assets................................. 36,809 10,474
Property and Equipment, net.............................. 3,951 3,127
Other Assets............................................. 442 485
-------- --------
$ 41,202 $ 14,086
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Current maturities of notes payable.................... $ -- $ 3,248
Accounts payable....................................... 1,872 2,140
Accrued liabilities--
Payroll and related benefits......................... 1,541 1,422
Other................................................ 1,461 918
Deferred revenue, current.............................. 7,084 6,656
-------- --------
Total current liabilities............................ 11,958 14,384
Notes Payable, net of current maturities................. -- 189
Noncurrent Deferred Revenue.............................. 1,168 1,321
Other Noncurrent Liabilities............................. 44 46
-------- --------
Total liabilities.................................... 13,170 15,940
-------- --------
Stockholders' Equity (Deficit):
Convertible preferred stock, no par value.............. -- 15,655
Common stock........................................... 47,239 1,131
Notes receivable from stockholders..................... (284) (292)
Deferred compensation.................................. (419) (459)
Cumulative translation adjustment...................... (35) (20)
Accumulated deficit.................................... (18,469) (17,869)
-------- --------
Total stockholders' equity (deficit)................. 28,032 (1,854)
-------- --------
$ 41,202 $ 14,086
======== ========
</TABLE>
See accompanying notes.
3
<PAGE>
BRIO TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
-------------------
1998 1997
--------- ---------
<S> <C> <C>
Revenues:
License fees............................................ $ 6,808 $ 3,950
Services................................................ 2,537 1,303
-------- ---------
Total revenues........................................ 9,345 5,253
-------- ---------
Cost of revenues:
License fees............................................ 280 210
Services................................................ 972 443
-------- ---------
Total cost of revenues................................ 1,252 653
-------- ---------
Gross Profit.............................................. 8,093 4,600
-------- ---------
Operating Expenses:
Research and development................................ 1,558 1,141
Sales and marketing..................................... 6,277 5,314
General and administrative.............................. 1,001 626
-------- ---------
Total operating expenses.............................. 8,836 7,081
-------- ---------
Loss from operations...................................... (743) (2,481)
Interest and other income (expense), net.................. 143 (62)
-------- ---------
Net loss.................................................. $ (600) $ (2,543)
======== =========
Basic net loss per share.................................. $ (0.05) $ (0.45)
======== =========
Shares used in computing basic net loss per share......... 11,459 5,675
======== =========
Pro forma basic net loss per share........................ $ (0.05) $ (0.25)
======== =========
Shares used in computing pro forma basic net loss per
share.................................................... 13,281 10,318
======== =========
</TABLE>
See accompanying notes.
4
<PAGE>
BRIO TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................ $ (600) $ (2,543)
Adjustments to reconcile net loss to cash provided by
(used in) operating activities--
Depreciation and amortization......................... 292 164
Provision for returns and doubtful accounts........... 95 107
Deferred compensation amortization.................... 35 --
Changes in operating assets and liabilities--
Accounts receivable................................. 817 1,066
Inventories......................................... (39) (45)
Prepaid expenses and other assets................... (98) (87)
Accounts payable and accrued liabilities............ 392 (258)
Deferred revenue.................................... 275 887
--------- ---------
Cash provided by (used in) operating activities... 1,169 (709)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment..................... (1,089) (519)
--------- ---------
Cash (used in) investing activities............... (1,089) (519)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments under notes payable.......................... (3,437) (1,537)
Proceeds from issuance of preferred stock, net.......... -- 4,325
Proceeds from issuance of common stock, net............. 30,466 1
Proceeds from repayment of notes receivable from stock-
holders................................................ -- 412
Issuance of note to stockholder......................... -- (400)
--------- ---------
Net cash provided by financing activities......... 27,029 2,801
--------- ---------
Net increase in cash and cash equivalents............... 27,109 1,573
Effect of exchange rate changes on cash................. (15) (1)
Cash and cash equivalents, beginning of period.......... 2,647 890
--------- ---------
Cash and cash equivalents, end of period................ $ 29,741 $ 2,462
========= =========
</TABLE>
See accompanying notes.
5
<PAGE>
BRIO TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
Basis of Presentation
The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in consolidated financial statements prepared in
accordance with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations. However, the Company
believes that the disclosures are adequate to make the information not
misleading. These condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements and the notes
thereto included in the Company's annual report on Form 10-K for the fiscal
year ended March 31, 1998.
The unaudited condensed consolidated financial statements included herein
reflect all adjustments (which include only normal, recurring adjustments)
that are, in the opinion of management, necessary to state fairly the results
for the periods presented. The results for such periods are not necessarily
indicative of the results to be expected for the full fiscal year.
The preparation of condensed consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the condensed consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Revenue Recognition
Effective April 1, 1998, the Company adopted Statement of Position (SOP) 97-
2, "Software Revenue Recognition." SOP 97-2 provides guidance on applying
generally accepted accounting principles in recognizing revenue on software
transactions. The adoption of SOP 97-2 did not have a material impact on the
Company's consolidated financial position or results of operations.
The Company's revenues are derived from two sources, license fees and
services. Services include software maintenance and support, training and
system implementation consulting.
Revenue from license fees is recognized upon shipment of the software if
collection of the resulting receivable is probable, the fee is fixed or
determinable, and vendor-specific objective evidence exists to allocate the
total fee to all delivered and undelivered elements of the arrangement. Such
undelivered elements in these arrangements typically consist of services.
Allowances are established for potential product returns and credit losses. In
instances where payments are subject to extended payment terms, revenue is
deferred until payments become due. If an acceptance period is required,
revenue is recognized upon the earlier of customer acceptance or the
expiration of the acceptance period.
Maintenance revenue is recognized ratably over the term of the maintenance
contract. If maintenance is included in an arrangement which includes a
license agreement, amounts related to maintenance are unbundled from the
license fee based on vendor specific objective evidence. Consulting and
training revenue is recognized when the services are performed.
Cost of revenues consists primarily of third-party fees, related personnel
and overhead allocations, the cost of media, documentation, packaging and
shipping related to products sold.
6
<PAGE>
BRIO TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Comprehensive Loss
In 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which was adopted by the Company in the quarter ended June 30, 1998. SFAS No.
130 requires companies to report a new, additional measure of income on the
statement of operations or to create a new financial statement that has the
new measure of income on it. "Comprehensive income" includes foreign currency
translation gains and losses and other unrealized gains and losses that have
been previously excluded from net income (loss) and reflected instead in
equity.
A summary of comprehensive loss follows (in thousands):
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS
ENDED JUNE 30,
----------------
1998 1997
------- --------
<S> <C> <C>
Net loss.................................................. $ (600) $ (2,543)
Foreign currency translation adjustment................... (15) (1)
------ --------
Comprehensive loss........................................ $ (615) $ (2,544)
====== ========
</TABLE>
Net Loss Per Share
Basic net loss per share is computed using the weighted average number of
shares of common stock outstanding. No diluted loss per share information has
been presented in the accompanying condensed consolidated statements of
operations since potential common shares from conversion of preferred stock,
stock options and warrants, and contingently issuable shares are antidilutive.
The Company evaluated the requirements of the Securities and Exchange
Commission Staff Accounting Bulletin (SAB) No. 98 and concluded that there are
no nominal issuances of common stock or potential common stock which would be
required to be shown as outstanding for all periods as outlined in SAB No. 98.
Pro forma basic net loss per share has been calculated assuming the
conversion of preferred stock into an equivalent number of common shares, as
if the shares had converted on the dates of their issuance.
Potential common shares of 978,138, using the treasury stock method, were
not included in the computation of diluted loss per share for the three month
periods ended June 30, 1998 because the Company incurred losses in those
periods and, therefore, the effect would be antidilutive.
Recent Accounting Announcements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The Statement
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999. Management believes the adoption of SFAS No.
133 will not have a material effect on the Company's financial statements.
NOTE 2. NOTES PAYABLE.
At June 30, 1998, the Company had a $10,000,000 accounts receivable-based
line of credit agreement. Interest on borrowings under the accounts receivable
line accrues at the bank's prime rate (8.5% at March 31, 1998). At June 30,
1998, there were no amounts outstanding under this arrangement. Borrowings
under the accounts receivable line of credit were limited to 80% of eligible
accounts receivable, in addition to up to $1.5 million in non-formula
availability. The line of credit is collateralized by substantially all of the
Company's assets, including the Company's intellectual property, accounts
receivable, and property and equipment. This line of credit requires the
Company to comply with various financial covenants, including quarterly
requirements to
7
<PAGE>
BRIO TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
maintain a minimum quick ratio and a minimum tangible net worth. The line
expires on December 1, 1999. In May 1998 the Company utilized a portion of the
net proceeds from its initial public offering to repay all of its bank
borrowings.
NOTE 3. LITIGATION.
On January 20, 1997, Business Objects, S.A. filed a complaint (the
"Complaint") against the Company in the U.S. District Court for the Northern
District of California in San Jose, California alleging that certain of the
Company's products infringe U.S. Patent No. 5,555,403. The Complaint seeks
injunctive relief and unspecified monetary damages. In April 1997, the Company
filed an answer and affirmative defenses to the Complaint, denying certain of
the allegations in the Complaint, and asserting a counterclaim requesting
declaratory relief that the Company is not infringing the patent and that the
patent is invalid and unenforceable. In December 1997, venue for the case was
changed to the Northern District of California in San Francisco, California.
The Company believes that it has meritorious defenses to the claims made in
the Complaint on both invalidity and non-infringement grounds, and intends to
defend the suit vigorously. The Company and Business Objects, S.A. are
currently conducting discovery and are awaiting a date for the claims
construction hearing. The pending litigation could result in substantial
expense to the Company and significant diversion of effort by the Company's
technical and management personnel. Litigation is subject to inherent
uncertainties, especially in cases such as this where complex technical issues
must be decided. The Company's defense of this litigation, regardless of the
merits of the Complaint or lack thereof, could be time-consuming or costly, or
divert the attention of technical and management personnel, which could have a
material adverse effect upon the Company's business, operating results and
financial condition. There can be no assurance that the Company will prevail
in the litigation given the complex technical issues and inherent
uncertainties in patent litigation. In the event the Company is unsuccessful
in the litigation, the Company may be required to pay damages to Business
Objects, S.A. and could be prohibited from marketing certain of its products
without a license, which license may not be available on acceptable terms. If
the Company is unable to obtain such a license, the Company may be required to
license a substitute technology or redesign to avoid infringement, in which
case the Company's business, operating results and financial condition could
be materially adversely affected. Collectively, sales of BrioQuery Navigator,
BrioQuery Explorer and BrioQuery Designer represented substantially all of the
Company's revenues in fiscal 1996 and represented a majority of the Company's
revenues in fiscal 1997 and fiscal 1998. The Company is unable to estimate the
amount of loss, if any, which may be incurred as a result of the Complaint.
NOTE 4. COMMON STOCK.
In April 1998, the Company was reincorporated via a merger with a newly-
formed Delaware corporation in connection with the Company's IPO which was
consummated May 1, 1998. Also, the stockholders approved a one-for-two reverse
stock split, the 1998 Stock Option Plan, the 1998 Employee Stock Purchase Plan
and the 1998 Directors' Stock Option Plan. All common, preferred and per share
amounts have been adjusted retroactively to give effect to the reverse stock
split.
In May 1998, the Company completed the initial public offering of its common
stock. The Company sold 3,085,000 shares for net proceeds of $30.4 million.
Concurrent with the closing of the initial public offering, 5,466,172 shares
of convertible preferred stock were converted into an equivalent number of
shares of common stock.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto of the Company for the fiscal year
ended March 31, 1998 included in the Company's Form 10-K and the other
information included elsewhere in this Report. Certain statements in this
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" are forward-looking statements. The forward-looking statements
contained herein are based on current expectations and entail various risks
and uncertainties that could cause actual results to differ materially from
those expressed in such forward-looking statements. For a more detailed
discussion of these and other business risks, see "Factors That May Affect
Future Operating Results" below.
OVERVIEW
The Company designs, develops, markets and supports software products that
enable organizations to rapidly implement enterprise business intelligence
solutions. The Company had net losses of $600,000 and $2.5 million for the
three months ended June 30, 1998 and 1997, respectively, and had an
accumulated deficit of approximately $18.5 million as of June 30, 1998. See
"Factors That May Affect Future Operating Results--History of Net Losses;
Substantial Accumulated Deficit; Uncertain Future Profitability" below.
The Company's revenues are derived principally from license fees for
software products and, to a lesser extent, fees for a range of services
complementing such products, including software maintenance and support,
training and system implementation consulting. Revenues in current periods are
generally attributable to the sale of the most recent version of the Company's
product suite, and the Company generally discontinues marketing older versions
upon new version introductions. The Company typically licenses its products on
a per user basis with the price per user varying based on the selection of
products licensed. Additionally, the Company is increasing its efforts to sell
customers larger enterprise-wide implementations of the Company's products
through licenses on a per site basis with the price per site varying based on
the selection of products licensed, the number of authorized users for each
product at each site and the number of licensed sites. The Company's customers
include organizations in a diverse set of industry segments. One customer
accounted for 12% of the Company's total revenues for the three months ended
June 30, 1998. Revenues from license fees are recognized upon shipment of the
software if collection of the resulting receivable is probable, the fee is
fixed or determinable and vendor-specific objective evidence exists to
allocate the total fee to all delivered and undelivered elements of the
arrangement. In instances where payments are subject to extended payment
terms, revenue is deferred until payments become due. If an acceptance period
is required, revenue is recognized upon the earlier of customer acceptance or
the expiration of the acceptance period. Allowances are established for
potential product returns and credit losses, which have been insignificant to
date. Fees for services are charged separately from license fees. In addition,
service revenues from maintenance and support services, which include ongoing
product support and periodic product updates, are recognized ratably over the
term of each contract, which is typically twelve months. Payments for
maintenance and support services are generally made in advance and are non-
refundable. Service revenues from training and consulting services are
recognized when the services are performed.
To date, revenues from license fees have been derived principally from
direct sales of software products to end users through the Company's direct
sales force. Although the Company believes that such direct sales will
continue to account for a significant portion of revenues from license fees in
the foreseeable future, the Company intends to continue to develop reselling
relationships with value-added resellers ("VARs"), resellers and distributors
(collectively referred to as the Company's "Indirect Channel"), and the
Company expects that revenues from sales through the Indirect Channel will
increase as a percentage of revenues from license fees. Revenues from the
Indirect Channel were 12% and 6% of total revenues for the three months ended
June 30, 1998 and 1997, respectively. The Company's ability to achieve revenue
growth and improved operating margins, as well as increased worldwide sales,
in the future will depend in large part upon its success in expanding and
maintaining the Indirect Channel worldwide. See "Factors That May Affect
Future Operating Results--Dependence on Direct Sales Force" and "--Dependence
on Development of Indirect Sales Channels" below.
9
<PAGE>
The Company is also increasing its efforts to sell customers larger,
enterprise-wide implementations of the Company's products, rather than
departmental sales, which may increase the complexity and length of the sales
cycle. In connection with such larger sales, the Company has in the past and
may in the future choose to grant greater pricing and other concessions, such
as discounted training and consulting, than for single department or local
network sales. See "Factors That May Affect Future Operating Results--Lengthy
Product Sales Cycle" below.
The Company has, to date, sold its products internationally through direct
sales offices in the United Kingdom, France and Australia, and indirectly
through established distribution relationships in more than 20 countries,
including Belgium, Italy, Japan, The Netherlands and South Africa. Sales to
customers outside of the United States and Canada, including sales generated
by the Company's foreign subsidiaries, represented 16% and 13% of total
revenues for the three months ended June 30, 1998 and 1997, respectively. A
substantial portion of the Company's international sales in the past have been
denominated and collected in foreign currencies, and the Company believes that
a portion of the Company's cost of revenues and operating expenses will
continue to be incurred in foreign currencies. Although it is impossible to
predict future exchange rate movements between the U.S. dollar and other
currencies, to the extent the U.S. dollar strengthens or weakens against other
currencies, a substantial portion of the Company's revenues, cost of revenues
and operating expenses will be commensurately lower or higher than would be
the case in a more stable foreign currency environment. Although the Company
has not historically undertaken foreign exchange hedging transactions to cover
its potential foreign currency exposure, it may do so in the future. See
"Factors That May Affect Future Operating Results--Risks Associated with
International Expansion" below.
Although the Company has experienced significant quarter-to-quarter revenue
growth in fiscal 1998 and 1997, the Company does not expect to sustain the
same rate of sequential quarterly revenue growth in future periods, and there
can be no assurance that the Company will be able to sustain revenue growth or
attain profitability in the future. The Company currently intends to commit
substantial financial resources to research and development, customer support
and sales and marketing, including the expansion of its direct sales force,
third-party partnering relationships and its indirect channel sales
organization, and expects that expenses relating to its litigation with
Business Objects, S.A. will increase in future periods. The Company also
expects to increase its staffing and systems infrastructure in order to
support the Company's expanding operations and to comply with the additional
responsibilities of a public company. As a result, the Company expects that
its operating expenses will increase significantly in fiscal 1999. See
"Factors That May Affect Future Operating Results--Fluctuations in Quarterly
Operating Results" and "--Litigation with Business Objects, S.A." below.
10
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain consolidated financial information as
a percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
JUNE 30,
----------------
1998 1997
------ ------
<S> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
License fees........................................ 73% 75%
Services............................................ 27 25
------ ------
Total revenues.................................... 100 100
------ ------
Cost of revenues:
License fees........................................ 3 4
Services............................................ 10 8
------ ------
Total cost of revenues............................ 13 12
------ ------
Gross profit.......................................... 87 88
------ ------
Operating expenses:
Research and development............................ 17 22
Sales and marketing................................. 67 101
General and administrative.......................... 11 12
------ ------
Total operating expenses.......................... 95 135
------ ------
Loss from operations.................................. (8) (47)
Interest and other income (expense), net.............. 2 (1)
------ ------
Net loss.............................................. (6)% (48)%
====== ======
</TABLE>
REVENUES
The Company's revenues are derived from license fees and services, which
include software maintenance and support, training and system implementation
consulting. Total revenues increased by 78% from $5.3 million for the three
months ended June 30, 1997 to $9.3 million for the three months ended June 30,
1998.
License Fees. Revenues from license fees increased by 72% from $4.0 million
for the three months ended June 30, 1997 to $6.8 million for the three months
ended June 30, 1998. Approximately $1.2 million of the increase was due to
growing sales to new customers and approximately $1.6 million of the increase
was due to increased follow-on sales to existing customers.
Services. Service revenues increased by 95% from $1.3 million for the three
months ended June 30, 1997 to $2.5 million for the three months ended June 30,
1998. Approximately $1.0 million of the increase was due to increases in
maintenance and support revenue and approximately $200,000 of the increase was
due to increased training and consulting services revenues, related to
increases in the Company's installed customer base.
COST OF REVENUES
License Fees. Cost of revenues from license fees consists primarily of
product packaging, shipping, media, documentation, and related personnel and
overhead allocations. Cost of revenues from license fees increased from
$210,000, or 5% of revenues from license fees, for the three months ended June
30, 1997 to $280,000, or 4% of revenues from license fees, for the three
months ended June 30, 1998. The increase in absolute dollars was due to the
increase in the number of licenses sold. The decrease as a percentage of
revenues from license
11
<PAGE>
fees was primarily due to an increase in the number of customers purchasing
master disks, which are less expensive to produce and ship, as compared to
"shrinkwrapped" product. Cost of revenues from license fees may vary between
periods due to the mix of customers purchasing master disks relative to
customers purchasing "shrinkwrapped" product.
Services. Cost of service revenues consists primarily of personnel costs and
third-party consulting fees associated with providing software maintenance and
support, training and consulting services. Cost of service revenues increased
from $443,000, or 34% of service revenues, for the three months ended June 30,
1997 to $972,000, or 38% of service revenues, for the three months ended June
30, 1998. Approximately $389,000 of the increase in absolute dollars was due
to increases in personnel and related costs resulting from the Company's
expansion of its support services and approximately $140,000 of the increase
was due to increases in the use of outside consultants for training and
consulting services and for level one technical support services. The increase
as a percentage of service revenues was due to the increased use of outside
consultants, which are generally more expensive than Company personnel. Cost
of service revenues may vary between periods due to the mix of services
provided by the Company's personnel relative to services provided by outside
consultants and to varying levels of expenditures required to build the
services organization.
OPERATING EXPENSES
Research and development. Research and development expenses consist
primarily of personnel and related costs associated with the development of
new products, the enhancement and localization of existing products, quality
assurance and testing. Research and development expenses increased from $1.1
million, or 22% of total revenues, for the three months ended June 30, 1997 to
$1.6 million, or 17% of total revenues, for the three months ended June 30,
1998. The increases were primarily due to increased personnel and related
costs required to develop new products and enhance existing products. The
Company believes that significant investment for product research and
development is essential to product and technical leadership and anticipates
that it will continue to commit substantial resources to research and
development in the future. The Company anticipates that research and
development expenditures will continue to increase in absolute dollars,
although such expenses may vary as a percentage of total revenues.
Sales and marketing. Sales and marketing expenses consist primarily of
salaries and other personnel related costs, commissions, bonuses and sales
incentives, travel, marketing programs such as trade shows and seminars, and
promotion costs. Sales and marketing expenses increased from $5.3 million, or
101% of total revenues, for the three months ended June 30, 1997 to $6.3
million, or 67% of total revenues, for the three months ended June 30, 1998.
The increase in absolute dollars was attributable to the expansion of the
Company's sales and marketing organization, including $670,000 for higher
sales commissions associated with increased revenues and approximately
$330,000 for increased marketing expenses worldwide, including marketing
activities, personnel and related costs. The decrease as a percentage of total
revenues was generally attributable to increases in revenues for the periods.
The Company believes that as it continues to expand its direct sales and
pre-sales support organization and its third-party partnering relationships
and its indirect channel sales organization on a worldwide basis, sales and
marketing expenses will continue to increase in absolute dollars. Such
expenses are currently intended to be funded by the Company's working capital.
In particular, the Company expects that sales compensation, travel and related
expenses will increase significantly as the Company continues to increase the
number of its direct sales personnel and its emphasis on direct field sales
efforts. Nonetheless, the Company expects sales and marketing expenses will
continue to vary as a percentage of total revenues.
General and administrative. General and administrative expenses consist
primarily of personnel costs for finance, human resources, information
systems, and general management, as well as legal, accounting and unallocated
overhead expenses. General and administrative expenses increased from
$626,000, or 12% of total revenues, for the three months ended June 30, 1997
to $1.0 million, or 11% of total revenues, for the three months ended June 30,
1998. The increases were primarily due to increased personnel and related
costs necessary
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to manage and support the Company's growth and facilities expansion. The
decrease in general and administrative expenses as a percentage of total
revenues is primarily attributable to increased efficiencies in the Company's
administrative operations and increased revenues. The Company expects that its
general and administrative expenses will increase in absolute dollars as the
Company expands its staffing to support expanded operations, incurs expenses
in its litigation with Business Objects, S.A., and continues its
responsibilities as a public company. The Company expects that such expenses
will vary as a percentage of total revenues.
Deferred Compensation. In connection with the grant of certain stock options
to employees during the fiscal year ended March 31, 1998, the Company recorded
deferred compensation of $580,000, representing the difference between the
deemed value of the Common Stock for accounting purposes and the option
exercise price of such options at the date of grant. Such amount is presented
as a reduction of stockholder's equity and amortized ratably over the vesting
period of the applicable options. Approximately $35,000 was expensed during
the three months ended June 30, 1998, and the balance will be expensed ratably
over the next four years as the options vest.
INTEREST AND OTHER INCOME (EXPENSE), NET
Interest and other income (expense), net, is comprised primarily of interest
income and foreign currency transaction gains or losses, net of interest
expense. Interest expense is comprised of interest incurred on the Company's
bank line of credit. Interest and other income (expense), net, increased from
a net expense of $62,000 for the three months ended June 30, 1997 to a net
income of $143,000 for the three months ended June 30, 1998. The increase in
interest and other income (expense), net, is attributable to a decrease in the
amount of borrowings on the Company's line of credit as a result of the
Company's initial public offering and an increase in interest income due to
larger cash balances associated with the closing of the Company's initial
public offering in May 1998.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company funded its operations and capital expenditures
primarily from the net proceeds of approximately $15.7 million from private
sales of Preferred Stock, cash from operations and, early in the Company's
history, development fees, and to a lesser extent, from bank borrowings. In
May 1998, the Company sold 3,085,000 shares of common stock in connection with
its initial public offering. The aggregate proceeds to the Company, after
deducting estimated offering expenses, were approximately $30.4 million.
As of June 30, 1998, the Company had cash and cash equivalents of $29.7
million. In addition, the Company maintains a bank line of credit which
provides for up to $10.0 million in borrowings. The Company can borrow up to
80% of eligible accounts receivable against this line, with an additional $1.5
million in non-formula availability, which is collateralized by substantially
all of the Company's assets, including the Company's intellectual property to
the extent required to secure the Bank's interest in the accounts receivables
and which provides for interest at the bank's prime rate. This line of credit
requires the Company to comply with various financial covenants, including
quarterly requirements to maintain a minimum quick ratio of 2.0:1.0 and a
minimum tangible net worth covenant. The line expires on December 1, 1999,
when any amounts outstanding thereunder would be due and payable. See Note 2
of Notes to Condensed Consolidated Financial Statements. As of June 30, 1998,
there were no outstanding bank borrowings.
Net cash used in operating activities was $709,000 in the three months ended
June 30, 1997 and net cash provided by operating activities was $1.2 million
in the three months ended June 30, 1998. The increase was due primarily to
decreases in net loss and favorable changes in the balances of operating
assets and liabilities.
Net cash used in investing activities was $519,000 and $1.1 million in the
three months ended June 30, 1997 and 1998, respectively, consisting primarily
of purchases of property and equipment. The Company has planned capital
commitments of up to approximately $2.0 million in fiscal 1999.
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Net cash provided by financing activities was $2.8 million and $27.0 million
in the three months ended June 30, 1997 and 1998, respectively, consisting
primarily of proceeds from its initial public offering, private sales of
Preferred Stock and periodic borrowings, net of repayments, on the bank line
of credit.
The Company believes that its current cash balances and any cash generated
from operations and from available or future debt financing, will be
sufficient to meet the Company's operating and capital requirements for at
least the next 12 months. However, there can be no assurance that the Company
will not require additional financing within this time frame. The Company has
no current plans, and is not currently negotiating, to obtain additional
financing.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
History of net losses; substantial accumulated deficit; uncertain future
profitability. The Company incurred net losses of $3.2 million, $6.0 million
and $8.1 million in fiscal 1996, 1997 and 1998, respectively. As of June 30,
1998, the Company had stockholders' equity of approximately $28.0 million.
Given the Company's history of net losses, there can be no assurance of
revenue growth or profitability on a quarterly or annual basis in the future.
While the Company achieved significant quarter-to-quarter revenue growth in
fiscal 1997 and 1998, the Company does not expect to sustain the same rate of
sequential quarterly revenue growth in future periods. In addition, the
Company intends to increase its operating expenses significantly in fiscal
1999; therefore, the Company's operating results will be adversely affected if
revenue does not increase. The Company's prospects must be considered in light
of the risks, expenses and difficulties frequently encountered by companies in
their early stage of development, particularly companies in rapidly evolving
markets. To address these risks, the Company must, among other things,
successfully increase the scope of its operations, respond to competitive
developments, continue to attract, retain and motivate qualified personnel and
continue to commercialize products incorporating advanced technologies. There
can be no assurance that the Company will be successful in addressing such
risks, and the failure to do so would have a material adverse effect on the
Company's business, operating results and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" above.
Fluctuations in quarterly operating results. The Company has experienced and
expects to continue to experience significant fluctuations in quarterly
operating results based on a number of factors, many of which are not within
the Company's control. Among other things, the Company's operating results
have fluctuated in the past due to the timing of product enhancements and new
product announcements by the Company, the lengthy sales cycle of the Company's
products, market acceptance of and demand for the Company's products, capital
spending patterns of the Company's customers, customer order deferrals in
anticipation of enhancements or new products offered by the Company, the
Company's ability to attract and retain key personnel, the mix of domestic and
international sales, the mix of license and service revenues, personnel
changes and changes in the timing and level of operating expenses. The
Company's results of operations may also fluctuate in the future due to a
number of factors, including but not limited to those discussed above as well
as the number and significance of product enhancements and new product
announcements by the Company's competitors, changes in pricing policies by the
Company or its competitors, the ability of the Company to develop, introduce
and market new and enhanced versions of the Company's products on a timely
basis, customer order deferrals in anticipation of enhancements or new
products offered by the Company's competitors, nonrenewal of service
agreements, software defects and other product quality problems, the mix of
direct and indirect sales, currency fluctuations, costs or damage awards
associated with the current Business Objects, S.A. litigation, and general
economic conditions. The Company anticipates that an increasing portion of its
revenue could be derived from larger orders, in which case the timing of
receipt and fulfillment of any such orders could cause material fluctuations
in the Company's operating results, particularly on a quarterly basis.
Furthermore, the Company has experienced, and expects to continue to
experience, seasonality due, among other things, to customer capital spending
patterns and the general summer slowdown in sales. Such seasonality could have
a material adverse effect on the Company's results of operations, particularly
for the quarters ending June 30 or September 30.
In addition, the Company currently intends to commit substantial financial
resources to research and development, customer support and sales and
marketing, including the expansion of its direct sales force, third-
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party partnering relationships and its indirect channel sales organization,
and expects that expenses relating to its litigation with Business Objects,
S.A. will increase in future periods. The Company also expects to increase its
staffing and systems infrastructure in order to support the Company's
expanding operations and to comply with the additional responsibilities of a
public company. To the extent such expenses are not subsequently followed by
increased revenues, the Company's business, operating results and financial
condition could be materially adversely affected. The timing of such expansion
and the rate at which new sales people become productive could also cause
material fluctuations in the Company's quarterly operating results.
Due to the foregoing factors, quarterly revenue and operating results are
difficult to forecast. Further, the Company's expense levels are based in
significant part on the Company's expectations as to future revenue and are
therefore relatively fixed in the short term. Additionally, the Company has in
the past and expects in the future to recognize a large portion of its license
revenue in the last month of each quarter. If revenue levels fall below
expectations, net income is likely to be disproportionately adversely affected
because a proportionately smaller amount of the Company's expenses varies with
its revenue. In light of the foregoing, in some future quarter the Company's
reported or anticipated operating results may fail to meet or exceed the
expectations of securities analysts or investors. In such event, the price of
the Company's Common Stock would be materially adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" above.
Dependence on direct sales force. The Company has historically sold its
products primarily through its direct sales and services organization located
in the United States, Canada, the United Kingdom, France and Australia, and
the Company intends to continue to invest significant resources to expand its
direct sales force. Revenues from direct sales were 91%, 93% and 85% of total
revenues for fiscal 1996, 1997 and 1998, respectively. Competition for
personnel with a sufficient level of expertise and experience for these
positions is intense, particularly among the Company's competitors who may
have substantially greater resources than the Company or greater resources
dedicated to hiring such personnel. In addition, the Company has experienced
significant turnover of its sales force. Such turnover tends to slow sales
efforts until replacement personnel can be recruited and trained to become
productive members of the Company's sales force. There can be no assurance
that the Company will be able to attract and retain adequate sales and
marketing personnel, despite the expenditure of significant resources to do
so, and the failure to do so could have a material adverse effect on the
Company's business, operating results and financial condition. See "--
Dependence on Key Personnel and Hiring of Additional Personnel."
Dependence on key personnel and hiring of additional personnel. The
Company's success depends to a significant degree upon the continued
contributions of its key management, engineering, sales and marketing
personnel, many of whom would be difficult to replace. The Company has
employment contracts with only three members of its executive management
personnel, and currently maintains "key person" life insurance only on Yorgen
Edholm, the Company's President and Chief Executive Officer, and Katherine
Glassey, the Company's Executive Vice President, Products and Services and
Chief Technology Officer, respectively. The Company does not believe such
insurance would adequately compensate it for the loss of either Mr. Edholm or
Ms. Glassey. The Company believes its future success will also depend in large
part upon its ability to attract and retain highly skilled managerial,
engineering, sales and marketing and finance personnel. Competition for such
personnel is intense, and there can be no assurance that the Company will be
successful in attracting and retaining such personnel. The Company has
recently experienced difficulties in hiring highly qualified sales and
engineering personnel, and the Company believes that it may have greater
difficulty in attracting such personnel with equity incentives as a public
company than it had while privately held. For example, as a result of market
forces, companies in the enterprise software industry have historically
experienced significant fluctuations in their market valuations. To the extent
that the Company's Common Stock trades at a premium relative to historical
industry averages or to other companies in the enterprise software industry,
the Company may experience difficulty in attracting qualified personnel. The
loss of the services of any of the key personnel, the inability to attract or
retain qualified personnel in the future or delays in either hiring required
personnel or the rate at which new people become productive, particularly
sales personnel and engineers, could have a material adverse effect
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on the Company's business, operating results and financial condition. In
addition, companies in the enterprise software industry whose employees accept
positions with competitive companies frequently claim that their competitors
have engaged in unfair hiring practices. The Company has, from time to time,
received such claims from other companies and there can be no assurance that
the Company will not receive additional claims in the future as it seeks to
hire qualified personnel or that such claims will not result in litigation
involving the Company. The Company could incur substantial costs in defending
itself against any such claims, regardless of the merits of such claims or
lack thereof.
Lengthy product sales cycle. The purchase of the Company's products may
require significant, executive-level investment and systems architecture
decisions by prospective customers. Such transactions may be delayed during
the customer acceptance process because the Company must provide a significant
level of education to prospective customers regarding the use and benefits of
the Company's products. The Company believes that most companies currently are
not yet aware of the benefits of enterprise-wide business intelligence
solutions or of the Company's products and capabilities, nor have such
companies deployed business intelligence solutions on an enterprise-wide
basis. Accordingly, the sales cycle associated with the purchase of the
Company's enterprise business intelligence products is typically three to nine
months in length and subject to a number of significant risks over which the
Company has little or no control, including customers' budgeting constraints
and internal acceptance review procedures. Further, to the extent that
potential customers divert resources and attention to issues associated with
the year 2000 issue, the Company's sales cycle could be further lengthened.
See "--Year 2000 Compliance."
Additionally, the sales cycle for the Company's products in international
markets has historically been, and is expected to continue to be, longer than
the sales cycle in the United States and Canada. Accordingly, as the Company
expands internationally, the average sales cycle for the Company's products is
expected to lengthen. Based in part upon, among other things, its lengthy
sales cycle, the Company believes that its quarterly revenues and operating
results could vary significantly in the future, and that excessive delay in
product sales could have a material adverse effect on the Company's business,
operating results and financial condition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" above.
Dependence on development of indirect sales channels. To date, the Company
has sold its products principally through its direct sales and services
organizations and, to a lesser extent, through value-added resellers ("VARs"),
resellers and distributors (collectively referred to as the Company's
"Indirect Channel"). Revenues from the Company's Indirect Channel were 9%, 7%
and 15% of total revenues for fiscal 1996, 1997 and 1998, respectively. The
Company's ability to achieve revenue growth and improved operating margins on
product sales, as well as increased worldwide sales, in the future will depend
in large part upon its success in expanding and maintaining the Indirect
Channel worldwide. Although the Company is currently investing and plans to
continue to invest significant resources to develop the Indirect Channel,
there can be no assurance that the Company will be able to continue to attract
and retain additional companies in the Indirect Channel that will be able to
market the Company's products effectively and will be qualified to provide
timely and cost-effective customer support and services. There also can be no
assurance that the Company will be able to manage conflicts within the
Indirect Channel or that the Company's focus on increasing sales through the
Indirect Channel will not divert management resources and attention from
direct sales. In addition, the Company's agreements with companies in the
Indirect Channel do not restrict such companies from distributing competing
products, and in many cases may be terminated by either party without cause.
There can be no assurance that the Company will be able to successfully expand
its Indirect Channel or that any such expansion will result in an increase in
revenues, and failure to do so could have a material adverse effect on the
Company's business, operating results and financial condition. See "--Sales
and Marketing."
Competition. The market in which the Company operates is still developing,
and is intensely competitive, highly fragmented and characterized by rapidly
changing technology and evolving standards. The Company's current and
potential competitors offer a variety of software solutions and generally fall
within four categories: (i) vendors of business intelligence software such as
Cognos, Business Objects, S.A., Seagate, and Andyne;
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(ii) vendors offering alternative approaches to delivering analysis
capabilities to users, such as MicroStrategy; (iii) database vendors that
offer products which operate specifically with their proprietary database,
such as Microsoft, IBM, Oracle or Arbor; and (iv) other companies that may in
the future announce offerings of enterprise business intelligence solutions.
The Company's competitive position in the market is uncertain, due principally
to the variety of current and potential competitors and the emerging nature of
the market. 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. The Company expects additional competition as other
established and emerging companies enter into the business intelligence
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
could have a material adverse effect on the Company's business, operating
results and financial condition. Current and potential competitors may make
strategic acquisitions or establish cooperative relationships among themselves
or with third parties, thereby increasing the ability of their products to
address the needs of the Company's prospective customers. The Company's
current or future indirect channel partners may establish cooperative
relationships with current or potential competitors of the Company, thereby
limiting the Company's ability to sell its products through particular
distribution channels. Accordingly, it is possible that new competitors or
alliances among current and new competitors may emerge and rapidly gain
significant market share. Such competition could have a material adverse
effect on 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
its products, which 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 able to compete successfully against current and
future competitors, and the failure to do so could have a material adverse
effect on the Company's business, operating results and financial condition.
The Company competes on the basis of certain factors, including product
features, time to market, ease of use, product performance, product quality,
analytical capabilities, user scalability, open architecture, customer support
and price. The Company believes it presently competes favorably with respect
to each of these factors. However, the Company's market is still evolving and
there can be no assurance that the Company will be able to compete
successfully against current and future competitors, and the failure to do so
successfully could have a material adverse effect on the Company's business,
operating results and financial condition.
Litigation with Business Objects, S.A. On January 20, 1997, Business
Objects, S.A. filed a complaint (the "Complaint") against the Company in the
U.S. District Court for the Northern District of California in San Jose,
California alleging that certain of the Company's products (including at least
the BrioQuery Navigator, BrioQuery Explorer and BrioQuery Designer products)
infringe at least claims 1, 2 and 4 of U.S. Patent No. 5,555,403. In April
1997, the Company filed an answer and affirmative defenses to the Complaint,
denying certain of the allegations in the Complaint and asserting a
counterclaim requesting declaratory relief that the Company is not infringing
the patent and that the patent is invalid and unenforceable. In December 1997,
venue for the case was changed to the Northern District of California in San
Francisco, California. The Company believes that it has meritorious defenses
to the claims made in the Complaint on both invalidity and non-infringement
grounds, and intends to defend the suit vigorously. Business Objects, S.A.
contends that there was no prior software or other prior art which allowed
users to associate a familiar name with a query or which permitted retrieved
values to be semantically dynamic. The Company has contended that, if the
patent were construed to cover the Company's current products, the patent
would then also cover prior art products, rendering the patent invalid.
Business Objects, S.A. contends that there are material differences between
those prior art products and the Company's current products. Business Objects,
S.A. also contends that the patent is valid because it has been commercially
successful and widely copied in the industry. The Company disputes these
contentions. The Company and Business Objects, S.A. are currently conducting
discovery and are awaiting a date for the claims construction hearing. The
pending litigation could result in substantial expense to the Company and
significant diversion of effort by the Company's technical and management
personnel. The
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Complaint seeks injunctive relief and unspecified monetary damages, and
Business Objects, S.A. is expected to seek lost profits and/or equivalent
royalties. The Complaint also alleges willful infringement, and seeks treble
damages, costs and attorneys' fees. Litigation is subject to inherent
uncertainties, especially in cases such as this where complex technical issues
must be decided. The Company's defense of this litigation, regardless of the
merits of the Complaint or lack thereof, could be time-consuming or costly, or
divert the attention of technical and management personnel, which could have a
material adverse effect upon the Company's business, operating results and
financial condition. There can be no assurance that the Company will prevail
in the litigation given the complex technical issues and inherent
uncertainties in patent litigation, particularly before the claims have been
construed by the Court. In the event the Company is unsuccessful in the
litigation, the Company may be required to pay damages to Business Objects,
S.A. and could be prohibited from marketing certain of its products without a
license, which license may not be available on acceptable terms. If the
Company is unable to obtain such a license, the Company may be required to
license a substitute technology or redesign to avoid infringement, in which
case the Company's business, operating results and financial condition could
be materially adversely affected. Collectively, sales of BrioQuery Navigator,
BrioQuery Explorer and BrioQuery Designer represented substantially all of the
Company's revenues in fiscal 1996 and represented a majority of the Company's
revenues in fiscal 1997 and fiscal 1998. See Part II, Item 1, "Legal
Proceedings."
Management of operations; new management team. The Company's recent growth
and expansion of operations has placed, and is expected to continue to place,
a significant strain on its managerial, operational and financial resources.
To manage its potential growth, the Company must continue to implement and
improve its operational and financial systems and to expand, train and manage
its employee base. Over half of the Company's executive management have joined
the Company within approximately the last eighteen months, including the
Company's Chief Financial Officer, Executive Vice President, Marketing and
Executive Vice President, Worldwide Operations. These individuals have not
previously worked together for substantial lengths of time and are in the
process of integrating as a management team, and certain of such individuals
do not have significant prior experience in public company executive
management. There can be no assurance that the Company will be able to
effectively manage the expansion of its operations, that the Company's
systems, procedures or controls will be adequate to support the Company's
operations or that Company management will be able to achieve the rapid
execution necessary to fully exploit the market opportunity for the Company's
products and services. Any inability to manage growth, if any, could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" above.
Risks associated with international expansion. Sales to customers outside of
the United States and Canada, including sales generated by the Company's
foreign subsidiaries, represented 9%, 14% and 19% of total revenues for fiscal
1996, 1997 and 1998, respectively. The Company has direct sales offices in the
United Kingdom, France and Australia, and has established distribution
relationships in more than 20 countries, including Belgium, Italy, Japan, The
Netherlands and South Africa. The Company has, to date, localized its products
in French, Italian and Japanese. A key component of the Company's strategy is
its planned expansion into additional international markets. To facilitate
this international expansion, the Company anticipates localizing its products
for additional foreign markets in the future. If the international revenues
generated by these expanded operations are not adequate to offset the expense
of establishing and maintaining these foreign operations, the Company's
business, operating results and financial condition could be materially
adversely affected. To date, the Company has only limited experience in
developing localized versions of its products and marketing and distributing
its products internationally. There can be no assurance that the Company will
be able to successfully localize, market, sell and deliver its products in
these markets, and failure to do so could have a material adverse effect on
the Company's business, operating results and financial condition.
In addition to the uncertainty as to the Company's ability to expand its
international presence, there are certain risks inherent in doing business on
an international level, such as increased difficulty in controlling operating
expenses, unexpected changes in regulatory requirements, tariffs and other
trade barriers, difficulties in staffing and managing foreign operations,
longer payment cycles, problems in collecting accounts receivable,
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political instability, fluctuations in currency exchange rates, seasonal
reductions in business activity during the summer months in Europe and certain
other parts of the world and potentially adverse tax consequences, which could
adversely impact the success of the Company's international operations. In
particular, the Company's international sales are generally denominated and
collected in foreign currencies, and the Company has not historically
undertaken foreign exchange hedging transactions to cover its potential
foreign currency exposure. In fiscal 1998, the Company incurred losses on
foreign currency translations resulting from intercompany receivables from its
foreign subsidiaries in an amount of approximately $131,000. There can be no
assurance that one or more of such factors will not have a material adverse
effect on the Company's future international operations and, consequently, on
the Company's business, operating results and financial condition.
Dependence upon product development; rapid technological change and evolving
industry standards. The Company's success will depend upon its ability to
develop new products that meet changing customer requirements. The market for
the Company's products is characterized by rapidly changing technology,
evolving industry standards and customer requirements, emerging competition
and frequent new product introductions. The Company's products incorporate a
number of advanced technologies, including a proprietary data analysis engine,
a distributed architecture, as well as Web access and delivery technology. As
a result, the Company may be required to change and improve its products in
response to changes in operating systems, applications, networking and
connectivity software, computer and communications hardware, programming tools
and computer language technology. Such changes and improvements are dependent,
in part, on the Company's ability to hire and retain highly qualified
engineering personnel. See "--Dependence on Key Personnel and Hiring of
Additional Personnel." In addition, the Company attempts to establish and
maintain partner alliances with influential companies in a variety of core
technology areas. The Company's failure to establish such alliances with
leading companies in particular technology areas could have a material adverse
effect on the Company's business, operating results and financial condition.
There can be no assurance that the Company can successfully respond to
changing technology, identify new product opportunities or develop and bring
new products to market in a timely and cost-effective manner. The Company has
in the past experienced delays in software development and there can be no
assurance that the Company will not experience delays in connection with its
current or future product development activities. In particular, development
efforts in the UNIX server environment are complex, and the Company in the
past has encountered delays in developing products for this environment.
Delays and difficulties associated with new product introductions or product
enhancements could have a material adverse effect on the Company's business,
operating results and financial condition. Failure of the Company, for
technological or other reasons, to develop and introduce new products and
product enhancements on a timely basis that are compatible with industry
standards and that satisfy customer requirements would have a material adverse
effect on the Company's business, operating results and financial condition.
In addition, the Company or its competitors may announce enhancements to
existing products, or new products embodying new technologies, industry
standards or customer requirements that have the potential to supplant or
provide lower cost alternatives to the Company's existing products. The
introduction of such enhancements or new products could render the Company's
existing products obsolete and unmarketable. There can be no assurance that
the announcement or introduction of new products by the Company or its
competitors or any change in industry standards will not cause customers to
defer or cancel purchases of existing products, which could have a material
adverse effect on the Company's business, operating results and financial
condition. Furthermore, introduction by the Company of products with
reliability, quality or compatibility problems could result in reduced orders,
delays in collecting accounts receivable and additional service costs. The
failure to introduce a new product or product enhancement on a timely basis
could delay or hinder market acceptance. Any such event could have a material
adverse effect on the Company's business, operating results and financial
condition.
Dependence on emerging market for enterprise business intelligence; no
assurance of market acceptance of enterprise business intelligence
products. The Company is focusing its selling efforts increasingly on larger,
enterprise-wide implementations of its products, and the Company expects such
sales to constitute an increasing portion of the Company's future revenue
growth, if any. To date, the Company's selling efforts have resulted in
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limited enterprise-wide implementations of the Company's products. The Company
believes that most companies currently are not yet aware of the benefits of
enterprise-wide business intelligence solutions or of the Company's products
and capabilities, nor have such companies deployed business intelligence
solutions on an enterprise-wide basis. While the Company has devoted
significant resources to promoting market awareness of its products and the
problems such products address (including training of its sales force to
promote enterprise business intelligence and demonstrating the enterprise-wide
business intelligence capabilities of Brio Enterprise at industry conferences
and trade shows, the costs of which the Company views as a normal part of its
new product sales and marketing activity), no assurance can be given that
these efforts will be sufficient to build market awareness of the need for
enterprise business intelligence or acceptance of the Company's products.
Failure of a significant market for enterprise business intelligence products
to develop, or failure of enterprise-wide implementations of the Company's
products to achieve broad market acceptance, would have a material adverse
effect on the Company's business, operating results and financial condition.
Year 2000 compliance. Many existing computer systems and applications, and
other control devices, use only two digits to identify a year in the date
field, without considering the impact of the upcoming change in the century.
As a result, such systems and applications could fail or create erroneous
results unless corrected so that they can process data related to the year
2000 and beyond. The Company relies on its systems, applications and devices
in operating and monitoring all major aspects of its business, including
financial systems (such as general ledger, accounts payable and payroll),
customer services, infrastructure, networks and telecommunications equipment.
The Company also relies, directly and indirectly, on external systems of
business enterprises such as customers, suppliers, creditors, financial
organizations, and governmental entities, both domestic and international, for
accurate exchange of data. The Company's current estimate is that the costs
associated with the year 2000 issue, and the consequences of incomplete or
untimely resolution of the year 2000 issue, will not have a material adverse
effect on the results of operations or financial position of the Company in
any given year. However, despite the Company's efforts to address the year
2000 impact on its internal systems, the Company has not fully identified such
impact or whether it can resolve it without disruption of its business and
without incurring significant expense. In addition, even if the internal
systems of the Company are not materially affected by the year 2000 issue, the
Company could be affected through disruption in the operation of the
enterprises with which the Company interacts. Furthermore, although the
Company's products comply with such year 2000 requirements, 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 to comply with year 2000
requirements. These expenditures may result in reduced funds available to
purchase software products such as those offered by the Company, which could
have a material adverse effect on the Company's business, operating results
and financial condition. See "--Lengthy Product Sales Cycle."
Risks of product defects; product liability. As a result of their
complexity, the Company's software products may contain undetected errors,
failures or viruses. Despite testing by the Company and use by current and
potential customers when new products are first introduced or new enhancements
are released, there can be no assurance that errors will not be found in new
products or enhancements after commencement of commercial shipments. Although
the Company has not experienced material adverse effects resulting from any
such defects and errors to date, there can be no assurance that defects and
errors will not be found in new products or enhancements after commencement of
commercial shipments, resulting in loss of revenues, delay in market
acceptance or damage to the Company's reputation, which could have a material
adverse effect upon the Company's business, operating results and financial
condition. Further, the Company's license agreements with its customers
typically contain provisions designed to limit the Company's exposure for
potential claims based on errors or malfunctions of its products. It is
possible, however, that the limitation of liability provisions contained in
the Company's license agreements may not be effective under the laws of
certain jurisdictions. Although the Company has not experienced any product
liability claims to date, the sale and support of the Company's products
entails the risk of such claims. Although the Company carries insurance
against product liability risks, there can be no assurance that such insurance
would be adequate to cover a potential claim. A product liability claim
brought against the Company could have a material adverse effect on the
Company's business, operating results and financial condition.
20
<PAGE>
Limited protection of proprietary rights. The Company currently relies
primarily on a combination of copyright and trademark laws, trade secrets,
confidentiality procedures and contractual provisions to protect its
proprietary rights. The Company also believes that factors such as the
technological and creative skills of its personnel, new product developments,
frequent product enhancements, name recognition and reliable product
maintenance are essential to establishing and maintaining a technology
leadership position. The Company seeks to protect its software, documentation
and other written materials under trade secret and copyright laws, which
afford only limited protection. The Company currently has one United States
patent application. There can be no assurance that the Company's patent
application will result in the issuance of a patent, or if issued, will not be
invalidated, circumvented or challenged, or that the rights granted
thereunder, if any, will provide competitive advantages to the Company or that
any of the Company's future patent applications, if any, will be issued with
the scope of the claims sought by the Company, if at all. Furthermore, there
can be no assurance that others will not develop technologies that are similar
or superior to the Company's technology or design around any patent that may
come to be owned by the Company. Despite the Company's efforts to protect its
proprietary rights, unauthorized parties may attempt to copy aspects of the
Company's products or to obtain and use information that the Company regards
as proprietary. Policing unauthorized use of the Company's products is
difficult, and while the Company is unable to determine the extent to which
piracy of its software products exists, software piracy can be expected to be
a persistent problem. In addition, the laws of some foreign countries do not
protect the Company's proprietary rights as fully as do the laws of the United
States. There can be no assurance that the Company's means of protecting its
proprietary rights in the United States or abroad will be adequate or that
competitors will not independently develop similar technology. The Company has
entered into source code escrow agreements with a number of its customers and
indirect channel partners requiring release of source code under certain
conditions. Such agreements provide that such parties will have a limited,
non-exclusive right to use such code in the event that there is a bankruptcy
proceeding by or against the Company, if the Company ceases to do business or,
in some cases, if the Company fails to meet its contractual obligations. The
provision of source code escrows may increase the likelihood of
misappropriation by third parties. The Company expects that software product
developers will increasingly be subject to infringement claims as the number
of products and competitors in the Company's industry segment grows and the
functionality of products in different industry segments overlaps. Any such
claims, with or without merit, could be time consuming to defend, result in
costly litigation, divert management's attention and resources, 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, if at all. In the event of a
successful claim of product infringement against the Company and failure or
inability of the Company to license the infringed or similar technology, the
Company's business, operating results and financial condition would be
materially adversely affected. Currently, the Company is engaged in litigation
with Business Objects, S.A. concerning the alleged infringement by the Company
of a U.S. patent held by Business Objects, S.A. See "--Litigation with
Business Objects, S.A." and Part II, Item 1, "Legal Proceedings."
Finally, in the future the Company may rely upon certain software that it
may license from third parties, including software that may be integrated with
the Company's internally developed software and used in the Company's products
to perform key functions. There can be no assurance that these third-party
software licenses will be available to the Company on commercially reasonable
terms. The inability to obtain or maintain any such software licenses could
result in shipment delays or reductions until equivalent software could be
developed, identified, licensed and integrated, which could have a material
adverse effect on the Company's business, operating results and financial
condition.
Limited history of prior market for common stock; possible volatility of
stock price. There has been a public market for the Company's Common Stock
only since April 30, 1998, and there can be no assurance that an active public
market will continue. The market price of the shares of the Company's 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, announcement of business partnerships, technological innovations or
new product introductions by the Company or its competitors, changes of
estimates of the Company's future operating results by securities analysts,
developments with respect to copyrights or proprietary rights, general market
conditions
21
<PAGE>
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 of equity securities of many technology companies.
Broad market fluctuations, as well as economic conditions generally and in the
software industry specifically, may result in material adverse effects on the
market price of the Company's Common Stock. 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 that
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. These broad market fluctuations may
adversely effect the market price of the Company's Common Stock.
Control by existing stockholders. The Company's executive officers and
directors, together with entities affiliated with such individuals,
beneficially own a majority of the Company's Common Stock. In particular,
Yorgen Edholm, the Company's President and Chief Executive Officer and a
director of the Company, and his spouse Katherine Glassey, the Company's
Executive Vice President, Products and Services and Chief Technology Officer
and a director of the Company, beneficially own over 30% of the Company's
Common Stock. Accordingly, these stockholders may, as a practical matter,
continue to be able to control the election of a majority of the Company's
directors and the determination of all corporate actions. This concentration
of ownership could have the effect of delaying or preventing a change in
control of the Company.
Anti-takeover provisions. Certain provisions of the Company's charter
documents, including provisions relating to a classified board of directors
and provisions eliminating cumulative voting, eliminating the ability of
stockholders to take actions by written consent and limiting the ability of
stockholders to raise matters at a meeting of stockholders without giving
advance notice, may have the effect of delaying or preventing a change in
control or management of the Company, which could have an adverse effect on
the market price of the Company's Common Stock. In addition, the Board of
Directors has authority to issue up to 2,000,000 shares of Preferred Stock and
to fix the rights, preferences, privileges and restrictions, including voting
rights, of these shares without any further vote or action by the
stockholders. The rights of the holders of the Common Stock will be subject
to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The issuance of Preferred
Stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire a majority of the outstanding
voting stock of the Company, thereby delaying, deferring or preventing a
change in control of the Company. Furthermore, such Preferred Stock may have
other rights, including economic rights senior to the Common Stock, and as a
result, the issuance of such Preferred Stock could have a material adverse
effect on the market value of the Common Stock. The Company has no present
plan to issue shares of Preferred Stock. Further, Section 203 of the General
Corporation Law of the State of Delaware (as amended from time to time, the
"DGCL"), which is applicable to the Company, prohibits certain business
combinations with certain stockholders for a period of three years after they
acquire 15% or more of the outstanding voting stock of a corporation.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
22
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On January 20, 1997, Business Objects, S.A. filed a complaint (the
"Complaint") against the Company in the U.S. District Court for the Northern
District of California in San Jose, California alleging that certain of the
Company's products (including at least the BrioQuery Navigator, BrioQuery
Explorer and BrioQuery Designer products) infringe at least claims 1, 2 and 4
of U.S. Patent No. 5,555,403. In April 1997, the Company filed an answer and
affirmative defenses to the Complaint, denying certain of the allegations in
the Complaint and asserting a counterclaim requesting declaratory relief that
the Company is not infringing the patent and that the patent is invalid and
unenforceable. In December 1997, venue for the case was changed to the
Northern District of California in San Francisco, California. The Company
believes that it has meritorious defenses to the claims made in the Complaint
on both invalidity and non-infringement grounds, and intends to defend the
suit vigorously. Business Objects, S.A. contends that there was no prior
software or other prior art which allowed users to associate a familiar name
with a query or which permitted retrieved values to be semantically dynamic.
The Company has contended that, if the patent were construed to cover the
Company's current products, the patent would then also cover prior art
products, rendering the patent invalid. Business Objects, S.A. contends that
there are material differences between those prior art products and the
Company's current products. Business Objects, S.A. also contends that the
patent is valid because it has been commercially successful and widely copied
in the industry. The Company disputes these contentions. The Company and
Business Objects, S.A. are currently conducting discovery and a claims
construction hearing has been scheduled for the third quarter of this fiscal
year. The pending litigation could result in substantial expense to the
Company and significant diversion of effort by the Company's technical and
management personnel. The Complaint seeks injunctive relief and unspecified
monetary damages, and Business Objects, S.A. is expected to seek lost profits
and/or equivalent royalties. The Complaint also alleges willful infringement,
and seeks treble damages, costs and attorneys' fees. Litigation is subject to
inherent uncertainties, especially in cases such as this where complex
technical issues must be decided. The Company's defense of this litigation,
regardless of the merits of the Complaint or lack thereof, could be time-
consuming or costly, or divert the attention of technical and management
personnel, which could have a material adverse effect upon the Company's
business, operating results and financial condition. There can be no assurance
that the Company will prevail in the litigation given the complex technical
issues and inherent uncertainties in patent litigation, particularly before
the claims have been construed by the Court. In the event the Company is
unsuccessful in the litigation, the Company may be required to pay damages to
Business Objects, S.A. and could be prohibited from marketing certain of its
products without a license, which license may not be available on acceptable
terms. If the Company is unable to obtain such a license, the Company may be
required to license a substitute technology or redesign to avoid infringement,
in which case the Company's business, operating results and financial
condition could be materially adversely affected. Collectively, sales of
BrioQuery Navigator, BrioQuery Explorer and BrioQuery Designer represented
substantially all of the Company's revenues in fiscal 1996 and represented a
majority of the Company's revenues in fiscal 1997 and fiscal 1998. See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Factors That May Affect Future Operating Results--Litigation with
Business Objects, S.A." and Item 1, "Business--Proprietary Rights."
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
In connection with its initial public offering in 1998, the Company filed a
Registration Statement on Form S-1, SEC File No. 333-47263 (the "Registration
Statement"), which was declared effective by the Commission on April 30, 1998.
Pursuant to the Registration Statement, the Company registered 3,085,000
shares of its Common Stock, $0.001 par value per share, for its own account,
of which 2,775,000 shares were sold in the Company's initial public offering
and an additional 310,000 shares were sold in May 1998 when the underwriters
exercised their over-allotment option. The offering commenced on May 1, 1998
and did not terminate until the 3,085,000 shares had been sold. The aggregate
offering price of the shares registered was $36,685,000 (which includes the
aggregate offering price of shares registered on behalf of certain selling
stockholders, in the amount
23
<PAGE>
of $2,750,000). The aggregate offering price of the shares sold for the
account of the Company was $33,935,000. The managing underwriters of the
offering were Deutsche Morgan Grenfell Inc., BancAmerica Robertson Stephens,
First Albany Corporation and Piper Jaffray Inc. From January 1998 to June
1998, the Company incurred the following expenses in connection with the
offering:
<TABLE>
<S> <C>
Underwriting discounts and commissions........................... $2,375,000
Other expenses................................................... 1,136,000
----------
Total Expenses................................................... $3,511,000
==========
</TABLE>
All of such expenses were direct or indirect payments to others. The net
offering proceeds to the Company through June 30, 1998, after deducting the
total expenses above were $30,424,000. From May 1, 1998 to June 30, 1998, the
Company used such net offering proceeds, in direct or indirect payments to
others, as follows:
<TABLE>
<S> <C>
Manufacturing, sales, marketing and administrative infrastruc-
ture........................................................... $ 5,020,000
Research and development activities............................. 1,144,000
Repayment of indebtedness....................................... 3,395,000
Purchase and installation of machinery and equipment............ 792,000
Temporary investments (short-term, investment grade, interest-
bearing financial instruments)................................. 22,345,000
-----------
Working Capital Total........................................... $30,424,000
===========
</TABLE>
Each of these amounts is a reasonable estimate of the application of the net
offering proceeds. This use of proceeds does not represent a material change
in the use of proceeds described in the prospectus of the Registration
Statement.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
27.1 Financial Data Schedule.
(b) Reports on Form 8-K:
None.
24
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
Brio Technology, Inc.
Karen J. Willem
By: /s/
-----------------------------------
Karen J. Willem
Chief Financial Officer (Principal
Financial and Accounting Officer)
Date: August 11, 1998
25
<TABLE> <S> <C>
<PAGE>
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 29,741
<SECURITIES> 0
<RECEIVABLES> 6,242
<ALLOWANCES> (646)
<INVENTORY> 400
<CURRENT-ASSETS> 36,809
<PP&E> 5,419
<DEPRECIATION> (1,468)
<TOTAL-ASSETS> 41,202
<CURRENT-LIABILITIES> 11,958
<BONDS> 0
0
0
<COMMON> 47,239
<OTHER-SE> (19,207)
<TOTAL-LIABILITY-AND-EQUITY> 28,032
<SALES> 9,345
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<CGS> 1,252
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<OTHER-EXPENSES> 8,836
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<INCOME-PRETAX> (600)
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