<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, 1999
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 000-23997
BRIO TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0210797
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
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 August 3, 1999 there were 14,874,617 shares of the registrant's Common
Stock outstanding.
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<PAGE>
BRIO TECHNOLOGY, INC.
QUARTERLY REPORT ON FORM 10-Q
For the Period Ended June 30, 1999
INDEX
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
PART I. Financial Information......................................... 3
Item 1. Financial Statements:......................................... 3
Condensed Consolidated Balance Sheets June 30, 1999 and March 3
31, 1999......................................................
Condensed Consolidated Statements of Operations-- 4
Three Months Ended June 30, 1999 and 1998.....................
Condensed Consolidated Statements of Cash Flows-- 5
Three Months Ended June 30, 1999 and 1998.....................
Notes to Condensed Consolidated Financial Statements.......... 6
Item 2. Management's Discussion and Analysis of Financial Condition 9
and Results of Operations.....................................
Item 3. Quantitative and Qualitative Disclosures about Market Risk.... 23
PART II. Other Information............................................. 24
Item 1. Legal Proceedings............................................. 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, except share amounts)
<TABLE>
<CAPTION>
June 30, March 31,
1999 1999
----------- ---------
<S> <C> <C>
ASSETS (unaudited)
Current Assets:
Cash and cash equivalents............................. $ 17,577 $18,587
Short-term investments................................ 15,981 13,862
Accounts receivable, net of allowance of $721 and
$682................................................. 10,043 7,875
Inventories........................................... 339 376
Prepaid expenses and other current assets............. 2,819 1,287
----------- -------
Total current assets.............................. 46,759 41,987
Property and Equipment, net............................. 4,304 4,130
Other Assets............................................ 951 937
----------- -------
$52,014 $47,054
=========== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable...................................... $ 2,004 $ 1,778
Accrued liabilities--
Payroll and related benefits........................ 3,149 3,353
Other............................................... 3,357 2,460
Deferred revenue, current............................. 10,696 9,071
----------- -------
Total current liabilities......................... 19,206 16,662
Noncurrent deferred revenue............................. 1,217 1,200
Other noncurrent liabilities............................ 35 37
----------- -------
Total liabilities................................. 20,458 17,899
----------- -------
Commitments and contingencies (See Note 3)
Stockholders' Equity:
Common stock.......................................... 15 15
Additional paid-in capital............................ 49,679 48,348
Notes receivable from stockholders.................... (217) (217)
Deferred compensation................................. (214) (268)
Accumulated components of comprehensive loss.......... 21 33
Accumulated deficit................................... 31,556 29,155
Total stockholders' equity........................ (17,738) (18,756)
----------- -------
$ 52,014 $47,054
=========== =======
</TABLE>
See accompanying notes.
3
<PAGE>
BRIO TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
-------------------
1999 1998
--------- ---------
<S> <C> <C>
Revenues:
License fees............................................ $ 11,375 $ 6,808
Services................................................ 4,300 2,537
--------- --------
Total revenues........................................ 15,675 9,345
--------- --------
Cost of revenues:
License fees............................................ 386 280
Services................................................ 1,915 972
--------- --------
Total cost of revenues................................ 2,301 1,252
--------- --------
Gross Profit.............................................. 13,374 8,093
--------- --------
Operating Expenses:
Research and development................................ 2,399 1,558
Sales and marketing..................................... 8,107 6,277
General and administrative.............................. 1,629 1,001
Restructuring charges................................... 155 --
--------- --------
Total operating expenses.............................. 12,290 8,836
--------- --------
Income (loss) from operations............................. 1,084 (743)
Interest and other income, net............................ 273 143
--------- --------
Net income (loss) before income taxes..................... 1,357 (600)
Income taxes.............................................. 339 --
--------- --------
Net income (loss)......................................... $ 1,018 $ (600)
========= ========
Basic net income (loss) per share......................... $ 0.07 $ (0.05)
========= ========
Shares used in computing basic net income (loss) per
share.................................................... 14,744 11,459
========= ========
Diluted net income (loss) per share....................... $ 0.06 $ (0.05)
========= ========
Shares used in computing diluted net income (loss) per
share.................................................... 15,948 11,459
========= ========
</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,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)....................................... $ 1,018 $ (600)
Adjustments to reconcile net income (loss) to cash
provided by operating activities--
Depreciation and amortization......................... 404 292
Provision for returns and doubtful accounts........... 39 95
Deferred compensation amortization.................... 28 35
Loss on disposal of property and equipment............ 71 --
Changes in operating assets and liabilities--
Accounts receivable................................. (2,207) 817
Inventories......................................... 37 (39)
Prepaid expenses and other assets................... (1,603) (98)
Accounts payable and accrued liabilities............ 917 392
Deferred revenue.................................... 1,642 275
--------- ---------
Cash provided by operating activities............. 346 1,169
--------- ---------
Cash Flows from Investing Activities:
Purchase of short-term investments...................... (6,606) --
Sales of short-term investments......................... 4,461 --
Purchases of property and equipment..................... (592) (1,089)
--------- ---------
Cash used in investing activities................. (2,737) (1,089)
--------- ---------
Cash Flows from Financing Activities:
Repayments under notes payable.......................... -- (3,437)
Proceeds from issuance of common stock, net............. 1,257 30,466
Income tax benefit from exercise of options............. 100 --
--------- ---------
Cash provided by financing activities............. 1,357 27,029
--------- ---------
Net (decrease) increase in cash and cash equivalents.... (1,034) 27,109
Effect of exchange rate changes on cash................. 24 (15)
Cash and cash equivalents, beginning of period.......... 18,587 2,647
--------- ---------
Cash and cash equivalents, end of period................ $ 17,577 $ 29,741
========= =========
</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, 1999.
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
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 the earlier of the date payments become due or the date payment
is received. 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.
Comprehensive Net Income (Loss)
A summary of comprehensive net income (loss) follows (in thousands):
<TABLE>
<CAPTION>
Three Months
Ended June 30,
----------------
1999 1998
------- -------
<S> <C> <C>
Net income (loss)............................................. $ 1,018 $ (600)
Unrealized loss on short-term investments..................... (26) --
Foreign currency translation adjustment....................... 24 (15)
------- ------
Comprehensive net income (loss)............................... $ 992 $ (615)
======= ======
</TABLE>
6
<PAGE>
BRIO TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Computation of Basic and Diluted Net Income (Loss) Per Share
Basic net income (loss) per share is computed using the weighted average
number of shares of common stock outstanding. Diluted net income per share
information is computed using the weighted average number of shares of common
and potential common stock outstanding. For the three months ended June 30,
1998, potential common shares from conversion of preferred stock, stock
options and warrants and contingently issuable shares have been excluded from
the calculation of diluted net loss per share as they are antidilutive.
Potential common shares of 2,828,063 were not included in the computation of
diluted loss per share for the three month period ended June 30, 1998, because
Brio incurred a loss in this period and, therefore, their effect would be
antidilutive.
The following is a reconciliation of the weighted average common stock used
to calculate basic net income per share to the weighted average common and
potential common shares used to calculate diluted net income per share for the
three months ended June 30, 1999 (in thousands):
<TABLE>
<S> <C>
Shares used in computing basic net income per share...................... 14,744
Options................................................................ 1,151
Other contingent common stock.......................................... 53
------
Shares used in computing diluted net income per share.................... 15,948
======
</TABLE>
Options to purchase 243,960 shares of common stock at the weighted average
exercise price of $19.10 per share were outstanding at June 30, 1999, but were
not included in the computation of diluted net income per share because the
options' exercise prices were greater than the average market price of the
common shares.
Note 2. Notes Payable.
At June 30, 1999, Brio 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 (7.75% at June 30, 1999). At June 30, 1999,
no amounts were outstanding under these arrangements. 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 Brio's assets,
including Brio's intellectual property, accounts receivable and property and
equipment. This line of credit requires Brio to comply with various financial
covenants, including quarterly requirements to maintain a minimum quick ratio,
and minimum tangible net worth. The line expires on December 1, 1999.
Note 3. Litigation.
On January 20, 1997, Business Objects, S.A. filed a complaint (the
"Complaint") against Brio in the U.S. District Court for the Northern District
of California in San Jose, California alleging that certain of Brio's products
infringe U.S. Patent No. 5,555,403. The Complaint seeks injunctive relief and
unspecified monetary damages. In April 1997, Brio 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
Brio 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. Based on the
advice of Brio's patent counsel, Brio 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. A claims
construction hearing was held on April 5, 1999. At the hearing, the court set
the trial date for September 13, 1999. The court also issued its claims
construction ruling on April 6, 1999. Brio and Business Objects, S.A. are
currently conducting discovery. The pending litigation could result in
substantial expense to Brio and significant diversion of effort by Brio's
technical and management personnel. Litigation is subject to inherent
uncertainties, especially in cases such as this where
7
<PAGE>
BRIO TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
complex technical issues must be decided. Brio'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 Brio's business,
operating results and financial condition. There can be no assurance that Brio
will prevail in the litigation given the complex technical issues and inherent
uncertainties in patent litigation. In the event Brio is unsuccessful in the
litigation, Brio 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 Brio is unable to
obtain such a license, Brio may be required to license a substitute technology
or redesign to avoid infringement, in which case Brio's business, operating
results and financial condition could be materially adversely affected.
Collectively, sales of BrioQuery Navigator, BrioQuery Explorer and BrioQuery
Designer represented a majority of Brio's revenues in fiscal 1997 and fiscal
1998 and a significant portion of Brio's revenues in fiscal 1999. Given the
early stages of discovery in this matter, Brio is unable to estimate the
likelihood that they will prevail in this matter or amount of loss, if any,
which may be incurred as a result of the Complaint.
Note 4. Subsequent Event.
On August 3, 1999, pursuant to the Agreement and Plan of Merger, Brio
completed the merger with SQRIBE Technologies Corp. (SQRIBE) in a tax-free,
stock-for-stock transaction. Under the terms of the merger, upon closing of
the agreement, Brio stockholders held approximately 55% of Brio, with former
SQRIBE stockholders holding approximately 45%. The merger is being accounted
for as a pooling of interests.
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, and with the audited financial
statements and notes thereto of the Company for the fiscal year ended March
31, 1999 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
Brio designs, develops, markets and supports enterprise business
intelligence software, which is software that enables organizations to
maximize the value of their corporate information through intuitive,
interactive data access and analysis. Brio had net losses of $6.0 million in
fiscal 1997, $8.1 million in fiscal 1998 and $887,000 in fiscal 1999. Brio had
an accumulated deficit of approximately $18.8 million as of March 31, 1999.
See "Risk Factors That May Affect Future Operating Results" for a description
of the risks related to Brio's operating results fluctuating in future
periods.
Brio's revenues consist of license fees for software products and fees for
services, 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 Brio's products. Brio
generally discontinues marketing older product versions when a new product
version is introduced. The products are typically licensed on a per user basis
with the price per user varying based on the selection of products licensed.
Additionally, Brio also sells larger enterprise-wide implementations of their
products through site licenses 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.
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. If vendor-
specific objective evidence does not exist to allocate the total fee to
all delivered and undelivered elements of the arrangement, revenue is
deferred until such evidence does exist, or until all elements are
delivered, whichever is earlier.
If payments are subject to extended payment terms and are not deemed fixed
or determinable, Brio defers revenue until payments become due. If an
acceptance period is required, Brio recognizes revenue upon the earlier of
customer acceptance or the expiration of the acceptance period. Brio
establishes allowances for potential product returns and credit losses, which
have been insignificant to date. Brio charges fees for services separately
from license fees. Brio recognizes revenues from maintenance and support
services, including ongoing product support and periodic product updates,
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. Brio recognizes revenues from training and consulting
services when the services are performed.
To date, Brio has derived revenues from license fees principally from direct
sales of software products to end users through Brio's direct sales force.
Although Brio believes that such direct sales will continue to account for a
significant portion of revenues from license fees in the foreseeable future,
Brio has recently developed and intends to continue to develop reselling
relationships with value added resellers, resellers and distributors. Brio
9
<PAGE>
expects that revenues from sales through value added resellers, resellers and
distributors will increase in the future as a percentage of revenues from
license fees. Revenues from value added resellers, resellers and distributors,
were 7% of total revenues for fiscal 1997 and 15% of total revenues for fiscal
1998 and 1999. Brio'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 relationships with
value added resellers, resellers and distributors. See "Factors That May
Affect Future Operating Results" for a description of the risks related to
Brio's sales strategy.
Brio is also increasing its efforts to sell customers licenses to larger,
enterprise-wide implementations of Brio's products, rather than departmental
or local network sales, which may increase the complexity and length of the
sales cycle. Brio has in the past and may in the future choose to grant
greater pricing and other concessions, such as discounted training and
consulting, for sales of site licenses. See "Factors That May Affect Future
Operating Results" for a description of the risks related to the sales cycle
of Brio's products.
Brio 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. Brio's direct sales
offices in the United Kingdom and Australia were formed through the
acquisition of distributors in those countries. Sales to customers outside of
the United States and Canada, including sales generated by Brio's foreign
subsidiaries, represented 14% of total revenues for fiscal 1997, 19% of total
revenues for fiscal 1998, and 17% of total revenues for fiscal 1999. A
substantial portion of Brio's international sales in the past have been
denominated and collected in foreign currencies and Brio believes that a
portion of Brio's cost of revenues and operating expenses will continue to be
incurred in foreign currencies. To date, there have been no material effects
of changes in foreign currency exchange rates on revenues or operating
expenses. During fiscal 1999, Brio incurred foreign currency transaction
losses of $127,000 resulting from intercompany receivables from its foreign
subsidiaries. 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 Brio'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 Brio 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" for a description of the risks related to Brio's
international sales strategy.
Although Brio has experienced significant quarter-to-quarter revenue growth
in fiscal 1999, 1998 and 1997, the same rate of sequential quarterly revenue
growth may not be sustainable and profitability may not be attained in the
future. Brio currently intends to commit substantial financial resources to
. research and development,
. customer support,
. sales and marketing, including the expansion of its direct sales force,
third-party partnering relationships and its indirect channel sales
organization,
. increased staffing and systems infrastructure to support Brio's
expanding operations, and
. merger-related expenses and integration costs associated with the
recently completed merger with Sqribe.
Brio also expects that expenses relating to its litigation with Business
Objects, S.A. will increase in future periods. As a result, Brio expects that
its operating expenses will increase significantly in fiscal 2000. See
"Factors That May Affect Future Operating Results" for a description of Brio's
litigation and its impact on Brio's financials.
10
<PAGE>
Results of Operations
The following table includes consolidated statements of operations data as a
percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
Three Months
Ended June 30,
-----------------
1999 1998
------- -------
<S> <C> <C>
Consolidated Statements of Operations Data:
Revenues:
License fees.............................................. 73% 73%
Services.................................................. 27 27
------- -------
Total revenues.......................................... 100 100
Cost of revenues:
License fees.............................................. 2 3
Services.................................................. 13 10
------- -------
Total cost of revenues.................................. 15 13
------- -------
Gross profit................................................ 85 87
Operating expenses:
Research and development.................................... 15 17
Sales and marketing......................................... 52 67
General and administrative.................................. 10 11
Restructuring charges....................................... 1 --
------- -------
Total operating expenses.................................... 78 95
------- -------
Income (loss) from operations............................... 7 (8)
Interest and other income, net.............................. 2 2
------- -------
Net income (loss) before income taxes....................... 9 (6)
Income taxes................................................ (2) --
------- -------
Net income (loss)........................................... 7% (6)%
======= =======
</TABLE>
Revenues
Brio derives revenues from license fees and services, which include software
maintenance and support, training and system implementation consulting. Total
revenues increased by 68% from $9.3 million for the three months ended June
30, 1998 to $15.7 million for the three months ended June 30, 1999.
Revenues by geographic location were as follows for the three months ended
June 30, 1998 and 1999:
<TABLE>
<CAPTION>
Three Months
Ended June 30,
--------------
1999 1998
------- ------
<S> <C> <C>
Revenues by Geography:
Domestic......................................................... $12,694 $7,808
International.................................................... 2,981 1,537
------- ------
Total revenues................................................. $15,675 $9,345
======= ======
</TABLE>
Revenue from international sources increased by 94% from $1.5 million for
the three months ended June 30, 1998 to $3.0 million for the three months
ended June 30, 1999. The increase was primarily due to increased license
revenues.
License Fees. Revenues from license fees increased by 67% from $6.8 million
for the three months ended June 30, 1998 to $11.4 million for the three months
ended June 30, 1999. Approximately $1.6 million of the
11
<PAGE>
increase was due to growing sales to new customers and approximately $3.0
million of the increase was due to increased follow-on sales to existing
customers.
Services. Service revenues increased by 69% from $2.5 million for the three
months ended June 30, 1998 to $4.3 million for the three months ended June 30,
1999. Approximately $1.5 million of the increase was due to an increase in
maintenance and support revenues and approximately $300,000 of the increase
was due to an increase in training and consulting revenues related to
increases in Brio'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 by 38% from
$280,000 for the three months ended June 30, 1998 to $386,000 for the three
months ended June 30, 1999. The increase in absolute dollars was due to the
increase in the number of licenses sold. The decrease as a percentage of total
revenues 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, and economies of scale associated with
absorbing fixed costs over a larger revenue base. 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 revenues from services consists primarily of personnel
costs and third-party consulting fees associated with providing software
maintenance and support, training and consulting services. Cost of revenues
from services increased by 97% from $972,000 for the three months ended June
30, 1998 to $1.9 million for the three months ended June 30, 1999.
Approximately $528,000 of the increase was due to increases in personnel and
related costs resulting from Brio's expansion of its support services in
response to increased demand for maintenance and support, training and
consulting services and approximately $400,000 of the increase was due to
increases in the use of outside consultants for training and consulting
services. Cost of revenues from services may vary between periods due to the
mix of services provided by Brio'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 by 54% from
$1.6 million for the three months ended June 30, 1998 to $2.4 million for the
three months ended June 30, 1999. Approximately $460,000 of the increase was
due to increased personnel and related costs required to continue to develop
new products and enhance existing products. Approximately $340,000 of the
increase was due to increased localization costs. Brio believes that
significant investment for 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. Brio
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 by 29% from $6.3
million for the three months ended June 30, 1998 to $8.1 million for the three
months ended June 30, 1999. Approximately $970,000 of the increase was
attributable to the costs associated with the expansion of Brio's sales and
marketing organization, including domestically through the growth of the
telesales organization, internationally through the establishment of
subsidiary offices in the United Kingdom, Australia, and France and through
the expansion of the worldwide field sales organization, approximately
$400,000 of the increase was attributable to higher sales commissions, bonuses
and sales incentives associated with increased revenues and approximately
$430,000 of the increase was
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attributable to increased domestic and international marketing expenses,
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. Brio 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. These expenses are currently intended to be funded by Brio's working
capital. In particular, Brio expects that sales compensation, travel and
related expenses will increase significantly as Brio continues to increase the
number of its direct sales personnel and its emphasis on direct field sales
efforts. Nonetheless, Brio 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 by 63% from
$1.0 million for the three months ended June 30, 1998 to $1.6 million for the
three months ended June 30, 1999. Approximately $290,000 of the increase was
attributable to increased personnel and related costs approximately $310,000
of the increase was attributable to professional fees necessary to manage and
support Brio'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 Brio's administrative operations and
increased revenues. Brio expects that its general and administrative expenses
will increase in absolute dollars as Brio 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. Brio expects
that such expenses will continue to vary as a percentage of total revenues.
Restructuring Charges. Restructuring charges of $155,000 for the three
months ended June 30, 1999 were related to Brio's merger with SQRIBE
Technologies, Corp., which was completed on August 3, 1999, and the reduction
in personnel associated with the integration of the two companies. There were
no restructuring charges in the three months ended June 30, 1998. Brio expects
that substantially all of the charges for the quarter ended June 30, 1999 will
be paid by August 31, 1999. Brio also expects to incur additional merger
related restructuring costs during the next two quarters of fiscal 2000.
Deferred Compensation. In connection with the granting of 1,369,368 stock
options to employees during fiscal 1998, with a weighted average exercise
price of $1.49 per share and a weighted average deemed fair market value of
$1.91 per share, Brio 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 stockholders' 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,
approximately $28,000 was expensed during the three months ended June 30,
1999, and the balance will be expensed ratably over the next three years as
the options vest.
Interest and Other Income, Net
Interest and other income, net, is comprised primarily of interest income
and foreign currency transaction gains or losses, and realized gains or losses
from the sale of investments, net of interest expense. Interest expense is
comprised of interest incurred on Brio's bank line of credit. Interest and
other income, net, increased from $143,000 for the three months ended June 30,
1998 to $273,000 for the three months ended June 30, 1999. The increase in
interest and other income, net, is attributable to a decrease in the amount of
borrowings on Brio's line of credit as a result of Brio's initial public
offering and an increase in interest income due to larger cash balances
associated with the closing of Brio's initial public offering in May 1998,
offset by foreign currency transaction losses of approximately $35,000.
Income Taxes
Brio's estimated effective tax rate in the first quarter of fiscal 2000 was
25%. The increase in the effective tax rate over the first quarter of fiscal
1999 relates primarily to the utilization of Federal and state net operating
loss carryforwards in fiscal 1999.
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Liquidity and Capital Resources
As of June 30, 1999, Brio had cash, cash equivalents and short-term
investments of $33.6 million. In addition, Brio maintains a bank line of
credit which provides for up to $10.0 million in borrowings, with interest at
the bank's prime rate. Brio can borrow up to 80% of eligible accounts
receivable against this line, with an additional $1.5 million in non-formula
availability. Borrowings are secured by substantially all of Brio's assets,
including Brio's copyrights and trademarks to the extent required to secure
the Bank's interest in the accounts receivables. The line of credit requires
Brio 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. As of June 30, 1999,
there were no outstanding bank borrowings.
Net cash provided by operating activities was $1.2 million for the three
months ended June 30, 1998 and $346,000 for the three months ended June 30,
1999. The decrease of $854,000 was due to changes in operating assets and
liabilities of approximately $2.4 million, offset by decreases in net losses
of approximately $1.6 million.
Net cash used in investing activities was $1.2 million for the three months
ended June 30, 1998, consisting of purchases of property and equipment. Net
cash used in investing activities was $2.7 million for the three months ended
June 30, 1999, consisting primarily of $2.1 million for the purchase of short-
term investments, net, and approximately $600,000 for the purchase of property
and equipment.
Net cash provided by financing activities was $27.0 million for the three
months ended June 30, 1998, consisting primarily of the net proceeds from
Brio's initial public offering and $1.4 million for the three months ended
June 30, 1999, consisting primarily of proceeds from the issuance of common
stock to employees under various incentive stock plans.
Year 2000 Readiness
Background. Computer systems have traditionally used a two-digit field to
designate a year. This format will not recognize the century date change that
will take place at the end of 1999. Such systems will recognize the year 2000
as 1900, not at all, or some year other than 2000. The inability to recognize
the proper date can and will cause systems to process information incorrectly,
resulting in system failures or other serious business problems.
Risks. Although Brio has been committed to ensuring all our systems are year
2000 compliant prior to December 1999, we may experience some operational
interruptions due to the year 2000 problem. We may also experience operational
difficulties caused by undetected errors or defects in the technology we use
in our internal systems. Brio's year 2000 readiness team has developed and is
implementing a four phase approach in order to prepare the organization for
any interruption which may occur on the advent of the year 2000.
Assessment Plan. Brio's year 2000 readiness team developed a plan which
consisted of four phases.
. In phase one, Brio identified and contacted the vendors of all of Brio's
internal information systems and non-informational technology systems to
determine whether these systems could potentially present a year 2000
problem. Brio requires that all vendors who provide material hardware or
software for Brio's information technology systems, or upgrades or
replacements of those products, provide assurances of their year 2000
compliance. Brio completed phase one in December 1998.
. In phase two, Brio will identify mission critical technology systems and
proceed to test these systems for their year 2000 compliance. Testing
will include automated polling of networked client and server computers,
compilation of relevant data regarding the software used by Brio, and a
manual review of the compiled data to locate systems which may be
vulnerable to year 2000 problems. This phase will also include the
establishment of replica systems for critical software and hardware
systems, rolling forward the replica date to December 31, 1999, allowing
the system to roll over into the year 2000 and
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observing the results. End users and Brio's year 2000 readiness team
will then conduct simulations, and verify and evaluate compliance and
test integrated systems for potential failure which might occur. Phase
two is scheduled to be completed in September 1999.
. In phase three, Brio's year 2000 readiness team, working with end users
and management, will develop contingency plans for mission-critical
technology systems. Phase three is scheduled to be completed in October
1999.
. In phase four, Brio's year 2000 readiness team, information technology
department staff and end users will perform tests and evaluate readiness
of mission critical technology systems on December 31, 1999. In order to
circumvent system failures resulting from any unanticipated year 2000
failures, all mission critical technology systems must be judged ready
for the start of the next business day or the steps outlined in Brio's
contingency plans will be initiated.
Cost. Brio anticipates that the total cost of the year 2000 program,
including the cost of material upgrades, purchase of replica servers, software
modifications and related consulting fees, will be approximately $150,000.
Contingency Plans. Brio has not yet finalized any contingency plans as a
result of its year 2000 readiness program, but will prepare contingency plans
upon the conclusion of its assessment of the results of our year 2000
simulation testing and third-party vendor and service provider responses.
Factors That May Affect Future Operating Results
Because our plans to achieve profitability in the future require us to grow
our work force, improve our infrastructure and acquire and develop new
technologies, failure to successfully do so could lower our operating results
and cause our stock price to decrease. If we cannot execute our growth
strategy, our stock price could decrease. Successfully achieving our growth
strategy depends upon the combined company's ability to:
. expand, train and manage our work force;
. continue to attract, retain and motivate qualified personnel; and
. develop or acquire new businesses, products and technologies.
In addition, if we cannot manage an expanding work force, improve our
reporting systems and customer service infrastructure and manage the
integration of acquired businesses, products or technologies, we will be
unable to continue manage the growth of our operations, which could harm our
business and financial results.
Brio has a history of net losses, and may not be profitable in the
future. Brio has a history of net losses, and cannot provide any assurance
that we will experience revenue growth or profitability on a quarterly or
annual basis in the future. In particular, Brio incurred net losses of $6.0
million in fiscal 1997, $8.1 million in fiscal 1998 and $887,000 in fiscal
1999. As of March 31, 1999, Brio had stockholders' equity of approximately
$29.2 million.
Brio anticipates increased operating expenses and a reduced rate of revenue
growth in the future. Brio currently expects to increase its expenses, and our
operating results will be harmed if increased revenues do not accompany these
increased expenses. Brio does not expect to sustain in future periods the same
rate of sequential quarterly revenue growth it has experienced in the past. In
addition, Brio will likely increase its operating expenses significantly in
fiscal 2000. Brio currently intends to commit substantial financial resources
to research and development, customer support and sales and marketing,
including the continued expansion of its domestic and international direct
sales force, third-party partnering relationships and Brio's domestic and
international indirect channel sales organization, and expects that expenses
relating to Brio's litigation with Business Objects, S.A. will increase in
future periods. Brio also expects to increase staffing and systems
infrastructure in order to support expanding operations.
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Our prospects for increased future revenues 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 combined company must:
. 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.
Brio may not be able to achieve these goals.
Brio's quarterly operating results will likely fluctuate based on factors
beyond our control. Brio 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 its control. Among other things, Brio's
operating results have fluctuated in the past due to:
. the timing of product enhancements and new product announcements;
. the lengthy sales cycle of its products;
. market acceptance of and demand for its products;
. capital spending patterns of its customers;
. customer order deferrals in anticipation of enhancements or new
products;
. its 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.
In addition, the announcement or introduction of new products by Brio or its
competitors or any change in industry standards may cause customers to defer
or cancel purchases of existing products. Furthermore, the introduction of
products with reliability, quality or compatibility problems could result in
reduced orders, delays in collecting accounts receivable and additional
service costs. Accordingly, Brio's results of operations may also fluctuate in
the future due to a number of additional factors, including but not limited to
those discussed above, as well as:
. the number and significance of product enhancements and new product
announcements by competitors;
. changes in customer buying patterns related to the year 2000 issue;
. changes in pricing policies by Brio and its competitors;
. Brio's ability to develop, introduce and market new and enhanced
versions of its products on a timely basis;
. customer order deferrals in anticipation of enhancements or new products
offered by 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 litigation between
Brio and Business Objects, S.A.; and
. general economic conditions.
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Due to these factors, quarterly revenue and operating results are difficult
to forecast and may not meet expectations.
Seasonality may affect Brio's results. Brio has experienced seasonality due
to customer capital spending patterns and the general summer slowdown in
sales. Brio expects to continue to experience seasonality as a result of these
factors. This seasonality could materially hurt results of operations,
particularly for the quarters ending June 30 or September 30.
If Brio's operating results do not meeting financial analysts' expectations,
our stock price may decline. In the future, our reported or anticipated
operating results may fail to meet or exceed the expectations of securities
analysts or investors. In that event, Brio's common stock price could be
materially reduced.
Because Brio depends on a direct sales force, any failure by Brio to attract
and retain adequate sales personnel could slow its sales and increase its
expenses, causing significant financial and operational risks. Brio may not be
able to attract and retain adequate sales personnel, despite the expenditure
of significant resources to do so, and the failure to do so could materially
harm its ability to sell its products at expected levels. Because turnover
tends to slow sales efforts until replacement personnel can be recruited and
trained, failure to retain sales personnel could seriously hamper its
business, operating results and financial condition. Competition for personnel
with a sufficient level of expertise and experience for direct sales positions
is intense, particularly among competitors who may have substantially greater
resources than the combined company or greater resources dedicated to hiring
direct sales personnel. In addition, Brio has experienced significant turnover
of its sales force.
Brio's success depends on key personnel who may not continue to work for it.
The loss of the services of any of the key personnel or the inability to
attract or retain qualified personnel in the future could harm Brio's
business, operating results and financial condition. The success of Brio will
depend to a significant degree upon the continued contributions of key
management, engineering, sales and marketing personnel, many of whom would be
difficult to retain or replace if they leave Brio. Because competition for
qualified personnel is intense, Brio may not be successful in attracting and
retaining the personnel it seeks.
Brio has recently experienced difficulties in hiring highly qualified sales
and engineering personnel, and may continue to have difficulty in attracting
employees in those categories. Brio has employment contracts with only three
members of its executive management personnel. Brio currently maintains "key
person" life insurance only on Yorgen Edholm, its President and Chief
Executive Officer, and Katherine Glassey, its Executive Vice President,
Products and Services and Chief Technology Officer. Brio does not believe its
current insurance would adequately compensate it for the loss of either Mr.
Edholm or Ms. Glassey.
Because the sales cycle for Brio's products is long, the timing of sales is
difficult to predict and Brio's quarterly revenues and earnings may fluctuate
significantly. Based in part on the lengthy sales cycle for Brio's products,
quarterly revenues and operating results could vary significantly in the
future. The sales cycle associated with the purchase of Brio's products is
typically three to nine months in length and subject to a number of
significant risks over which Brio has little or no control, including
customers' budgeting constraints and internal acceptance review procedures.
Sales transactions may be delayed during the customer acceptance process
because Brio must provide a significant level of education to prospective
customers regarding the use and benefits of its products. Further, to the
extent that potential customers divert resources and attention to issues
associated with the year 2000 issue, Brio's sales cycle could be further
lengthened. Additionally, the sales cycle for Brio'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, if Brio's
international operations expand, the average sales cycle for its products is
expected to lengthen. In addition, Brio anticipates that an increasing portion
of its revenue could be derived from larger orders, in which case the timing
of receipt and fulfillment of those orders could cause material fluctuations
in operating results, particularly on a quarterly basis.
Because Brio expects to achieve revenue growth and increased margins through
indirect sales channels, Brio's failure to develop and manage indirect sales
channels could limit its sales growth and financial
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performance. Brio may not be able to continue to attract and retain additional
indirect channel partners that will be able to market its products effectively
and provide timely and cost-effective customer support and services. Brio may
not be able to manage conflicts within its indirect channel or that its focus
on increasing sales through the indirect channels will not divert management
resources and attention from direct sales. In addition, Brio's agreements with
indirect channel partners do not restrict the channel partners from
distributing competing products, and in many cases may be terminated by either
party without cause. The ability of Brio to achieve revenue growth and
improved operating margins on product sales in the future will depend in large
part upon its success in expanding and maintaining indirect channels
worldwide. Indirect channels include value added resellers, resellers and
distributors.
To date, Brio has sold its products principally through its direct sales and
service organizations and, to a lesser extent, through the indirect channel.
Revenues from Brio's indirect channel were 7% of total revenues for fiscal
1997 and 15% of total revenues for fiscal 1998 and 1999.
Brio's strategy of acquiring new businesses and technologies involves
integration and transaction completion risks. As part of our business
strategy, we expect to enter into business combinations and acquisitions.
Acquisition transactions are accompanied by a number of risks, including:
. the difficulty of assimilating the operations and personnel of the
acquired companies;
. the potential disruption of our ongoing business and distraction of
management;
. the difficulty of incorporating acquired technology or content and
rights into our products;
. the correct assessment of the relative percentages of in-process
research and development expense which can be immediately written off as
compared to the amount which must be amortized over the appropriate life
of the asset;
. the failure to successfully develop an acquired in-process technology
could result in the impairment of amounts currently capitalized as
intangible assets;
. unanticipated expenses related to technology integration;
. the maintenance of uniform standards, controls, procedures and policies;
. the impairment of relationships with employees and customers as a result
of any integration of new management personnel; and
. the potential unknown liabilities associated with acquired businesses.
We may not be successful in addressing these risks or any other problems
encountered in connection with such acquisitions.
Brio is in a highly competitive industry and some of its competitors may be
more successful in attracting and retaining customers. The market in which
Brio operates is highly competitive. Brio expects that competition will
continue to intensify. Increased competition could result in:
. price reductions;
. fewer customer orders;
. reduced gross margins;
. longer sales cycles; and
. loss of market share.
Brio 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 Brio's existing products.
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Current and potential competitors offer a variety of software solutions and
generally fall within four categories:
. vendors of business intelligence software, including Cognos, Business
Objects, Hummingbird and Seagate Software;
. vendors offering alternative approaches to delivering analysis
capabilities to users, including Information Advantage and
MicroStrategy;
. database vendors that offer products which operate specifically with
their proprietary database, including Microsoft, IBM, and Oracle; and
. other companies that may in the future announce offerings of enterprise
business intelligence solutions.
These 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 Brio. Brio
expects additional competition as other established and emerging companies
enter into the business intelligence software market and new products and
technologies are introduced. Brio will compete on the basis of the following
factors:
. product features;
. time to market;
. ease of use;
. product performance;
. product quality;
. analytical capabilities;
. user scalability;
. open architecture;
. customer support; and
. price.
Brio's failure to compete favorably in these areas could limit its ability
to attract and retain customers, which could have a material adverse affect on
our results of operations.
Market consolidation may create more formidable competitors. Alliances among
current and new competitors may emerge and rapidly gain significant market
share. The failure of Brio to compete successfully against current and future
competitors could materially harm its business, operating results and
financial condition by driving down prices and reducing revenue growth.
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 Brio's
prospective customers. Current or future indirect channel partners of Brio may
establish cooperative relationships with current or potential competitors,
thereby limiting Brio's ability to sell its products through particular
distribution channels. Such competition could have a material adverse effect
on Brio's ability to obtain new licenses, and maintenance and support renewals
for existing licenses, on favorable terms. Further, competitive pressures may
require Brio to reduce the price of its products, which could have a material
adverse effect on its revenues, profitability and business condition.
Brio's litigation with Business Objects, S.A. could result in substantial
expense to Brio and a significant diversion of effort by its management and
technical personnel. In addition, if the outcome of this litigation is
unfavorable, Brio may be required to pay damages and be enjoined from selling
its products or required to obtain a license or modify its products to
continue to sell them. Brio's pending litigation with Business Objects, S.A.
could result in substantial expense to Brio and significant diversion of
effort by its technical and management personnel.
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Business Object, S.A.'s 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 like
this where complex technical issues must be decided. Brio's defense of this
litigation, regardless of the merits or lack of merit of the complaint, could
be time-consuming or costly, or divert the attention of technical and
management personnel, which could have a material adverse effect upon Brio's
business, operating results and financial condition. Brio may not prevail in
the litigation given the complex technical issues and inherent uncertainties
in patent litigation, particularly before the court has construed the claims.
In the event Brio is unsuccessful in the litigation, it may be required to
pay damages to Business Objects and could be prohibited from marketing its
BrioQuery Navigator, BrioQuery Explorer and BrioQuery Designer products
without a license, which may not be available on acceptable terms. If Brio is
unable to obtain a license, it may be required to license a substitute
technology or redesign to its products to avoid infringement, in which case
its 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 Brio's
revenues in fiscal 1996 and a majority of its revenues in fiscal 1997 and
fiscal 1998. For more information regarding Brio's litigation with Business
Objects S.A., see "Information Regarding Brio--Business of Brio; Legal
Proceedings."
Brio's plans to expand internationally expose Brio to risks related to
managing international operations, currency exchange rates, tariffs and other
difficulties related to foreign operations. A key component of Brio's strategy
is its planned expansion into additional international markets. If the
international revenues generated by these expanded operations are not adequate
to offset the expense of establishing and maintaining these foreign
operations, Brio's business, operating results and financial condition could
be materially harmed. In addition to the uncertainty as to Brio's ability to
expand its international presence, there are risks inherent in doing business
on an international level, including:
. technical difficulties associated with product localization in foreign
countries;
. 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;
. political instability;
. fluctuations in currency exchange rates;
. seasonal reductions in business activity during the summer months in
Europe; and
. potentially adverse tax consequences.
Each of these factors could adversely impact the success of Brio's
international operations and, consequently, on Brio's business, operating
results and financial condition. In particular, Brio's international sales are
generally denominated and collected in foreign currencies, and Brio has not
historically undertaken foreign exchange hedging transactions to cover
potential foreign currency exposure. Brio incurred losses on foreign currency
translations resulting from intercompany receivables from foreign subsidiaries
in an amount of approximately $131,000 in fiscal 1998 and approximately
$127,000 in fiscal 1999.
Brio's future success will depend upon successful product development in the
face of changing customer requirements and rapid technological change. Brio's
failure to develop and introduce new products and product enhancements on a
timely basis that meet changing customer requirements and technological
changes could
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result in reduced demand for or market acceptance of Brio's products, which
could hurt Brio's business, operating results and financial condition. Brio's
products incorporate a number of advanced technologies, including proprietary
data analysis engines, a distributed architecture, as well as Web access and
delivery technology. Brio 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.
Brio may not successfully respond to changing technology, identify new
product opportunities or develop and bring new products to market in a timely
and cost-effective manner. In the past Brio has experienced delays in software
development. In particular, development efforts in the UNIX server environment
are complex, and in the past Brio has encountered delays in developing
products for this environment. Brio may experience delays in connection with
current or future product development activities.
Because Brio's future success will depend upon successful product
development in the face of evolving industry standards, failure to introduce
new products could hurt its growth and profitability. Brio's failure to
introduce new products or product enhancements on a timely basis that are
compatible with industry standards could delay or hinder demand for or market
acceptance of its products, which could hurt Brio's growth and profitability.
The market may not accept Brio's products, which would reduce revenues,
growth and profitability. Brio is focusing its selling efforts increasingly on
larger, enterprise-wide implementations of its products, and Brio expects
these sales to constitute an increasing portion of any of its future revenue
growth. Failure of a significant market for enterprise business intelligence
products to develop, or failure of enterprise-wide implementations of Brio's
products to achieve broad market acceptance, could materially harm Brio's
business, operating results and financial condition. To date, Brio's selling
efforts have resulted in limited enterprise-wide implementations of its
products. Brio believes that most companies currently are not yet aware of the
benefits of enterprise-wide business intelligence solutions or of its products
and capabilities, nor have most companies deployed business intelligence
solutions on an enterprise-wide basis. Brio's efforts to promote market
awareness of its products and the problems its products address may not be
sufficient to build market awareness of the need for enterprise business
intelligence or acceptance of Brio's products.
The year 2000 problem could cause Brio's software products to malfunction
and Brio's customers to cease their purchasing of Brio's products. Brio's
computer systems and applications could fail or create erroneous results
unless corrected so that they can process data related to the year 2000 and
beyond. Brio relies on its systems, applications and devices in operating and
monitoring all major aspects of its business, including financial systems,
customer services, infrastructure, networks and telecommunications equipment.
Brio also relies, directly and indirectly, on external systems of business
enterprises including customers, suppliers, creditors, financial
organizations, and governmental entities, both domestic and international, for
accurate exchange of data. Brio has not fully identified the impact of the
year 2000 issue on its internal systems or whether it can resolve these issues
without disruption of its business and without incurring significant expense.
In addition, even if Brio's internal systems are not materially affected by
the year 2000 issue, Brio could be affected through disruption in the
operation of the enterprises with which it interacts. Furthermore, Brio
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 like those offered by Brio, which could have a
material adverse effect on Brio's business, operating results and financial
condition.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations" for a discussion of the impact of the year 2000 problem on
Brio's operations.
Product defects could adversely affect Brio's operating results. As a result
of their complexity, Brio's software products may contain undetected errors,
failures or viruses. Brio or its customers may discover errors
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in new products or enhancements after commencement of commercial shipments,
resulting in loss of revenues, delay in market acceptance or damage to Brio's
reputation, which could have a material adverse effect upon Brio's business,
operating results and financial condition. Further, Brio's license agreements
with customers typically contain provisions designed to limit Brio's exposure
for potential claims based on errors or malfunctions of Brio's products.
The limitation of liability provisions contained in Brio's license
agreements may not be effective under the laws of all jurisdictions. Brio's
sale and support of its products entails the risk of warranty claims, and
Brio's insurance against product liability risks may not be adequate to cover
a potential claim. A product liability claim brought against Brio could have a
material adverse effect on its business, operating results and financial
condition.
Brio has no issued patents, and its intellectual property protection may not
be adequate to prevent competitors from entering its markets or developing
competing products. Brio's failure to protect its proprietary rights may allow
competitors to enter its market or develop competing products, resulting in
competitive harm to Brio. The methods used by Brio to protect its proprietary
rights afford only limited protection. Brio currently relies primarily on a
combination of copyright and trademark laws, trade secrets, confidentiality
procedures and contractual provisions to protect its proprietary rights. Brio
currently has one U.S. patent application. This patent application may not
result in the issuance of a patent. Even if a patent is issued, it may be
invalidated, circumvented or challenged, and the rights granted under the
patent, if any, may not provide Brio competitive advantages. Brio may not
obtain any more patents. Others may develop technologies that are similar or
superior to Brio's technology or design around any patent that Brio may come
to own.
Despite Brio's efforts to protect its proprietary rights, unauthorized
parties may attempt to copy aspects of Brio's products or to obtain and use
information that Brio regards as proprietary. Policing unauthorized use of
Brio's products is difficult, and while Brio is unable to determine the extent
to which piracy of its software products exists, Brio expect software piracy
to be a persistent problem. In addition, the laws of some foreign countries do
not protect proprietary rights as fully as do the laws of the U.S. Brio's
means of protecting its proprietary rights in the U.S. or abroad may not be
adequate, and competitors may independently develop similar technology.
Investment Risks
Brio's common stock has a limited trading history and a volatile price.
There has only been a public market for Brio's common stock since April 30,
1998, and an active public market may not continue. The market price of the
shares of Brio's common stock is likely to be highly volatile and may be
significantly affected by a number of factors, including:
. actual or anticipated fluctuations in our operating results;
announcement of business partnerships;
. technological innovations or new product introductions by us or our
competitors;
. changes of estimates of our future operating results by securities
analysts;
. developments with respect to copyrights or proprietary rights; or
. general market conditions.
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 Brio'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. Such litigation may
occur in the future with respect to Brio, and could result in substantial
costs and a diversion of management's attention and resources, which could
have a material adverse effect upon Brio's business, operating results and
financial condition.
22
<PAGE>
Anti-takeover provisions may adversely effect Brio's stock price and make it
more difficult for a third party to acquire Brio. Provisions of Brio's charter
documents may have the effect of delaying or preventing a change in control of
Brio or its management, which could have a material adverse effect on the
market price of Brio common stock. These include 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.
In addition, the Brio 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
Brio common stock will be subject to, and may be adversely affected by, the
rights of the holders of any preferred stock that Brio may issue 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 Brio's outstanding voting stock, thereby delaying, deferring or
preventing a change in control of Brio. Brio has no present plan to issue
shares of preferred stock.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Brio's exposure to market risk for changes in interest rates relates
primarily to Brio's investment portfolio. Brio maintains an investment policy
which ensures the safety and preservation of its invested funds by limiting
default risk, market risk, and reinvestment risk. As of June 30, 1999, Brio
had $17.6 million of cash and cash equivalents with a weighted average
variable rate of 4.37% and $16.0 million of short-term investments with a
weighted average variable rate of 5.30%.
Brio mitigates default risk by attempting to invest in high credit quality
securities and by constantly positioning its portfolio to respond
appropriately to a significant reduction in a credit rating of any investment
issuer or guarantor. The portfolio includes only marketable securities with
active secondary or resale markets to ensure portfolio liquidity and maintains
a prudent amount of diversification.
Brio has no cash flow exposure due to rate changes for long-term debt
obligations. Brio has entered into borrowing agreements to support general
corporate purposes including capital expenditures and working capital needs,
should the need arise. Brio currently has no short-term or long-term debt
outstanding.
Brio conducts business on a global basis in international currencies. As
such, it is exposed to adverse or beneficial movements in foreign currency
exchange rates. Brio may enter into foreign currency forward contracts to
minimize the impact of exchange rate fluctuations on certain foreign currency
commitments and balance sheet positions. The realized gains and losses on
these contracts are deferred and offset against realized and unrealized gains
and losses when the transaction occurs. At June 30, 1999 there were no
outstanding foreign currency exchange contracts.
23
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
On January 20, 1997, Business Objects, S.A. filed a complaint against Brio
in the U.S. District Court for the Northern District of California in San
Jose, California alleging that certain of Brio'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, Brio 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 Brio 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. Based upon the advice of Brio's patent counsel, Blakely, Sokoloff,
Taylor & Zafman, LLP, Brio believes that it has meritorious defenses to the
claims made in the complaint and intends to defend the suit vigorously. A
claims construction hearing was held on April 5, 1999. At the hearing, the
court set the trial date for September 13, 1999. The court also issued its
claims construction ruling on April 6, 1999. Brio and Business Objects, S.A.
are currently conducting discovery.
The pending litigation could result in substantial expense to Brio and
significant diversion of effort by Brio'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. Brio'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 Brio's business, operating results and financial
condition.
There can be no assurance that Brio will prevail in the litigation given the
complex technical issues and inherent uncertainties in patent litigation,
particularly before the Court has construed the claims. In the event Brio is
unsuccessful in the litigation, Brio may be required to pay damages to
Business Objects, S.A. and could be prohibited from marketing its BrioQuery
Navigator, BrioQuery Explorer and BrioQuery Designer products without a
license, which license may not be available on acceptable terms. If Brio is
unable to obtain such a license, Brio may be required to license a substitute
technology or redesign to avoid infringement, in which case Brio'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 Brio's revenues in fiscal
1996 and represented a majority of Brio's revenues in fiscal 1997 and fiscal
1998 and a significant portion of Brio's revenues in fiscal 1999.
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.
/s/ Karen J. Willem
By: _________________________________
Karen J. Willem
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: August 13, 1999
25
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