<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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 January 29, 1999 there were 14,537,137 shares of the registrant's
Common Stock outstanding.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
BRIO TECHNOLOGY, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 1998
INDEX
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
PART I. Financial Information
Item 1. Financial Statements:.......................................... 3
Condensed Consolidated Balance Sheets December 31, 1998 and
March 31, 1998................................................ 3
Condensed Consolidated Statements of Operations--Three and Nine
Months Ended December 31, 1998 and 1997....................... 4
Condensed Consolidated Statements of Cash Flows--Nine Months
Ended December 31, 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..... 25
PART II. Other Information
Item 1. Legal Proceedings.............................................. 26
Item 2. Changes in Securities and Use of Proceeds...................... 27
Item 3. Defaults Upon Senior Securities................................ 27
Item 4. Submission of Matters to a Vote of Security Holders............ 27
Item 5. Other Information.............................................. 27
Item 6. Exhibits and Reports on Form 8-K............................... 27
Signature...................................................... 28
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
BRIO TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
------------ ---------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.............................. $18,223 $ 2,647
Short-term investments................................. 12,185 --
Accounts receivable, net of allowance.................. 6,348 6,508
Inventories............................................ 379 361
Prepaid expenses and other current assets.............. 874 958
------- -------
Total current assets................................. 38,009 10,474
Property and Equipment, net.............................. 4,090 3,127
Other Assets............................................. 1,013 485
------- -------
$43,112 $14,086
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Current maturities of notes payable.................... $ -- $ 3,248
Accounts payable....................................... 1,698 2,140
Accrued liabilities--
Payroll and related benefits......................... 2,165 1,422
Other................................................ 2,400 918
Deferred revenue....................................... 7,982 6,656
------- -------
Total current liabilities.......................... 14,245 14,384
Notes Payable, net of current maturities................. -- 189
Noncurrent Deferred Revenue.............................. 973 1,321
Other Noncurrent Liabilities............................. 39 46
------- -------
Total liabilities.................................. 15,257 15,940
------- -------
Stockholders' Equity (Deficit):
Convertible preferred stock, no par value.............. -- 15,655
Common stock........................................... 48,020 1,131
Notes receivable from stockholders..................... (255) (292)
Deferred compensation.................................. (308) (459)
Cumulative translation adjustment...................... (23) (20)
Unrealized gains on short-term investments............. 7 --
Accumulated deficit.................................... (19,586) (17,869)
------- -------
Total stockholders' equity (deficit)............... 27,855 (1,854)
------- -------
$43,112 $14,086
======= =======
</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 Nine Months
Ended December Ended December
31, 31,
---------------- ----------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
License fees............................ $ 9,156 $ 5,433 $23,587 $13,914
Services................................ 3,234 1,816 8,717 4,646
------- ------- ------- -------
Total revenues........................ 12,390 7,249 32,304 18,560
------- ------- ------- -------
Cost of revenues:
License fees............................ 371 225 1,072 654
Services................................ 1,390 730 3,799 1,717
------- ------- ------- -------
Total cost of revenues................ 1,761 955 4,871 2,371
------- ------- ------- -------
Gross Profit.............................. 10,629 6,294 27,433 16,189
------- ------- ------- -------
Operating Expenses:
Research and development................ 1,887 1,415 5,011 3,860
Sales and marketing..................... 7,135 5,774 19,747 16,764
General and administrative.............. 1,279 766 3,392 2,079
In-process research and development..... 1,653 -- 1,653 --
------- ------- ------- -------
Total operating expenses.............. 11,954 7,955 29,803 22,703
------- ------- ------- -------
Loss from operations...................... (1,325) (1,661) (2,370) (6,514)
Interest and other income (expense), net.. 305 (146) 775 (226)
------- ------- ------- -------
Net loss before income taxes.............. (1,020) (1,807) (1,595) (6,740)
Income taxes.............................. 120 -- 122 --
------- ------- ------- -------
Net loss.................................. $(1,140) $(1,807) $(1,717) $(6,740)
======= ======= ======= =======
Basic net loss per share.................. $ (0.08) $ (0.31) $ (0.13) $ (1.18)
======= ======= ======= =======
Shares used in computing basic net loss
per share................................ 14,443 5,742 13,432 5,715
======= ======= ======= =======
Diluted net loss per share................ $ (0.08) $ (0.31) $ (0.13) $ (1.18)
======= ======= ======= =======
Shares used in computing diluted net loss
per share................................ 14,443 5,742 13,432 5,715
======= ======= ======= =======
</TABLE>
See accompanying notes.
4
<PAGE>
BRIO TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended December
31,
----------------
1998 1997
------- -------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss.................................................... $(1,717) $(6,740)
Adjustments to reconcile net loss to cash provided by (used
in) operating activities:
Depreciation and amortization............................. 947 458
Provision for returns and doubtful accounts............... 122 424
Deferred compensation amortization........................ 99 76
Loss on disposal of property and equipment................ 47 --
In-process research and development....................... 1,653 --
Changes in operating assets and liabilities, net of
acquired business--
Accounts receivable..................................... 38 (2,059)
Inventories............................................. (18) (243)
Prepaid expenses and other assets....................... 66 (312)
Accounts payable and accrued liabilities................ 1,730 85
Deferred revenue........................................ 978 2,868
------- -------
Cash provided by (used in) operating activities....... 3,945 (5,443)
------- -------
Cash Flows from Investing Activities:
Purchase of short-term investments.......................... (12,178) --
Acquisition of business, net of cash acquired............... (2,203) --
Purchases of property and equipment......................... (1,871) (1,180)
------- -------
Cash used in investing activities....................... (16,252) (1,180)
------- -------
Cash Flows from Financing Activities:
Repayments under notes payable.............................. (3,437) (5,336)
Proceeds from notes payable................................. -- 6,564
Proceeds from issuance of preferred stock, net.............. -- 5,844
Proceeds from issuance of common stock, net................. 31,291 24
Proceeds from repayment of notes receivable from
stockholders............................................... 24 457
Issuance of note to stockholder............................. -- (400)
Income tax benefit from exercise of options................. 8 --
------- -------
Net cash provided by financing activities............... 27,886 7,153
------- -------
Net increase in cash and cash equivalents..................... 15,579 530
Effect of exchange rate changes on cash....................... (3) 52
Cash and cash equivalents, beginning of period................ 2,647 890
------- -------
Cash and cash equivalents, end of period...................... $18,223 $ 1,472
======= =======
</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 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.
6
<PAGE>
BRIO TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Comprehensive Income (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 income (loss) follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
-------------------- ------------------
1998 1997 1998 1997
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Net loss......................... $ (1,140) $ (1,807) $ (1,717) $ (6,740)
Unrealized gain (loss) on short-
term investments................ 3 -- 7 --
Foreign currency translation
adjustment...................... 3 56 (3) 52
--------- --------- -------- --------
Comprehensive income (loss)...... $ (1,134) $ (1,751) $ (1,713) $ (6,688)
========= ========= ======== ========
</TABLE>
Net Loss Per Share
Basic net 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. 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. 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.
Potential common shares of 1,624,738, using the treasury stock method, were
not included in the computation of diluted loss per share for the nine month
period ended December 31, 1998, because the Company incurred a loss in this
period and, therefore, the effect would be antidilutive.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." 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 December 31, 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 (7.75% at December 31, 1998).
At December 31, 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
7
<PAGE>
BRIO TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
quarterly requirements to maintain a minimum quick ratio and a minimum
tangible net worth. The line expires on December 1, 1999.
Note 3. Acquisition.
In October 1998, the Company acquired all of the outstanding stock of
MerlinSoft, Inc. (MerlinSoft), a California corporation, for cash. The total
purchase price was $2.2 million, and the acquisition was accounted for as a
purchase. In connection with the acquisition, net intangibles of $2.3 million
were acquired. The results of operations of MerlinSoft and the estimated fair
value of the assets acquired and liabilities assumed are included in the
Company's financial statements from the date of acquisition. Intangibles
arising from the acquisition are being amortized on a straight-line basis over
three years. Management estimates that $1.7 million of the purchased
intangibles represented purchased in-process research and development that had
not yet reached technological feasibility and had no alternative future use.
Accordingly, this amount was immediately expensed in the Condensed
Consolidated Statements of Operations upon consummation of the acquisition.
The value assigned to purchased in-process research and development, based on
a valuation prepared by a third-party appraiser, was determined by identifying
significant research projects for which technological feasibility had not been
established. The value was determined by estimating the costs to develop the
purchased in-process research and development into commercially viable
products, estimating the resulting net cash flows from such products and
discounting the net cash flows back to their present value. The discount rate
includes a factor that takes into account the uncertainty surrounding the
successful development of the purchased in-process technology. If these
projects are not successfully developed, business, operating results, and
financial condition of the Company may be adversely affected. Additionally,
the value of other intangible assets acquired may become impaired.
Note 4. 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 the Company expects that a claims
construction hearing will be held in March 1999. 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.
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. For the three months ended December 31, 1998 and 1997, the Company
had net losses of $1.1 million and $1.8 million, respectively. For the nine
months ended December 31, 1998 and 1997, the Company had net losses of $1.7
million and $6.7 million, respectively. The Company had an accumulated deficit
of approximately $19.6 million as of December 31, 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 approximately 14% of the Company's total revenues for the three
months ended December 31, 1998. No single customer accounted for more than 10%
of the Company's total revenues for the nine months ended December 31, 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 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.
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 companies through 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 11% and 17% of total revenues for the
three months ended December 31, 1998 and 1997, respectively, and 14% and 12%
of total revenues for the nine months ended
9
<PAGE>
December 31, 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.
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 17% and 22% of total
revenues for the three months ended December 31, 1998 and 1997, respectively,
and 17% and 19% of total revenues for the nine months ended December 31, 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. As a result, the Company expects
that its operating expenses will increase significantly in the remainder of
fiscal 1999 and fiscal 2000. 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 Nine Months
Ended Ended
December 31, December 31,
---------------- ----------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Consolidated Statements of
Operations Data:
Revenues:
License fees..................... 74% 75% 73% 75%
Services......................... 26 25 27 25
------ ------ ------ ------
Total revenues................. 100 100 100 100
------ ------ ------ ------
Cost of revenues:
License fees..................... 3 3 3 4
Services......................... 11 10 12 9
------ ------ ------ ------
Total cost of revenues......... 14 13 15 13
------ ------ ------ ------
Gross profit....................... 86 87 85 87
------ ------ ------ ------
Operating expenses:
Research and development......... 15 20 16 21
Sales and marketing.............. 59 80 61 90
General and administrative....... 10 10 10 11
In-process research and
development..................... 13 -- 5 --
------ ------ ------ ------
Total operating expenses....... 97 110 92 122
------ ------ ------ ------
Loss from operations............... (11) (23) (7) (35)
Interest and other income
(expense), net.................... 3 (2) 2 (1)
------ ------ ------ ------
Net loss before taxes.............. (8) (25) (5) (36)
Income taxes....................... 1 -- -- --
------ ------ ------ ------
Net loss........................... (9)% (25)% (5)% (36)%
------ ------ ------ ------
</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 71% from $7.2 million for the three
months ended December 31, 1997 to $12.4 million for the three months ended
December 31, 1998. Total revenues also increased 74% from $18.6 million for
the nine months ended December 31, 1997 to $32.3 million for the nine months
ended December 31, 1998.
License Fees. Revenues from license fees increased by 69% from $5.4 million
for the three months ended December 31, 1997 to $9.2 million for the three
months ended December 31, 1998. Approximately $1.7 million of the increase was
due to growing sales to new customers and approximately $2.1 million of the
increase was due to increased follow-on sales to existing customers. Revenues
from license fees also increased by 70% from $13.9 million for the nine months
ended December 31, 1997 to $23.6 million for the nine months ended December
31, 1998. Approximately $4.1 million of the increase was due to growing sales
to new customers and approximately $5.6 million of the increase was due to
increased follow-on sales to existing customers.
Services. Service revenues increased by 78% from $1.8 million for the three
months ended December 31, 1997 to $3.2 million for the three months ended
December 31, 1998. Approximately $1.3 million of the increase was due to
increases in maintenance and support revenue and approximately $150,000 of the
increase was due
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to increased training and consulting services revenues, related to increases
in the Company's installed customer base. Service revenues also increased by
88% from $4.6 million for the nine months ended December 31, 1997 to $8.7
million for the nine months ended December 31, 1998. Approximately $3.2
million of the increase was due to increases in maintenance and support
revenue and approximately $900,000 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
$225,000 to $371,000 for the three months ended December 31, 1997 and 1998,
respectively. Cost of revenues from license fees also increased from $654,000
to $1.1million, for the nine months ended December 31, 1997 and 1998,
respectively. Cost of revenues from license fees were 3% for the three months
ended December 31, 1997 and the three and nine months ended December 31, 1998.
For the nine months ended December 31, 1997, cost of revenues from license
fees were 4% of total revenues. The increase in absolute dollars was due to
the increase in the number of licenses sold. 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 $730,000, or 10% of total revenues, for the three months ended December
31, 1997 to $1.4 million, or 11% of total revenues, for the three months ended
December 31, 1998. Approximately $470,000 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 $200,000 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. Cost of
service revenues also increased from $1.7 million, or 9% of total revenues,
for the nine months ended December 31, 1997 to $3.8 million, or 12% of total
revenues, for the nine months ended December 31, 1998. Approximately $1.6
million 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 $500,000 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 increases as a percentage of service
revenues were primarily 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 $1.4
million, or 20% of total revenues, for the three months ended December 31,
1997 to $1.9 million, or 15% of total revenues, for the three months ended
December 31, 1998. Research and development expenses also increased from $3.9
million, or 21% of total revenues, for the nine months ended December 31, 1997
to $5.0 million, or 16% of total revenues, for the nine months ended December
31, 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.
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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 $5.9 million, or
80% of total revenues, for the three months ended December 31, 1997 to $7.1
million, or 58% of total revenues, for the three months ended December 31,
1998. Sales and marketing expenses also increased from $16.8 million, or 90%
of total revenues, for the nine months ended December 31, 1997 to $19.7
million, or 61% of total revenues, for the nine months ended December 31,
1998. The increase in absolute dollars was attributable to the expansion of
the Company's sales and marketing organization, including the addition of
field and telesales 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 $766,000
for the three months ended December 31, 1997 to $1.3 million for the three
months ended December 31, 1998. For the three months presented, general and
administrative expenses were 10% of total revenues. General and administrative
expenses also increased from $2.1 million, or 11% of total revenues, for the
nine months ended December 31, 1997 to $3.4 million, or 10% of total revenues
for the nine months ended December 31, 1998. The increases were primarily due
to increased personnel and related costs necessary to manage and support the
Company's growth and facilities expansion, as well as the addition of expenses
related to being a public company. 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 stockholders' equity and amortized ratably over the vesting
period of the applicable options. Approximately $29,000 was expensed during
the three months ended December 31, 1998 and approximately $99,000 was
expensed during the nine months ended December 31, 1998. The balance will be
expensed ratably over the next three years as the options vest.
Purchased in-process research and development
In connection with the acquisition of MerlinSoft, Inc., the Company
allocated $1.7 million of the purchase price to in-process research and
development projects. This allocation represents the estimated fair value
based on future cash flows that have been adjusted by the projects' cost-based
completion percentage. At the acquisition date, the development of these
projects had not yet reached technological feasibility and the research and
development in progress had no alternative future uses. Accordingly, these
costs were expensed as of the acquisition date.
The Company used a third-party appraiser to assess and value the in-process
research and development. The value assigned to this asset was determined by
identifying significant research projects for which technological feasibility
had not been established. In the case of MerlinSoft, this included the
development,
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programming and testing activities associated with the creation of software
components which enable delivery of analytical applications. Valuation of
development efforts in the future has been excluded from the research and
development appraisal.
The nature of the efforts to develop the acquired in-process technology into
a commercially viable product relate to the completion of all planning,
designing, and prototyping and testing activities that are necessary to
establish that the proposed technologies meet their design specifications
including functional, technical, and economic performance requirements.
The value assigned to purchased in-process technology was determined by
estimating the contribution of the purchased in-process technology in
developing a commercially viable product, estimating the resulting net cash
flows from the expected sales of such a product, and discounting the net cash
flows to their present value using an appropriate discount rate.
Revenue growth rates for MerlinSoft were estimated by a third party
appraiser based on a detailed forecast prepared by management, as well as the
appraiser's discussions with finance, marketing, and engineering
representatives of the Company and MerlinSoft. Revenue growth rates beyond
2000 were based on industry growth expectations. Allocation of total
MerlinSoft projected revenues to in-process research and development was based
on the appraiser's discussions with the Company and MerlinSoft management. The
preponderance of future revenues is expected to originate from the sale of
products that are not yet completed.
Selling, general and administrative expenses and profitability estimates
were determined based on management forecasts as well as an analysis of
comparable company's margin expectations.
The projections utilized in the transaction pricing and purchase price
allocation analysis exclude the potential synergistic benefits related
specifically to the Company's ownership. Due to the relatively early stage of
the development and reliance on future, unproven products and technologies,
the cost of capital (discount rate) for MerlinSoft was estimated using venture
capital rates of return. Due to the nature of the forecast and the risks
associated with the projected growth and profitability of the development
projects, a discount rate of 54 percent was used to discount cash flows from
the in-process projects. Because the in-process projects are such an integral
part of the business enterprise, only a moderate increase in the discount rate
for the in-process technology was deemed appropriate. This discount rate is
commensurate with MerlinSoft's market position, the uncertainties in the
economic estimates described above, the inherent uncertainty surrounding the
successful development of the purchased in-process technology, the useful life
of such technology, the profitability levels of such technology, and the
uncertainty related to technological advances that could render even
MerlinSoft's development stage technologies obsolete.
The Company believes that the foregoing assumptions used in the forecasts
were reasonable at the time of the acquisition. No assurance can be given,
however, that the underlying assumptions used to estimate sales, development
costs or profitability, or the events associated with such projects, will
transpire as estimated. For these reasons, actual results may vary from
projected results.
Remaining development efforts for MerlinSoft's research and development
include various phases of development, programming and testing. Funding for
such projects is expected to be obtained from internally generated sources.
As evidenced by the continued support of the development of the in-process
technology, and derivative products, management believes the Company has a
reasonable chance of successfully completing the research and development
programs. However, as with all of the Company's software development efforts,
there is risk associated with the completion of the MerlinSoft research and
development projects, and there is no assurance that technological or
commercial success will be achieved.
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If the development of the in-process technology, and derivative products, is
unsuccessful, the sales and profitability of the Company may be adversely
affected in future periods. Commercial results are also subject to uncertain
market events, and risks, which are beyond the Company's control, such as
trends in technology, changes in government regulation, market size and
growth, and product introduction or other actions by competitors.
Interest and other income (expense), net, and income taxes
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 $146,000 for the three months ended December 31, 1997 to a
net income of $305,000 for the three months ended December 31, 1998. Interest
and other income (expense), net, also increased from a net expense of $226,000
for the nine months ended December 31, 1997 to a net income of $775,000 for
the nine months ended December 31, 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.
The Company recorded a net loss for the three and nine months ended December
31, 1998, due to an in-process research and development write-off and foreign
losses. The tax provision of $120,000 and $122,000 for the three and nine
months ended December 31, 1998, respectively, represents the minimum taxes
payable for Federal and state taxes.
Liquidity and Capital Resources
As of December 31, 1998, the Company had cash, cash equivalents and short-
term investments of $30.4 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 December 31, 1998, there were no outstanding bank
borrowings.
Net cash used in operating activities was $5.4 million in the nine months
ended December 31, 1997 and net cash provided by operating activities was $3.9
million in the nine months ended December 31, 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 $1.2 million and $16.3 million in
the nine months ended December 31, 1997 and 1998, respectively, consisting of
purchases of property and equipment, short-term investments, and the
acquisition of a business. The Company has planned capital commitments of
approximately $2.3 million in fiscal 1999.
Net cash provided by financing activities was $7.2 million and $27.9 million
in the nine months ended December 31, 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.
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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 December
31, 1998, the Company had stockholders' equity of approximately $27.9 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 and fiscal 2000; 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 customer buying
patterns related to the year 2000 issue, 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-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.
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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 vary 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 continue to have
difficulty in attracting such personnel with equity incentives as a public
company. 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 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.
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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 the 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, and Seagate Software; (ii) vendors offering
alternative approaches to delivering analysis capabilities to users, such as
Information Advantage and MicroStrategy; (iii) database vendors that offer
products which operate specifically with their proprietary database, such as
Microsoft, IBM, and Oracle; 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
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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 the Company expects that a claims construction hearing will be
held in March 1999. 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
19
<PAGE>
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 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. Certain of the Company's executive management have joined
the Company within approximately the last two years, 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, Chinese 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, 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.
20
<PAGE>
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
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
21
<PAGE>
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. The Company currently has no formal contingency plans
in place to deal with system failure in connection with the year 2000 problem.
However, the Company anticipates that in the event of such failure the Company
would attempt to perform mission critical MIS and other internal functions
manually, although most likely with significantly diminished efficacy. See "--
Fluctuations in Quarterly Operating Results" and "--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.
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
22
<PAGE>
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 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
23
<PAGE>
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.
24
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's investment portfolio. The Company 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
December 31, 1998, the Company had $16.9 million and $12.2 million of cash and
cash equivalents and short-term investments, respectively, with a weighted
average variable rate of 4.43% and 5.20%, respectively.
The Company 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.
The Company has no cash flow exposure due to rate changes for long-term debt
obligations. The Company has entered into borrowing agreements to support
general corporate purposes including capital expenditures and working capital
needs, should the need arise. The Company currently has no short-term or long-
term debt outstanding.
The Company conducts business on a global basis in international currencies.
As such, it is exposed to adverse or beneficial movements in foreign currency
exchange rates. The Company 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 December 31, 1998
there were no outstanding foreign currency exchange contracts.
25
<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. and the Company expects that a claims construction
hearing will be held in March 1999. 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."
26
<PAGE>
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.
The net offering proceeds to the Company were $30,424,000. From May 1, 1998 to
December 31, 1998, the Company used the net offering proceeds, in direct or
indirect payments to others, as follows:
<TABLE>
<S> <C>
Manufacturing, sales, marketing and administrative
infrastructure............................................... $19,331,000
Research and development activities........................... 4,092,000
Repayment of indebtedness..................................... 3,395,000
Purchase and installation of machinery and equipment.......... 1,633,000
Acquisition of a business, net of cash acquired............... 1,973,000
-----------
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.
27
<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.
By: /s/ Karen J. Willem
-----------------------------------
Karen J. Willem
Chief Financial Officer (Principal
Financial and Accounting Officer)
Date: February 16, 1998
28
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 18,223
<SECURITIES> 12,185
<RECEIVABLES> 7,021
<ALLOWANCES> (673)
<INVENTORY> 379
<CURRENT-ASSETS> 38,009
<PP&E> 6,050
<DEPRECIATION> (1,960)
<TOTAL-ASSETS> 43,112
<CURRENT-LIABILITIES> 14,245
<BONDS> 0
0
0
<COMMON> 48,020
<OTHER-SE> (20,165)
<TOTAL-LIABILITY-AND-EQUITY> 43,112
<SALES> 12,390
<TOTAL-REVENUES> 12,390
<CGS> 1,761
<TOTAL-COSTS> 1,761
<OTHER-EXPENSES> 11,954
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,020)
<INCOME-TAX> 120
<INCOME-CONTINUING> (1,140)
<DISCONTINUED> 0
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<CHANGES> 0
<NET-INCOME> (1,140)
<EPS-PRIMARY> (0.08)
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</TABLE>
