<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
(Mark One)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission file number: 000-23997
----------------
BRIO TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0210797
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4980 Great America Parkway
Santa Clara, CA 95054
(Address of principal executive offices, including zip code)
(408) 496-7400
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
As of August 10, 2000 there were 28,230,105 shares of the registrant's
Common Stock outstanding.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
BRIO TECHNOLOGY, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 2000
INDEX
<TABLE>
<CAPTION>
Page
----
PART I. Financial Information
<C> <S> <C>
Item 1. Financial Statements:......................................... 3
Condensed Consolidated Balance Sheets--
June 30, 2000 and March 31, 2000............................. 3
Condensed Consolidated Statements of Operations--
Three Months Ended June 30, 2000 and 1999................... 4
Condensed Consolidated Statements of Cash Flows--
Three Months Ended June 30, 2000 and 1999.................... 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.... 23
PART II. Other Information
Item 1. Legal Proceedings............................................. 24
Item 2. Changes in Securities and Use of Proceeds..................... 24
Item 3. Defaults Upon Senior Securities............................... 24
Item 4. Submission of Matters to a Vote of Security Holders........... 24
Item 5. Other Information............................................. 24
Item 6. Exhibits and Reports on Form 8-K.............................. 24
Signature............................................................... 25
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
BRIO TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
June 30, March 31,
2000 2000
----------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 12,416 $ 21,573
Short-term investments................................. 8,725 11,831
Accounts receivable, net of allowance of $2,166 and
$2,848................................................ 27,366 31,429
Inventories............................................ 410 822
Deferred income taxes.................................. 633 1,890
Prepaid expenses and other current assets.............. 3,263 3,862
-------- --------
Total current assets............................... 52,813 71,407
Property and equipment, net.............................. 22,103 12,118
Other assets............................................. 1,895 2,339
-------- --------
$ 76,811 $ 85,864
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................... $ 3,498 $ 7,801
Accrued liabilities--
Payroll and related benefits......................... 6,407 11,423
Other................................................ 9,861 8,786
Deferred revenue, current.............................. 25,603 24,108
-------- --------
Total current liabilities.......................... 45,369 52,118
Noncurrent deferred revenue.............................. 1,902 2,717
Other noncurrent liabilities............................. 1,940 2,903
-------- --------
Total liabilities.................................. 49,211 57,738
-------- --------
Stockholders' equity:
Common stock........................................... 28 28
Additional paid-in capital............................. 80,559 76,807
Notes receivable from stockholders..................... (409) (483)
Deferred compensation.................................. (87) (118)
Accumulated components of comprehensive income......... 384 312
Accumulated deficit.................................... (52,875) (48,420)
-------- --------
Total stockholders' equity......................... 27,600 28,126
-------- --------
$ 76,811 $ 85,864
======== ========
</TABLE>
See accompanying notes.
3
<PAGE>
BRIO TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended
June 30,
----------------
2000 1999
------- -------
<S> <C> <C>
Revenues:
License fees.............................................. $18,970 $18,293
Services.................................................. 14,055 9,286
------- -------
Total revenues.......................................... 33,025 27,579
------- -------
Cost of revenues:
License fees.............................................. 957 764
Services.................................................. 6,044 3,973
------- -------
Total cost of revenues.................................. 7,001 4,737
------- -------
Gross profit................................................ 26,024 22,842
------- -------
Operating expenses:
Research and development.................................. 5,567 4,659
Sales and marketing....................................... 21,073 14,763
General and administrative................................ 3,925 3,155
Non-recurring operating expenses.......................... -- 1,159
------- -------
Total operating expenses................................ 30,565 23,736
------- -------
Loss from operations........................................ (4,541) (894)
Interest and other income (expense), net.................... 86 (228)
------- -------
Loss before provision for income taxes...................... (4,455) (1,122)
Provision for income taxes.................................. -- 399
------- -------
Net loss.................................................... $(4,455) $(1,521)
======= =======
Basic and diluted net loss per share........................ $ (0.16) $ (0.07)
======= =======
Shares used in computing basic and diluted net loss per
share...................................................... 27,987 21,229
======= =======
</TABLE>
See accompanying notes.
4
<PAGE>
BRIO TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended
June 30,
-----------------
2000 1999
-------- -------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss................................................... $ (4,455) $(1,521)
Adjustments to reconcile net loss to cash used in operating
activities--
Depreciation and amortization............................ 1,332 706
Provision for returns and doubtful accounts.............. -- 91
Deferred compensation amortization....................... 18 28
Loss on disposal of property and equipment............... -- 71
Provision for loss on marketable securities.............. -- 346
Changes in operating assets and liabilities--
Accounts receivable.................................... 4,063 (866)
Inventories............................................ 412 37
Deferred income taxes.................................. 1,257 --
Prepaid expenses and other assets...................... 951 (2,026)
Accounts payable and accrued liabilities............... (9,207) 1,318
Deferred revenue....................................... 680 1,595
-------- -------
Cash used in operating activities.................... (4,949) (221)
-------- -------
Cash Flows from Investing Activities:
Purchases of short-term investments........................ (908) (6,580)
Sales of short-term investments............................ 3,931 4,463
Purchases of property and equipment, net................... (11,225) (958)
-------- -------
Cash used in investing activities.................... (8,202) (3,075)
-------- -------
Cash Flows from Financing Activities:
Proceeds from issuance of common stock, net................ 3,765 1,289
Proceeds from repayment of notes receivable from
stockholders.............................................. 74 --
-------- -------
Cash provided by financing activities................ 3,839 1,289
-------- -------
Net decrease in cash and cash equivalents.................. (9,312) (2,007)
Effect of exchange rate changes on cash.................... 155 39
Cash and cash equivalents, beginning of period............. 21,573 21,026
-------- -------
Cash and cash equivalents, end of period................... $ 12,416 $19,058
======== =======
</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 Brio, 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, Brio 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 Brio's
annual report on Form 10-K, as amended, for the fiscal year ended March 31,
2000.
The unaudited condensed consolidated financial statements included herein
reflect all adjustments (which include only normal, recurring adjustments) that
are, in the opinion of management, necessary to state fairly the results for
the periods presented. The results for such periods are not necessarily
indicative of the results to be expected for the full fiscal year.
The preparation of condensed consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the condensed consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Revenue Recognition
The Company's revenues are derived from two sources, license fees and
services. Services include software maintenance and support, training and
system implementation consulting.
Revenue from license fees is recognized upon shipment of the software if
collection of the resulting receivable is probable, the fee is fixed or
determinable and vendor-specific objective evidence exists to allocate the
total fee to all delivered and undelivered elements of the arrangement. If
vendor-specific objective evidence does not exist to allocate the total fee to
all delivered and undelivered elements of the arrangement, revenue is deferred
until such evidence does exist for the undelivered elements, or until all
elements are delivered, whichever is earlier. 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 when payments become due or the date
payment is received. If an extended 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 CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Comprehensive Loss
A summary of comprehensive loss follows (in thousands):
<TABLE>
<CAPTION>
Three Months
Ended June 30,
----------------
2000 1999
------- -------
<S> <C> <C>
Net loss.................................................. $(4,455) $(1,521)
Unrealized loss on short-term investments................. (83) (271)
Foreign currency translation adjustment................... 155 39
------- -------
Comprehensive loss...................................... $(4,383) $(1,753)
======= =======
</TABLE>
Computation of Basic and Diluted Net Loss Per Share
Basic net loss per share is computed using the weighted average number of
shares of common stock outstanding. Diluted net loss per share information is
computed using the weighted average number of shares of common and potential
common stock outstanding. For the three months ended June 30, 2000 and 1999,
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 because Brio incurred a loss in these
periods and therefore, their affect would be antidilutive. Potential common
shares of 2,049,000 for the three months ended June 30, 2000 and 7,169,000 for
the three months ended June 30, 1999 were not included in the computation of
diluted net loss per share.
Note 2. Acquisition of Sqribe Technologies Corp.
In August 1999, Brio completed its merger with SQRIBE Technologies Corp.
(SQRIBE), a Delaware Corporation. Brio acquired all of the outstanding shares
of SQRIBE preferred and common stock in a tax-free, stock-for-stock transaction
for approximately 13.2 million shares of Brio common stock. In addition, Brio
assumed all outstanding stock options and warrants of SQRIBE. The acquisition
was accounted for as a pooling-of-interests. All prior period condensed
consolidated financial statements were restated, in accordance with required
pooling-of-interests accounting and disclosures. Reconciliation of the June 30,
1999 condensed consolidated statement of operations with previously reported
separate company performance is presented below (in thousands):
<TABLE>
<CAPTION>
Three Months
Ended
June 30,
1999
------------
<S> <C>
Total revenues
Brio.......................................................... $15,675
SQRIBE........................................................ 11,904
-------
Combined and restated........................................... $27,579
=======
Net income (loss)
Brio.......................................................... $ 1,018
SQRIBE...................................................... . (2,539)
-------
Combined and restated........................................... $(1,521)
=======
</TABLE>
7
<PAGE>
BRIO TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 3. Notes Payable
At June 30, 2000, Brio had a $15.0 million accounts receivable-based line of
credit agreement. Interest on borrowings under the line of credit accrue at the
bank's prime rate (9.5% at June 30, 2000). At June 30, 2000, no amounts were
outstanding under the line of credit. Borrowings under the line of credit are
limited to 80% of eligible accounts receivable. The line of credit is
collateralized by substantially all of Brio's assets, including Brio's
copyrights and trademarks, to the extent required to establish a security
interest in the accounts receivable. The line of credit requires Brio to comply
with a net income covenant, excluding non-recurring operating charges, of
$1.00. Brio was not in compliance with this covenant as of June 30, 2000,
however, a waiver was obtained from the bank. The line of credit expires on
December 31, 2000.
Note 4. Industry Segment Information
Brio adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," in fiscal 1998. SFAS No. 131 establishes standards for
reporting information about operating segments in annual financial statements
and requires selected information about operating segments in interim financial
reports issued to stockholders. It also establishes standards for related
disclosures about products and services, and geographic areas. Operating
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker, or decision making group, in deciding how to allocate
resources and in assessing performance.
Brio is organized based upon the nature of the products and services it
offers. Under this organizational structure, Brio operates in two business
segments: license fees and services. Brio evaluates its segment's performance
based on several factors including revenue and gross profit. Brio does not
allocate or report financial operations by segment beyond revenue and cost of
revenue, nor do we allocate long-term assets by business segment. No additional
segment information is reported in this footnote as required segment
disclosures are included in the Condensed Consolidated Statements of
Operations.
Note 5. Litigation
On September 9, 1999, Brio and Business Objects, S.A. executed a Memorandum
of Understanding settling Business Object's pending patent litigation against
Brio involving patent number 5,555,403 pursuant to which Brio agreed to pay to
Business Objects, S.A. $10.0 million, payable in $1.0 million payments over 10
consecutive quarters, with the first payment due September 30, 1999. Of the
$10.0 million settlement, $9.1 million represents the net present value of the
10 quarterly payments and the remaining $900,000 represents interest that will
be recognized over the payment term using the effective interest rate method.
As part of this settlement, Business Objects, S.A. dismissed its pending
lawsuit against Brio involving patent number 5,555,403 and Brio dismissed its
pending lawsuit against Business Objects, S.A. involving patent number
5,915,257. As of June 30, 2000, $4.0 million in the accompanying balance sheet
is included in accrued liabilities and $2.0 million is included in other
noncurrent liabilities, representing the net present value of the 10 quarterly
payments, offset by $350,100 included in accrued liabilities and $60,200
included in other noncurrent liabilities, representing the interest that will
be recognized over the payment term.
Note 6. Non-recurring Operating Expenses
Non-recurring operating expenses in the three months ended June 30, 1999 are
comprised of merger and restructuring costs related to the SQRIBE acquisition
which was completed on August 3, 1999. For the three months ended June 30,
1999, merger and restructuring costs of $1,159,000 consisted of $940,000 in
severance costs to terminate employees and $219,000 in other miscellaneous
merger-related expenses. All termination notices and benefits were communicated
to the affected employees prior to period-end and substantially all of the
merger-related expenses were incurred prior to period-end. Substantially all of
the merger-related charges were paid during fiscal 2000.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto, and with Brio's audited financial
statements and notes thereto for the fiscal year ended March 31, 2000 included
in Brio's Form 10-K, as amended, 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 "Risk Factors That May Affect Future Operating Results" below.
Overview
Brio delivers a business-to-business (B2B) analytic software infrastructure
("B2B Analytics") that enables companies to use information through analytic
dashboards--inside and outside the firewall--to be more competitive, customer-
centric and responsive to the changing demands of business. Brio had net losses
applicable to common stock of $10.9 million in fiscal 2000, $753,000 in fiscal
1999 and $15.7 million in fiscal 1998. As of June 30, 2000, Brio incurred a net
loss of approximately $4.5 million and had an accumulated deficit of
approximately $52.9 million. See "Risk Factors That May Affect Future Operating
Results" for a description of the risks related to Brio's operating results
fluctuations in future periods.
In August 1999, Brio completed its merger with SQRIBE Technologies Corp.
(SQRIBE), a Delaware corporation. Brio acquired all of the outstanding shares
of SQRIBE preferred and common stock in a tax-free, stock-for-stock transaction
for approximately 13.2 million shares of Brio common stock. In addition, Brio
assumed all outstanding stock options and warrants of SQRIBE. The acquisition
was accounted for as a pooling-of-interests. The June 30, 1999 condensed
consolidated statement of operations has been restated, in accordance with
required pooling-of-interests accounting and disclosures.
Brio's revenues consist of license fees for software products and fees for
services, including software maintenance and support, training and system
implementation consulting. Revenues in current periods are generally
attributable to the sale of the most recent version of Brio's products. Brio
generally discontinues marketing older product versions when a new product
version is introduced. The products are typically licensed on a per user basis
with the price per user varying based on the selection of products licensed or
on a per computer server basis with the price varying based on the computing
power of the server. Additionally, Brio also sells larger enterprise-wide
implementations of their products through site licenses with the price per site
varying based on the selection of:
. products licensed;
. the number of authorized users or computer servers for each product at
each site; and
. the number of licensed sites.
Revenues from license fees are recognized upon shipment of the software if:
. collection of the resulting receivable is probable;
. the fee is fixed or determinable; and
. vendor-specific objective evidence exists to allocate the total fee to
all delivered and undelivered elements of the arrangement. If vendor-
specific objective evidence does not exist to allocate the total fee to
all delivered and undelivered elements of the arrangement, revenue is
deferred until such evidence does exist for the undelivered elements, or
until all elements are delivered, whichever is earlier.
If payments are subject to extended payment terms and are not deemed fixed
or determinable, Brio defers revenue until payments become due. If an extended
acceptance period is required, Brio recognizes revenue upon the earlier of
customer acceptance or the expiration of the acceptance period. Brio
establishes allowances
9
<PAGE>
for potential product returns and credit losses, which have been insignificant
to date. Brio charges fees for services separately from license fees. Brio
recognizes revenues from maintenance and support services, including ongoing
product support and periodic product updates, ratably over the term of each
contract, which is typically twelve months. Payments for maintenance and
support services are generally made in advance and are non-refundable. Brio
recognizes revenues from training and consulting services when the services are
performed.
To date, Brio has derived revenues from license fees principally from direct
sales of software products to end users through Brio's direct sales force.
Although Brio believes that such direct sales will continue to account for a
significant portion of revenues from license fees in the foreseeable future,
Brio has recently developed, and intends to continue to develop, reselling
relationships with value added resellers (VARs), resellers and distributors.
Brio expects that revenues from sales through VARs, resellers and distributors
will increase in the future as a percentage of revenues from license fees.
Revenues from VARs, resellers and distributors were 26% of total revenues for
fiscal 2000, 21% of total revenues for fiscal 1999 and 24% of total revenues
for fiscal 1998. Revenues from VARs, resellers and distributors were 18% of
total revenues for the three months ended June 30, 2000. Brio's ability to
achieve revenue growth and improved operating margins, as well as increased
worldwide sales in the future, will depend in large part upon its success in
expanding and maintaining relationships with VARs, resellers and distributors.
See "Risk Factors That May Affect Future Operating Results" for a description
of the risks related to Brio's sales strategy.
Brio is also increasing its efforts to sell licenses for larger, enterprise-
wide implementations of Brio's products, rather than departmental or local
network sales, which increases the complexity and length of the sales cycle. In
particular, at the end of the three months ended June 30, 2000, approximately
$5.0 million of forecasted deals were delayed. These were generally for large-
scale deployments of Brio's products and Brio believes that these deals will be
closed in the coming quarters. Brio has, in the past and may in the future,
choose to grant greater license discounts and discounts on other elements, such
as training and consulting, for sales of site licenses. See "Risk Factors That
May Affect Future Operating Results" for a description of the risks related to
the sales cycle of Brio's products.
Brio has, to date, sold its products internationally through direct sales
offices in the United Kingdom, France, Germany, Japan and Australia, and
indirectly through established distribution relationships in more than 40
countries, including Belgium, Italy, The Netherlands and South Africa. Brio's
direct sales offices in the United Kingdom and Australia were formed through
the acquisition of distributors in those countries. Sales to customers outside
of the United States and Canada, including sales generated by Brio's foreign
subsidiaries, represented 18% of total revenues for fiscal 2000 and fiscal 1999
and 17% of total revenues for fiscal 1998. Sales to customers outside of the
United States and Canada, including sales generated by Brio's foreign
subsidiaries, represented 22% of total revenues for the three months ended June
30, 2000. A substantial portion of Brio's international sales in the past have
been denominated and collected in foreign currencies and Brio believes that a
portion of its cost of revenues and operating expenses will continue to be
incurred in foreign currencies. To date, there have been no material effects of
changes in foreign currency exchange rates on revenues or operating expenses.
During fiscal 2000, Brio incurred a loss on foreign currency translations
resulting from intercompany receivables from foreign subsidiaries in an amount
of approximately $429,000. During the three months ended June 30, 2000, Brio
incurred a loss of approximately $390,000 in foreign currency translations
resulting from intercompany receivables from foreign subsidiaries. Although it
is impossible to predict future exchange rate movements between the U.S. dollar
and other currencies, to the extent the U.S. dollar strengthens or weakens
against other currencies, a substantial portion of Brio's revenues, cost of
revenues and operating expenses will be commensurately lower or higher than
would be the case in a more stable foreign currency environment. Although Brio
has not historically undertaken foreign exchange hedging transactions to cover
its potential foreign currency exposure, it may do so in the future. See "Risk
Factors That May Affect Future Operating Results" for a description of the
risks related to Brio's international sales strategy.
10
<PAGE>
Although Brio has experienced significant quarter-to-quarter revenue growth
in fiscal 2000, 1999 and 1998, the same rate of sequential quarterly revenue
growth may not be sustainable and profitability may not be attained in the
future. Brio's rate of revenue growth declined in the three months ended June
30, 2000 and historical rates of revenue growth may not be achieved in the
future.
Brio currently intends to commit substantial financial resources to the
following:
. research and development;
. customer support;
. sales and marketing, including the expansion of its direct sales force,
third-party partnering relationships and its indirect channel sales
organization; and
. increased staffing and systems infrastructure to support Brio's expanding
operations.
Brio expects that its operating expenses will increase significantly in
fiscal 2001. See "Risk Factors That May Affect Future Operating Results."
Results of Operations
The following table includes consolidated statements of operations data as a
percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
Three Months
Ended June 30,
------------------
2000 1999
------- -------
<S> <C> <C>
Consolidated Statements of Operations Data:
Revenues:
License fees......................................... 57% 66%
Services............................................. 43 34
------- -------
Total revenues..................................... 100 100
------- -------
Cost of revenues:
License fees......................................... 3 3
Services............................................. 18 14
------- -------
Total cost of revenues............................. 21 17
------- -------
Gross profit........................................... 79 83
------- -------
Operating expenses:
Research and development............................. 17 17
Sales and marketing.................................. 64 54
General and administrative........................... 11 11
Non-recurring operating expenses..................... -- 4
------- -------
Total operating expenses........................... 92 86
------- -------
Loss from operations................................... (13) (3)
Interest and other income (expense), net............... -- (1)
------- -------
Loss before provision for income taxes................. (13) (4)
Provision for income taxes............................. -- 1
------- -------
Net loss............................................... (13)% (5)%
======= =======
</TABLE>
11
<PAGE>
Revenues
Brio derives revenues from license fees and services, which include
software maintenance and support, training and system implementation
consulting. Total revenues increased $5.4 million or 20% for the three months
ended June 30, 2000 compared to the three months ended June 30, 1999. These
increases were primarily due to increased services revenue including training,
consulting and maintenance and support services associated with license sales.
Revenues by geographic location were as follows for the three months ended
June 30, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months
Ended June 30,
---------------
2000 1999
------- -------
<S> <C> <C>
Revenues by Geography:
Domestic................................................... $25,907 $21,806
International.............................................. 7,118 5,773
------- -------
Total revenues........................................... $33,025 $27,579
======= =======
</TABLE>
Revenue from international sources increased $1.3 million or 23% for the
three months ended June 30, 2000 compared to the three months ended June 30,
1999. The increase was primarily due to increased demand for Brio products in
Europe and Asia as Brio continues to expand direct and indirect sales efforts
in these areas.
License Fees. Revenues from license fees increased $677,000 or 4% for the
three months ended June 30, 2000 compared to the three months ended June 30,
1999. Approximately $264,000 of the increase was due to growing sales to new
customers and approximately $413,000 of the increase was due to increased
follow-on sales to existing customers.
Services. Services revenues increased $4.8 million or 51% for the three
months ended June 30, 2000 compared to the three months ended June 30, 1999.
The increase was due to an increase of approximately $1.9 million in training
and consulting revenues and $2.9 million in maintenance and support revenues
related to increases in Brio's installed customer base.
Cost of Revenues
License Fees. Cost of revenues from license fees consists primarily of
product packaging, shipping, media, documentation and related personnel and
overhead allocations. Cost of revenues from license fees increased $193,000 or
25% for the three months ended June 30, 2000 compared to the three months
ended June 30, 1999. The increase in absolute dollars was due to an 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 revenues from services consists primarily of personnel
costs and third-party consulting fees associated with providing software
maintenance and support and training and consulting services. Cost of revenues
from services increased $2.1 million or 52% for the three months ended June
30, 2000 compared to the three months ended June 30, 1999. Approximately $1.5
million of the increase was due to increases in personnel and related costs
resulting from Brio's expansion in support services in response to increased
demand for maintenance and support and training and consulting services..
Approximately $600,000 of the increase was due to increases in the use of
outside consultants for training and consulting services. Cost of revenues
from services may vary between periods due to the mix of services provided by
Brio's personnel relative to services provided by outside consultants and to
varying levels of expenditures required to build the services organization.
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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 $908,000 or
19% for the three months ended June 30, 2000 compared to the three months ended
June 30, 1999. The increases were primarily due to increased personnel and
related costs required to develop new products and enhance existing products.
Brio believes that significant investment for research and development is
essential to product and technical leadership and anticipates that it will
continue to commit substantial resources to research and development in the
future. Brio anticipates that research and development expenditures will
continue to increase in absolute dollars, although such expenses may vary as a
percentage of total revenues.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries and other personnel related costs, commissions, bonuses and sales
incentives, travel, marketing programs such as trade shows and seminars and
promotion costs. Sales and marketing expenses increased $6.3 million or 43% for
the three months ended June 30, 2000 compared to the three months ended June
30, 1999. Approximately $2.8 million of the increase was attributable to the
costs associated with the expansion of Brio's worldwide sales organization,
approximately $1.3 million of the increase was attributable to higher sales
commissions, bonuses and sales incentives associated with increased revenues
and approximately $2.2 million of the increase was attributable to increased
domestic and international marketing expenses, including marketing activities,
personnel and related costs. Brio believes that as it continues to expand its
direct sales and pre-sales support organization, 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. In
particular, Brio expects that sales compensation, travel and related expenses
will increase significantly as Brio continues to increase the number of its
direct and indirect sales personnel and its emphasis on direct field sales and
channel sales efforts. Brio expects sales and marketing expenses will continue
to vary as a percentage of total revenues.
General and Administrative. General and administrative expenses consist
primarily of personnel costs for finance, human resources, information systems
and general management, as well as legal, accounting and unallocated overhead
expenses. General and administrative expenses increased $770,000 or 24% for the
three months ended June 30, 2000 compared to the three months ended June 30,
1999. Substantially all of the increase was attributable to increased personnel
and related costs. Brio expects that its general and administrative expenses
will increase in absolute dollars as Brio expands its staffing to support
expanded operations and continues its responsibilities as a public company.
Brio expects that such expenses will continue to vary as a percentage of total
revenues.
Deferred Compensation. In connection with the granting of 1,369,368 stock
options to employees during fiscal 1998, with a weighted average exercise price
of $1.49 per share and a weighted average deemed fair market value of $1.91 per
share, Brio recorded deferred compensation of $580,000, representing the
difference between the deemed value of the common stock for accounting purposes
and the option exercise price of such options at the date of grant. In
addition, Brio granted 67,419 stock options to employees during fiscal 1999, at
a weighted average exercise price of $1.56 per share, with a weighted average
deemed fair market value of $4.27 per share and recorded the difference between
the deemed fair market value of the common stock for accounting purposes and
the option exercise price of such options at the date of grant as $63,000 of
compensation expense and $188,000 of deferred compensation. Such amounts are
presented as a reduction of stockholders' equity and amortized ratably over the
vesting period of the applicable options. Approximately $18,000 was expensed
during the three months ended June 30, 2000, approximately $28,000 was expensed
during the three months ended June 30, 1999 and the balance will be expensed
ratably over the next two years as the options vest.
Non-recurring Operating Expenses. Non-recurring operating expenses in the
three months ended June 30, 1999 are comprised of merger and restructuring
costs related to the SQRIBE acquisition that was completed on August 3, 1999.
For the three months ended June 30, 1999, merger and restructuring costs of
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$1,159,000 consisted of $940,000 in severance costs to terminate employees and
$219,000 in other miscellaneous merger-related expenses. All termination
notices and benefits were communicated to the affected employees prior to
period-end and substantially all of the merger-related expenses were incurred
prior to period-end. Substantially all of the merger-related charges were paid
during fiscal 2000.
Interest and Other Income (Expense), Net
Interest and other income (expense), net, is comprised primarily of interest
income and foreign currency transaction gains or losses, and realized gains or
losses from the sale of investments, net of interest expense and interest
charges relating to the Business Objects, S.A. litigation settlement and
interest incurred on Brio's bank line of credit. Interest and other income
(expense), net, increased to a net income of $86,000 for the three months ended
June 30, 2000 from a net expense of $228,000 for the three months ended June
30, 1999. For the three months ended June 30, 1999, Brio recorded a permanent
impairment on a marketable security in the amount of $346,000 resulting in the
net expense. This was a one-time charge that did not occur in the three months
ended June 30, 2000.
Income Taxes
Brio recorded a net loss for the three months ended June 30, 2000. Given the
uncertainty over achieving profitability during the remainder of fiscal 2001
and beyond, Brio has not recorded a deferred tax benefit relating to the loss
incurred in the three months ended June 30, 2000.
Liquidity and Capital Resources
As of June 30, 2000, Brio had cash, cash equivalents and short-term
investments of $21.1 million. In addition, Brio maintains an accounts
receivable-based line of credit which provides for up to $15.0 million in
borrowings, with interest at the bank's prime rate. Brio can borrow up to 80%
of eligible accounts receivable against this line of credit. At June 30, 2000,
no amounts were outstanding under the line of credit. Borrowings are secured by
substantially all of Brio's assets, including Brio's copyrights and trademarks,
to the extent required to secure the Bank's interest in the accounts
receivables. The line of credit requires Brio to comply with a net income
covenant, excluding non-recurring operating charges, of $1.00. Brio was not in
compliance with this covenant as of June 30, 2000, however, a waiver was
obtained from the bank. The line of credit expires on December 31, 2000.
Net cash used in operating activities was $4.9 million for the three months
ended June 30, 2000 and $221,000 for the three months ended June 30, 1999. The
decrease of $4.7 million was due to changes in operating assets and liabilities
of approximately $7.6 million, offset by increases in net losses of
approximately $2.9 million.
Net cash used in investing activities was $8.2 million for the three months
ended June 30, 2000, consisting primarily of $11.2 million for purchases of
property and equipment, net, offset by $3.0 million of sales of short-term
investments, net of purchases. Net cash used in investing activities was $3.1
million for the three months ended June 30, 1999, consisting primarily of $2.1
million of purchases of short-term investments, net of sales, and approximately
$1.0 million for the purchase of property and equipment, net.
Net cash provided by financing activities was $3.8 million for the three
months ended June 30, 2000, consisting primarily of proceeds from the issuance
of common stock to employees under various incentive stock plans and proceeds
from the repayment of notes receivable from stockholders. Net cash provided by
financing activities was $1.3 million for the three months ended June 30,1999,
consisting of proceeds from the issuance of common stock to employees under
various incentive stock plans.
Brio currently has no material commitments other than those under operating
lease agreements. Brio has experienced a substantial increase in its capital
expenditures and operating lease arrangements since inception,
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which is consistent with increased staffing, and anticipates that this will
continue in the future. Additionally, Brio will continue to evaluate possible
acquisitions of, or investments in businesses, products and technologies that
are complimentary of those of Brio, which may require the use of cash.
Management believes existing cash, cash equivalents and short-term investments
will be sufficient to meet Brio's operating requirements for at least the next
twelve months; however, Brio may sell additional equity or debt securities or
obtain credit facilities to further enhance its position. The sale of
additional securities could result in additional dilution to Brio stockholders.
Risk Factors That May Affect Future Operating Results
We desire to take advantage of the "Safe Harbor" provisions of the Private
Securities Litigation Reform Act of 1995 and of Section 21E and Rule 3b-6 under
the Securities and Exchange Act of 1934. Specifically, we wish to alert readers
that the following important factors, as well as other factors including,
without limitation, those described elsewhere in reports we have filed with the
SEC, could in the future affect, and in the past have affected, our actual
results and could cause our results for future periods to differ materially
from those expressed in any forward-looking statements made by or on behalf of
us. We assume no obligation to update these forward-looking statements.
Because our plans to achieve profitability in the future require us to grow
our work force, improve our infrastructure and acquire and develop new
technologies, failure to successfully do so could lower our operating results
and cause our stock price to decrease. If we cannot execute our growth
strategy, our stock price could decrease. Successfully achieving our growth
strategy depends upon the combined company's ability to:
. expand, train and manage our work force;
. continue to attract, retain and motivate qualified personnel; and
. develop or acquire new businesses, products and technologies.
In addition, if we cannot manage an expanding work force, improve our
reporting systems and customer service infrastructure and manage the
integration of acquired businesses, products or technologies, we will be unable
to continue to manage the growth of our operations, which could harm our
business and financial results.
Brio has a history of net losses, and may not be profitable in the
future. Brio has a history of net losses, and we cannot provide any assurance
that we will experience revenue growth or profitability on a quarterly or
annual basis in the future. In particular, Brio incurred net losses applicable
to common stock of $10.9 million in fiscal 2000, $753,000 in fiscal 1999 and
$15.7 million in fiscal 1998. As of June 30, 2000, Brio incurred a net loss of
approximately $4.5 million and had stockholders' equity of approximately $27.6
million.
Brio anticipates increased operating expenses and a reduced rate of revenue
growth in the future. Brio currently expects to increase its expenses, and our
operating results will be harmed if increased revenues do not accompany these
increased expenses. Brio may not sustain the same rate of sequential quarterly
revenue growth it has experienced in the past in future periods. In particular,
during the three months ended June 30, 2000, Brio found forecasted deals for
large-scale deployments of its software were delayed. Such deployments have
become more prevalent and take longer to evaluate, implement and close than
transactions in Brio's historical experience. In addition, Brio will likely
increase its operating expenses significantly in fiscal 2001. Brio currently
intends to commit substantial financial resources to research and development,
customer support and sales and marketing, including the continued expansion of
its domestic and international direct sales force, third-party partnering
relationships and Brio's domestic and international indirect channel sales
organization. Brio also expects to increase staffing and systems infrastructure
in order to support expanding operations.
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Our prospects for increased future revenues must be considered in light of
the risks, expenses and difficulties frequently encountered by companies in a
similar stage of development, particularly companies in rapidly evolving
markets. To address these risks, the company must:
. successfully increase the scope of its operations;
. respond to competitive developments;
. continue to attract, retain and motivate qualified personnel; and
. continue to commercialize products incorporating advanced technologies.
Brio may not be able to achieve these goals.
Brio's quarterly operating results will likely fluctuate based on factors
beyond our control. Brio has experienced, and expects to continue to
experience, significant fluctuations in quarterly operating results based on a
number of factors, many of which are not within its control. Among other
things, Brio's operating results have fluctuated in the past due to:
. the timing of product enhancements and new product announcements;
. the lengthy sales cycle of its products;
. market acceptance of and demand for its products;
. capital spending patterns of its customers;
. customer order deferrals in anticipation of enhancements or new products;
. its ability to attract and retain key personnel;
. the mix of domestic and international sales;
. the mix of license and service revenues;
. personnel changes; and
. changes in the timing and level of operating expenses.
During the three months ended June 30, 2000, Brio found that several of
these factors negatively impacted its profitability. In particular, Brio found
that deals for large-scale deployments of its products, which have become more
prevalent, have a longer sales cycle than smaller implementations. In addition,
the mix of license and service revenues varied significantly when compared to
historical experience.
The announcement or introduction of new products by Brio or its competitors
or any change in industry standards may cause customers to defer or cancel
purchases of existing products. Furthermore, the introduction of products with
reliability, quality or compatibility problems could result in reduced orders,
delays in collecting accounts receivable and additional service costs.
Accordingly, Brio's results of operations may also fluctuate in the future due
to a number of additional factors, including but not limited to those discussed
above, as well as:
. the number and significance of product enhancements and new product
announcements by competitors;
. changes in pricing policies by Brio and its competitors;
. Brio's ability to develop, introduce and market new and enhanced versions
of its products on a timely basis;
. customer order deferrals in anticipation of enhancements or new products
offered by competitors;
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. nonrenewal of service agreements, software defects and other product
quality problems;
. the mix of direct and indirect sales;
. currency fluctuations; and
. general economic conditions.
Due to these factors, quarterly revenue and operating results are difficult
to forecast and may not meet expectations.
Seasonality may affect Brio's results. Brio has experienced seasonality due
to customer capital spending patterns and the general summer slowdown in sales.
Brio expects to continue to experience seasonality as a result of these
factors. This seasonality could materially hurt results of operations,
particularly for the quarters ending June 30 or September 30.
If Brio's operating results do not meet financial analysts' expectations,
our stock price may decline. In the future, our reported or anticipated
operating results may fail to meet or exceed the expectations of securities
analysts or investors. In that event, Brio's common stock price could be
materially reduced.
Because Brio depends on a direct sales force, any failure by Brio to attract
and retain adequate sales personnel could slow its sales and increase its
expenses, causing significant financial and operational risks. Brio may not be
able to attract and retain adequate sales personnel, despite the expenditure of
significant resources to do so, and the failure to do so could materially harm
its ability to sell its products at expected levels. Because turnover tends to
slow sales efforts until replacement personnel can be recruited and trained,
failure to retain sales personnel could seriously hamper our business,
operating results and financial condition. Competition for personnel with a
sufficient level of expertise and experience for direct sales positions is
intense, particularly among competitors who may have substantially greater
resources than Brio or greater resources dedicated to hiring direct sales
personnel. In addition, Brio has experienced significant turnover of its sales
force.
Brio's success depends on key personnel who may not continue to work for
it. The loss of the services of any of the key personnel or the inability to
attract or retain qualified personnel in the future could harm Brio's business,
operating results and financial condition. The success of Brio will depend to a
significant degree upon the continued contributions of key management,
engineering, sales and marketing personnel, many of whom would be difficult to
retain or replace if they leave Brio. Because competition for qualified
personnel is intense, Brio may not be successful in attracting and retaining
the personnel it seeks.
Brio has recently experienced difficulties in hiring highly qualified sales
and engineering personnel, and may continue to have difficulty in attracting
employees in those categories. Brio has employment contracts with only four
members of its executive management personnel.
Because the sales cycle for Brio's products is long, the timing of sales is
difficult to predict and Brio's quarterly revenues and earnings may fluctuate
significantly. Based in part on the lengthy sales cycle for Brio's products,
quarterly revenues and operating results could vary significantly in the
future. The sales cycle associated with the purchase of Brio's products is
typically three to nine months in length and subject to a number of significant
risks over which Brio has little or no control, including customers' budgeting
constraints and internal acceptance review procedures. In particular, large-
scale deployments of Brio's products, which are becoming more prevalent in the
industry, take longer to evaluate, implement and close than historical sales
cycles seem to indicate. Sales transactions may be delayed during the customer
acceptance process because Brio must provide a significant level of education
to prospective customers regarding the use and benefits of its products.
Additionally, the sales cycle for Brio's products in international markets has
historically been, and is expected to continue to be, longer than the sales
cycle in the United States and Canada. Accordingly, if Brio's international
operations expand, the average sales cycle for its products is expected to
lengthen. In addition, Brio anticipates that an increasing portion of its
revenue could be derived from larger orders, in which case the
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timing of receipt and fulfillment of those orders could cause material
fluctuations in operating results, particularly on a quarterly basis.
Because Brio expects to achieve revenue growth and increased margins through
indirect sales channels, Brio's failure to develop and manage indirect sales
channels could limit its sales growth and financial performance. Brio may not
be able to continue to attract and retain additional indirect channel partners
that will be able to market its products effectively and provide timely and
cost-effective customer support and services. Brio may not be able to manage
conflicts within its indirect channel or that its focus on increasing sales
through the indirect channels will not divert management resources and
attention from direct sales. In addition, Brio's agreements with indirect
channel partners do not restrict the channel partners from distributing
competing products, and in many cases may be terminated by either party without
cause. The ability of Brio to achieve revenue growth and improved operating
margins on product sales in the future will depend in large part upon its
success in expanding and maintaining indirect channels worldwide. Indirect
channels include VARs, resellers and distributors.
To date, Brio has generated a majority of its sales from its direct sales
force, and has supplemented its direct sales efforts with the efforts of VARs,
resellers and distributors in a variety of locations throughout the world.
These third parties perform some or all of the following functions: sales and
marketing; systems implementation and integration; software development and
customization; and ongoing consulting, training, service and technical support.
Brio generally offers such parties discounts on products and training, as well
as a cooperative marketing program and field level assistance from Brio's
direct and channel sales forces. Brio intends to leverage sales and marketing
through indirect channel partners that will distribute or resell Brio's
products in their respective markets. Revenues from VARs, resellers and
distributors accounted for approximately 26% of total revenues in fiscal 2000,
21% of total revenues in fiscal 1999 and 24% of total revenues in fiscal 1998.
Revenues from VARs, resellers and distributors were 18% of total revenues for
the three months ended June 30, 2000. Revenues from VARs, resellers and
distributors may not increase as a percentage of total revenues or in absolute
dollars in the future periods, which could hurt Brio's profitability.
Brio's strategy of acquiring new businesses and technologies involves
integration and transaction completion risks. As part of our business strategy,
we expect to enter into business combinations and acquisitions. Acquisition
transactions are accompanied by a number of risks, including:
. the difficulty of assimilating the operations and personnel of the
acquired companies;
. the potential disruption of our ongoing business and distraction of
management;
. the difficulty of incorporating acquired technology or content and rights
into our products;
. the correct assessment of the relative percentages of in-process research
and development expense which can be immediately written off as compared
to the amount which must be amortized over the appropriate life of the
asset;
. the failure to successfully develop an acquired in-process technology
could result in the impairment of amounts currently capitalized as
intangible assets;
. unanticipated expenses related to technology integration;
. the maintenance of uniform standards, controls, procedures and policies;
. the impairment of relationships with employees and customers as a result
of any integration of new management personnel; and
. the potential unknown liabilities associated with acquired businesses.
We may not be successful in addressing these risks or any other problems
encountered in connection with such acquisitions.
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Brio is in a highly competitive industry and some of its competitors may be
more successful in attracting and retaining customers. The market in which Brio
operates is highly competitive. Brio expects that competition will continue to
intensify. Increased competition could result in:
. price reductions;
. fewer customer orders;
. reduced gross margins;
. longer sales cycles; and
. loss of market share.
Brio or its competitors may announce enhancements to existing products, or
new products embodying new technologies, industry standards or customer
requirements that have the potential to supplant or provide lower-cost
alternatives to Brio's existing products.
Current and potential competitors offer a variety of software solutions and
generally fall within several categories:
. vendors of business intelligence software such as Cognos, Business
Objects, Seagate Software and Hummingbird;
. vendors offering alternative approaches to delivering reporting and
analysis capabilities to users, such as MicroStrategy, Computer
Associates, Information Advantage and Actuate;
. enterprise information portal software vendors, such as Plumtree and
Viador;
. database vendors that offer client products that operate specifically
with their proprietary database, such as Microsoft, IBM, Oracle and
Arbor;
. analytic application vendors such a E.piphany; and
. other companies that may in the future announce offerings of a B2B
Analytic software infrastructure.
These competitors may be able to respond more quickly than Brio to new or
emerging technologies and changes in customer requirements or devote greater
resources to the development, promotion and sales of their products than Brio.
Brio expects additional competition as other established and emerging companies
enter into the B2B Analytics market and new products and technologies are
introduced. Brio will compete on the basis of the following factors:
. completeness of product offering;
. product features;
. ease of use;
. product performance;
. product quality;
. analytical capabilities;
. scalability;
. open architecture;
. customer support;
. time to market; and
. price.
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Our failure to compete favorably in these areas could limit our ability to
attract and retain customers, which could have a material adverse affect on our
results of operations.
Market consolidation may create more formidable competitors. Alliances among
current and new competitors may emerge and rapidly gain significant market
share. The failure of Brio to compete successfully against current and future
competitors could materially harm its business, operating results and financial
condition by driving down prices and reducing revenue growth. Current and
potential competitors may make strategic acquisitions or establish cooperative
relationships among themselves or with third parties, thereby increasing the
ability of their products to address the needs of Brio's prospective customers.
Current or future indirect channel partners of Brio may establish cooperative
relationships with current or potential competitors, thereby limiting Brio's
ability to sell its products through particular distribution channels. Such
competition could have a material adverse effect on Brio's ability to obtain
new licenses and maintenance and support renewals for existing licenses on
favorable terms. Further, competitive pressures may require Brio to reduce the
price of its products, which could have a material adverse effect on our
business, operating results and financial condition.
Brio's plans to expand internationally expose Brio to risks related to
managing international operations, currency exchange rates, tariffs and other
difficulties related to foreign operations. A key component of Brio's strategy
is its planned expansion into additional international markets. If the
international revenues generated by these expanded operations are not adequate
to offset the expense of establishing and maintaining these foreign operations,
Brio's business, operating results and financial condition could be materially
harmed. In addition to the uncertainty as to Brio's ability to expand its
international presence, there are risks inherent in doing business on an
international level, including:
. technical difficulties associated with product localization in foreign
countries;
. increased difficulty in controlling operating expenses;
. unexpected changes in regulatory requirements;
. tariffs and other trade barriers;
. difficulties in staffing and managing foreign operations;
. longer payment cycles;
. problems in collecting accounts receivable;
. political instability;
. fluctuations in currency exchange rates;
. seasonal reductions in business activity during the summer months in
Europe; and
. potentially adverse tax consequences.
Each of these factors could adversely impact the success of Brio's
international operations and, consequently, could harm Brio's business,
operating results and financial condition. In particular, Brio's international
sales are generally denominated and collected in foreign currencies, and Brio
has not historically undertaken foreign exchange hedging transactions to cover
potential foreign currency exposure. Brio incurred a loss on foreign currency
translations resulting from intercompany receivables from foreign subsidiaries
in an amount of approximately $429,000 in fiscal 2000 and approximately
$126,000 in fiscal 1999. During the three months ended June 30, 2000, Brio
incurred a loss of approximately $390,000 on foreign currency translations
resulting from intercompany receivables from foreign subsidiaries.
Brio's future success will depend upon successful product development in the
face of changing customer requirements and rapid technological change. Brio's
failure to develop and introduce new products and product enhancements on a
timely basis that meet changing customer requirements and technological changes
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could result in reduced demand for or market acceptance of Brio's products,
which could hurt Brio's business, operating results and financial condition.
Brio's products incorporate a number of advanced technologies, including
proprietary data analysis engines, a distributed architecture, as well as Web
access and delivery technology. Brio may be required to change and improve its
products in response to changes in operating systems, applications, networking
and connectivity software, computer and communications hardware, programming
tools and computer language technology.
Brio may not successfully respond to changing technology, identify new
product opportunities or develop and bring new products to market in a timely
and cost-effective manner. In the past Brio has experienced delays in software
development. In particular, development efforts in the UNIX server environment
are complex, and in the past Brio has encountered delays in developing products
for this environment. Brio may experience delays in connection with current or
future product development activities.
Because Brio's future success will depend upon successful product
development in the face of evolving industry standards, failure to introduce
new products could hurt its growth and profitability. Brio's failure to
introduce new products or product enhancements on a timely basis that are
compatible with industry standards could delay or hinder demand for or market
acceptance of its products, which could hurt Brio's growth and profitability.
The market may not accept Brio's products, which would reduce revenues,
growth and profitability. Brio is focusing its selling efforts increasingly on
larger, enterprise-wide implementations of its products, and Brio expects these
sales to constitute an increasing portion of any of its future revenue growth.
Failure of a significant market for B2B Analytics products to develop, or
failure of enterprise-wide implementations of Brio's products to achieve broad
market acceptance, could materially harm Brio's business, operating results and
financial condition. Enterprise-wide sales efforts also tend to result in
longer sales cycles. See risk factor "Because the sales cycle for Brio products
is long, the timing of sales is difficult to predict and Brio's quarterly
revenues and earnings may fluctuate significantly." To date, Brio's selling
efforts have resulted in limited enterprise-wide implementations of its
products. Brio believes that most companies currently are not yet aware of the
benefits of enterprise-wide B2B Analytics solutions or of its products and
capabilities, nor have most companies deployed B2B Analytics solutions on an
enterprise-wide basis. Brio's efforts to promote market awareness of its
products and the problems its products address may not be sufficient to build
market awareness of the need for B2B Analytics or acceptance of Brio's
products.
Product defects could adversely affect Brio's operating results. As a result
of their complexity, Brio's software products may contain undetected errors,
failures or viruses. Brio or its customers may discover errors in new products
or enhancements after commencement of commercial shipments, resulting in loss
of revenues, delay in market acceptance or damage to Brio's reputation, which
could have a material adverse effect upon Brio's business, operating results
and financial condition.
Brio's license agreements with customers typically contain provisions
designed to limit Brio's exposure for potential claims based on errors or
malfunctions of Brio's products. The limitation of liability provisions
contained in Brio's license agreements may not be effective under the laws of
all jurisdictions. Brio's sale and support of its products entail the risk of
warranty claims, and Brio's insurance against product liability risks may not
be adequate to cover a potential claim. A product liability claim brought
against Brio could have a material adverse effect on its business, operating
results and financial condition.
Brio has one issued patent and three pending patent applications. Brio's
intellectual property protection may not be adequate to prevent competitors
from entering its markets or developing competing products. Brio's limited
intellectual property protection may allow competitors to enter its market or
develop competing products, resulting in competitive harm to Brio. The methods
used by Brio to protect its proprietary rights afford only limited protection.
Brio currently relies primarily on a combination of copyright and trademark
laws, trade secrets, confidentiality procedures and contractual provisions to
protect its proprietary rights. Brio currently has one U.S. patent and three
pending applications. The patent applications may not result in the
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issuance of a patent. Our issued patent and any additional patents issued to us
may be invalidated, circumvented or challenged, and the rights granted under
these patents might not provide Brio competitive advantages. Brio may not
obtain any more patents. Others may develop technologies that are similar or
superior to Brio's technology or design around our patent or any other patent
that we may come to own.
Despite Brio's efforts to protect its proprietary rights, unauthorized
parties may attempt to copy aspects of Brio's products or to obtain and use
information that Brio regards as proprietary. Policing unauthorized use of
Brio's products is difficult, and while Brio is unable to determine the extent
to which piracy of its software products exists, Brio expects software piracy
to be a persistent problem. In addition, the laws of some foreign countries do
not protect proprietary rights as fully as do the laws of the U.S. Brio's means
of protecting its proprietary rights in the U.S. or abroad may not be adequate,
and competitors may independently develop similar technology.
Investment Risks
Brio's common stock has a limited trading history and a volatile
price. There has only been a public market for Brio's common stock since April
30, 1998, and an active public market may not continue. The market price of the
shares of Brio's common stock is likely to be highly volatile and may be
significantly affected by a number of factors, including:
. actual or anticipated fluctuations in our operating results;
. announcement of business partnerships;
. technological innovations or new product introductions by us or our
competitors;
. changes of estimates of our future operating results by securities
analysts;
. developments with respect to copyrights or proprietary rights; or
. general market conditions.
In addition, the stock market has, from time to time, experienced
significant price and volume fluctuations that have particularly affected the
market prices of equity securities of many technology companies. Broad market
fluctuations, as well as economic conditions generally, and in the software
industry specifically, may result in material adverse effects on the market
price of Brio's common stock. In the past, following periods of volatility in
the market price of a particular company's securities, securities class action
litigation has often been brought against that company. Such litigation may
occur in the future with respect to Brio, and could result in substantial costs
and a diversion of management's attention and resources, which could have a
material adverse effect upon Brio's business, operating results and financial
condition.
Anti-takeover provisions may adversely effect Brio's stock price and make it
more difficult for a third party to acquire Brio. Provisions of Brio's charter
documents may have the effect of delaying or preventing a change in control of
Brio or its management, which could have a material adverse effect on the
market price of Brio's common stock. These include provisions:
. relating to a classified board of directors and provisions eliminating
cumulative voting;
. eliminating the ability of stockholders to take actions by written
consent; and
. limiting the ability of stockholders to raise matters at a meeting of
stockholders without giving advance notice.
In addition, the Brio board of directors has authority to issue up to
2,000,000 shares of preferred stock and to fix the rights, preferences,
privileges and restrictions, including voting rights, of these shares without
any further vote or action by the stockholders. The rights of the holders of
Brio's common stock will be subject to, and may be adversely affected by, the
rights of the holders of any preferred stock that Brio may issue in the
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future. The issuance of preferred stock, while providing desirable flexibility
in connection with possible acquisitions and other corporate purposes, could
have the effect of making it more difficult for a third party to acquire a
majority of Brio's outstanding voting stock, thereby delaying, deferring or
preventing a change in control of Brio. Brio has no present plan to issue
shares of preferred stock.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Brio's exposure to market risk for changes in interest rates relates
primarily to Brio's investment portfolio. Brio maintains an investment policy
which ensures the safety and preservation of its invested funds by limiting
default risk, market risk and reinvestment risk. As of June 30, 2000, Brio had
$12.4 million of cash and cash equivalents with a weighted average variable
rate of 5.5% and $8.7 million of short-term investments with a weighted average
variable rate of 6.3%.
Brio mitigates default risk by attempting to invest in high credit quality
securities and by constantly positioning its portfolio to respond appropriately
to a significant reduction in a credit rating of any investment issuer or
guarantor. The portfolio includes only marketable securities with active
secondary or resale markets to ensure portfolio liquidity and maintains a
prudent amount of diversification.
Brio currently has no cash flow exposure due to rate changes for long-term
debt obligations. Brio has entered into borrowing agreements to support general
corporate purposes including capital expenditures and working capital needs,
should the need arise. Brio currently has no short-term or long-term debt
outstanding.
Brio conducts business on a global basis in international currencies. As
such, it is exposed to adverse or beneficial movements in foreign currency
exchange rates. Brio may enter into foreign currency forward contracts to
minimize the impact of exchange rate fluctuations on certain foreign currency
commitments and balance sheet positions. At June 30, 2000 there were no
outstanding foreign currency exchange contracts.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Not applicable.
Item 2. Changes in Securities and Use of Proceeds.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to Vote of Security Holders.
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
27.1 Financial Data Schedule.
(b) Reports on Form 8-K:
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Brio Technology, Inc.
/s/ Tamara L. MacDuff
By __________________________________
Tamara L. MacDuff
Chief Financial Officer (Principal
Financial and Accounting Officer)
Date: August 14, 2000
