<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 September 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)
<TABLE>
<S> <C>
Delaware 77-0210797
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
</TABLE>
4980 Great America Parkway
Santa Clara, California 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 November 9, 2000 there were 28,793,156 shares of the registrant's
Common Stock outstanding.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
BRIO TECHNOLOGY, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2000
INDEX
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
PART I. Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets--September 30, 2000 and
March 31, 2000................................................ 3
Condensed Consolidated Statements of Operations--Three and Six
Months Ended September 30, 2000 and 1999...................... 4
Condensed Consolidated Statements of Cash Flows--Six Months
Ended September 30, 2000 and 1999............................. 5
Notes to Condensed Consolidated Financial Statements........... 6
Management's Discussion and Analysis of Financial Condition and
Item 2. 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...................... 26
Item 3. Defaults Upon Senior Securities................................ 26
Item 4. Submission of Matters to a Vote of Security Holders............ 26
Item 5. Other Information.............................................. 26
Item 6. Exhibits and Reports on Form 8-K............................... 26
Signature............................................................... 27
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
BRIO TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
September 30, March 31,
2000 2000
------------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 12,044 $ 21,573
Short-term investments.............................. 5,138 11,831
Accounts receivable, net of allowance of $2,362 and
$2,848............................................. 29,865 31,429
Inventories......................................... 443 822
Deferred income taxes............................... 633 1,890
Prepaid expenses and other current assets........... 3,607 3,862
--------- ---------
Total current assets............................ 51,730 71,407
Property and equipment, net........................... 24,833 12,118
Other assets.......................................... 2,015 2,339
--------- ---------
$ 78,578 $ 85,864
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $ 5,603 $ 7,801
Accrued liabilities--
Payroll and related benefits...................... 8,572 11,423
Other............................................. 10,041 8,786
Deferred revenue, current........................... 27,822 24,108
--------- ---------
Total current liabilities....................... 52,038 52,118
Noncurrent deferred revenue........................... 1,431 2,717
Other noncurrent liabilities.......................... 980 2,903
--------- ---------
Total liabilities............................... 54,449 57,738
--------- ---------
Stockholders' equity:
Common stock........................................ 28 28
Additional paid-in capital.......................... 80,889 76,807
Notes receivable from stockholders.................. (82) (483)
Deferred compensation............................... (62) (118)
Accumulated components of comprehensive income...... 543 312
Accumulated deficit................................. (57,187) (48,420)
--------- ---------
Total stockholders' equity...................... 24,129 28,126
--------- ---------
$ 78,578 $ 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 September Six Months Ended
30, September 30,
----------------- -----------------
2000 1999 2000 1999
------- -------- ------- --------
<S> <C> <C> <C> <C>
Revenues:
License fees.......................... $18,982 $ 21,177 $37,952 $ 39,470
Services.............................. 14,904 9,479 28,959 18,765
------- -------- ------- --------
Total revenues...................... 33,886 30,656 66,911 58,235
------- -------- ------- --------
Cost of revenues:
License fees.......................... 1,007 826 1,964 1,498
Services.............................. 6,735 3,835 12,779 7,808
------- -------- ------- --------
Total cost of revenues.............. 7,742 4,661 14,743 9,306
------- -------- ------- --------
Gross profit............................ 26,144 25,995 52,168 48,929
------- -------- ------- --------
Operating expenses:
Research and development.............. 6,688 4,856 12,255 9,515
Sales and marketing................... 20,053 14,888 41,126 29,651
General and administrative............ 3,544 3,888 7,469 7,135
Non-recurring operating expenses...... -- 20,242 -- 21,401
------- -------- ------- --------
Total operating expenses............ 30,285 43,874 60,850 67,702
------- -------- ------- --------
Loss from operations.................... (4,141) (17,879) (8,682) (18,773)
Interest and other income (expense),
net.................................... (171) 407 (85) 179
------- -------- ------- --------
Loss before provision for income taxes.. (4,312) (17,472) (8,767) (18,594)
Provision for income taxes.............. -- -- -- 399
------- -------- ------- --------
Net loss................................ $(4,312) $(17,472) $(8,767) $(18,993)
======= ======== ======= ========
Basic and diluted net loss per share.... $ (0.15) $ (0.71) $ (0.31) $ (0.82)
======= ======== ======= ========
Shares used in computing basic and
diluted net loss per share............. 28,194 24,764 28,092 23,201
======= ======== ======= ========
</TABLE>
See accompanying notes.
4
<PAGE>
BRIO TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
September 30,
-----------------
2000 1999
------- --------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss................................................... $(8,767) $(18,993)
Adjustments to reconcile net loss to cash used in operating
activities--
Depreciation and amortization............................ 2,616 1,408
Provision for returns and doubtful accounts.............. 191 759
Deferred compensation amortization....................... 32 97
Loss on disposal of property and equipment............... 60 768
Provision for loss on marketable securities.............. -- 346
Changes in operating assets and liabilities--
Accounts receivable.................................... 1,564 (2,751)
Inventories............................................ 378 114
Deferred income taxes.................................. 1,258 (449)
Prepaid expenses and other assets...................... 388 (478)
Accounts payable and accrued liabilities............... (5,717) 15,953
Deferred revenue....................................... 2,428 2,665
------- --------
Cash used in operating activities.................... (5,569) (561)
------- --------
Cash Flows from Investing Activities:
Purchases of short-term investments........................ (896) (15,369)
Sales of short-term investments............................ 7,518 8,472
Purchases of property and equipment........................ (16,281) (2,463)
Proceeds from sale of property and equipment............... 890 --
------- --------
Cash used in investing activities.................... (8,769) (9,360)
------- --------
Cash Flows from Financing Activities:
Repayments of notes payable................................ -- (2,000)
Proceeds from issuance of common stock, net................ 4,115 2,066
Proceeds from repayment of notes receivable from
stockholders.............................................. 392 998
------- --------
Cash provided by financing activities................ 4,507 1,064
------- --------
Net decrease in cash and cash equivalents.................. (9,831) (8,857)
Effect of exchange rate changes on cash.................... 302 88
Cash and cash equivalents, beginning of period............. 21,573 21,026
------- --------
Cash and cash equivalents, end of period................... $12,044 $ 12,257
======= ========
</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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Comprehensive Loss
A summary of comprehensive loss follows (in thousands):
<TABLE>
<CAPTION>
Three Months Six Months
Ended September Ended September
30, 30,
----------------- -----------------
2000 1999 2000 1999
------- -------- ------- --------
<S> <C> <C> <C> <C>
Net loss............................. $(4,312) $(17,472) $(8,767) $(18,993)
Unrealized gain (loss) on short-term
investments......................... 12 174 (71) 225
Foreign currency translation
adjustment.......................... 147 21 302 88
------- -------- ------- --------
Comprehensive loss................. $(4,153) $(17,277) $(8,536) $(18,680)
======= ======== ======= ========
</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 and six months ended September 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 effect would be antidilutive. Potential
common shares of 1,589,953 for the three months ended September 30, 2000,
2,081,978 for the six months ended September 30, 2000, 2,931,000 for the three
months ended September 30, 1999 and 2,897,000 for the six months ended
September 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.
Note 3. Notes Payable
At September 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 September 30, 2000). At September 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. In August 2000, the line of
credit was amended to change the covenants under the agreement. The amended
agreement requires Brio to comply with a net income covenant, excluding non-
recurring operating charges, of $1.00, except for the quarter ended September
30, 2000 whereby Brio's loss may not exceed $5.1 million and an adjusted quick
ratio covenant of at least 2:1. Brio was in compliance with these covenants as
of September 30, 2000. 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
7
<PAGE>
BRIO TECHNOLOGY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 September 30, 2000, $4.0 million in the accompanying balance
sheet is included in accrued liabilities and $1.0 million is included in other
noncurrent liabilities, representing the net present value of the remaining
quarterly payments, offset by $274,900 included in accrued liabilities and
$20,200 included in other noncurrent liabilities, representing the interest
that will be recognized over the payment term. As of March 31, 2000, $4.0
million in the accompanying balance sheet is included in accrued liabilities
and $3.0 million is included in other noncurrent liabilities, representing the
net present value of the remaining quarterly payments, offset by $423,900
included in accrued liabilities and $119,600 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 and six months ended September
30, 1999 are comprised of merger and restructuring costs related to the SQRIBE
acquisition and the settlement of Brio's ongoing patent litigation with
Business Objects, S.A. as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
September 30, September 30,
------------- -------------
1999 1999
------------- -------------
<S> <C> <C>
Merger and restructuring costs................... $11,105 $12,264
Settlement costs (see Note 5).................... 9,137 9,137
------- -------
Total non-recurring operating expenses........... $20,242 $21,401
======= =======
</TABLE>
Brio's merger with SQRIBE was completed on August 3, 1999. For the three
months ended September 30, 1999, merger and restructuring costs of $11.1
million consisted of $7.2 million in transaction and related professional fees,
$107,000 in severance costs to terminate employees, $1.3 million in merger
integration
8
<PAGE>
BRIO TECHNOLOGY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
expenses, $387,000 in consolidation of facilities, $697,000 in equipment
retirements and $1,414,000 in other miscellaneous merger-related expenses. For
the six months ended September 30, 1999, merger and restructuring costs of
$12.3 million consisted of $7.2 million in transaction and related professional
fees, $1.0 million in severance costs to terminate employees, $1.3 million in
merger integration expenses, $387,000 in consolidation of facilities, $697,000
in equipment retirements, $260,000 in merger-related advertising expenses and
$1,420,000 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.
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 approximately $10.9 million in fiscal 2000,
$753,000 in fiscal 1999 and $15.7 million in fiscal 1998. Brio incurred a net
loss of approximately $4.3 million during the three months ended September 30,
2000. Brio had an accumulated deficit of approximately $57.2 million as of
September 30, 2000. 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. All prior period condensed
consolidated financial statements were 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
9
<PAGE>
. 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 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, system integrators
and distributors. Brio expects that revenues from sales through VARs,
resellers, system integrators and distributors will increase in the future as a
percentage of revenues from license fees. Revenues from VARs, resellers, system
integrators 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, system integrators and distributors were 22% of
total revenues for the three months ended September 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, system
integrators 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.
These large-scale deployments of Brio's products were delayed during the three
and six months ended September 30, 2000 and are expected to close in the coming
quarters. 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, China 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, Australia and China 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 18% of total revenues for the three months
ended September 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
10
<PAGE>
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.
Brio incurred a loss of approximately $215,000 in foreign currency translations
resulting from intercompany receivables from foreign subsidiaries for the three
months ended September 30, 2000. 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
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.
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 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."
11
<PAGE>
Results of Operations
The following table includes consolidated statements of operations data as a
percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
September 30, September 30,
---------------- ----------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Consolidated Statements of
Operations Data:
Revenues:
License fees...................... 56 % 69 % 57 % 68 %
Services.......................... 44 31 43 32
------ ------ ------ ------
Total revenues.................. 100 100 100 100
Cost of revenues:
License fees...................... 3 3 3 3
Services.......................... 20 12 19 13
------ ------ ------ ------
Total cost of revenues.......... 23 15 22 16
------ ------ ------ ------
Gross profit........................ 77 85 78 84
Operating expenses:
Research and development.......... 20 16 18 16
Sales and marketing............... 59 48 62 51
General and administrative........ 10 13 11 12
Non-recurring operating expenses.. -- 66 -- 37
------ ------ ------ ------
Total operating expenses........ 89 143 91 116
------ ------ ------ ------
Loss from operations................ (12) (58) (13) (32)
Interest and other income (expense),
net................................ (1) 1 -- --
------ ------ ------ ------
Net loss before provision for income
taxes.............................. (13) (57) (13) (32)
Provision for income taxes.......... -- -- -- 1
------ ------ ------ ------
Net loss............................ (13)% (57)% (13)% (33)%
====== ====== ====== ======
</TABLE>
Revenues
Brio derives revenues from license fees and services, which include software
maintenance and support, training and system implementation consulting. Total
revenues increased $3.2 million or 11% for the three months ended September 30,
2000 compared to the three months ended September 30, 1999 and $8.7 million or
15% for the six months ended September 30, 2000 compared to the six months
ended September 30, 1999. These increases were primarily due to increased
services revenue including training, consulting and maintenance and support
services associated with license sales offset by lower license fees revenue.
One customer accounted for more than 10% of total revenues for the three months
ended September 30, 2000. No customer accounted for more than 10% of total
revenues for the six months ended September 30, 2000 and the three and six
month periods ended September 30, 1999.
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Revenues by geographic location were as follows for the three and six months
ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months Six Months
Ended September Ended September
30, 30,
--------------- ---------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues by Geography:
Domestic..................................... $27,781 $25,003 $53,688 $46,809
International................................ 6,105 5,653 13,223 11,426
------- ------- ------- -------
Total revenues............................. $33,886 $30,656 $66,911 $58,235
======= ======= ======= =======
</TABLE>
Revenue from international sources increased $452,000 or 8% for the three
months ended September 30, 2000 compared to the three months ended September
30, 1999 and $1.8 million or 16% for the six months ended September 30, 2000
compared to the six months ended September 30, 1999. The increases were
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 decreased $2.2 million or 10% for
the three months ended September 30, 2000 compared to the three months ended
September 30, 1999 and $1.5 million or 4% for the six months ended September
30, 2000. The decreases were primarily due to a delay in signing large-scale
deployments of Brio's products which are expected to close in the coming
quarters and the lengthening of the sales cycle for Brio's products.
Services. Services revenues increased $5.4 million or 57% for the three
months ended September 30, 2000 compared to the three months ended September
30, 1999. The increase was due to an increase of approximately $2.3 million in
training and consulting revenues and $3.1 million in maintenance and support
revenues related to increases in Brio's installed customer base. Services
revenues increased $10.2 million or 54% for the six months ended September 30,
2000 compared to the six months ended September 30, 1999. The increase was due
to an increase of approximately $4.2 million in training and consulting
revenues and $6.0 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 $181,000 or
22% for the three months ended September 30, 2000 compared to the three months
ended September 30, 1999 and $466,000 or 31% for the six months ended September
30, 2000 compared to the six months ended September 30, 1999. The increases in
absolute dollars were due to the mix of shipments of master disks versus
"shrinkwrapped" product. Cost of revenues from license fees may vary between
periods due to the mix of customers purchasing master disks relative to
customers purchasing "shrinkwrapped" product.
Services. Cost of 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 $2.9 million or 76% for the three months ended
September 30, 2000 compared to the three months ended September 30, 1999.
Approximately $2.6 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 $300,000 of the increase was due to
increases in the use of outside consultants for training and consulting
services. Cost of revenue from services increased $5.0 million or 64% for the
six months ended September 30, 2000 compared to the six months ended September
30, 1999. Approximately $4.2 million of the increase was due to increases in
personnel and related costs resulting from Brio's expansion in support services
in response to
13
<PAGE>
increased demand for maintenance and support and training and consulting
services. Approximately $800,000 of the increase was due to increases in the
use of outside consultants for training and consulting services. Cost of
revenues from services may vary between periods due to the mix of services
provided by Brio's personnel relative to services provided by outside
consultants and to varying levels of expenditures required to build the
services organization.
Operating Expenses
Research and Development. Research and development expenses consist
primarily of personnel and related costs associated with the development of new
products, the enhancement and localization of existing products, quality
assurance and testing. Research and development expenses increased $1.8 million
or 38% for the three months ended September 30, 2000 compared to the three
months ended September 30, 1999 and $2.7 million or 29% for the six months
ended September 30, 2000 compared to the six months ended September 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
sustain 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 $5.2 million or 35% for
the three months ended September 30, 2000 compared to the three months ended
September 30, 1999. Approximately $2.9 million of the increase was attributable
to the costs associated with the expansion of Brio's worldwide sales
organization and approximately $900,000 of the increase was attributable to
higher sales commissions, bonuses, training and recruiting expenses and sales
incentives associated with increased revenues. Approximately $1.4 million of
the increase was attributable to increased domestic and international marketing
expenses, including marketing activities, personnel and related costs. Sales
and marketing expenses increased $11.5 million or 39% for the six months ended
September 30, 2000 compared to the six months ended September 30, 1999.
Approximately $5.5 million of the increase was attributable to the costs
associated with the expansion of Brio's worldwide sales organization and
approximately $2.2 million of the increase was attributable to higher sales
commissions, bonuses, training and recruiting expenses and sales incentives
associated with increased revenues. Approximately $3.8 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 decreased $344,000 or 9% for the
three months ended September 30, 2000 compared to the three months ended
September 30, 1999. Substantially all of the decrease was attributable to
decreased facilities related expenses due to our facilities consolidation.
General and administrative expenses increased $334,000 or 5% during the six
months ended September 30, 2000 compared to the six months ended September 30,
1999. Substantially all of the increase was attributable to increased personnel
and related costs, offset by a decrease in facilities related expenses due to
our facilities consolidation completed during the three months ended September
30, 2000. Brio expects that its general and administrative expenses will
increase in absolute dollars as Brio expands its staffing to support expanded
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<PAGE>
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 $14,000 was expensed
during the three months ended September 30, 2000, approximately $32,000 was
expensed during the six months ended September 30, 2000, approximately $69,000
was expensed during the three months ended September 30, 1999, approximately
$97,000 was expensed during the six months ended September 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 and six months ended September 30, 1999 are comprised of merger and
restructuring costs related to the SQRIBE acquisition and the settlement of
Brio's ongoing patent litigation with Business Objects, S.A. as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
September 30, September 30,
1999 1999
------------- -------------
<S> <C> <C>
Merger and restructuring costs................... $11,105 $12,264
Settlement costs................................. 9,137 9,137
------- -------
Total non-recurring operating expenses......... $20,242 $21,401
======= =======
</TABLE>
Brio's merger with SQRIBE was completed on August 3, 1999. For the three
months ended September 30, 1999, merger and restructuring costs of $11.1
million consisted of $7.2 million in transaction and related professional fees,
$107,000 in severance costs to terminate employees, $1.3 million in merger
integration expenses, $387,000 in consolidation of facilities, $697,000 in
equipment retirements and $1,414,000 in other miscellaneous merger-related
expenses. For the six months ended September 30, 1999, merger and restructuring
costs of $12.3 million consisted of $7.2 million in transaction and related
professional fees, $1.0 million in severance costs to terminate employees, $1.3
million in merger integration expenses, $387,000 in consolidation of
facilities, $697,000 in equipment retirements, $260,000 in merger-related
advertising expenses and $1,420,000 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.
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 September 30, 2000, $4.0 million in the accompanying balance
sheet is included in accrued liabilities and $1.0 million is included in other
noncurrent liabilities, representing the net present value of the
15
<PAGE>
remaining quarterly payments, offset by $274,900 included in accrued
liabilities and $20,200 included in other noncurrent liabilities, representing
the interest that will be recognized over the payment term. As of March 31,
2000, $4.0 million in the accompanying balance sheet is included in accrued
liabilities and $3.0 million is included in other noncurrent liabilities,
representing the net present value of the remaining quarterly payments, offset
by $423,900 included in accrued liabilities and $119,600 included in other
noncurrent liabilities, representing the interest that will be recognized over
the payment term.
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 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, decreased from a
net income of $407,000 for the three months ended September 30, 1999 to a net
expense of $171,000 for the three months ended September 30, 2000. Interest and
other income (expense), net, decreased from a net income of $179,000 for the
six months ended September 30, 1999 to a net expense of $85,000 for the six
months ended September 30, 2000. These decreases were due to increased losses
on foreign currency translations resulting from intercompany receivables from
foreign subsidiaries, interest charges relating to the Business Objects, S.A.
litigation and lower cash, cash equivalent and short-term investment balances.
Income Taxes
Brio recorded net losses for the three and six months ended September 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 losses incurred in the three and six months ended September 30,
2000. For the six months ended September 30, 1999, Brio recorded a provision
for income taxes of $399,000 consisting primarily of Federal and state
alternative minimum taxes as Brio utilized net operating loss carryforwards to
offset income taxes generated from domestic operations for that period.
Liquidity and Capital Resources
As of September 30, 2000, Brio had cash, cash equivalents and short-term
investments of $17.2 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 September 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. In August 2000, the line of credit was amended to change
the covenants under the agreement. The amended agreement requires Brio to
comply with a net income covenant, excluding non-recurring operating charges,
of $1.00, except for the quarter ended September 30, 2000 whereby Brio's loss
may not exceed $5.1 million and an adjusted quick ratio covenant of at least
2:1. Brio was in compliance with these covenants as of September 30, 2000. The
line of credit expires on December 31, 2000.
Net cash used in operating activities was $5.6 million for the six months
ended September 30, 2000 and $561,000 for the six months ended September 30,
1999. The increase of $5.0 million was due to changes in operating assets and
liabilities of approximately $15.2 million principally related to accounts
payable and accrued liabilities, offset by decreases in net losses of
approximately $10.2 million.
Net cash used in investing activities was $8.8 million for the six months
ended September 30, 2000, consisting primarily of $16.3 million for purchases
of property and equipment, net, offset by $6.6 million of sales of short-term
investments, net of purchases and $890,000 of proceeds from the sale of
property and equipment. Net cash used in investing activities was $9.4 million
for the six months ended September 30, 1999,
16
<PAGE>
consisting primarily of $6.9 million of purchases of short-term investments,
net of sales, and approximately $2.5 million for the purchase of property and
equipment, net.
Net cash provided by financing activities was $4.5 million for the six
months ended September 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 $1.1 million for the six months ended
September 30, 1999 consisting 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 of repayments of notes payable.
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, 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 approximately $10.9 million in fiscal 2000, $753,000 in
fiscal 1999 and $15.7 million in fiscal 1998. Brio incurred a net loss of
approximately $4.3 million during the three months ended September 30, 2000. As
of September 30, 2000, Brio had stockholders' equity of approximately $24.1
million.
17
<PAGE>
Brio anticipates increased operating expenses and a variable 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 and six months ended September 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.
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 and six months ended September 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
18
<PAGE>
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;
. 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
19
<PAGE>
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 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, system integrators 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, system integrators 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, system integrators 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, system integrators and distributors were 22% of total revenues for
the three months ended September 30, 2000. Revenues from VARs, resellers,
system integrators 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;
20
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. the failure to successfully develop an acquired in-process technology
could result in the impairment of amounts currently capitalized as
intangible assets;
. unanticipated expenses related to technology integration;
. the maintenance of uniform standards, controls, procedures and policies;
. the impairment of relationships with employees and customers as a result
of any integration of new management personnel; and
. the potential unknown liabilities associated with acquired businesses.
We may not be successful in addressing these risks or any other problems
encountered in connection with such acquisitions.
Brio is in a highly competitive industry and some of its competitors may be
more successful in attracting and retaining customers. The market in which Brio
operates is highly competitive. Brio expects that competition will continue to
intensify. Increased competition could result in:
. price reductions;
. fewer customer orders;
. reduced gross margins;
. longer sales cycles; and
. loss of market share.
Brio or its competitors may announce enhancements to existing products, or
new products embodying new technologies, industry standards or customer
requirements that have the potential to supplant or provide lower-cost
alternatives to Brio's existing products.
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;
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. product performance;
. product quality;
. analytical capabilities;
. scalability;
. open architecture;
. customer support;
. time to market; and
. price.
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.
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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. Brio incurred a loss of approximately $215,000 in
foreign currency translations resulting from intercompany receivables from
foreign subsidiaries for the three months ended September 30, 2000.
Brio's future success will depend upon successful product development in the
face of changing customer requirements and rapid technological change. Brio's
failure to develop and introduce new products and product enhancements on a
timely basis that meet changing customer requirements and technological changes
could 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
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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 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
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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 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 September 30, 2000, Brio
had $12.0 million of cash and cash equivalents with a weighted average variable
rate of 5.8% and $5.1 million of short-term investments with a weighted average
variable rate of 6.5%.
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 September 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.
At Brio's Annual Meeting of Stockholders on August 24, 2000, Brio's
stockholders approved the following items:
1. The election of the following individuals as directors of Brio:
<TABLE>
<CAPTION>
Authority
For Withheld
---------- ---------
<S> <C> <C>
Yorgen H. Edholm..................................... 18,162,172 3,586,571
Bernard J. Lacroute.................................. 21,322,372 426,371
</TABLE>
2. The amendment of Brio's 1998 Stock Option Plan to: (i) increase the
aggregate number of shares of Common Stock reserved for issuance under such
plan by 4,000,000 shares to 9,862,087 shares; (ii) amend the plan's
evergreen feature so that it provides that the lesser of 4% of Brio's
outstanding Common stock or 1,000,000 shares shall automatically become
available for issuance under the plan on the first date of the Company's
fiscal years beginning in 2001, 2002, and 2003; and (iii) increase the
annual limit on the maximum number of shares of Common Stock that can be
granted to any employee under the plan during a fiscal year of the Company
by 2,200,000 shares to a total of 3,200,000 shares.
For: 10,266,639 Against: 7,863,648 Abstain: 18,223 Broker non-votes:
3,600,233
3. The ratification of the appointment of Arthur Andersen LLP as Brio's
independent public accounts for the fiscal year ending March 31, 2001.
For: 21,714,709 Against: 23,621 Abstain: 10,413 Broker non-votes:
None
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: November 14, 2000
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EXHIBIT INDEX
<TABLE>
<C> <S>
27.1 Financial Data Schedule.
</TABLE>
