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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 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
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BRIO TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0210797
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4980 Great America Parkway
Santa Clara, California 95054
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (408) 496-7400
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
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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 than the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90
days. (1) YES [X] NO [_] ; (2) YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant was approximately $370,456,596 as of June 26, 2000 based upon
the closing sale price on the Nasdaq National Market reported for such date.
Shares of Common Stock held by each officer and director and by each person
who owns 5% or more of the outstanding Common Stock have been excluded in that
such persons may be deemed to be affiliates. This determination of affiliate
status is not necessarily a conclusive determination for other purposes.
There were 28,153,374 shares of the registrant's Common Stock issued and
outstanding as of June 26, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the definitive proxy
statement for the Annual Meeting of Stockholders to be held on August 16,
2000.
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PART I
Certain statements in this Annual Report on Form 10-K, including certain
statements contained in Item 1, "Business" and Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations," constitute
"forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements
of Brio to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. All
forward-looking statements included in this document are based on information
available to Brio on the date hereof, and Brio assumes no obligation to update
any such forward-looking statements. See Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Risk Factors That
May Affect Future Operating Results."
Item 1. Business.
Overview
Brio Technology, Inc. (Brio) delivers a business-to-business (B2B) analytic
software infrastructure 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. The Brio
ONE solution meets the complete range of decision-processing needs with
integrated business intelligence, enterprise reporting, enterprise information
portal and packaged analytic applications that work across client/server and
Web environments, all with ease of experience and scalability. With Brio ONE,
companies can derive higher business value from all of their enterprise
information sources, including enterprise resource planning (ERP), sales force
automation (SFA) and customer relationship management (CRM) applications as
well as data marts, data warehouses and the Web.
Brio products are available through direct sales and professional services
organizations located in the United States, Canada, Latin America, the United
Kingdom, France, Germany, Japan, Australia, and more than 40 countries
worldwide through value added resellers (VARs), resellers and distributors. See
Note 4 of Notes to Consolidated Financial Statements for additional information
about geographic revenue.
Brio currently serves thousands of organizations worldwide with over 4,000
installed sites. Brio counts over one third of the Fortune 500 as customers,
including Alaska Airlines, AT&T, British Telecom, California State University
System, Carrefour, Compaq Computer Corp., Fidelity Investments, Hewlett-
Packard, Hoffman LaRoche, Hughes Communications, IBM, Merrill Lynch, Motorola,
Sun Microsystems and the U.S. Army.
Industry Background
In today's increasingly competitive markets, organizations in every industry
are seeking to improve the business professional's ability to make timelier,
fact-based business decisions. The key to achieving this goal is the effective
use of real-time business information across the organization. While many
organizations have spent considerable effort and resources over the past decade
to collect, organize and distribute data, few have been able to effectively put
it to use. Over the past few years, the Web has opened up a new channel of
information delivery.
Today, corporations are looking to take advantage of the Web to provide
users with a streamlined solution for tracking key indicators that drive
business. The use of the Web has not only transformed how information is
produced and distributed within an organization, but has also enabled
organizations to extend access to information to their business partners and
customers. Companies are now working together towards a common objective and
sharing operating information via the Web for increased efficiencies and better
perspective into their businesses.
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Organizations are also erecting e-business sites to handle transactions.
Companies moving to e-business will win or lose based on how well they
leverage real-time information from their suppliers, customers and other third
parties. To facilitate effective information sharing and decision making,
companies need to implement an architecture which integrates disparate and
hard-to-reach data sources into a personalized user environment that supports
real-time analysis.
Brio's extended analytic infrastructure reaches outside the firewall so
organizations can distribute information globally, providing customers and
business partners the ability to act on real-time information to make better,
more-informed business decisions. Today, with portal technology and a complete
analytic infrastructure, Brio puts both structured and unstructured
information into the hands of every user and provides them with query,
analysis and reporting tools to improve their decision making and ability to
manage the top line. Brio refers to this shared use of information and
analytics inside and outside the organization as "B2B Analytics." B2B
Analytics need to:
. take full advantage of the ubiquitous nature and distribution benefits
offered by the Web;
. integrate with and leverage the organization's existing systems; and
. provide a comprehensive solution to the organization's information needs.
In the absence of a B2B Analytics solution, organizations have deployed
partial solutions for their reporting, analysis and information access needs.
However, many organizations are realizing that incompatible and disparate
reporting and analysis tools have inhibited the production and distribution of
information. In addition, they are also realizing that they do not have the
time to deploy two separate systems to service internal employees and external
constituencies such as business partners and customers. As a result, Brio
believes that organizations need a comprehensive, easy-to-use B2B Analytics
solution that unifies access to all business information, meets the needs of
all users inside and outside the enterprise, and is effective in traditional
networks as well as email and Web environments.
Brio Solution
Brio ONE is Brio's flagship offering, which provides a complete B2B
Analytics infrastructure that integrates business intelligence, enterprise
reporting, analytic applications and enterprise information portal software.
Brio ONE takes the entire enterprise into account--supporting traditional
"brick-and-mortar" business requirements as well as the demands of the new e-
business model. Brio ONE is designed to meet the complete range of decision
making needs--including internal employees as well as external customers,
vendors and business partners. Brio ONE aims to increase the business value of
enterprise information by empowering everyone in the enterprise to easily
access and utilize the information they need to make better business
decisions.
Brio ONE delivers ease of use for both business decision makers and
information technology (IT) staff by providing:
. an intuitive, easy to understand and use interface;
. a personalized experience for each end user;
. adaptability for individual work styles and information needs;
. real-time interaction with information for greater understanding; and
. streamlined implementation, administration and maintenance.
Beyond ease-of-use, Brio ONE fulfills the performance requirements of large
enterprise deployments by:
. being scalabe in multiple dimensions from individual work groups to
entire enterprise, from bytes to terabytes of data, from one to hundreds
of database and application servers, and from one to thousands of users;
and
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. providing distributed processing and operations across a broad range of
platforms and data sources.
Brio ONE supports the full range of information delivery and analysis
requirements for users throughout the enterprise, at every level of experience,
technological sophistication and security clearance. Brio ONE facilitates
business intelligence by:
. enhancing the value of existing enterprise information;
. leveraging customers' information assets and infrastructure, including
ERP, SFA and CRM applications, data marts and data warehouses; and
. empowering personnel, at every level of the enterprise as well as
externally, to find, use and publish information that contributes to the
enterprise's success.
Brio Strategy
Brio's strategy is to be a leading provider of B2B Analytic solutions for
both traditional Fortune 1000 companies and emerging e-business companies.
Brio's B2B Analytic software infrastructure enables companies to use
information--inside and outside the firewall--to be more competitive, customer-
centric and responsive to the changing demands of business. The following are
key elements of Brio's strategy:
Extend Technology Leadership. Brio has designed its products to satisfy
customers' desire for rapid implementation, intuitive user interfaces, easy
integration with existing database and other system software, high performance,
and limited information technology staff support. Brio products incorporate a
number of advanced technologies, including a proprietary data analysis engine,
a distributed architecture and Web access and delivery technology based on
standards such as Java, HTML and XML. Brio intends to devote significant
resources to research and development efforts and to form strategic
relationships that will enable Brio to further enhance its products'
functionality and ease of use.
Broaden Distribution Channels. To date, Brio has sold its products primarily
through its direct sales and services organizations located in the United
States, Canada, the United Kingdom, France, Germany, Japan and Australia. In
addition, Brio has sold its products worldwide through VARs, resellers and
distributors. Brio intends to grow its direct sales organization to intensify
its coverage of large organizations and to augment its telesales operation to
cover smaller organizations. In addition, Brio will continue to both leverage
and grow its existing network of VARs, resellers and distributors to expand its
indirect distribution channel worldwide.
Expand Product Deployments Throughout the Enterprise. Brio's products and
related services are designed to enable its customers to deploy business
intelligence throughout their organizations. Although most organizations
initially deploy Brio's products on a departmental or pilot basis, Brio
believes that initial customer success with this deployment can lead to
significant opportunities for larger scale adoption of Brio's products within
the organization. Brio intends to focus its sales and services efforts on large
organizations seeking large-scale B2B Analytics infrastructure deployments as
well as making initial customer pilots or deployments successful.
Leverage Industry Relationships. To accelerate the adoption of Brio's
products as a standard platform for B2B Analytics, Brio has formed strategic
relationships that provide for enhanced compatibility with partner technologies
and increased market exposure and sales opportunities for Brio's products and
services. Brio's partners include industry-leading providers of software and
hardware, such as IBM, Microsoft and Oracle, that complement Brio's product and
service offerings. Brio also partners with a wide range of training,
implementation and application development services related to Brio's products.
Brio's strategic relationships can, among other things, consist of:
. Brio's participation in various sales and marketing initiatives sponsored
by these companies, including joint presentations at industry trade shows
and conferences; and
. Brio agreements to support certain technology standards promoted by these
companies.
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Increase International Presence. Outside of the United States, Brio has:
. direct sales offices in Canada, the United Kingdom, France, Germany,
Japan and Australia;
. established distributor relationships in more than 40 countries,
including Belgium, Italy, The Netherlands and South Africa; and
. localized products in Chinese, French, German, Italian, Japanese,
Portuguese (Brazilian) and Spanish.
Brio intends to expand its global sales capabilities by increasing the size
of its direct sales, sales support and marketing organizations, expanding its
distribution channels in Europe, Latin America and Asia/Pacific and continuing
localization efforts of its products in selected markets.
Provide Premium Customer Support and Service. Brio believes that offering
quality service and support is important to customer satisfaction and provides
a significant opportunity to build customer loyalty and to differentiate itself
from its competition. Brio intends to increase its focus on customer
satisfaction by continuing to invest in support services including additional
staffing, a Web-based help line and systems infrastructure. In addition, Brio
is committed to providing customer-driven product functionality through
feedback from user groups, prospects, consultants, partners and customer
surveys.
Products and Technology
Brio offers a set of technologies that create an integrated B2B Analytics
infrastructure called "Brio ONE." Brio ONE is designed to meet the entire range
of business intelligence needs of companies who need to provide decision
processing and self-service business intelligence to a broad constituency of
individuals, including employees, customers and business partners. Brio ONE's
product functionality includes enterprise reporting, analytical reporting, ad
hoc query and on-line analytical processing (OLAP), enterprise information
portal, as well as tools for building and deploying a wide range of analytic
applications.
All of the products within the Brio ONE platform are designed to deliver
enterprise-caliber scalability, performance and ease of experience to users.
The major benefits of Brio ONE include the ability to:
. provide universal access to all information sources "inside and outside"
the enterprise, including: data stored and maintained in data warehouses
and data marts; ERP, SFA and CRM systems and other corporate or
departmental applications; as well as documents, spreadsheets and other
unstructured data;
. support the delivery of information and content across the entire Web-
enabled enterprise;
. support the decision-processing needs of both decision makers and the IT
staff; and
. implement a single-source solution that supports the development and
delivery of a wide-range of decision-processing applications, from
personal query and reporting applications to strategic analytic
applications.
Brio ONE is comprised of the following integrated product line solutions:
. Brio.Enterprise, Brio's integrated business intelligence suite;
. Brio.Report, Brio's enterprise reporting technology;
. Brio.Portal, Brio's enterprise information portal; and
. Brio.Applications, Brio's packaged analytic application suite for
strategic business analysis, revenue optimization and performance
management.
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Brio.Enterprise
Brio.Enterprise is Brio's integrated business intelligence suite that
incorporates query, analysis and analytical reporting capabilities for client-
server and Web environments. Brio.Enterprise includes: BrioQuery Designer,
BrioQuery Explorer, BrioQuery Navigator, Brio.Insight, Brio.QuickView,
Brio.Freeview and the Brio Enterprise Server (comprised of the Broadcast Server
and the OnDemand Server).
BrioQuery. All editions of BrioQuery unify query, analysis, reporting,
charting and analytic dashboard capabilities in one product for client-server
users. To meet the differing needs of these users, BrioQuery is available in
three editions:
. BrioQuery Designer extends the core BrioQuery capabilities with
application administration functionality to define and manage security,
auditing and centralized access to features which enable IT departments
to control the intelligence environment;
. BrioQuery Explorer is designed for power users or independent analysts
who need direct access to database tables and repositories of pre-defined
data and reports and need to be able to create their own queries,
analyses and reports; and
. BrioQuery Navigator is used by analysts or information consumers who do
not have the technical ability or need to directly access database
tables. These users typically only need access to pre-defined dashboards,
data and reports that they can use as a basis for independent analyses.
Web-based Products. Brio's Web-based client products provide users with a
wide range of report, query and analytical capabilities within standard Web
browsers. Together with Brio's server-based products, they enable organizations
to deploy software that facilitates simplified administration and maintenance.
Brio's Web-based products include:
. Brio.Insight. Employing the same user-interface as BrioQuery,
Brio.Insight delivers interactive query, analysis, reporting, charting
and analytical capabilities inside a standard Web browser. Whether
connected to the Web, to the Brio Enterprise Server or operating without
connection, Brio.Insight enables users to go beyond viewing static
reports to perform independent analysis and reports on the delivered
information;
. Brio.Quickview. Brio.Quickview enables organizations to deliver a
portfolio of "view only" analytic applications and reports to users
through a Web browser. These portfolios can include fully formatted
reports with color, highlights, charts and tables. When used in
conjunction with the Brio.Enterprise Server, Brio.Quickview provides
users with the option to query the database live, retrieving data that is
used to create their portfolio or to limit the view based on a set of
criteria; and
. Brio.Freeview. Brio.Freeview provides the same functionality as
Brio.Quickview but allows the online display and printing of pre-built
reports, with no analysis capabilities, and prohibits the ability to
reach-through to the database to retrieve fresh data.
Brio Enterprise Server. The Brio Enterprise Server product includes two
server modules, the Broadcast Server and the OnDemand Server. It also includes
a unified administration tool. The Brio Enterprise Server is designed to meet
the information distribution and data access needs of information consumers,
while providing IT departments with centralized control, administration and
security management functionality.
. Broadcast Server. The Broadcast Server enables IT departments to control
the integrity and distribution of business information. It allows
information producers to take queries, analyses and reports created with
BrioQuery, and to schedule automatic processing and delivery of such
reports based on date, time or event. The Broadcast Server pushes the
reports and documents in a highly compressed format out to Web, client-
server and mobile users via file transfer protocol, email, Web servers
and/or network file servers and printers.
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. OnDemand Server. The OnDemand Server is a Web-based application server,
which offers both mobile and desktop users easy and secure access to a
variety of data sources. Users logon to the OnDemand Server to retrieve a
personalized list of reports and analysis packages they have privileges
to access. With the OnDemand Server adaptive reporting feature, IT
departments can determine on a report-by-report basis the level of
Brio.Insight and Brio.Quickview functionality and interactivity that a
particular user is allowed. Additionally, the OnDemand Server
(optionally) allows users to author and run database queries over the
Web. The server can then pre-build reports and transmit them to Brio's
Web-based client products, Brio.Insight, Brio.Quickview and
Brio.Freeview. The OnDemand Server also automates the installation and
maintenance of Brio's Web client software.
Brio.Report
Brio.Report is a high-volume, high-performance server-based enterprise
reporting tool that enables customers to develop and process a complete range
of reports, from small reports to mission-critical operational reports that
access large volumes of data in production databases, legacy applications and
data warehouses. Output from Brio.Report can range from high-volume printed
reports to highly interactive reports delivered via the Web. Brio.Report
consists of Brio.Report Builder, Brio.Report SQR Server, Brio.Report Viewer and
Brio.Report Activator, as described below:
. Brio.Report Builder. A powerful and flexible graphical report development
environment enabling users to rapidly create enterprise reports via an
easy point-and-click interface. Users can quickly build personalized
reports such as visual analysis, with minimal assistance from their IT
personnel;
. Brio.Report SQR Server. A powerful report processing and data
manipulation technology for high-performance reporting providing native
access to over 75 combinations of databases and operating environments;
. Brio.Report Viewer. Utility for viewing end-user reports; and
. Brio.Report Activator. A set of integration components and ActiveX
controls designed to enable developers to add extensive, flexible data-
access and reporting features to commercial and custom Microsoft Windows
applications, allowing users of those applications to pull information
from databases easily and quickly.
Brio.Portal
Brio.Portal provides dynamic, self-service access to enterprise information
for employees, partners and customers. The distributed architecture of
Brio.Portal manages structured and unstructured information and integrates
knowledge management and business intelligence technology. This framework
scales across platforms and locations and automatically personalizes the
browser-based user interface and the content end users have access to based on
each user's preferences and authorization. Brio.Portal also provides multiple
integration capabilities to leverage existing enterprise information sources
including data warehouses, applications, productivity tools and internet
content.
Brio.Applications
Brio.Applications is a flexible, powerful and evolutionary application
framework to meet strategic analysis and performance management requirements.
The initial product offering in the Brio.Applications suite is the Brio.Impact
Revenue Performance Optimization (RPO) Application.
Brio.Impact is an RPO packaged software application designed specifically
for global corporations that need to manage healthy, top-line growth in the
environment of changing product, market and business models. Brio.Impact
produces insight into a company's revenue stream enabling users to find new
opportunities to generate more revenue out of their existing business. Unlike
other analytic applications, Brio.Impact provides specialized metrics that help
company's track and manage the top-line. Its key features include:
. sophisticated content in the form of business rules and metrics for
sales, marketing, product management and finance to help them jointly
manage the revenue generation process;
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. a complete and customizable analytic foundation that captures and
automates best practices and analytical methods for analyzing and
optimizing revenue performance;
. a tightly integrated, collaborative framework by which all users share
and interact with the same embedded business and analytical models,
tactics and plans; and
. an easy-to-use "performance dashboard" that provides intelligent
navigation paths to isolate anomalies and analyze performance in the same
way that top performers analyze and make decisions about their business.
Platforms
Brio's business intelligence solutions, enterprise information portal,
enterprise reporting solutions and analytic applications are designed to
operate on most popular server platforms including Windows NT and UNIX (AIX,
HP-UX and Sun Solaris). Brio's client products currently operate on a number of
operating systems including Windows (95, 98, 2000 and NT), PowerMac and UNIX
(AIX, HP-UX and Sun Solaris). Brio's products provide native, ODBC, DB2 and
OLEDB connectivity to a variety of data sources including relational database
management systems such as Oracle, DB2, SQL Server and Adaptive Server, non-
relational database management systems such as Hyperion Essbase, Microsoft On-
line Analytical Processing Services and Informix Metacube.
Sales and Marketing
Sales. To date, Brio has sold its products primarily through its direct
sales and services organizations located in the United States, Canada, the
United Kingdom, France, Germany, Japan and Australia, and has sold its products
worldwide through VARs, resellers and distributors. The direct sales process
involves the generation of sales leads through direct mail, seminars and
telemarketing, or requests for proposals from prospects. Brio's field sales
force conducts multiple presentations and demonstrations of Brio's products to
management and users at customer sites as part of the direct sales effort.
Sales cycles typically range from three to nine months. The direct sales force
is compensated for sales made through indirect channel partners as well as
direct sales to ensure appropriate cooperation with Brio's VARs, resellers and
distributors. The direct sales force supports local partners and engages in
joint sales efforts with partners, while the channel sales organization
provides channel management.
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.
Brio intends to grow its direct sales organization and its telesales
operation to serve smaller organizations. In addition, Brio will realign and
grow its channel sales organization to develop new market opportunities and to
continue to leverage and grow its existing network of VARs, resellers and
distributors to expand its indirect distribution channel worldwide. Brio
currently expects that it will fund such expansion out of its working capital.
Brio's agreements with its VARs generally provide for the right to resell a
customized version of Brio's products in conjunction with sales of the VARs
products or services. Brio typically offers its VARs a purchase discount to
incent the VAR to sell Brio's products. Brio's agreements with its distributors
generally require that such distributors make certain minimum purchases of
Brio's products, none of which minimum purchases are material in amount either
individually or in the aggregate. Brio does not typically grant exclusive sales
territories to its distributors.
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Marketing. Brio is focused on building market awareness and acceptance of
Brio and its products, as well as developing strategic partnerships. Brio has a
marketing strategy with several key components: image and awareness building,
direct marketing to both prospective and existing customers, a strong Web
presence, as well as broad-scale marketing programs in conjunction with key
local and global partners. Brio's corporate marketing strategy includes
extensive public relations activities, a conference and trade show speakers
program, as well as programs to work closely with key analysts and other
influential third parties. Brio's direct marketing activities include
participation in selected trade shows and conferences, targeted advertising, as
well as ongoing direct mail efforts to existing and prospective customers. Brio
has effectively used local, regional and Web-based seminars to assist prospects
in selecting enterprise business intelligence, enterprise reporting, enterprise
information portal and analytic applications solutions. Brio has used the Web
to further interest and the lead generation process and to improve the quality
of the leads that it provides to the sales organization. Brio has invested in
building a partner and channel marketing function which helps to recruit,
train, support and conduct cooperative marketing with technology partners,
systems integrators, consultants, VARs, resellers and distributors. These
programs help to foster strong relationships between Brio and its various
partners. The marketing organization also provides a wide-range of programs,
materials and events to support the sales organization in its efforts.
Brio's sales and marketing organization consisted of 278 full-time employees
as of March 31, 2000. The sales and marketing staff is based at Brio's
corporate headquarters in Santa Clara, California. Brio also has field sales
offices in the metropolitan areas of Chicago, New York, San Francisco,
Columbus, Los Angeles, Atlanta, Washington D.C. and Dallas as well as
international sales offices in its foreign subsidiary locations.
Research and Development
Brio's internal research and development teams have created the products
that have been the basis for Brio's success, and Brio intends to continue to
make substantial investments in research and development and related activities
to maintain and enhance its product lines. Brio believes that its future
success will, in large part, depend on its ability to maintain and improve
current products and to develop new products that meet B2B Analytic needs.
Brio's internal research and development teams are organized into business
units comprised of product management, product marketing, engineering, quality
assurance and technical publications. As of March 31, 2000, Brio's research and
development organization consisted of 113 full-time employees. Product
requirements are based on customer feedback, technical support experience,
market analysis and technology trends. Brio employs a professional development
methodology that constantly monitors customer satisfaction, quality, cost and
delivery schedules.
Customer and Technical Support
Brio believes that high quality, real-time customer support is a value-add
to the successful marketing and sale of its products. Maintenance and support
contracts, which are typically for twelve months and offered with an initial
license, may be renewed annually and are typically set at a percentage of the
total license fee. A large portion of Brio's direct sales to customers have
maintenance and support contracts that entitle the customers to patches,
updates and upgrades at no additional cost, when available, and unlimited
access to Brio's Technical Support hotline. Customers purchasing maintenance
have several options to choose from that can be tailored to specific needs.
Customers needing assistance have their issues immediately logged into the
support database at the time of the call. Brio supplements its standard
telephone hotline support with a number of Web-based support services,
including access to frequently asked questions, a patch download area and an
interface to the technical support department's problem-tracking database,
which allows customers to submit cases and view the status of any of their
current cases on-line. To improve user access to explanatory materials, Brio
provides on-line documentation with all of its products. Among other things,
such documentation includes detailed explanations of product features as well
as problem-solving tips. As of March 31, 2000, Brio's services and support
organization consisted of 111 full-time employees.
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Competition
Brio's market is still developing. The business intelligence, enterprise
reporting, enterprise information portals and analytic applications markets are
intensely competitive, highly fragmented and characterized by rapidly changing
technology and evolving standards. Brio's current and potential competitors
offer a variety of software solutions and generally fall within several
categories:
. business intelligence software vendors 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 as E.piphany; and
. other companies that may in the future announce offerings of a B2B
Analytic software infrastructure.
Brio's competitive position in the market is uncertain, due principally to
the variety of current and potential competitors, and the emerging nature of
the market. Brio has experienced and expects to continue to experience
increased competition from current and potential competitors, many of whom have
significantly greater financial, technical, marketing and other resources than
Brio. Such competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements or devote greater resources
to the development, promotion and sales of their products than Brio. Brio
expects additional competition as other established and emerging companies
develop business intelligence software and B2B Analytics products and
technologies. Increased competition could result in price reductions, fewer
customer orders, reduced gross margins, longer sales cycles and loss of market
share, any of which could materially and adversely affect Brio's business,
operating results and financial condition.
Current and potential competitors may make strategic acquisitions or
establish cooperative relationships among themselves or with third parties,
increasing the ability of their products to address the needs of our
prospective customers. Our current or future indirect channel partners may
establish cooperative relationships with our current or potential competitors,
limiting our ability to sell our products through particular distribution
channels. Accordingly, competitors or alliances among current and new
competitors may emerge and rapidly gain significant market share. Such
competition could materially adversely affect Brio's ability to obtain new
licenses and maintenance and support renewals for existing licenses, on terms
favorable to Brio. Further, competitive pressures may require Brio to reduce
the price of its products, which could have a material adverse effect on Brio's
business, operating results and financial condition. Brio may not be able to
compete successfully against current and future competitors, and the failure to
do so could have a material adverse effect upon Brio's business, operating
results and financial condition.
Brio competes on the basis of the following factors:
. completeness of product offering;
. product features;
. ease of use;
. product performance;
. product quality;
. analytical capabilities;
. scalability;
10
<PAGE>
. open architecture;
. customer support;
. time to market; and
. price.
Brio believes it presently competes favorably with respect to each of these
factors. However, Brio's market is still evolving and there can be no
assurance that Brio will be able to compete successfully against current and
future competitors, and the failure to do so successfully could have a
material adverse effect on Brio's business, operating results and financial
condition.
Proprietary Rights
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 also believes that factors such as the
technological and creative skills of its personnel, new product developments,
frequent product enhancements, name recognition and reliable product
maintenance are essential to establishing and maintaining a technology
leadership position.
Brio seeks to protect its software, documentation and other written
materials under trade secret and copyright laws, which afford only limited
protection. Brio currently has one United States patent and three pending
patent applications. These pending patent applications may not result in the
issuance of a patent. Our issued patent and any additional patents may not
provide Brio competitive advantages. Brio may not obtain any more patents.
Others may develop technologies that are similar or superior to our technology
or design around our patent or any other patent that Brio may come to own.
Despite Brio's efforts to protect its proprietary rights, unauthorized
parties may attempt to copy aspects of Brio's products or to obtain and use
information that Brio regards as proprietary. Policing unauthorized use of
Brio's products is difficult, and while Brio is unable to determine the extent
to which piracy of its software products exists, software piracy can be
expected to be a persistent problem. In addition, the laws of some foreign
countries do not protect Brio's proprietary rights as fully as do the laws of
the United States. There can be no assurance that Brio's means of protecting
its proprietary rights in the United States or abroad will be adequate or that
competitors will not independently develop similar technology.
Brio has entered into source code escrow agreements with a number of
customers and indirect channel partners requiring release of source code. Such
agreements provide that the contracting party will have a limited, non-
exclusive right to use the code, subject to the agreement, in the event that:
. there is a bankruptcy proceeding by or against Brio;
. Brio ceases to do business; or
. in some cases, Brio fails to meet its contractual obligations.
The provision of source code escrows may increase the likelihood of
misappropriation by third parties.
Brio expects that software product developers will increasingly be subject
to infringement claims as the number of products and competitors in Brio's
industry segment grows and the functionality of products in different industry
segments overlaps. Any claims, with or without merit, could:
. be time consuming to defend;
. result in costly litigation;
. divert management's attention and resources;
11
<PAGE>
. cause product shipment delays; or
. require Brio to enter into royalty or licensing agreements.
Such royalty or licensing agreements, if required, may not be available on
acceptable terms, if at all. In the event of a successful claim of product
infringement against Brio and its failure or inability to license the infringed
or similar technology, Brio's business, operating results and financial
condition could be materially adversely affected.
Finally, in the future Brio may rely upon software that it may license from
third parties, including software that may be integrated with Brio's internally
developed software and used in Brio's products to perform key functions. There
can be no assurance that these third-party software licenses will be available
on commercially reasonable terms. Brio's inability to obtain or maintain any
third-party software licenses could result in shipment delays or reductions
until equivalent software is developed, identified, licensed and integrated,
which could have a material adverse effect on Brio's business, operating
results and financial condition.
Employees
As of March 31, 2000, Brio had 573 employees, including 278 in sales and
marketing, 111 in services and support, 113 in research and development and 71
in general and administrative functions. Brio believes its employee relations
are good. Brio's success depends to a significant degree upon the continued
contributions of its key management, engineering, sales and marketing
personnel, many of whom would be difficult to replace. Brio has employment
contracts with only four members of its executive management personnel, and
currently maintains "key person" life insurance only on Yorgen Edholm, Brio's
President and Chief Executive Officer. Brio does not believe such insurance
would adequately compensate it for the loss of Mr. Edholm.
Brio believes its future success will also depend in large part upon its
ability to attract and retain highly skilled managerial, engineering, sales and
marketing and finance personnel. Competition for such personnel is intense, and
there can be no assurance that Brio will be successful in attracting and
retaining such personnel. The loss of the services of any of the key personnel,
the inability to attract or retain qualified personnel in the future or delays
in either hiring required personnel, or the rate at which new people become
productive, particularly sales personnel and engineers, could have a material
adverse effect on Brio's business, operating results and financial condition.
In particular, Brio has, from time to time, experienced and may continue to
experience significant turnover of its sales force, due principally to the
intensely competitive market for such personnel. Such turnover tends to slow
sales efforts until replacement personnel can be recruited and trained to
become productive members of Brio's sales force.
12
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of Brio and their ages as of June 26, 2000 are as
follows:
<TABLE>
<CAPTION>
Name Age Position(s)
---- --- ----------
<C> <C> <S>
Yorgen H. Edholm... 45 President, Chief Executive Officer and Director
Katherine Glassey.. 42 Chief Technology Officer, Executive Vice President,
Business Intelligence Products and Director
Scott Chalmers..... 56 Executive Vice President, Worldwide Sales Operations
John Schroeder..... 44 Executive Vice President, Products and Services
Tamara MacDuff..... 42 Chief Financial Officer and Executive Vice President,
Finance and Operations
Sujata Luther...... 43 Executive Vice President, Marketing
</TABLE>
Yorgen H. Edholm is a co-founder of Brio and has been its President and
Chief Executive Officer and a director since inception. Prior to founding Brio,
Mr. Edholm was a manager with the Management Consulting Division of Arthur
Young & Company in New York (now Ernst & Young, LLP) where he co-founded the
microcomputer-based Decision Support Systems Group. Before that, Mr. Edholm was
a product manager with Industry Mathematics AB in Stockholm, Sweden. Mr. Edholm
holds a M.S. in Computer Science and Applied Mathematics from the School of
Physical Engineering at the Royal Institute of Technology in Stockholm, Sweden
and an M.B.A. in Organizational Behavior and International Economics from the
Stockholm School of Economics in Stockholm, Sweden. Mr. Edholm is the spouse of
Katherine Glassey.
Katherine Glassey is a co-founder of Brio and has been its Chief Technology
Officer since January 1997 and has been a director since inception. She is also
Executive Vice President, Business Intelligence Products. Prior to joining
Brio, Ms. Glassey established and managed application development and
consulting organizations for Metaphor Computer Systems, Inc., a decision
support hardware and software company. Before joining Metaphor, Ms. Glassey was
a Senior Consultant with the Management Consulting Division of Arthur Young &
Company in New York where she co-founded the microcomputer-based Decision
Support Systems Group. Ms. Glassey holds a B.S. in Operations Research from
Cornell University with a Minor in English Literature. Ms. Glassey is the
spouse of Yorgen H. Edholm.
Scott Chalmers joined Brio as Executive Vice President, Worldwide Sales in
August 1999 in connection with Brio's merger with SQRIBE Technologies Corp.,
where Mr. Chalmers had served as vice president of sales since joining in April
1998. Prior to SQRIBE, he was vice president of worldwide sales for Visigenic
Software, where he was responsible for all of the company's sales activity,
including direct and channel sales. Prior to that, he was with Informix
Software as vice president of U.S. sales. His previous experience also includes
sales management positions at AT&T and IBM. Mr. Chalmers holds a MBA from the
University of California at Los Angeles and a bachelor's degree from Oklahoma
University.
John Schroeder joined Brio as Executive Vice President, Products and
Services in August 1999 in connection with Brio's merger with SQRIBE
Technologies, Corp., where Mr. Schroeder oversaw the development of the
company's enterprise reporting and information delivery architecture since
joining in 1996. Mr. Schroeder has also held executive position at Compuware
Corp., where he was general manager of the company's applications management
products business, and at Candle Corp., where he served as executive director
responsible for systems management products. He hold a bachelor's degree in
computer science from Southern Illinois Univeristy.
Tamara MacDuff joined Brio in 1992 and is currently the Chief Financial
Officer and Executive Vice President, Finance and Operations. Prior to joining
Brio, she was a consultant with a public accounting firm providing business
advisory services. Ms. MacDuff holds a bachelor's degree in finance with a
minor in accounting from San Jose State University. Ms. MacDuff is also a
Certified Public Accountant.
13
<PAGE>
Sujata Luther joined Brio in June 2000 and is currently Executive Vice
President, Marketing. Prior to joining Brio, Ms. Luther spent nearly 17 years
at Mattel, most recently as the senior vice president, international marketing
and consumer strategy where she had global responsibility for girls' toys
including development and execution of marketing campaigns, advertising,
promotions and public relations. Ms. Luther was previously the senior vice
president, worldwide consumer and sales research responsible for all product
lines at Mattel. Ms. Luther holds an MBA from University of Santa Clara, an MA
in Management Sciences from Bajaj Institute of Management in Bombay and a BA in
Psychology from Delhi University.
Item 2. Properties.
Brio's principal executive offices are located in Santa Clara, California
where Brio leases approximately 141,000 square feet under a lease that expires
in May 2010, approximately 17,000 square feet under a lease that expires in May
2005 and approximately 12,000 square feet under a lease that expires in October
2003. Brio also leases space (typically less than 5,000 square feet) in various
geographic locations primarily for sales and support personnel. Brio believes
that its current facilities are adequate to meet its needs through the end of
fiscal 2001, at which time Brio may need to lease additional space.
Brio was incorporated in California in February 1989 and was reincorporated
in Delaware in April 1998. Its principal executive offices are located at 4980
Great America Parkway, Santa Clara, California 95054. Its telephone number at
that location is (408) 496-7400.
Item 3. Legal Proceedings.
On January 20, 1997, Business Objects, S.A. filed a complaint against Brio
in the U.S. District Court for the Northern District of California in San Jose,
alleging that certain of Brio's products (including at least the BrioQuery
Navigator, BrioQuery Explorer and BrioQuery Designer products) infringed at
least claims 1, 2, and 4 of U.S. Patent Number 5,555,403. On April 4, 1997,
Brio filed an answer and affirmative defenses to the complaint, denying certain
of the allegations in the complaint and asserting a counterclaim requesting
declaratory relief that Brio is not infringing the patent and that the patent
is invalid and unenforceable. In December 1997, venue for the case was changed
to the Northern District of California in San Francisco. On July 30, 1999, Brio
filed an action against Business Objects, S.A. in the U.S. District Court for
the Northern District of California in San Jose, alleging that certain of
Business Objects, S.A. products infringe U.S. Patent Number 5,915,257. 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 a patent number 5,555,403 for $10.0 million, payable in $1.0 million
payments over 10 quarters with the first payment due September 30, 1999. 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.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
14
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Brio's Common Stock has been traded on the NASDAQ National Market since its
initial public offering on May 1, 1998. As of April 1, 2000 Brio changed its
symbol from "BRYO" to "BRIO." Brio has never declared or paid cash dividends on
its capital stock. It currently intends to retain all available funds and any
future earnings for use in the operation of its business and does not
anticipate paying any cash dividends in the foreseeable future. In addition,
the terms of Brio's primary credit facility prohibit the paying of dividends
without the lender's consent.
The following table sets forth the high and low sales prices of Brio's
Common Stock as reported by the NASDAQ National Market for each fiscal quarter
in the two-year period ended March 31, 2000:
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
Fiscal 2000
First Quarter.................................................. $21.00 $11.25
Second Quarter................................................. $24.75 $12.81
Third Quarter.................................................. $64.50 $18.50
Fourth Quarter................................................. $54.00 $27.06
Fiscal 1999
First Quarter.................................................. $19.06 $11.00
Second Quarter................................................. $13.88 $ 7.38
Third Quarter.................................................. $18.25 $ 7.00
Fourth Quarter................................................. $26.50 $14.38
</TABLE>
Item 6. Selected Financial Data.
In August 1999, Brio completed its merger with SQRIBE Technologies Corp.
("SQRIBE") in a transaction accounted for as a pooling-of-interests. All prior
period consolidated financial statements have been restated for all periods
presented, in accordance with required pooling-of-interests accounting and
disclosures. SQRIBE had a fiscal year that ended on December 31 of each year.
Restated historical consolidated financial statements combine the SQRIBE
results for the fiscal years ended December 31, 1998 and 1997 with Brio's
results for the years ended March 31, 1999 and 1998, respectively. In order to
conform SQRIBE's fiscal year to Brio's fiscal year, the results of operations
of SQRIBE for the three months ended March 31, 1999 have been reflected as an
adjustment to retained earnings as of that date, and the consolidated balance
sheet of Brio at March 31, 1999 includes the balance sheet of SQRIBE at March
31, 1999. Revenue, net loss and net loss applicable to common stock for SQRIBE
was $10.8 million, $1.8 million and $3.6 million, respectively, for the three
months ended March 31, 1999. See Note 3 of Notes to Consolidated Financial
Statements for additional information and disclosure.
The selected historical consolidated financial data set forth below should
be read in conjunction with Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the Consolidated Financial
Statements and the Notes thereto and the other information contained in this
Report. The selected consolidated statements of operations data for the years
ended March 31, 2000, 1999 and 1998, and the selected consolidated balance
sheet data as of March 31, 2000 and 1999, are derived from, and are qualified
by reference to, the audited Consolidated Financial Statements of Brio
appearing elsewhere in this Report. The selected consolidated statements of
operations data for the years ended March 31, 1997 and 1996, and the selected
consolidated balance sheet data as of March 31, 1998, 1997 and 1996, are
derived from the audited Consolidated Financial Statements of Brio not included
herein. The historical results of operations presented are not necessarily
indicative of results to be expected for any subsequent period.
15
<PAGE>
<TABLE>
<CAPTION>
Years Ended March 31,
---------------------------------------------
2000 1999 1998 1997 1996
-------- ------- -------- ------- -------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statements of
Operations Data:
Total revenues................. $132,036 $85,686 $ 51,895 $31,383 $15,945
Loss from operations........... (10,315) (1,767) (15,694) (8,618) (7,869)
Net income (loss).............. (10,910) 163 (15,723) (8,624) (8,066)
Net loss applicable to common
stock......................... (10,910) (753) (15,723) (8,624) (8,066)
Basic net loss per share....... $ (0.43) $ (0.04) $ (1.22) $ (0.66) $ (0.65)
Shares used in computing basic
net loss per share............ 25,261 19,984 12,871 13,018 12,374
Consolidated Balance Sheet
Data:
Cash, cash equivalents and
short-term investments........ $ 33,404 $35,311 $ 7,326 $ 4,020 $ 2,541
Total assets................... 85,864 68,260 29,423 17,947 9,558
Redeemable common stock........ -- 3,110 344 516 516
Stockholders' equity
(deficit)..................... 28,126 26,288 (1,264) 152 547
</TABLE>
Item 7. 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 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
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. Brio had an accumulated deficit of approximately
$48.4 million as of March 31, 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 consolidated
financial statements have 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.
16
<PAGE>
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
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 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. 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 to larger, enterprise-
wide implementations of Brio's products, rather than departmental or local
network sales, which may increase the complexity and length of the sales cycle.
Brio has, in the past and may in the future, choose to grant greater 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, 18% of total
revenues for fiscal 1999 and 17% of total revenues for fiscal 1998. 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. 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
17
<PAGE>
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 attained 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>
Years Ended
March 31,
------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Consolidated Statements of Operations Data:
Revenues:
License fees............................................. 68% 68% 69%
Services................................................. 32 32 31
--- --- ---
Total revenues......................................... 100 100 100
Cost of revenues:
License fees............................................. 2 3 4
Services................................................. 13 12 10
--- --- ---
Total cost of revenues................................. 15 15 14
--- --- ---
Gross profit............................................... 85 85 86
Operating expenses:
Research and development................................. 15 16 19
Sales and marketing...................................... 50 57 68
General and administrative............................... 10 12 15
Stock compensation to principal stockholders............. -- -- 14
In-process research and development...................... -- 2 --
Non-recurring operating expenses......................... 17 -- --
--- --- ---
Total operating expenses............................... 92 87 116
--- --- ---
Loss from operations....................................... (7) (2) (30)
Interest and other income, net............................. -- 3 --
--- --- ---
Income (loss) before income taxes.......................... (7) 1 (30)
Provision for income taxes................................. (1) 1 --
--- --- ---
Net loss................................................... (8) -- (30)
Increase in redemption value of redeemable common stock.... -- (1) --
--- --- ---
Net loss applicable to common stock........................ (8)% (1)% (30)%
=== === ===
</TABLE>
18
<PAGE>
Fiscal Years Ended March 31, 2000, 1999 and 1998
Revenues
Brio derives revenues from license fees and services, which include software
maintenance and support, training and system implementation consulting. Total
revenues increased $46.4 million or 54% in fiscal 2000 when compared to fiscal
1999 and $33.8 million or 65% in fiscal 1999 compared to fiscal 1998. The
increases were primarily due to increased license revenue and related
maintenance and support revenue.
Revenues by geographic location were as follows:
<TABLE>
<CAPTION>
Years Ended March 31,
------------------------
2000 1999 1998
-------- ------- -------
<S> <C> <C> <C>
Revenues by Geography:
Domestic.......................................... $107,779 $70,097 $43,315
International..................................... 24,257 15,589 8,580
-------- ------- -------
Total revenues.................................. $132,036 $85,686 $51,895
======== ======= =======
</TABLE>
Revenues from international sources increased $8.7 million or 56% in fiscal
2000 compared to fiscal 1999 and $7.0 million or 82% in fiscal 1999 compared to
fiscal 1998. The increases were primarily due to increased demand for Brio
products in Europe and Asia as Brio continued to expand direct and indirect
sales efforts in these areas. See Note 4 of Notes to Consolidated Financial
Statements for additional information about revenues in geographic areas.
License Fees. Revenues from license fees increased $31.4 million or 54% in
fiscal 2000 compared to fiscal 1999 and $22.6 million or 63% in fiscal 1999
compared to fiscal 1998. The increases were due to growing sales to new
customers--approximately $10.3 million of the increase in fiscal 2000 and
approximately $8.1 million of the increase in fiscal 1999--and increased
follow-on sales to existing customers--approximately $21.1 million of the
increase in fiscal 2000 and approximately $14.5 million of the increase in
fiscal 1999.
Services. Service revenues increased $15.0 million or 55% in fiscal 2000
compared to fiscal 1999 and $11.2 million or 70% in fiscal 1999 compared to
fiscal 1998. The increases were due to an increase in maintenance and support
revenues--approximately $9.9 million of the increase in fiscal 2000 and
approximately $7.9 million of the increase in fiscal 1999--and an increase in
training and consulting revenues related to Brio's installed customer base--
approximately $5.1 million of the increase in fiscal 2000 and approximately
$3.3 million of the increase in fiscal 1999.
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 $672,000 or
26% in fiscal 2000 compared to fiscal 1999 and $653,000 or 34% in fiscal 1999
compared to fiscal 1998. The increases in absolute dollars in fiscal 2000 and
fiscal 1999 were primarily due to an increase in the number of licenses sold.
The decreases as a percentage of total revenues in fiscal 2000 and 1999 were
primarily due to an increase in the number of customers purchasing master
disks, which are less expensive to produce and ship, as compared to "shrink-
wrapped" product, and to economies of scale associated with absorbing fixed
costs over a larger revenue base. Cost of revenues from license fees may vary
between periods due to the mix of customers purchasing master disks relative to
customers purchasing "shrink-wrapped" product.
Services. Cost of revenues from services consists primarily of personnel
costs and third-party consulting fees associated with providing software
maintenance and support, training and consulting services. Cost of
19
<PAGE>
revenues from services increased by $6.4 million or 61% in fiscal 2000 compared
to fiscal 1999 and $5.4 million or 105% in fiscal 1999 compared to fiscal 1998.
The increases were due principally to increases in personnel and related costs
resulting from Brio's expansion of its support services in response to
increased demand for maintenance and support and training and consulting
services--approximately $4.1 million of the increase in fiscal 2000 and
approximately $3.6 million of the increase in fiscal 1999--and increases in the
use of outside consultants for training and consulting services--approximately
$2.3 million of the increase in fiscal 2000 and approximately $1.8 million of
the increase in fiscal 1999. 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 $6.2 million
or 45% in fiscal 2000 compared to fiscal 1999 and $3.9 million or 40% in fiscal
1999 compared to fiscal 1998. The increases from year to year were primarily
due to increased personnel and related costs required to continue to develop
new products and enhance existing products. Brio believes that significant
investment in 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 $17.7 million or 37% in
fiscal 2000 compared to fiscal 1999 and $13.3 million or 38% in fiscal 1999
compared to fiscal 1998. The increases were attributable to the costs
associated with the expansion of Brio's sales and marketing organization,
including domestically through the growth of the telesales organization,
internationally through the establishment of subsidiary offices in the United
Kingdom, France, Germany, Japan and Australia in addition to the expansion of
the worldwide field sales organization which contributed approximately $8.0
million of the increase in fiscal 2000 and approximately $4.7 million of the
increase in fiscal 1999. Higher sales commissions, bonuses and sales incentives
associated with increased revenues also contributed approximately $6.1 million
of the increase in fiscal 2000 and approximately $5.4 million of the increase
in fiscal 1999. Increased domestic and international marketing expenses,
including marketing activities, personnel and related costs contributed
approximately $3.6 million of the increase in fiscal 2000 and approximately
$3.2 million of the increase in fiscal 1999. The decrease in sales and
marketing expenses as a percentage of total revenues was generally attributable
to increases in revenues for the periods. Brio believes that as it continues to
expand its direct sales and pre-sales support organization and its third-party
partnering relationships and its indirect channel sales organization on a
worldwide basis, sales and marketing expenses will continue to increase in
absolute dollars. These expenses are currently intended to be funded by Brio's
working capital. In particular, Brio expects that sales compensation, travel
and related expenses will increase significantly as Brio continues to increase
the number of its direct sales personnel and its emphasis on direct field sales
efforts. Nonetheless, Brio expects sales and marketing expenses will continue
to vary as a percentage of total revenues.
General and Administrative. General and administrative expenses consist
primarily of personnel costs for finance, human resources, information systems,
and general management, as well as legal, accounting and unallocated overhead
expenses. General and administrative expenses increased $3.3 million or 31% in
fiscal 2000 compared to fiscal 1999 and $2.7 million or 34% in fiscal 1999
compared to fiscal 1998. The increases in fiscal 2000 and 1999 was due to
increased personnel and related costs--approximately $1.2 million of the
increase in fiscal 2000 and $1.8 million of the increase in fiscal 1999--
increased professional fees--approximately $1.9 million in fiscal 2000 and
approximately $200,000 of the increase in fiscal 1999--and higher expenses
associated with managing and supporting Brio's growth and facilities
expansion--approximately $200,000 of the increase in fiscal 2000 and
approximately $700,000 of the increase
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in fiscal 1999. The decrease in general and administrative expenses as a
percentage of total revenues is primarily attributable to increased
efficiencies in Brio's administrative operations and increased revenues. Brio
expects that its general and administrative expenses will increase in absolute
dollars as Brio expands its staffing to support expanded operations. 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 $155,000 was expensed
during fiscal 2000, approximately $129,000 was expensed during fiscal 1999,
approximately $105,000 was expensed during fiscal 1998 and the balance will be
expensed ratably over the next two years as the options vest. See Note 7 of
Notes to Consolidated Financial Statements for additional information regarding
deferred compensation.
Stock Compensation to Principal Stockholders. In September 1997, SQRIBE
permitted certain stockholders controlling 97% of the then outstanding shares
of common stock, including an executive officer, to exchange one-third of their
shares of common stock for shares of Series B convertible preferred stock on a
one-for-one basis. These stockholders subsequently sold these shares to third-
party investors. Compensation expense of $7.7 million was recognized in this
exchange in fiscal 1998 based on the difference between the fair values of the
common and preferred shares on the date of the exchange.
Purchased In-Process Research and Development. In connection with the
acquisition of MerlinSoft, Inc. (MerlinSoft), Brio allocated $1.7 million of
the purchase price to in-process research and development projects. This
allocation represented the estimated fair value based on future cash flows that
have been adjusted by the project's completion percentage. While Brio relied
upon an independent, third party appraisal of the acquired intangible assets,
management was primarily responsible for estimating their fair values. At the
acquisition date, the development of these projects had not yet reached
technological feasibility due to issues involving the completion of
scalability, performance and security functions and the research and
development in progress had no alternative future uses. Accordingly, these
costs were expensed as of the acquisition date. The excess of the purchase
price over identified intangible assets was approximately $600,000.
Brio used a third-party appraiser to assess and value the in-process
research and development. The value assigned to purchased in-process research
and development was determined by estimating the contribution of the purchased
in-process technology in developing a commercially viable product, estimating
the resulting net cash flows from the expected sales of such a product, and
discounting the net cash flows to their present value using an appropriate
discount rate. The discount rate included a factor that took into account the
uncertainty surrounding the successful development of the acquired in-process
technology. Valuation of development efforts in the future was excluded from
the research and development appraisal.
The purchased in-process research and development consisted of two projects.
Both of these projects are aimed at the delivery of timely, in-depth,
sophisticated analytical applications. The first product provides data models
for analysis in specific industries and functional areas, metric libraries, a
Web-based client and the ability for business users to manage application
components ("Analysis Product"). The second product includes in-depth modeling
features for margin analysis and what-if scenarios to determine the impact of
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various decisions and parameters ("Modeling Product"). The research and
development costs incurred by MerlinSoft in the development of the Analysis
Product were approximately $298,000 in fiscal 1998 and approximately $4,000 in
fiscal 1997. The research and development costs incurred by MerlinSoft in the
development of the Modeling Product were approximately $34,000 in fiscal 1998.
At the date of acquisition, the research and development costs to complete the
Analysis Product were estimated by MerlinSoft to be approximately $855,000 in
fiscal 2000 and 1999. At the date of acquisition, the research and development
costs to complete the Modeling Product project were estimated by MerlinSoft to
be approximately $933,000 in fiscal 2000 and 1999.
The development technologies were evaluated in the context of Interpretation
4 of Statement of Financial Accounting Standards (SFAS) No. 2 and SFAS No. 86,
where appropriate. In accordance with these provisions, research and
development projects were evaluated individually to determine if technological
feasibility had been achieved and if there was any alternative future use. Such
evaluation consisted of a specific review of the efforts, including the overall
objectives of the project, progress toward the objectives and uniqueness of
developments to these objectives. The issue of alternative future use was
addressed in discussions with the management of Brio. This process included on-
site management interviews and review of technical data.
As of March 31, 2000, Brio has successfully completed the Analysis and
Modeling Products. MerlinSoft's results have not differed significantly from
the forecast assumptions. Brio's research and development expenditures since
the acquisition have not differed materially from expectations. Revenue
contribution from the acquired technology falls within an acceptable range of
the forecast assumptions. The risks associated with products are still
considered high and no assurance can be made that the products will meet market
expectations.
Non-recurring operating expenses. Non-recurring operating expenses are
comprised of merger and restructuring costs related to the SQRIBE merger and
the settlement of Brio's ongoing patent litigation with Business Objects, S.A.
as follows (in thousands):
<TABLE>
<CAPTION>
March 31, 2000
--------------
<S> <C>
Merger and restructuring costs................................ $13,160
Settlement costs.............................................. 9,137
-------
Total non-recurring operating expenses...................... $22,297
=======
</TABLE>
Brio's merger with SQRIBE was completed on August 3, 1999. In fiscal 2000,
merger and restructuring costs of $13.2 million consisted of $7.4 million in
transaction and related professional fees, $639,000 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 $2,737,000
in other miscellaneous merger-related expenses. All termination notices and
benefits were communicated to the affected employees prior to year-end and all
of the merger-related expenses were incurred prior to year-end. Substantially
all of the merger-related charges were paid during fiscal 2000.
On September 9, 1999, Brio and Business Objects, S.A. announced the
settlement of a patent infringement action, pending in the U.S. District Court
for the Northern District of California in San Jose, pursuant to which Brio
agreed to pay to Business Objects, S.A. $10.0 million, payable quarterly in
$1.0 million payments over 10 quarters, with the first payment due September
30, 1999. The $9.1 million of settlement costs represent the net present value
of the quarterly payments and the remaining $900,000 represents interest and
will be recognized over the payment term using the effective interest rate
method.
Interest and Other Income, Net
Interest and other income, net, is comprised primarily of interest income
and foreign currency transaction gains or losses and realized gains or losses
from the sale of investments, net of interest expense. Interest
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expense is comprised 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, net, decreased $1.9 million or 72% in fiscal 2000
compared to fiscal 1999 primarily due to interest charges relating to the
Business Objects, S.A. litigation settlement, lower cash, cash equivalent and
short-term investment balances and a higher loss on foreign currency
translations resulting from intercompany receivables from foreign subsidiaries
of approximately $429,000. Interest and other income, net, increased $2.6
million in fiscal 1999 compared to fiscal 1998 primarily due to an increase in
interest income resulting from larger cash balances associated with the closing
of Brio's initial public offering in May 1998 and a gain on the sale of
business by SQRIBE, offset by foreign currency transaction losses resulting
from intercompany receivables from foreign subsidiaries of approximately
$126,000. See Note 2 of Notes to Consolidated Financial Statements for a
description of foreign currency transactions and Brio's policy related to
accounting for short-term investments.
Provision for Income Taxes
The provision for income taxes of $1,343,000 in fiscal 2000, $747,000 in
fiscal 1999 and $104,000 in fiscal 1998, consisted primarily of Federal and
state alternative minimum taxes as Brio utilized net operating loss
carryforwards to offset current income taxes generated from domestic
operations.
At March 31, 2000, Brio has approximately $17,140,000 of Federal net
operating loss carryforwards and approximately $10,464,000 of State net
operating loss carryforwards both of which expire at various dates through
2020. Brio also has approximately $14,069,000 of Foreign net operating loss
carryforwards which expire at various dates through 2020 or carryforward
indefinitely. In addition, Brio has R&D tax credit carryforwards of
approximately $2,954,000 which expire at various dates through 2020. Brio
believes that, based on a number of factors, there is sufficient uncertainty
regarding the realizability of carryforwards and credits and has therefore
provided a valuation allowance for a significant portion of its deferred tax
asset at March 31, 2000. These factors include a history of operating losses,
recent increases in expense levels to support Brio's growth, the competitive
nature of Brio's market and the lack of predictability of revenue. Management
will continue to assess the realizability of the tax benefits available to Brio
based on actual and forecasted operating results. Furthermore, the Internal
Revenue Code contains provisions which may limit the net operating loss and
research and development credit carryforwards to be used in any given year upon
the occurrence of certain events, including a significant change in ownership.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." The
statement establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 is effective for fiscal
years beginning after June 15, 2000. Management believes the adoption of SFAS
No. 133 will not have a material effect on Brio's financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 provides guidance on applying generally accepted
accounting principles to revenue recognition in financial statements. Brio will
adopt SAB No. 101, as amended by SAB No. 101B, in the fourth quarter of fiscal
2001. Management believes the adoption of SAB No. 101 will not have a material
effect on Brio's financial statements.
In March 2000, the Emerging Issues Task Force (EITF) reached a consensus on
Issue 00-2, "Accounting for the Costs of Developing a Web Site." EITF 00-2
states that for specific web site development costs, the accounting for such
costs should be based generally on a model consistent with the American
Institute of Certified Public Accountants Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." All costs incurred in the planning stage should be expensed
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as incurred. For the web site application and development stage, all costs
relating to software used to operate a web site should be accounted for
pursuant to SOP 98-1, unless a plan exists to market the software externally,
in which case the costs should be accounted for pursuant to SFAS No. 86. Web
site hosting fees should be expensed over the period of benefit and web site
graphics should be capitalized in accordance with SOP 98-1. This consensus will
be applicable to all web site development costs incurred for quarters beginning
after June 30, 2000, even for costs relating to projects that are in progress
as of that date. Management believes that the adoption of EITF 00-2 will not
have a material effect on Brio's financial statements.
In March 2000, the FASB issued Financial Standards Board Interpretation
(FIN) No. 44, "Accounting for Certain Transactions involving Stock
Compensation--an Interpretation of APB Opinion No. 25. FIN No. 44 addresses the
application of APB No. 25 to clarify, among other issues, (a) the definition of
employee for purposes of applying APB No. 25, (b) the criteria for determining
whether a plan qualifies as a noncompensatory plan, (c) the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. FIN No. 44 is effective July 1, 2000, but
certain conclusions cover specific events that occur after either December 15,
1998, or January 12, 2000. To the extent FIN No. 44 covers events occurring
during the period after December 15, 1998, or January 12, 2000, but before the
effective date of July 1, 2000, the effects of applying the interpretation will
be recognized on a prospective basis from July 1, 2000. Management believes
that the adoption of FIN No. 44 will not have a material effect on Brio's
financial statements.
Liquidity and Capital Resources
As of March 31, 2000, Brio had cash, cash equivalents and short-term
investments of $33.4 million. In addition, Brio maintains a bank line of
credit. The line provides for up to $15.0 million in borrowings, with interest
at the bank's prime rate. Borrowings under the accounts receivable 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
intellectual property, accounts receivable and property and equipment to the
extent required to secure the line. As of March 31, 2000, the line of credit
requires Brio to comply with a net income covenant, excluding non-recurring
operating charges, of $1. Brio was in compliance with this covenant as of March
31, 2000. The line expires on December 31, 2000. No amounts are outstanding
under the line as of March 31, 2000.
As part of the merger with SQRIBE, Brio assumed a $2.5 million bank line of
credit. During fiscal 2000, all amounts outstanding under the line were paid
and the line was cancelled. Brio also assumed a $1.0 million equipment purchase
line of credit. As of March 31, 2000, a $500,000 letter of credit has been
issued under the equipment line to support a facilities lease.
Net cash generated by operating activities was $1.3 million in fiscal 2000
and $3.9 million in fiscal 1999. Net cash used in operating activities was $1.1
million in fiscal 1998. The decrease in fiscal 2000 was primarily due to a
$10.2 million increase in net loss applicable to common stock, offset by $7.6
million of favorable changes in the balances of operating assets and
liabilities. The increase in fiscal 1999 was primarily due to a $15.1 million
decrease in net loss applicable to common stock, offset by $10.1 million of
unfavorable changes in the balances of operating assets and liabilities.
Net cash used in investing activities was $6.9 million in fiscal 2000,
consisting of approximately $9.3 million for the purchase of property and
equipment, net, offset by approximately $2.4 million in sales of short-term
investments, net of purchases. Net cash used in investing activities was $20.1
million in fiscal 1999, consisting of approximately $4.1 million for the
purchase of property and equipment, net, approximately $13.8 million for the
purchase of short-term investments, net of sales and approximately $2.2 million
for the purchase of MerlinSoft, net of cash acquired. Net cash used in
investing activities was $3.1 million in fiscal 1998, consisting of purchases
of property and equipment, net.
Net cash provided by financing activities was $6.0 million in fiscal 2000,
consisting of approximately $6.7 million of proceeds from the issuance of
common stock to employees under various incentive stock plans and
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approximately $1.3 million of proceeds from the repayment of notes receivable
from stockholders, offset by approximately $2.0 million of repayments under
notes payable. Net cash provided by financing activities was $29.9 million in
fiscal 1999, consisting of approximately $33.3 million of proceeds from the
issuance of common stock to employees under various incentive stock plans and
the proceeds from Brio's initial public offering, offset by approximately $1.6
million of issuance of notes to stockholders, net of repayments and
approximately $1.8 million in net repayments under notes payable. Net cash
provided by financing activities was $7.3 million in fiscal 1998, consisting of
approximately $5.8 million of proceeds from private sales of preferred stock
and proceeds from the exercise of preferred stock warrants, approximately
$200,000 of proceeds from the issuance of common stock to employees under
various incentive stock plans, approximately $100,000 of repayment of notes
receivable to stockholders and approximately $1.2 million of periodic
borrowings, net of repayments, on the bank line of credit.
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's stockholders.
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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 21B 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 and incorporated into this quarterly report on Form 10-Q by reference,
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 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 March 31, 2000, Brio had stockholders' equity of
approximately $28.1 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 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.
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Brio's quarterly operating results will likely fluctuate based on factors
beyond our control. Brio has experienced, and expects to continue to
experience, significant fluctuations in quarterly operating results based on a
number of factors, many of which are not within its control. Among other
things, Brio's operating results have fluctuated in the past due to:
. the timing of product enhancements and new product announcements;
. the lengthy sales cycle of its products;
. market acceptance of and demand for its products;
. capital spending patterns of its customers;
. customer order deferrals in anticipation of enhancements or new products;
. its ability to attract and retain key personnel;
. the mix of domestic and international sales;
. the mix of license and service revenues;
. personnel changes; and
. changes in the timing and level of operating expenses.
In addition, the announcement or introduction of new products by Brio or its
competitors or any change in industry standards may cause customers to defer or
cancel purchases of existing products. Furthermore, the introduction of
products with reliability, quality or compatibility problems could result in
reduced orders, delays in collecting accounts receivable and additional service
costs. Accordingly, Brio's results of operations may also fluctuate in the
future due to a number of additional factors, including but not limited to
those discussed above, as well as:
. the number and significance of product enhancements and new product
announcements by competitors;
. changes in 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 meeting financial analysts' expectations,
our stock price may decline. In the future, our reported or anticipated
operating results may fail to meet or exceed the expectations of securities
analysts or investors. In that event, Brio's common stock price could be
materially reduced.
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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 the 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. Brio currently maintains "key
person" life insurance only on Yorgen Edholm, its President and Chief Executive
Officer. Brio does not believe its current insurance would adequately
compensate it for the loss of Mr. Edholm.
Because the sales cycle for Brio's products is long, the timing of sales is
difficult to predict and Brio's quarterly revenues and earnings may fluctuate
significantly. Based in part on the lengthy sales cycle for Brio's products,
quarterly revenues and operating results could vary significantly in the
future. The sales cycle associated with the purchase of Brio's products is
typically three to nine months in length and subject to a number of significant
risks over which Brio has little or no control, including customers' budgeting
constraints and internal acceptance review procedures. Sales transactions may
be delayed during the customer acceptance process because Brio must provide a
significant level of education to prospective customers regarding the use and
benefits of its products. 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 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
28
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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.
Brio's strategy of acquiring new businesses and technologies involves
integration and transaction completion risks. As part of our business strategy,
we expect to enter into business combinations and acquisitions. Acquisition
transactions are accompanied by a number of risks, including:
. the difficulty of assimilating the operations and personnel of the
acquired companies;
. the potential disruption of our ongoing business and distraction of
management;
. the difficulty of incorporating acquired technology or content and rights
into our products;
. the correct assessment of the relative percentages of in-process research
and development expense which can be immediately written off as compared
to the amount which must be amortized over the appropriate life of the
asset;
. the failure to successfully develop an acquired in-process technology
could result in the impairment of amounts currently capitalized as
intangible assets;
. unanticipated expenses related to technology integration;
. the maintenance of uniform standards, controls, procedures and policies;
. the impairment of relationships with employees and customers as a result
of any integration of new management personnel; and
. the potential unknown liabilities associated with acquired businesses.
We may not be successful in addressing these risks or any other problems
encountered in connection with such acquisitions.
Brio is in a highly competitive industry and some of its competitors may be
more successful in attracting and retaining customers. The market in which Brio
operates is highly competitive. Brio expects that competition will continue to
intensify. Increased competition could result in:
. price reductions;
. fewer customer orders;
. reduced gross margins;
. longer sales cycles; and
. loss of market share.
Brio or its competitors may announce enhancements to existing products, or
new products embodying new technologies, industry standards or customer
requirements that have the potential to supplant or provide lower-cost
alternatives to Brio's existing products.
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;
29
<PAGE>
. 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.
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 conditions.
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;
30
<PAGE>
. 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.
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. 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.
31
<PAGE>
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. Further, Brio's license agreements with customers
typically contain provisions designed to limit Brio's exposure for potential
claims based on errors or malfunctions of Brio's products.
The limitation of liability provisions contained in Brio's license
agreements may not be effective under the laws of all jurisdictions. Brio's
sale and support of its products 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
32
<PAGE>
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 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 7A. 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 March 31, 2000, Brio had
$21.6 million of cash and cash equivalents with a weighted average variable
rate of 4.76% and $11.8 million of short-term investments with a weighted
average variable rate of 5.95%.
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 March 31, 2000 there were no
outstanding foreign currency exchange contracts.
33
<PAGE>
Item 8. Financial Statements and Supplementary Data
BRIO TECHNOLOGY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants.................................... 35
Consolidated Balance Sheets ................................................ 36
Consolidated Statements of Operations....................................... 37
Consolidated Statements of Stockholders' Equity (Deficit)................... 38
Consolidated Statements of Cash Flows....................................... 39
Notes to Consolidated Financial Statements.................................. 40
</TABLE>
34
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Brio Technology, Inc.:
We have audited the accompanying consolidated balance sheets of Brio
Technology, Inc. (a Delaware corporation) and subsidiaries as of March 31, 2000
and 1999, and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for each of the three years in the period ended
March 31, 2000. These financial statements and the schedule referred to below
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Brio Technology, Inc. and
subsidiaries as of March 31, 2000 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
2000, in conformity with accounting principles generally accepted in the United
States.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed under 14 (a) is
presented for purposes of complying with the Securities and Exchange
Commissions rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
San Jose, California
April 21, 2000
35
<PAGE>
BRIO TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
March 31,
------------------
2000 1999
-------- --------
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents................................ $ 21,573 $ 21,026
Short-term investments................................... 11,831 14,285
Accounts receivable, net of allowance of $2,848 and
$1,394.................................................. 31,429 20,674
Inventories.............................................. 822 376
Deferred income taxes.................................... 1,890 2,095
Prepaid expenses and other current assets................ 3,862 1,458
-------- --------
Total current assets.................................. 71,407 59,914
Property and Equipment, net................................ 12,118 6,540
Other Assets............................................... 2,339 1,806
-------- --------
$ 85,864 $ 68,260
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Current maturities of notes payable...................... $ -- $ 2,000
Accounts payable......................................... 7,801 4,251
Accrued liabilities--
Payroll and related benefits............................ 11,423 5,902
Other................................................... 8,786 5,716
Deferred revenue, current................................ 24,108 18,666
-------- --------
Total current liabilities............................. 52,118 36,535
Noncurrent Deferred Revenue................................ 2,717 2,194
Other Noncurrent Liabilities............................... 2,903 133
-------- --------
Total liabilities..................................... 57,738 38,862
-------- --------
Redeemable common stock.................................... -- 3,110
-------- --------
Commitments and Contingencies (Notes 5 and 8)
Stockholders' Equity:
Convertible preferred stock, $0.001 par value, aggregate
liquidation preference of $19,560 at March 31, 1999:
Authorized--None at March 31, 2000 and 4,992,189 shares
at March 31, 1999....................................... -- 5
Issued and outstanding--4,610,597 shares at March 31,
1999....................................................
Preferred stock, $0.001 par value:
Authorized--2,000,000 shares at March 31, 2000 and 1999,
none issued and outstanding............................. -- --
Common stock, $0.001 par value:
Authorized--60,000,000 shares at March 31, 2000 and
1999.................................................... 28 21
Issued and outstanding--27,669,555 shares at March 31,
2000 and 21,424,928 shares
at March 31, 1999.......................................
Additional paid-in capital............................... 76,807 66,180
Notes receivable from stockholders....................... (483) (1,820)
Deferred compensation.................................... (118) (456)
Accumulated components of comprehensive income (loss).... 312 (132)
Accumulated deficit...................................... (48,420) (37,510)
-------- --------
Total stockholders' equity............................ 28,126 26,288
-------- --------
$ 85,864 $ 68,260
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
36
<PAGE>
BRIO TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended March 31,
---------------------------
2000 1999 1998
-------- ------- --------
<S> <C> <C> <C>
Revenues:
License fees................................... $ 89,670 $58,282 $ 35,731
Services....................................... 42,366 27,404 16,164
-------- ------- --------
Total revenues............................... 132,036 85,686 51,895
-------- ------- --------
Cost of revenues:
License fees................................... 3,254 2,582 1,929
Services....................................... 16,835 10,468 5,101
-------- ------- --------
Total cost of revenues....................... 20,089 13,050 7,030
-------- ------- --------
Gross profit..................................... 111,947 72,636 44,865
-------- ------- --------
Operating expenses:
Research and development....................... 19,917 13,732 9,830
Sales and marketing............................ 66,208 48,470 35,162
General and administrative..................... 13,840 10,548 7,860
Stock compensation to principal stockholders... -- -- 7,707
In-process research and development............ -- 1,653 --
Non-recurring operating expenses............... 22,297 -- --
-------- ------- --------
Total operating expenses..................... 122,262 74,403 60,559
-------- ------- --------
Loss from operations............................. (10,315) (1,767) (15,694)
Interest and other income, net................... 748 2,677 75
-------- ------- --------
Income (loss) before provision for income taxes.. (9,567) 910 (15,619)
Provision for income taxes....................... 1,343 747 104
-------- ------- --------
Net income (loss)................................ (10,910) 163 (15,723)
Increase in redemption value of redeemable common
stock........................................... -- (916) --
-------- ------- --------
Net loss applicable to common stock.............. $(10,910) $ (753) $(15,723)
======== ======= ========
Basic net loss per share......................... $ (0.43) $ (0.04) $ (1.22)
======== ======= ========
Shares used in computing basic net loss per
share........................................... 25,261 19,984 12,871
======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
37
<PAGE>
BRIO TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Notes
Convertible Receivable Accumulated
Compre- Preferred Stock Common Stock Additional From Deferred Components of Accumu-
hensive ------------------ ------------------ Paid-in Stock- Compen- Comprehensive lated
Loss Shares Amount Shares Amount Capital holders sation Income (Loss) Deficit
-------- ---------- ------ ---------- ------ ---------- ---------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, MARCH
31, 1997......... 7,032,255 $ 3 13,125,600 $ 13 $17,929 $ (314) $ -- $ (62) $(17,417)
Issuance of
Series C
preferred stock,
net............. 852,269 -- -- -- 5,844 -- -- -- --
Conversion of
common stock to
Series B
preferred
stock........... 2,115,439 2 (2,115,439) (2) 7,707 -- -- -- --
Conversion of
redeemable
common stock to
Series B
preferred
stock........... 76,806 -- -- -- 172 -- -- -- --
Exercise of
common stock
options for
cash............ -- -- 190,993 -- 205 -- -- -- --
Exercise of
common stock
options for
notes
receivable...... -- -- 57,701 -- 35 (35) -- -- --
Exercise of
common stock
warrant for
cash............ -- -- 10,000 -- 6 -- -- -- --
Repurchase of
restricted
shares.......... -- -- (9,480) -- (6) -- -- -- --
Repayment of
notes receivable
from
stockholders.... -- -- -- -- -- 57 -- -- --
Deferred
compensation.... -- -- -- -- 580 -- (580) -- --
Amortization of
deferred
compensation.... -- -- -- -- -- -- 105 -- --
Termination of
shares granted
under incentive
stock plans..... -- -- -- -- (16) -- 16 -- --
Net loss
applicable to
common stock.... $(15,723) -- -- -- -- -- -- (15,723)
Cumulative
translation
adjustment...... 217 -- -- -- -- -- -- -- 217 --
-------- ---------- ----- ---------- ----- ------- ------- ----- ----- --------
$(15,506)
========
BALANCE, MARCH
31, 1998......... 10,076,769 5 11,259,375 11 32,456 (292) (459) 155 (33,140)
Conversion of
preferred stock
to common
stock........... (5,466,172) -- 5,466,172 5 (5) -- -- -- --
Exercise of
common stock
options for
cash............ -- -- 329,203 1 515 -- -- -- --
Exercise of
common stock
options for
notes
receivable...... -- -- 1,232,589 1 1,640 (1,641) -- -- --
Issuance of
common stock
pursuant to
Employee Stock
Purchase Plan... -- -- 105,137 -- 737 -- -- -- --
Issuance of
common stock
during initial
public offering,
net............. -- -- 3,085,000 3 30,421 -- -- -- --
Repurchase of
restricted
shares.......... -- -- (52,548) -- (54) 54 -- -- --
Stock
compensation
arrangements.... -- -- -- -- 390 -- (188) -- --
Repayment of
notes receivable
from
stockholders.... -- -- -- -- -- 59 -- -- --
Amortization of
deferred
compensation.... -- -- -- -- -- -- 129 -- --
Termination of
shares granted
under incentive
stock plans..... -- -- -- -- (62) -- 62 -- --
Income tax
benefit from
stock options
exercised....... -- -- -- -- 142 -- -- -- --
Adjustment to
conform SQRIBE
Technologies,
Corp. fiscal
year-end........ -- -- -- -- -- -- -- -- (3,617)
Net income
applicable to
common stock.... $ (753) -- -- -- -- -- -- -- -- (753)
Cumulative
translation
adjustment...... (23) -- -- -- -- -- -- -- (23) --
Unrealized loss
on investments.. (264) -- -- -- -- -- -- -- (264) --
-------- ---------- ----- ---------- ----- ------- ------- ----- ----- --------
$ (1,040)
========
BALANCE, MARCH
31, 1999......... 4,610,597 5 21,424,928 21 66,180 (1,820) (456) (132) (37,510)
Conversion of
preferred stock
to common
stock........... (4,610,597) (5) 4,610,597 5 -- -- -- -- --
Conversion of
redeemable
common stock to
common stock.... -- -- -- -- 3,110 -- -- -- --
Exercise of
common stock
options for
cash............ -- -- 1,287,331 1 4,123 -- -- -- --
Issuance of
common stock
pursuant to
Employee Stock
Purchase Plan... -- -- 347,324 1 2,554 -- -- -- --
Repurchase of
restricted
shares.......... -- -- (625) -- -- -- -- -- --
Repayment of
notes receivable
from
stockholders.... -- -- -- -- -- 1,337 -- -- --
Amortization of
deferred
compensation.... -- -- -- -- -- -- 155 -- --
Termination of
shares granted
under incentive
stock plans..... -- -- -- -- (183) -- 183 -- --
Income tax
benefit from
stock options
exercised....... -- -- -- -- 1,023 -- -- -- --
Net loss
applicable to
common stock.... $(10,910) -- -- -- -- -- -- -- -- (10,910)
Cumulative
translation
adjustment...... 128 -- -- -- -- -- -- -- 128 --
Unrealized gain
on investments.. 316 -- -- -- -- -- -- -- 316 --
-------- ---------- ----- ---------- ----- ------- ------- ----- ----- --------
$(10,466)
========
BALANCE, MARCH
31, 2000......... -- $ -- 27,669,555 $ 28 $76,807 $ (483) $(118) $ 312 $(48,420)
========== ===== ========== ===== ======= ======= ===== ===== ========
<CAPTION>
Total
Stockholders'
Equity
(Deficit)
-------------
<S> <C>
BALANCE, MARCH
31, 1997......... $ 152
Issuance of
Series C
preferred stock,
net............. 5,844
Conversion of
common stock to
Series B
preferred
stock........... 7,707
Conversion of
redeemable
common stock to
Series B
preferred
stock........... 172
Exercise of
common stock
options for
cash............ 205
Exercise of
common stock
options for
notes
receivable...... --
Exercise of
common stock
warrant for
cash............ 6
Repurchase of
restricted
shares.......... (6)
Repayment of
notes receivable
from
stockholders.... 57
Deferred
compensation.... --
Amortization of
deferred
compensation.... 105
Termination of
shares granted
under incentive
stock plans..... --
Net loss
applicable to
common stock.... (15,723)
Cumulative
translation
adjustment...... 217
-------------
BALANCE, MARCH
31, 1998......... (1,264)
Conversion of
preferred stock
to common
stock........... --
Exercise of
common stock
options for
cash............ 516
Exercise of
common stock
options for
notes
receivable...... --
Issuance of
common stock
pursuant to
Employee Stock
Purchase Plan... 737
Issuance of
common stock
during initial
public offering,
net............. 30,424
Repurchase of
restricted
shares.......... --
Stock
compensation
arrangements.... 202
Repayment of
notes receivable
from
stockholders.... 59
Amortization of
deferred
compensation.... 129
Termination of
shares granted
under incentive
stock plans..... --
Income tax
benefit from
stock options
exercised....... 142
Adjustment to
conform SQRIBE
Technologies,
Corp. fiscal
year-end........ (3,617)
Net income
applicable to
common stock.... (753)
Cumulative
translation
adjustment...... (23)
Unrealized loss
on investments.. (264)
-------------
BALANCE, MARCH
31, 1999......... 26,288
Conversion of
preferred stock
to common
stock........... --
Conversion of
redeemable
common stock to
common stock.... 3,110
Exercise of
common stock
options for
cash............ 4,124
Issuance of
common stock
pursuant to
Employee Stock
Purchase Plan... 2,555
Repurchase of
restricted
shares.......... --
Repayment of
notes receivable
from
stockholders.... 1,337
Amortization of
deferred
compensation.... 155
Termination of
shares granted
under incentive
stock plans..... --
Income tax
benefit from
stock options
exercised....... 1,023
Net loss
applicable to
common stock.... (10,910)
Cumulative
translation
adjustment...... 128
Unrealized gain
on investments.. 316
-------------
BALANCE, MARCH
31, 2000......... $ 28,126
=============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
38
<PAGE>
BRIO TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years Ended March 31,
----------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss applicable to common stock............. $(10,910) $ (753) $(15,723)
Adjustments to reconcile net loss to cash
provided by (used in) operating activities:
Depreciation and amortization.................. 2,977 2,378 1,303
Amortization of long-term assets............... 371 150 14
Adjustment to conform SQRIBE Technologies
Corp. fiscal year-end......................... -- (1,767) --
Increase in redemption value of redeemable
common stock.................................. -- 916 --
In-process research and development............ -- 1,653 --
Gain on sale of business....................... -- (692) --
Loss on disposal of property and equipment..... 768 52 8
Provision for returns and doubtful accounts.... 1,494 823 732
Provision for loss on marketable securities.... 346 -- --
Stock compensation............................. -- 202 7,707
Deferred compensation amortization............. 155 129 105
Deferred taxes................................. 205 (1,915) (75)
Changes in operating assets and liabilities,
net of acquired business:
Accounts receivable.......................... (12,249) (6,756) (7,444)
Inventories.................................. (446) (15) (257)
Prepaid expenses and other assets............ (3,308) (915) 644
Accounts payable and accrued liabilities..... 15,934 5,360 3,780
Deferred revenue............................. 5,965 5,060 8,100
-------- -------- --------
Net cash provided by (used in) operating
activities................................ 1,302 3,910 (1,106)
-------- -------- --------
Cash Flows from Investing Activities:
Purchases of property and equipment, net........ (9,323) (4,058) (3,095)
Purchases of short-term investments............. (24,662) (15,490) --
Sales of short-term investments................. 27,086 1,633 --
Acquisition of business, net of cash acquired... -- (2,203) --
-------- -------- --------
Net cash used in investing activities...... (6,899) (20,118) (3,095)
-------- -------- --------
Cash Flows from Financing Activities:
Proceeds from notes payable..................... -- 2,000 4,950
Repayments under notes payable.................. (2,000) (3,805) (3,766)
Proceeds from issuance of preferred stock, net.. -- -- 5,844
Proceeds from issuance of common stock, net..... 6,679 33,318 205
Proceeds from repayment of notes receivable from
stockholders................................... 1,337 59 457
Issuance of notes to stockholders............... -- (1,641) (400)
-------- -------- --------
Net cash provided by financing activities.. 6,016 29,931 7,290
-------- -------- --------
Net increase in cash and cash equivalents....... 419 13,723 3,089
Effect of exchange rate changes on cash......... 128 (23) 217
Cash and cash equivalents, beginning of period.. 21,026 7,326 4,020
-------- -------- --------
Cash and cash equivalents, end of period........ $ 21,573 $ 21,026 $ 7,326
-------- -------- --------
Supplemental disclosure of cash flow
information:
Cash paid for interest......................... $ 361 $ 75 $ 171
======== ======== ========
Cash paid for income taxes..................... $ 1,266 $ 2,575 $ 33
======== ======== ========
Noncash investing and financing activities:
Conversion of common stock into preferred
stock......................................... $ -- $ -- $ 7,707
======== ======== ========
Conversion of redeemable common stock into
preferred stock............................... $ -- $ -- $ 172
======== ======== ========
Conversion of redeemable common stock into
common stock.................................. $ 3,110 $ -- $ --
======== ======== ========
Termination of shares granted under incentive
stock plans................................... $ 183 $ 62 $ 16
======== ======== ========
Income tax benefit of option exercises......... $ 1,023 $ 142 $ --
======== ======== ========
Stock issued for notes, net of repurchases..... $ -- $ 1,587 $ 35
======== ======== ========
Adjustment to conform SQRIBE Technologies
Corp. fiscal year-end......................... $ -- $ 1,850 $ --
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
39
<PAGE>
BRIO TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
1. ORGANIZATION AND OPERATIONS:
Brio Technology, Inc. (Brio), was incorporated in California in 1989 and
reincorporated in Delaware in April 1998 (see Note 7). Brio delivers a
business-to-business analytic software infrastructure that enables companies to
use information and analytic dashboards--inside and outside the firewall--to be
more competitive, customer-centric and responsive to the changing demands of
business. The Brio ONE solution meets the complete range of decision-processing
needs with integrated business intelligence, enterprise reporting, enterprise
information portals and packaged analytic applications that work across
client/server and Web environments, all with ease of experience and
scalability. With Brio ONE, companies can derive higher business value from all
of their enterprise information sources, including enterprise resource planning
(ERP), sales force automation (SFA), and customer relationship management (CRM)
applications, as well as data marts, data warehouses and the Web.
Brio is subject to a number of risks associated with companies in a similar
stage of development, including rapid technological growth, dependence on key
personnel and the sales force, potential competition from larger, more
established companies, dependence on product development and the ability to
penetrate the market with its products.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements include the accounts of Brio and its
wholly-owned subsidiaries. All significant intercompany accounts and
transactions are eliminated in consolidation.
Use of Estimates in the Preparation of Financial Statements
The preparation of 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,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the period.
Actual results could differ from those estimates.
Foreign Currency Translation
The functional currency of Brio's subsidiaries is the local currency.
Accordingly, Brio applies the current rate method to translate the
subsidiaries' financial statements into U.S. dollars. Translation adjustments
are included in accumulated components of comprehensive income (loss) in
stockholders' equity (deficit) in the accompanying consolidated financial
statements. Transaction gains and losses, which have not been material to date,
are included in interest and other income (expense), net, in the accompanying
consolidated statements of operations.
Cash and Cash Equivalents
Brio considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. At March 31, 2000 and 1999, Brio
held its cash in checking and money market accounts.
Short-Term Investments
Management determines the appropriate classifications of investments in debt
and equity securities at the time of purchase. All of Brio's investments are
classified as available-for-sale. Available-for-sale securities are
40
<PAGE>
BRIO TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
carried at fair value, with the unrealized gains and losses reported in
accumulated components of comprehensive income (loss) in stockholders' equity
(deficit) in the accompanying consolidated financial statements. The fair
value of Brio's available-for-sale securities is based on quoted market prices
at the balance sheet dates. Realized gains and losses and declines in value
judged to be other-than-temporary on available-for-sale securities are
included in interest and other income (expense), net, in the accompanying
consolidated statements of operations. The cost of securities sold is based on
the specific identification method. Interest on securities classified as
available-for-sale is included in interest and other income (expense), net, in
the accompanying consolidated statements of operations.
A summary of the fair value of Brio's available-for-sale investment
portfolio is as follows (in thousands):
<TABLE>
<CAPTION>
March 31,
---------------
2000 1999
------- -------
<S> <C> <C>
Corporate debt securities and commercial paper.............. $16,651 $14,463
Government debt securities.................................. 8,780 8,631
------- -------
Total..................................................... 25,431 23,094
Less: Cash equivalents...................................... 13,600 8,809
------- -------
Total short-term investments.............................. $11,831 $14,285
======= =======
</TABLE>
Significant Concentrations
Financial instruments that potentially subject Brio to concentrations of
credit risk consist principally of accounts receivable. Brio performs periodic
credit evaluations of its customers' financial condition and generally does
not require collateral. For the years ended March 31, 2000, 1999 and 1998, no
customer accounted for more than 10% of total revenues.
Inventories
Brio's inventories are carried at the lower of cost or market on a first-
in, first-out basis. Inventory consists principally of completed software
packages including media and documentation.
Property and Equipment
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives (three to seven years) of
the assets. Leasehold improvements are amortized over the shorter of the term
of the related lease or the estimated useful life of the asset.
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
March 31,
----------------
2000 1999
------- -------
<S> <C> <C>
Computer equipment and software............................ $13,244 $ 8,757
Furniture and fixtures..................................... 3,825 2,402
Leasehold improvements..................................... 2,259 503
------- -------
19,328 11,662
Less: Accumulated depreciation and amortization............ (7,210) (5,122)
------- -------
$12,118 $ 6,540
======= =======
</TABLE>
41
<PAGE>
BRIO TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue Recognition
Effective April 1, 1998, Brio adopted Statement of Position (SOP) 97-2,
"Software Revenue Recognition." SOP 97-2 provides guidance on applying
generally accepted accounting principles in recognizing revenue on software
transactions. The adoption of SOP 97-2 did not have a material impact on Brio's
consolidated financial position or the timing of Brio's revenue recognition, or
cause changes to its revenue recognition policy.
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 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.
Deferred Revenue
Deferred revenue represents amounts received from customers under certain
license, maintenance and service agreements for which the revenue earnings
process has not been completed. In situations where the services are not
expected to be provided and revenue recognized within twelve months of the
balance sheet date, such amounts are classified as noncurrent deferred revenue.
Software Development Costs
Under Statement of Financial Accounting Standards (SFAS) No. 86 "Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,"
costs incurred in the research and development of software products are
expensed as incurred until technological feasibility has been established. Once
established, these costs would be capitalized. Amounts that could have been
capitalized under this Statement were insignificant and, therefore, no costs
have been capitalized to date.
Comprehensive Loss
In 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
130, "Reporting Comprehensive Income," which was adopted by Brio in the quarter
ended June 30, 1998. SFAS No. 130
42
<PAGE>
BRIO TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
requires companies to report a new, additional measure of income on the
statement of operations or to create a new financial statement that has the new
measure of income on it. "Comprehensive income (loss)" includes foreign
currency translation gains and losses and other unrealized gains and losses
that have been previously excluded from net income (loss) and reflected in
equity instead. Brio has reported the components of comprehensive loss on its
consolidated statements of stockholders' equity (deficit).
Computation of Basic Net Loss Per Share
Basic net loss per share is computed using the weighted average number of
shares of common stock outstanding. No diluted net loss per share information
is presented as Brio has incurred net losses in all periods presented.
Potential common shares from conversion of preferred stock, stock options and
warrants and contingently issuable shares have been excluded from the
calculation of diluted net loss per share as they are antidilutive. Potential
common shares of 5,023,873 using the treasury stock method were not included in
the computation of diluted net loss per share for the year ended March 31, 2000
because Brio incurred a loss in this period and, therefore, the effect would be
antidilutive.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
No. 133 is effective for fiscal years beginning after June 15, 2000. Management
believes the adoption of SFAS No. 133 will not have a material effect on Brio's
financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 provides guidance on applying generally accepted
accounting principles to revenue recognition in financial statements. Brio will
adopt SAB No. 101, as amended by SAB No. 101B, in the fourth quarter of fiscal
2001. Management believes the adoption of SAB No. 101 will not have a material
effect on Brio's financial statements.
In March 2000, the Emerging Issues Task Force (EITF) reached a consensus on
Issue 00-2, "Accounting for the Costs of Developing a Web Site." EITF 00-2
states that for specific web site development costs, the accounting for such
costs should be based generally on a model consistent with the American
Institute of Certified Public Accountants SOP 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use." All costs
incurred in the planning stage should be expensed as incurred. For the web site
application and development stage, all costs relating to software used to
operate a web site should be accounted for pursuant to SOP 98-1, unless a plan
exists to market the software externally, in which case the costs should be
accounted for pursuant to SFAS No. 86. Web site hosting fees should be expensed
over the period of benefit and web site graphics should be capitalized in
accordance with SOP 98-1. This consensus will be applicable to all web site
development costs incurred for quarters beginning after June 30, 2000, even for
costs relating to projects that are in progress as of that date. Management
believes that the adoption of EITF 00-2 will not have a material effect on
Brio's financial statements.
In March 2000, the FASB issued Financial Standards Board Interpretation
(FIN) No. 44, "Accounting for Certain Transactions involving Stock
Compensation--an Interpretation of APB Opinion No. 25. FIN No. 44 addresses the
application of APB No. 25 to clarify, among other issues, (a) the definition of
employee for purposes of applying APB No. 25, (b) the criteria for determining
whether a plan qualifies as a
43
<PAGE>
BRIO TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
noncompensatory plan, (c) the accounting consequence of various modifications
to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. FIN No. 44 is effective July 1,
2000, but certain conclusions cover specific events that occur after either
December 15, 1998, or January 12, 2000. To the extent FIN No. 44 covers events
occurring during the period after December 15, 1998, or January 12, 2000, but
before the effective date of July 1, 2000, the effects of applying the
interpretation will be recognized on a prospective basis from July 1, 2000.
Management believes that the adoption of FIN No. 44 will not have a material
effect on Brio's financial statements.
Reclassifications
Certain prior year financial statement balances have been reclassified to
conform to the fiscal 2000 presentation.
3. ACQUISITIONS:
SQRIBE
On February 23, 1999, Brio entered into a definitive merger agreement with
SQRIBE Technologies Corp. (SQRIBE). Under the terms of the agreement, upon
closing of the transaction, Brio stockholders would hold approximately 55% of
Brio, with former SQRIBE stockholders holding approximately 45%.
In August 1999, Brio completed its merger with SQRIBE. 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 pooling-of-interests.
All prior period consolidated financial statements were restated, in accordance
with required pooling-of-interests accounting and disclosures. SQRIBE had a
fiscal year that ended on December 31 of each year. The consolidated financial
statements combine the SQRIBE results for the fiscal years ended December 31,
1998 and 1997, with Brio's results for the years ended March 31, 1999 and 1998,
respectively. In order to conform SQRIBE's fiscal year to Brio's fiscal year,
the results of operations of SQRIBE for the three months ended March 31, 1999
have been reflected as an adjustment to retained earnings as of that date, and
the consolidated balance sheet of Brio at March 31, 1999 includes the balance
sheet of SQRIBE at March 31, 1999. Revenue, net loss and net loss applicable to
common stock for SQRIBE was $10.8 million, $1.8 million and $3.6 million,
respectively, for the three months ended March 31, 1999. Reconciliation of the
consolidated financial statements with previously reported separate company
performance for the years ended March 31, 1999 and 1998 is presented below (in
thousands):
<TABLE>
<CAPTION>
Years Ended
March 31,
-----------------
1999 1998
------- --------
<S> <C> <C>
Total Revenues
Brio................................................... $46,524 $ 26,772
SQRIBE................................................. 39,162 25,123
------- --------
Combined and restated................................ $85,686 $ 51,895
======= ========
Net income (loss)
Brio................................................... $ (887) $ (8,072)
SQRIBE................................................. 1,050 (7,651)
------- --------
Combined and restated................................ $ 163 $(15,723)
======= ========
Net income (loss) applicable to common stock
Brio................................................... $ (887) $ (8,072)
SQRIBE................................................. 134 (7,651)
------- --------
Combined and restated................................ $ (753) $(15,723)
======= ========
</TABLE>
44
<PAGE>
BRIO TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
MerlinSoft
In October 1998, Brio acquired all of the outstanding stock of MerlinSoft,
Inc. (MerlinSoft), a California corporation, for cash. The total purchase price
was $2.2 million, and the acquisition was accounted for as a purchase. In
connection with the acquisition, net intangibles of $2.3 million were acquired.
The results of operations of MerlinSoft and the estimated fair value of the
assets acquired and liabilities assumed are included in Brio's financial
statements from the date of acquisition. Intangibles arising from the
acquisition are being amortized on a straight-line basis over three years.
While Brio relied upon a third party appraisal of the acquired intangible
assets, management was primarily responsible for estimating their fair values.
Management estimates that $1.7 million of the purchased intangibles represented
purchased in-process research and development that had not yet reached
technological feasibility and had no alternative future use. The excess of the
purchase price over identified assets was approximately $600,000.
The purchased in-process research and development consisted of two projects.
Both of these projects are aimed at the delivery of timely, in-depth,
sophisticated analytical applications. The first product provides data models
for analyses in specific industries and functional areas, metric libraries, a
web-based client, and the ability for business users to manage application
components ("Analysis Product"). The second product includes in-depth modeling
features for margin analysis and what-if scenarios to determine the impact of
various decisions and parameters ("Modeling Product"). The research and
development costs incurred by MerlinSoft in the development of the Analysis
Product were approximately $298,000 in fiscal 1998 and approximately $4,000 in
fiscal 1997. The research and development costs incurred by MerlinSoft in the
development of the Modeling Product were approximately $34,000 in fiscal 1998.
At the date of acquisition, the research and development costs to complete the
Analysis Product were estimated by MerlinSoft to be approximately $855,000 in
fiscal 2000 and 1999. At the date of acquisition, the research and development
costs to complete the Modeling Product project were estimated by MerlinSoft to
be approximately $933,000 in fiscal 2000 and 1999.
As of March 31, 2000, Brio has successfully completed the Analysis and
Modeling Products. MerlinSoft's results have not differed significantly from
the forecast assumptions. The risks associated with products are still
considered high and no assurance can be made that the products will meet market
expectations. If these projects do not meet market expectations, the operating
results and financial condition of Brio may be adversely affected.
Additionally, the value of other intangible assets acquired may become
impaired. Comparative pro forma information has not been presented as the
operations of MerlinSoft were not material to Brio's consolidated financial
statements.
4. INDUSTRY SEGMENT AND GEOGRAPHIC 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
45
<PAGE>
BRIO TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 Consolidated Statements of Operations.
Brio markets its products in the United States and Canada and in other
foreign countries through its domestic sales personnel and its foreign
subsidiaries. Revenues by geographic area were as follows:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
United States and Canada...................................... 82% 82% 83%
Europe, the Middle East and Africa............................ 13% 13% 12%
Asia Pacific and the rest of the world........................ 5% 5% 5%
</TABLE>
No one foreign country comprised more than 10% of total revenues for fiscal
2000, 1999 and 1998. None of Brio's international operations have material
items of long-lived assets.
5. COMMITMENTS:
Brio leases various facilities under operating leases which expire on
various dates through May 2010. Brio also leases office equipment under various
non-cancelable operating leases with terms which expire through July 2003.
Future minimum lease payments relating to these agreements are as follows:
<TABLE>
<CAPTION>
Fiscal Year March 31,
---------------------
<S> <C>
2001............................................................. $ 6,679,597
2002............................................................. 5,507,300
2003............................................................. 5,273,801
2004............................................................. 5,365,577
2005............................................................. 5,310,978
Thereafter....................................................... 23,993,815
-----------
$52,131,068
===========
</TABLE>
In December 1999, Brio entered into a new lease agreement commencing on June
1, 2000 for its new corporate headquarters. The lease expires in May 2010 and
calls for average monthly payments over the term of the lease of approximately
$378,000 per month. The payments due under this lease are included in the
future minimum lease payments above.
Rent expense for the years ending March 31, 2000, 1999 and 1998 was
$4,620,000, $3,533,000 and $2,260,000, respectively.
6. NOTES PAYABLE:
As of March 31, 2000, Brio has a $15.0 million accounts receivable-based
line of credit agreement. Interest on borrowings under the accounts receivable
line accrues at the bank's prime rate (9.0% at March 31, 2000). Borrowings
under the accounts receivable line of credit were limited to 80% of eligible
accounts receivable. The line of credit is collateralized by substantially all
of Brio's assets, including Brio's intellectual property, accounts receivable
and property and equipment. As of March 31, 2000, the line of credit required
Brio to comply with a net income covenant, excluding non-recurring operating
charges of $1. Brio was in compliance with this covenant as of March 31, 2000.
The line expires on December 31, 2000. As of March 31, 2000 there were no
amounts outstanding under the line.
46
<PAGE>
BRIO TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As part of the merger with SQRIBE, Brio assumed a $2.5 million bank line of
credit. During fiscal 2000, all amounts outstanding under the line were paid
and the line was cancelled. Brio also assumed a $1.0 million equipment
purchase line of credit. As of March 31, 2000, a $500,000 letter of credit has
been issued under the equipment line to support a facilities lease.
7. STOCKHOLDERS' EQUITY:
Common Stock
In February 1998, the Board of Directors authorized the filing of a
registration statement with the Securities and Exchange Commission to register
shares of its common stock in connection with a proposed Initial Public
Offering (IPO). On May 1, 1998, the offering was consummated and all of the
then currently outstanding convertible preferred stock converted to 5,466,172
shares of common stock upon the closing of the IPO.
In April 1998, Brio's board of directors approved a one-for-two reverse
stock split of its preferred and common stock. All preferred stock, common
stock and per share amounts have been adjusted retroactively to give effect to
the reverse stock split.
In April 1998, Brio's board of directors approved the reincorporation of
Brio in Delaware in connection with Brio's IPO which was consummated May 1,
1998. Upon reincorporation, Brio issued new shares with a par value of $0.001
per share to all preferred and common stockholders.
Upon closing of the merger with SQRIBE in August 1999, all of the then
outstanding shares of SQRIBE convertible preferred stock were converted to
4,610,597 shares of Brio common stock.
As part of the merger with SQRIBE, Brio assumed an agreement, dated
September 1997, whereby certain stockholders controlling 97% of the then
outstanding shares of common stock, including an executive officer, exchanged
one-third of their common shares for Series B convertible preferred stock on a
one-for-one basis. This exchange was made to facilitate the sale of stock by
these stockholders to third-party investors, who wished to purchase preferred
stock in SQRIBE, and was not done in contemplation of the merger with Brio.
Compensation expense of $7.7 million was recognized in this exchange in fiscal
1998 based on the difference between the fair values of the common and
preferred shares on the date of the exchange.
Upon closing of the merger with SQRIBE in August 1999, all of the then
outstanding shares of redeemable common stock of SQRIBE were converted to
153,612 shares of Brio common stock.
As of March 31, 2000, Brio has reserved the following shares of its common
stock for future issuance:
<TABLE>
<S> <C>
Employee stock purchase plan....................................... 1,339,548
Exercise of stock options.......................................... 7,359,725
Other option and warrant agreements................................ 28,162
---------
Total shares reserved............................................ 8,727,435
=========
</TABLE>
During fiscal 1997, certain employees funded the purchase of common stock
under the 1992 Stock Option Plan with fully secured notes payable to Brio.
As part of the merger with SQRIBE, Brio assumed an agreement, dated in
fiscal 1998, that permitted certain employees to accelerate the exercisability
of their options to purchase 1,232,589 shares of common stock covered by their
option agreements in exchange for full recourse promissory notes totaling
$1,641,000. The notes bear interest at 7% and are due in 2003. Repayment of
the notes accelerates in the event of
47
<PAGE>
BRIO TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
termination of employment. The shares purchased under the agreement have been
pledged as partial security for the notes. Brio has the right to repurchase
these shares at the original sale price based on the vesting schedule in the
original option agreements. No shares were repurchased under this agreement
during fiscal 2000. During fiscal 1999, 32,003 shares of stock were repurchased
and the related note from a terminated employee was cancelled as permitted
under the arrangement. At March 31, 2000, 12,611 shares were subject to this
repurchase right at a weighted average price of $1.35.
Stock Options
Through March 31, 2000, Brio has 2,079,795 shares of common stock reserved
for issuance under the 1992 Stock Option Plan (the "Plan"). Under the Plan, the
Board of Directors may grant options to purchase Brio's common stock to
employees, directors, or consultants at an exercise price of not less than 100%
of the fair value of Brio's common stock. Any options granted must be granted
by the tenth anniversary of the effective date of the Plan. Options issued
under the Plan generally have a term of five years from the date of grant and
generally vest ratably over four years.
Brio's 1998 Stock Option Plan (the "1998 Plan") was adopted by Brio's Board
of Directors in February 1998. Through March 31, 2000, Brio has 5,262,087
shares of common stock reserved for issuance under the 1998 Plan. The shares
reserved for issuance under the 1998 Plan increase annually on the first day of
Brio's fiscal year through April 1, 2003, by the lesser of 600,000 or three
percent of the shares outstanding on the last day of the immediately preceding
fiscal year. Under the 1998 Plan, the Board of Directors may grant options to
purchase Brio's common stock to employees, directors or consultants at an
exercise price of not less than 100% of the fair value of Brio's common stock
on the date of grant, in the case of incentive stock options, and not less than
85% of the fair value of Brio's common stock on the date of grant, in the case
of nonqualified stock options. Options must all be granted by the tenth
anniversary of the effective date of the 1998 Plan. Options issued under the
1998 Plan will generally have a term of 10 years from the date of grant and
will generally vest ratably over four years.
Brio's 1998 Directors' Stock Option Plan (the "Directors' Plan") was adopted
by Brio's Board of Directors in February 1998. A total of 300,000 shares of
common stock has been reserved for issuance under the Directors' Plan. Through
March 31, 2000, 85,000 options have been granted under the Directors' Plan. The
Directors' Plan provides for the initial grant of nonqualified stock options to
purchase 20,000 shares of common stock on the date on which the optionee first
becomes a non-employee director of Brio subsequent to the initial public
offering (the "First Option"), and an additional option to purchase 5,000
shares of common stock on the next anniversary to existing and future non-
employee directors of Brio if, on such date, the director has served on the
board for at least six months (the "Subsequent Option"). The exercise price per
share of all options granted under the Directors' Plan will equal the fair
market value of a share of Brio's common stock on the date of grant of the
option. Options issued under the Directors' Plan will have a term of 10 years
from the date of grant; the First Option shall become exercisable in
installments of 25% of the total number of shares subject to the First Option
on each of the first, second, third and fourth anniversaries of the date of
grant of the First Option; each Subsequent Option shall become exercisable in
full on the day before the first anniversary of the date of grant of that
Subsequent Option.
As part of the merger with SQRIBE, Brio assumed all options outstanding
under SQRIBE's 1995 Stock Option Plan as amended and restated. No additional
options will be granted under this plan. Stock options granted under this plan
generally have vesting terms of four years and are exercisable for a period not
to exceed ten years from the date of issuance.
48
<PAGE>
BRIO TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Option activity under the Plans is as follows:
<TABLE>
<CAPTION>
Weighted
Shares Average
Available Options Exercise
for Grant Outstanding Price
---------- ----------- --------
<S> <C> <C> <C>
Outstanding--March 31, 1997................... 1,885,448 2,501,471 $ 1.04
Restricted shares repurchased............... 9,480 -- --
Options granted............................. (2,733,253) 2,733,253 1.80
Options exercised........................... -- (248,694) 1.00
Options canceled............................ 1,731,036 (1,731,036) 1.27
---------- ---------- ------
Outstanding--March 31, 1998................... 892,711 3,254,994 1.56
Authorized.................................. 3,740,267 -- --
Restricted shares repurchased............... 52,548 -- --
Options granted............................. (3,106,173) 3,106,173 7.46
Options exercised........................... -- (1,561,792) 1.38
Options canceled............................ 397,629 (397,629) 4.31
---------- ---------- ------
Outstanding--March 31, 1999................... 1,976,982 4,401,746 5.53
Authorized.................................. 2,267,703 -- --
Restricted shares repurchased............... 625 -- --
Options granted............................. (3,208,498) 3,208,498 22.27
Options exercised........................... -- (1,287,331) 3.22
Options canceled............................ 1,173,770 (1,173,770) 8.62
---------- ---------- ------
Outstanding--March 31, 2000................... 2,210,582 5,149,143 $15.78
========== ========== ======
</TABLE>
Certain unvested options have been exercised and are subject to repurchase
by Brio until such shares vest. As of March 31, 2000, 30,699 shares were
subject to the right of repurchase at a weighted average exercise price of
$0.95.
A summary of options outstanding and exercisable is as follows:
<TABLE>
<CAPTION>
As of March 31, 2000
----------------------------------------------------
Options Outstanding Options Exercisable
--------------------- --------------------
Weighted Weighted
Range of Number Average Average Average
Contractual of Contractual Exercise Number Exercise
Prices Options Life (years) Price Exercisable Price
----------- --------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.60-$ 7.63 1,337,201 6.81 $ 3.29 611,764 $ 2.63
$ 7.75-$12.50 686,719 4.07 9.02 217,832 9.00
$12.56-$24.75 1,981,493 4.55 15.18 258,547 14.51
$25.56-$43.38 1,088,490 4.84 35.00 17,920 31.75
$46.25-$60.00 55,240 4.74 53.10 -- --
------------- --------- ---- ------ --------- ------
$ 0.60-$60.00 5,149,143 5.14 $15.78 1,106,063 $ 7.13
========= =========
</TABLE>
Brio's 1998 Employee Stock Purchase Plan (the "Purchase Plan") was adopted
by Brio's Board of Directors in February 1998. Through March 31, 2000, Brio has
1,792,009 shares of common stock reserved for issuance under the Purchase Plan.
The shares reserved for issuance under the Purchase Plan increase annually on
the first day of Brio's fiscal year through April 1, 2000, by the lesser of
300,000 or two percent of the shares outstanding on the last day of the
immediately preceding fiscal year. The Purchase Plan permits eligible
49
<PAGE>
BRIO TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
employees to purchase common stock at 85% of the lower of the fair market value
of Brio's common stock on the first day or the last day of each six-month
offering period.
Brio accounts for its stock option and employee stock purchase plans (the
"Plans") under APB Opinion No. 25, "Accounting for Stock Issued to Employees."
Had compensation expense for these Plans been determined consistent with SFAS
No. 123, "Accounting for Stock Based Compensation," Brio's net loss applicable
to common stock would have increased to the following pro forma amounts (in
thousands, except per share information):
<TABLE>
<CAPTION>
Years Ended March 31,
---------------------------
2000 1999 1998
-------- ------- --------
<S> <C> <C> <C>
Net loss applicable to common stock:
As reported.................................. $(10,910) $ (753) $(15,723)
Pro forma.................................... $(14,049) $(2,777) $(16,342)
Basic net loss per share:
As reported.................................. $ (0.43) $ (0.04) $ (1.22)
Pro forma.................................... $ (0.56) $ (0.14) $ (1.27)
</TABLE>
The weighted average grant date fair value of options granted during fiscal
2000, 1999, and 1998, was $14.00, $4.47 and $0.56, respectively. The fair value
of each option grant is estimated on the date of grant using the Black-Scholes
option pricing model with the following assumptions used for grants:
<TABLE>
<CAPTION>
Years Ended March 31,
----------------------------------
2000 1999 1998
---------- ---------- ------------
<S> <C> <C> <C>
Risk-free interest rates.................. 5.09-6.65% 4.33-5.73% 5.36-6.73%
Expected dividend yields.................. 0% 0% 0%
Expected lives............................ 2.76 years 3.14 years 3 to 4 years
Volatility................................ 101.9% 100.9% 0.01%
During fiscal 2000 and 1999, Brio issued 347,324 shares and 105,137 shares,
respectively, under the Purchase Plan. The weighted average grant date fair
value of each purchase right issued under the Purchase Plan during fiscal 2000
and 1999 was $5.00 and $4.76, respectively. The fair value of the purchase
rights granted in fiscal 2000 and 1999 was estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions:
<CAPTION>
Year Ended March 31,
---------------------
2000 1999
---------- ----------
<S> <C> <C> <C>
Risk-free interest rates.................. 6.15% 4.24%
Expected dividend yields.................. 0% 0%
Expected lives............................ 1 year 0.5 years
Volatility................................ 101.9% 100.9%
</TABLE>
Other Option and Warrant Agreements
As part of the merger with SQRIBE, Brio assumed certain warrant agreements
that granted rights to purchase 634,821 shares of Series A convertible
preferred stock at $3.31 per share and 2,560 shares of common stock at $4.10
per share. These rights were issued in connection with certain financing
transactions in 1995. The warrants to purchase 634,821 shares of Series A
convertible preferred stock were exercised in 1996. As of March 31, 2000, the
remaining 2,560 warrants, which expire in 2001, are still outstanding.
50
<PAGE>
BRIO TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As part of the merger with SQRIBE, Brio assumed a severance agreement with
an officer, dated in 1996, whereby the officer was granted the right to
purchase 8,534 shares of common stock at $2.34 per share if the fair market
value of the common stock did not exceed certain specified targets by December
31, 1999. In 1996, $110,000 was accrued as severance expense for the estimated
fair value of the arrangement. As of December 31, 1999, the specified targets
discussed above were met and, accordingly, the right to purchase the shares
expired.
As part of the merger with SQRIBE, Brio assumed a warrant agreement, dated
in fiscal 1998, that granted rights to a consulting firm to purchase 25,602
shares of common stock at $7.03 per share. An expense of $106,000 was recorded
for the fair value of these warrants when they were issued. As of March 31,
2000, these warrants, which expire in 2008, are still outstanding,
Deferred Compensation
In connection with the granting of 1,369,368 stock options to employees
during the fiscal year ended March 31, 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 amount is
presented as a reduction of stockholder's equity (deficit) and amortized
ratably over the vesting period of the applicable options. Approximately
$155,000, $129,000 and $105,000 was expensed during the fiscal years ended
March 31, 2000, 1999 and 1998, respectively, and the balance will be expensed
ratably over the next two years as the options vest.
8. CONTINGENCIES:
On January 20, 1997, Business Objects, S.A. filed a complaint against Brio
in the U.S. District Court for the Northern District of California in San Jose,
alleging that certain of Brio's products (including at least the BrioQuery
Navigator, BrioQuery Explorer and BrioQuery Designer products) infringed at
least claims 1, 2, and 4 of U.S. Patent Number 5,555,403. On April 4, 1997,
Brio filed an answer and affirmative defenses to the complaint, denying certain
of the allegations in the complaint and asserting a counterclaim requesting
declaratory relief that Brio is not infringing the patent and that the patent
is invalid and unenforceable. In December 1997, venue for the case was changed
to the Northern District of California in San Francisco, California. On July
30, 1999, Brio filed an action against Business Objects, S.A. in the U.S.
District Court for the Northern District of California in San Jose, alleging
that certain of Business Objects, S.A. products infringe U.S. Patent Number
5,915,257. 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 for $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 is included
in non-recurring operating expenses for the year ended March 31, 2000. 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.
51
<PAGE>
BRIO TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. NON-RECURRING OPERATING EXPENSES:
Non-recurring operating expenses are comprised of merger and restructuring
costs related to the SQRIBE merger and the settlement of Brio's ongoing patent
litigation with Business Objects, S.A. as follows (in thousands):
<TABLE>
<CAPTION>
March 31, 2000
--------------
<S> <C>
Merger and restructuring costs................................ $13,160
Settlement costs (see Note 8)................................. 9,137
-------
Total non-recurring operating expenses...................... $22,297
=======
</TABLE>
Brio's merger with SQRIBE was completed on August 3, 1999. In fiscal 2000,
merger and restructuring costs of $13.2 million consisted of $7.4 million in
transaction and related professional fees, $639,000 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 $2,737,000
in other miscellaneous merger-related expenses. All termination notices and
benefits were communicated to the affected employees prior to year-end and all
of the merger-related expenses were incurred prior to year-end. Substantially
all of the merger-related charges were paid during fiscal 2000.
10. INCOME TAXES:
Brio accounts for income taxes using an asset and liability approach which
requires the recognition of deferred tax assets and liabilities for expected
future tax consequences. The deferred tax assets and liabilities are determined
using the current applicable enacted federal and state tax rates.
Brio's income (loss) before provision for income taxes consists of income
(loss) generated by its domestic operations and losses generated by its foreign
subsidiaries as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended March 31,
--------------------------
2000 1999 1998
------- ------- --------
<S> <C> <C> <C>
Domestic........................................ $(4,244) $ 3,478 $(13,721)
Foreign......................................... (5,323) (2,568) (1,898)
------- ------- --------
Total income (loss) before provision for
income taxes................................. $(9,567) $ 910 $(15,619)
======= ======= ========
</TABLE>
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
Years Ended March
31,
--------------------
2000 1999 1998
------ ------- ----
<S> <C> <C> <C>
Current:
State................................................ $ 823 $ 364 $ 54
Federal.............................................. 269 1,967 75
Foreign.............................................. 46 100 50
------ ------- ----
Total current...................................... 1,138 2,431 179
Deferred:
State................................................ 205 -- --
Federal.............................................. -- (1,684) (75)
------ ------- ----
Total deferred..................................... 205 (1,684) (75)
------ ------- ----
Total provision for income taxes....................... $1,343 $ 747 $104
====== ======= ====
</TABLE>
52
<PAGE>
BRIO TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The difference between the statutory U.S. Federal income tax rate of 34% and
Brio's actual income taxes is due to the following (in thousands):
<TABLE>
<CAPTION>
Years Ended March 31,
------------------------
2000 1999 1998
------- ------ -------
<S> <C> <C> <C>
Expected income tax expense (benefit)............ $(3,253) $ 309 $(5,310)
Expected state income taxes, net of federal tax
expense (benefit)............................... (288) 36 (625)
Non-deductible merger costs...................... 2,430 -- --
Utilization of net operating losses.............. (2,193) -- --
Foreign taxes.................................... 27 -- --
Alternative minimum tax.......................... 866 -- --
Utilization of tax credits....................... (1,251) (824) --
Pre-merger and foreign losses.................... 2,321 -- --
Increase in valuation allowance.................. 2,775 1,023 5,975
Non-deductible items............................. 188 203 64
Other............................................ (279) -- --
------- ------ -------
Provision for income taxes..................... $ 1,343 $ 747 $ 104
======= ====== =======
</TABLE>
Brio has a net deferred tax asset as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended March
31,
------------------
2000 1999
-------- --------
<S> <C> <C>
Allowance for sales returns and doubtful accounts........ $ 686 $ 506
Depreciation and amortization............................ 55 48
Accrued expenses and other............................... 4,768 2,968
Deferred revenue......................................... 4,001 3,472
Intangible assets........................................ 551 591
Federal and state credits................................ 3,151 1,425
Capitalized research and development..................... 112 129
Net operating losses..................................... 11,180 4,352
Gain on sale of business................................. -- (300)
-------- --------
24,504 13,191
Valuation allowance...................................... (22,614) (11,096)
-------- --------
Net deferred tax asset................................... $ 1,890 $ 2,095
======== ========
</TABLE>
Brio has provided a valuation allowance for a significant portion of its
deferred tax asset as of March 31, 2000. The total net deferred tax asset as of
March 31, 2000 relates to expected tax refunds on net operating losses carried
back to SQRIBE tax returns filed prior to the merger. The total valuation
allowance increased $11,518,000 in fiscal 2000 compared to fiscal 1999 due to
approximately $8,743,000 relating to income tax benefits arising from the
exercise of stock options that were credited directly to stockholders' equity
and will not be available to benefit the provision for income taxes in any
future periods and approximately $2,775,000 relating to net operating loss
carryforwards.
At March 31, 2000, Brio has approximately $17,140,000 of Federal net
operating loss carryforwards and approximately $10,464,000 of State net
operating loss carryforwards both of which expire at various dates through
2020. Brio also has approximately $14,069,000 of Foreign net operating loss
carryforwards which expire at various dates through 2020 or carryforward
indefinitely. In addition, Brio has R&D tax credit
53
<PAGE>
BRIO TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
carryforwards of approximately $2,954,000 which expire at various dates through
2020. Furthermore, the Internal Revenue Code contains provisions which may
limit the net operating loss and research and development credit carryforwards
to be used in any given year upon the occurrence of certain events, including a
significant change in ownership.
54
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charged to Balance
Beginning Costs and at End
Description of Period Expenses Deductions of Period
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year ended March 31, 2000:
Allowance for returns and doubtful
accounts......................... $1,394,000 $1,494,000 $ 40,000 $2,848,000
Year ended March 31, 1999:
Allowance for returns and doubtful
accounts......................... $ 997,000 $ 823,000 $426,000 $1,394,000
Year ended March 31, 1998:
Allowance for returns and doubtful
accounts.......................... $ 624,000 $ 732,000 $359,000 $ 997,000
</TABLE>
55
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Certain information required by Part III is omitted from this report because
Brio will file a definitive proxy statement within 120 days after the end of
its fiscal year pursuant to Regulation 14A (the "Proxy Statement") for its
Annual Meeting of Stockholders to be held on August 16, 2000, and the
information included in the Proxy Statement is incorporated herein by
reference.
Item 10. Directors and Executive Officers of the Registrant.
(a) Executive Officers--See the section entitled "Executive Officers of the
Registrant" in Part I, Item 1 hereof.
(b) Directors--the information required by this Item is incorporated by
reference to the section entitled "Election of Directors" in the Registrant's
Proxy Statement.
Item 11. Executive Compensation.
The information required by this Item is incorporated by reference to the
sections entitled "Compensation of Executive Officers" in the Registrant's
Proxy statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this Item is incorporated by reference to the
sections entitled "Brio Common Stock Ownership of Certain Beneficial Owners and
Management" of the Registrant's Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by this Item is incorporated by reference to the
section entitled "Certain Relationships and Related Transactions" in the
Registrant's Proxy Statement.
56
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following documents are filed as part of this report:
(1) Financial Statements and Report of Arthur Andersen LLP, Independent
Auditors
(2) Financial Statement Schedule
(3) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
(b) Reports on Form 8-K.
None
(c) Exhibits and Financial Statement Schedule.
(1) The following exhibits are filed herewith or incorporated herein by
reference:
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
2.1 Agreement and Plan of Merger dated February 23, 1999 among Brio,
Socrates Acquisition Corporation and SQRIBE Technologies Corp. **
2.2 Amendment No. 1 to Agreement and Plan of Merger dated March 24, 1999
among Brio, Socrates Acquisition Corporation and SQRIBE
Technologies Corp. (included in Exhibit 2.1). **
2.3 Amendment No. 2 to Agreement and Plan of Merger dated July 2, 1999
among Brio, Socrates Acquisition Corporation and SQRIBE
Technologies Corp. (included in Exhibit 2.1). **
3.1 Amended and Restated Certificate of Incorporation of Brio. *
3.2 Form of Amended and Restated Certificate of Incorporation of Brio. *
3.3 Bylaws of Brio. *
4.1 Specimen Stock Certificate. *
4.2 Amended and Restated Rights Agreement dated as of June 27, 1997
between Brio and the individuals and entities listed in the
signature pages hereto, as amended effective February 27, 1998. *
4.3 Amendment to Rights Agreement dated February 24, 1999. **
10.1 Form of Indemnification Agreement between Brio and each of its
Officers and Directors. *
10.2 Loan and Security Agreement dated December 30, 1997 between Brio and
Silicon Valley Bank. *
10.3 Sublease dated February 1997 between Brio and KPMG Peat Marwick LLP.
*
10.4 Lease Agreement dated June 27, 1996 between Brio and the Arrillaga
Family Trust. *
10.5 Employment Agreement dated July 15, 1996 between Brio and Robert
Currie. *
10.6 Employment Agreement dated July 21, 1997 between Brio and Karen
Willem. *
10.7 Employment Agreement dated March 1999 between Brio and Yorgen
Edholm. **
10.8 1992 Stock Option Plan. *
10.9 1998 Stock Option Plan. *
10.10 1998 Director's Stock Option Plan. *
</TABLE>
57
<PAGE>
<TABLE>
<C> <S>
10.11 1998 Employee Stock Purchase Plan. *
10.12 Form of Affiliate Agreement. **
10.13 Employment Agreement between Brio and Ofir Kedar. **
10.14 Employment Agreement between Brio and Scott Chalmers. **
10.15 Employment Agreement between Brio and John Schroeder. **
10.16 Employment Agreement between Brio and Sujata Luther.
10.17 Lease Agreement dated December 20, 1999 between Brio and Sobrato
Development Group.
21.1 List of Subsidiaries. *
23.1 Consent of Independent Public Accountants.
24.1 Power of Attorney (see page 59).
27.1 Financial Data Schedule.
</TABLE>
--------
* Incorporated by reference to identically numbered exhibits filed with Brio's
Registration Statement on Form S-1 (No. 333-47263) and amendments thereto
which became effective April 30, 1998
** Incorporated by reference to identically numbered exhibits filed with Brio's
Registration Statement on Form S-4 (No. 333-82341 ) and amendments hereto
which became effective August 3, 1999.
58
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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/ Yorgen H. Edholm
By: _________________________________
Yorgen H. Edholm
President, Chief Executive
Officer and Director (Principal
Executive Officer)
Date: June 29, 2000
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Yorgen H. Edholm and Tamara MacDuff, jointly and
severally, his or her attorneys-in-fact, each with the power of substitution,
for him or her in any and all capacities, to sign any amendments to this Report
on Form 10-K, and to file the same, with exhibits thereto and other documents
in connection therewith with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his or her
substitute or substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Yorgen H. Edholm President, Chief Executive June 29, 2000
______________________________________ Officer and Director
Yorgen H. Edholm (Principal Executive
Officer)
/s/ Tamara MacDuff Chief Financial Officer June 29, 2000
______________________________________ and Executive Vice
Tamara MacDuff President, Finance and
Operations (Principal
Financial and Accounting
Officer)
/s/ Katherine Glassey Edholm Chief Technical Officer June 29, 2000
______________________________________ and Director
Katherine Glassey Edholm
/s/ Ofir Kedar Chairman of the Board of June 29, 2000
______________________________________ Directors
Ofir Kedar
/s/ Bernard J. Lacroute Director June 29, 2000
______________________________________
Bernard J. Lacroute
Director
______________________________________
Michael Cline
Director
______________________________________
Charlie Federman
/s/ E. Floyd Kvamme Director June 29, 2000
______________________________________
E. Floyd Kvamme
</TABLE>
59
