<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
----------------
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1997.
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 0-27774
PRISM SOLUTIONS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 77-0282704
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1000 HAMLIN COURT
SUNNYVALE, CA 94089
(Address of principal executive offices, including zip code)
TELEPHONE NUMBER (408) 752-1888
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
Yes [X] No [ ]
As of August 1, 1997, there were 14,592,398 shares of the Registrant's Common
Stock outstanding.
===============================================================================
<PAGE> 2
PRISM SOLUTIONS, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE NO.
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS:
<S> <C>
Consolidated Balance Sheets
December 31, 1996 and June 30, 1997.......................................... 3
Consolidated Statements of Operations Three months ended June 30,
1996 and June 30, 1997 and
six months ended June 30, 1996 and June 30, 1997............................. 4
Condensed Consolidated Statements of Cash Flows
Six months ended June 30, 1996 and June 30, 1997............................. 5
Notes to Consolidated Financial Statements................................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................................... 7
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................... 11
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS............................................................ 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......................... 11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................................. 12
SIGNATURES................................................................... 13
INDEX TO EXHIBITS............................................................ 14
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
PRISM SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ ---------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 14,844 $ 3,205
Short-term investments 20,052 27,366
Accounts receivable, net 8,392 8,757
Other receivables 151 444
Prepaid expenses and other assets 836 970
-------- --------
Total current assets 44,275 40,742
Property and equipment, net 1,861 2,036
Other assets 163 1,500
-------- --------
Total assets $ 46,299 $ 44,278
======== ========
LIABILITIES
Current liabilities:
Accounts payable $ 1,326 $ 1,831
Accrued commissions 703 1,049
Accrued payroll and related 1,726 1,598
Deferred revenue 4,752 4,741
Other accrued liabilities 1,270 1,264
-------- --------
Total current liabilities 9,777 10,483
Other liabilities 14 14
-------- --------
Total liabilities 9,791 10,497
-------- --------
Contingencies (Note 3)
STOCKHOLDERS' EQUITY
Common stock 14 14
Additional paid-in capital 49,876 48,455
Unrealized holding gains/(losses) -- (18)
Receivables from stockholders (104) (90)
Accumulated deficit (13,278) (14,580)
-------- --------
Total stockholders' equity 36,508 33,781
-------- --------
Total liabilities and stockholders' equity $ 46,299 $ 44,278
======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
3
<PAGE> 4
PRISM SOLUTIONS, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ------------------------------
1996 1997 1996 1997
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
License $ 4,718 $ 5,126 $ 9,115 $ 11,740
Services and other 3,000 5,084 6,010 8,666
------------ ------------ ------------ ------------
Total revenues 7,718 10,210 15,125 20,406
------------ ------------ ------------ ------------
Cost of revenues:
License 124 191 257 568
Services and other 1,543 3,215 3,167 5,246
------------ ------------ ------------ ------------
Total cost of revenues 1,667 3,406 3,424 5,814
------------ ------------ ------------ ------------
Gross margin 6,051 6,804 11,701 14,592
------------ ------------ ------------ ------------
Costs and expenses:
Sales and marketing 4,581 5,201 8,802 10,544
Research and development 1,240 2,011 2,289 3,509
General and administrative 777 1,369 1,415 2,577
------------ ------------ ------------ ------------
Total operating expenses 6,598 8,581 12,506 16,630
------------ ------------ ------------ ------------
Loss from operations (547) (1,777) (805) (2,038)
Interest income, net 491 444 552 938
Other expense, net (43) (79) (58) (133)
------------ ------------ ------------ ------------
Loss before income taxes (99) (1,412) (311) (1,233)
Provision for income taxes (24) (35) (30) (69)
------------ ------------ ------------ ------------
Net loss $ (123) $ (1,447) $ (341) $ (1,302)
============ ============ ============ ============
Net loss per share $ (0.01) $ (0.11) $ (0.04) $ (0.10)
============ ============ ============ ============
Shares used in per share
calculation 12,738,439 12,946,956 9,018,093 13,091,776
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE> 5
PRISM SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
1996 1997
-------- --------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net cash used in operating activities $ (495) $ (1,966)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (783) (954)
Purchases of short-term investments (2,995) (7,296)
-------- --------
Net cash used in investing activities (3,778) (8,250)
-------- --------
Cash flows from financing activities:
Proceeds from stock sold through employee
purchase plan -- 485
Proceeds from exercise of stock options -- 106
Proceeds from initial public offering 35,634 --
Repayment on long-term debt (703) --
Repurchase of common stock -- (2,012)
Proceeds from receivable due from stockholder -- 14
Other 86 (16)
-------- --------
Net cash provided by (used in) financing 35,017 (1,423)
activities -------- --------
Net increase (decrease) in cash and cash equivalents 30,744 (11,639)
Cash and cash equivalents at beginning of year 1,861 14,844
-------- --------
Cash and cash equivalents at end of period $ 32,605 $ 3,205
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE> 6
PRISM SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements at June 30, 1997 are unaudited and reflect
all adjustments (consisting only of normal recurring adjustments) which are, in
the opinion of management, necessary for a fair presentation of the financial
position and operating results for the interim period. The consolidated
financial statements should be read in conjunction with the notes thereto,
together with management's discussion and analysis of financial condition and
results of operations for the fiscal year ended December 31, 1996 and the three
months ended March 31, 1997. The results of operations for the three and six
months ended June 30, 1997 are not necessarily indicative of the results for the
entire year ending December 31, 1997. The previous year end's balance sheet data
was derived from audited financial statements but does not include all
disclosures required by generally accepted accounting principles.
2. NET LOSS PER SHARE
The net loss per share, on a historical basis, is computed using the weighted
average number of common and dilutive common equivalent shares outstanding
during the period. Common equivalent shares are excluded from the computation if
their effect is antidilutive.
3. CONTINGENCIES
On March 5, 1997, a complaint styled Adler et al., v. Prism Solutions, Inc. et
al., Case No. CV764547, was filed by the law firm of Milberg Weiss Bershad Hynes
& Lerach LLP in Superior Court of the State of California, County of Santa
Clara, against the Company and several of its current and former officers and
directors and the underwriters of its initial public offering. The complaint, a
putative class action, was filed on behalf of those persons who purchased or
otherwise acquired the common stock of the Company from March 14 through October
14, 1996, and alleges that the defendants artificially inflated the demand for
the common stock prior to and after the initial public offering. The complaint
seeks damages in an unspecified amount. The Company believes the complaint has
no merit and intends to vigorously defend the action.
4. RECENT PRONOUNCEMENTS
During February 1997, the Financial Accounting Standards Board issued Statement
No. 128 (FAS 128), "Earnings per Share," which specifies the computation,
presentation and disclosure requirements for earnings per share. FAS 128
supersedes Accounting Principles Board Opinion No. 15 and is effective for
financial statements issued for periods ending after December 15, 1997. FAS 128
requires restatement of all prior period earnings per share data presented after
the effective date. The Company does not believe that FAS 128 will have a
material impact on the Company's financial position, results of operations or
cash flows.
During June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (FAS 130), "Reporting Comprehensive
Income." This statement establishes requirements for disclosure of comprehensive
income and becomes effective for the Company for fiscal years beginning after
December 15, 1997, with reclassification of earlier financial statements for
comparative purposes. Comprehensive income generally represents all changes in
stockholders' equity except those resulting from investments or contributions by
stockholders. The Company is evaluating alternative formats for presenting this
information, but does not expect this pronouncement to materially impact the
Company's results of operations.
During June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (FAS 131), "Disclosures about Segments of
an Enterprise and Related Information." This statement establishes standards for
disclosure about operating segments in annual financial statements and selected
information in interim financial reports. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. This statement supersedes Statement of Financial Accounting Standards
No. 14, "Financial Reporting for Segments of a Business Enterprise." The new
standard becomes effective for fiscal years beginning after December 15, 1997,
and requires that comparative information from earlier years be restated to
conform to the requirements of this standard. The Company is evaluating the
requirements of FAS 131 and the effects, if any, on the Company's current
reporting and disclosures.
6
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
In addition to historical information contained herein, Management's Discussion
and Analysis contains forward-looking statements. The forward-looking statements
contained herein are subject to certain risks and uncertainties including those
discussed below that could cause actual results to differ materially from those
reflected herein, or those in the Company's Form 10-K dated December 31, 1996.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis only as of the date hereof. The
Company undertakes no obligation to publicly revise any forward-looking
statements in order to reflect events or circumstances after the date hereof.
OVERVIEW
Prism designs, develops, markets and supports data warehouse management software
that assists customers in developing, managing and maintaining data warehouses.
The Company was incorporated in California in March 1991 and reincorporated in
Delaware in February 1996. Through the end of 1992, the Company was in the
development stage and was engaged primarily in research and development and the
establishment of a sales and marketing infrastructure. The Company began
shipping its principal products, Prism Warehouse Manager and Prism Directory
Manager, in December 1992 and April 1995, respectively. In December 1996, Prism
Warehouse Manager and Prism Directory Manager were replaced with Prism Warehouse
Executive and Prism Warehouse Directory, respectively, as the Company's next
generation software. In the fourth quarter of 1996, Prism also completed the
first transactions for Iterations, its consulting methodology. The majority of
the Company's total revenues to date have been derived from software license
revenues, which accounted for 61% of total revenues in 1996 and 58% of total
revenues in the first six months of 1997. Services and other revenues accounted
for the remaining revenues in 1996 and the first six months of 1997. The Company
expects that license revenues will continue to account for a majority of the
Company's total revenues for the foreseeable future.
During February 1997, the Financial Accounting Standards Board issued Statement
No. 128 (FAS 128), "Earnings per Share," which specifies the computation,
presentation and disclosure requirements for earnings per share. FAS 128
supersedes Accounting Principles Board Opinion No. 15 and is effective for
financial statements issued for periods ending after December 15, 1997. FAS 128
requires restatement of all prior period earnings per share data presented after
the effective date. The Company does not believe that FAS 128 will have a
material impact on the Company's financial position, results of operations or
cash flows.
During June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (FAS 130), "Reporting Comprehensive
Income." This statement establishes requirements for disclosure of comprehensive
income and becomes effective for the Company for fiscal years beginning after
December 15, 1997, with reclassification of earlier financial statements for
comparative purposes. Comprehensive income generally represents all changes in
stockholders' equity except those resulting from investments or contributions by
stockholders. The Company is evaluating alternative formats for presenting this
information, but does not expect this pronouncement to materially impact the
Company's results of operations.
During June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (FAS 131), "Disclosures about Segments of
an Enterprise and Related Information." This statement establishes standards for
disclosure about operating segments in annual financial statements and selected
information in interim financial reports. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. This statement supersedes Statement of Financial Accounting Standards
No. 14, "Financial Reporting for Segments of a Business Enterprise." The new
standard becomes effective for fiscal years beginning after December 15, 1997,
and requires that comparative information from earlier years be restated to
conform to the requirements of this standard. The Company is evaluating the
requirements of FAS 131 and the effects, if any, on the Company's current
reporting and disclosures.
The following table sets forth operating results as a percentage of total
revenues for the three month and six month periods ended June 30, 1996 and
1997:
7
<PAGE> 8
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUES PERCENTAGE OF TOTAL REVENUES
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- --------------------------------
1996 1997 1996 1997
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
License 61% 50% 60% 58%
Services and other 39 50 40 42
----- ----- ----- -----
Total revenues 100 100 100 100
----- ----- ----- -----
Cost of revenues:
License 2 2 2 3
Services and other 20 31 21 25
----- ----- ----- -----
Total cost of revenues 22 33 23 28
----- ----- ----- -----
Gross margin 78 67 77 72
----- ----- ----- -----
Costs and expenses:
Sales and marketing 59 51 58 52
Research and development 16 20 15 17
General and 10 13 9 13
----- ----- ----- -----
administrative
Total operating expenses 85 84 82 82
----- ----- ----- -----
Loss from operations (7) (17) (5) (10)
Interest income, net 6 4 3 5
Other expense, net 0 (1) 0 (1)
----- ------ ----- ------
Loss before income taxes (1) (14) (2) (6)
Provision for income taxes 0 0 0 0
----- ----- ----- -----
Net loss (1)% (14)% (2)% (6)%
===== ===== ===== =====
</TABLE>
REVENUES
The Company's revenues are derived from license fees for its software products
and fees for services complementing its products, including software maintenance
and support, implementation, consulting and training.
License Revenues. The increase in license revenues from the second quarter of
1996 to the same period of 1997 and from the first half of 1996 to the same
period of 1997 was primarily due to an increased number of license transactions.
However, the average transaction size declined somewhat from the first quarter
of 1996 to the same period in 1997 and from the first half of 1996 to the same
period of 1997, due mainly to the smaller configuration of systems licensed to
customers.
Services and Other Revenues. The growth in services and other revenues from the
second quarter and first half of 1996 to the same periods of 1997 was the result
primarily of an increase in the number and scope of consulting engagements as
the Company's consulting organization has grown and, to a lesser extent, of
increased licensing activity causing an increase in the maintenance base as well
as yearly maintenance renewals. The majority of services and other revenues in
both periods came from implementation and consulting revenues.
COST OF REVENUES
Cost of License Revenues. Cost of license revenues consists primarily of
increases in certain reserves, costs of royalties paid to third-party vendors,
and expenses incurred for product media and duplication, shipping expenses,
printing of manuals and packaging materials. The dollar amount of cost of
license revenues increased from the second quarter of 1996 to the same period of
1997 and from the first half of 1996 to the first half of 1997 primarily because
of increases in certain reserves, distribution costs, and media and duplication
costs as well as royalty payments and payments to marketing partners for their
assistance in consummating licensing transactions. The Company expects that the
cost of license revenues will increase in absolute dollars as the Company
licenses additional technology and products from third parties for inclusion in
its product line.
Cost of Services and Other Revenues. Cost of services and other revenues
consists primarily of personnel-related costs incurred in providing consulting
and implementation services, telephone support and training to customers. The
dollar amount of cost of services and other revenues increases from the second
quarter of 1996 to the same period of 1997 and from the first half of 1996 to
the first half of 1997 were primarily due to increased personnel-related costs
as the Company continued to expand its consulting, customer support and training
organizations to support an increase in license revenue. The Company expects
that the costs of services and other revenues will increase in absolute dollars.
8
<PAGE> 9
OPERATING EXPENSES
The growth in operating expenses occurred primarily as a result of increases in
salaries and benefits, resulting from higher staffing levels and the expansion
of facilities.
Sales and Marketing. Sales and marketing expenses consist primarily of salaries,
commissions and bonuses paid to sales and marketing personnel and promotional
expenses. The increases in dollar amount in sales and marketing expenses from
the second quarter of 1996 to the same period of 1997 and from the first half of
1996 to the same period of 1997 were primarily due to the expansion of the
Company's sales operations and increased marketing activities, including trade
shows and promotional expenses. The percentage decrease from 1996 to 1997 in
sales and marketing expenses compared to total revenues resulted primarily from
increases in productivity as sales personnel and system engineers became more
experienced, and due to the economies of scale associated with the increase in
total revenues. The Company expects that sales and marketing expenses will
continue to increase in absolute dollars but slightly decrease as a percentage
of total revenues if the Company's total revenues continue to increase.
Research and Development. Research and development expenses consist primarily of
salaries paid to the engineering staff. The increases in research and
development expenses from the second quarter of 1996 to the same period of 1997
and from the first half of 1996 to the first half of 1997 were primarily
attributable to increased staffing and associated support for software engineers
required to expand and enhance the Company's product line. Software development
costs have been expensed in accordance with Statement of Financial Accounting
Standards No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed." To date, costs incurred after establishment of
technological feasibility have been immaterial and, as a result, all research
and development costs have been expensed as incurred. The Company believes that
a significant level of investment for research and development is required to
remain competitive and, accordingly, the Company anticipates that research and
development expenses will increase in absolute dollars and remain fairly
constant as a percentage of total revenues if the Company's total revenues
continue to increase.
General and Administrative. General and administrative expenses consist
primarily of salary expenses for administrative and executive staff. These
expenses increased from the second quarter of 1996 to the same period of 1997
and from the first half of 1996 to the first half of 1997 primarily due to the
Company's increased finance and information systems department staffing. The
increases from 1996 to 1997 in general and administrative expenses as a
percentage of total revenues were principally caused by legal fees related to
the shareholder lawsuit and costs related to management turnover, in particular
recruiting and severance costs. The Company expects that its general and
administrative expenses will increase in absolute dollars and decrease as a
percentage of revenues if the Company's total revenues continue to increase.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and short-term investments decreased to
$30,571,000 as of June 30, 1997 from $34,896,000 as of December 31, 1996, due
primarily to the purchase of treasury stock and payment of prepaid royalties to
third-party vendors. As of June 30, 1997, the Company had $3,205,000 in cash and
cash equivalents and $27,366,000 in short-term investments, which are classified
as available for sale.
The Company expects that its capital expenditures will remain constant or
increase in absolute dollars as the Company's employee base grows. As of June
30, 1997, the Company had no material commitments to make capital expenditures.
The Company's principal commitments consisted of non-cancelable operating leases
on its facilities.
To date, the Company has not invested in derivative securities or any other
financial instruments that involve a high level of complexity or risk.
Management expects that, in the future, cash in excess of current requirements
will be invested in short-term, interest-bearing, investment grade securities.
The Company believes its current cash balances and cash flow from operations, if
any, will be sufficient to meet its working capital and capital expenditure
requirements for at least the next 12 months. Although operating activities may
provide cash in certain periods, to the extent the Company experiences growth in
the future, the Company anticipates that its operating and investing activities
may use cash. Consequently, any such future growth may require the Company to
obtain additional equity or debt financing, which may not be available or may be
dilutive.
9
<PAGE> 10
ADDITIONAL RISK FACTORS THAT MIGHT AFFECT FUTURE RESULTS
Limited Operating History; History of Losses
The Company's limited operating history makes the prediction of future operating
results difficult. Although the Company has experienced significant growth in
revenues in recent periods, the Company does not believe that this growth rate
is indicative of future operating results. The Company has never been profitable
on an annual basis and currently believes that it could continue to experience
operating losses in 1997. Future operating results will depend on many factors,
including the growth of the data warehousing market, the length of the sales
cycle, the level of product and price competition, demand for the Company's
products, transaction size, the Company's success in expanding its direct sales
force and indirect distribution channels, the ability of the Company to support
and maintain existing products, develop and market new products and control
costs, the ability to recruit and retain software engineers and other key
personnel, general economic conditions and other factors.
Through the remainder of 1997, the Company will continue to invest more in
customer services, marketing and research and development, and make personnel
additions to the Company's sales force worldwide. These additional expenses may
adversely affect the Company's operating margin if there are no offsetting
increases in revenues or reductions in other operating expenses.
Management of Growth
The Company is currently experiencing a period of rapid growth that has placed
and is expected to continue to place a strain on the Company's administrative,
financial and operational resources. Further significant increases in the number
of employees are anticipated during the remainder of 1997. The Company's ability
to manage its staff and facilities growth effectively will require it to
continue to improve its operational, financial and management controls,
reporting systems and procedures, and to train, motivate and manage its
employees. If the Company's management is unable to manage growth effectively
and new employees are unable to achieve performance levels, the Company's
business, operating results and financial condition could be adversely affected.
The Company recently made acquisitions of other smaller software and consulting
companies. Such acquisitions are expected to place further strains on the
Company's administrative, financial and operational resources as the acquired
technology and personnel are integrated into the Company. If the Company's
management is unable to effectively integrate and assimilate such acquisitions,
the Company's business, operating results and financial condition could be
adversely affected.
Lengthy Sales Cycle
The licensing of the Company's products by its customers typically involves a
significant technical evaluation and commitment of capital and other resources,
with the attendant delays frequently associated with customers' internal
procedures to approve large capital expenditures and to test and accept new
technologies that affect key operations. For these and other reasons, the sales
cycle associated with the licensing of the Company's products is typically
lengthy and subject to a number of significant risks, including customers'
budgetary constraints and internal acceptance reviews, that are beyond the
Company's control. During 1996, the Company began to experience longer sales
cycles, which have continued through the second quarter of 1997. The Company
believes the longer sales cycles are due to increased competition. If the longer
sales cycle persists or continues to lengthen, the Company's future financial
performance could be adversely affected.
Competition
The data warehouse market is intensely competitive and subject to rapid change.
Competitors vary in size and in the scope of the products and services they
offer. The Company encounters competition from a number of sources, including
management information systems departments of customers and potential customers.
The most active competitors to the Company's Prism Scaleable Enterprise and
Prism Scaleable Warehouse packages are Evolutionary Technologies International,
Carleton Corporation, and PLATINUM Technology. The most active competitor to the
Company's Prism Scaleable Data Mart package is Informatica and several other
small, private companies. The Company expects to experience additional
competition from other established and emerging software companies, including
some of the Company's current marketing partners. Increased competition has
resulted in the lengthening of sales cycles and price reductions, and could
result in reduced transaction sizes, fewer customer orders, reduced gross
margins and loss of market share, any of which could have a material adverse
effect on the Company's business, operating results and financial condition.
Product Concentration
Substantially all of the Company's revenues to date have been attributable to
licenses for Prism Warehouse Manager (replaced by Prism Warehouse Executive),
Prism Directory Manager (replaced by Prism Warehouse Directory) and related
services. The Company currently expects that revenues attributable to Prism
Warehouse Executive and Prism Warehouse Directory, including maintenance and
consulting services, will continue to account for a majority of the Company's
total revenues. A decline in demand for or failure to achieve broad market
acceptance of these products as a result of competition, technological change or
otherwise, would have a
10
<PAGE> 11
material adverse effect on the business, operating results and financial
condition of the Company. A decline in license revenues from these products
would also have a material adverse effect on sales of other Company products.
The Company's future financial performance will depend in part on the successful
development, introduction and customer acceptance of new releases of Prism
Warehouse Executive and Prism Warehouse Directory, including new versions
incorporating a new code base which is currently being written. There can be no
assurance that the Company will continue to be successful in these or any new or
enhanced products.
Dependence on Key Personnel
The Company's future success will depend in large part upon its ability to
attract, retain and motivate highly skilled employees. There is significant
competition for employees with the skills required to perform the services
offered by the Company, particularly for software development engineers, and
there can be no assurance that the Company will be able to continue to attract
and retain sufficient numbers of highly skilled employees. The loss of a
significant number of the Company's senior management or other key research,
development, sales and marketing personnel, particularly if lost to competitors,
could have a material adverse effect on the Company's business, operating
results and financial condition, including its ability to attract employees.
Risks Associated with International Operations
The Company intends to continue to expand its operations in Europe and into Asia
and Latin America, which will require significant management attention and
financial resources. There can be no assurance that the Company's efforts to
develop international sales and support channels will be successful, and the
failure of such efforts could have a material adverse effect on the Company's
business, operating results and financial condition. International sales are
subject to a number of risks, including longer payment cycles, unexpected
changes in regulatory requirements, import and export restrictions and tariffs,
difficulties in staffing and managing foreign operations, the burden of
complying with a variety of foreign laws, greater difficulty in accounts
receivable collection, potentially adverse tax consequences, currency
fluctuations and political and economic instability.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 5, 1997, a complaint styled Adler et al., v. Prism Solutions, Inc. et
al., Case No. CV764547, was filed by the law firm of Milberg Weiss Bershad Hynes
& Lerach LLP in Superior Court of the State of California, County of Santa
Clara, against the Company and several of its current and former officers and
directors and the underwriters of its initial public offering. The complaint, a
putative class action, was filed on behalf of those persons who purchased or
otherwise acquired the common stock of the Company from March 14 through October
14, 1996, and alleges that the defendants artificially inflated the demand for
the common stock prior to and after the initial public offering. The complaint
seeks damages in an unspecified amount. The Company believes the complaint has
no merit and intends to vigorously defend the action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its 1997 Annual Meeting of Stockholders (the "Annual Meeting")
on May 27, 1997. At the Annual Meeting, the Company's stockholders elected James
W. Ashbrook, Kevin A. Fong, Promod Haque, E. Floyd Kvamme, Nancy J. Schoendorf,
Norris van den Berg and Warren M. Weiss to the Company's Board of Directors and
approved certain proposals described more fully below. Proxies were solicited by
the Company pursuant to Regulation 14A under the Securities Exchange Act of
1934, as amended. As of April 4, 1997, the record date for the Annual Meeting,
there were approximately 13,385, 462 shares of the Company's Common Stock
outstanding, of which 11,463,668 shares, or 85.7%, were present in person or by
proxy at the Annual Meeting.
The following matters were brought before the Annual Meeting:
11
<PAGE> 12
1. Election of Directors. Each of the following persons was elected as a
director of the Company, to serve until the next annual meeting of the
Company's stockholders and until his successor has been elected and
qualified or until his earlier resignation and removal:
<TABLE>
<CAPTION>
Shares in Favor Shares Withheld
--------------- ---------------
<S> <C> <C>
James W. Ashbrook 10,965,800 497,888
Kevin A. Fong 11,366,764 96,924
Promod Haque 11,366,764 96,924
E. Floyd Kvamme 10,945,270 518,418
Nancy J. Schoendorf 10,969,170 494,518
Norris van den Berg 10,969,270 494,418
Warren M. Weiss 11,366,220 97,468
</TABLE>
2. Amendment of Equity Incentive Plan. The amendment of the company's 1996
Equity Incentive Plan to increase the total number of shares of the
Company's Common Stock from 2,000,000 shares to 3,500,000 shares, and
increase of 1,500,000 shares, was voted on and approved by the Company's
stockholders as follows:
<TABLE>
<CAPTION>
Shares in Favor Shares Against Shares Abstaining Broker Non-Votes
--------------- -------------- ----------------- ----------------
<S> <C> <C> <C>
8,613,899 819,503 77,967 1,952,319
</TABLE>
3. Ratification of Selection of Independent Accountants. The selection of
Coopers & Lybrand L.L.P. as the Company's independent accountants for the
fiscal year ending December 31, 1997 was voted on and ratified by the
Company's stockholders as follows:
<TABLE>
<CAPTION>
Shares in Favor Shares Against Shares Abstaining Broker Non-Votes
--------------- -------------- ----------------- ----------------
<S> <C> <C> <C>
11,439,037 15,862 8,789 0
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following exhibits are filed as part of this Form 10-Q:
11.01 Computation of Net Loss per Share
27.01 Financial Data Schedule (EDGAR version only)
99.01 Report of Independent Accountants
(b) Reports on Form 8-K. No reports were filed during the quarter ended
June 30, 1997.
12
<PAGE> 13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATED: August 12, 1997
PRISM SOLUTIONS, INC.
(Registrant)
By: /S/ WARREN M. WEISS
------------------------------------------
Warren M. Weiss
President and Chief Executive Officer
By: /S/ EARL C. CHARLES
------------------------------------------
Earl C. Charles
Vice President, Finance and Administration
Chief Financial Officer
13
<PAGE> 14
PRISM SOLUTIONS, INC.
INDEX TO EXHIBITS
EXHIBIT
-------
11.01 COMPUTATION OF NET LOSS PER SHARE
27.01 FINANCIAL DATA SCHEDULE (EDGAR VERSION ONLY)
99.01 REPORT OF INDEPENDENT ACCOUNTANTS
14
<PAGE> 1
EXHIBIT 11.01
PRISM SOLUTIONS, INC.
COMPUTATION OF NET LOSS PER SHARE
(IN THOUSANDS, SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ -------------------------
1996 1997 1996 1997
------------ ------------ ------------ ----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Weighted average shares 12,738,439 12,946,596 8,505,734 13,091,776
outstanding
Common equivalent shares
pursuant
to SAB No. 83 -- -- 512,359 --
Net effect of dilutive stock -- -- -- --
------------ ------------ ------------ ----------
options
Average common and common stock
equivalent shares 12,738,439 12,946,596 9,018,093 13,091,776
============ ============ ============ ==========
outstanding
Net income (loss) $ (123) $ (1,447) $ (341) $ (1,302)
============ ============ ============ ==========
Net income (loss) per share $ (0.01) $ (0.11) $ (0.04) $ (0.10)
============ ============ ============ ==========
</TABLE>
NOTE: THERE IS NO DIFFERENCE BETWEEN PRIMARY AND FULLY DILUTED NET LOSS PER
SHARE FOR ALL PERIODS PRESENTED. FOR THE THREE AND SIX MONTHS ENDED JUNE 30,
1996 AND 1997, CONVERSION OF COMMON STOCK EQUIVALENTS WAS NOT ASSUMED BECAUSE
THE EFFECT IS ANTI-DILUTIVE.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 3,205
<SECURITIES> 27,366
<RECEIVABLES> 8,757
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 40,742
<PP&E> 2,036
<DEPRECIATION> 0
<TOTAL-ASSETS> 44,278
<CURRENT-LIABILITIES> 10,483
<BONDS> 0
0
0
<COMMON> 14
<OTHER-SE> 33,767
<TOTAL-LIABILITY-AND-EQUITY> 44,278
<SALES> 10,210
<TOTAL-REVENUES> 10,210
<CGS> 3,406
<TOTAL-COSTS> 3,406
<OTHER-EXPENSES> 8,581
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (444)
<INCOME-PRETAX> (1,412)
<INCOME-TAX> 35
<INCOME-CONTINUING> (1,447)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,447)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
<PAGE> 1
EXHIBIT 99.01
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Director and Stockholders
Prism Solutions, Inc.
Sunnyvale, California
We have reviewed the accompanying consolidated balance sheet, statements of
operations and cash flows of Prism Solutions, Inc. and subsidiaries as of June
30, 1997, and for the three month and six month periods then ended. These
consolidated financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the year then ended (not presented herein); and in our report dated
January 17, 1997, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying consolidated balance sheet as of December 31, 1996, is fairly
stated, in all material respects, in relation to the consolidated balance sheet
from which it has been derived.
COOPERS & LYBRAND L.L.P.
San Jose, California
July 15, 1997
