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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
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 DECEMBER 31, 1996
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)
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DELAWARE 77-0282704
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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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)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value per share
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 [ ]
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 the 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. [ ]
The aggregate market value of Common Stock held by non-affiliates of the
Registrant as of March 18, 1997 was approximately $75,252,206. Shares of Common
Stock held by each executive, director and 5% or greater shareholder have been
excluded in that such persons may be deemed affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
As of March 18, 1997, there were approximately 13,378,170 shares of the
Registrant's Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement in connection with the
Registrant's 1997 Annual Meeting of Stockholders to be held May 27, 1997 in
Sunnyvale, California are incorporated by reference in Part III.
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PRISM SOLUTIONS, INC.
FORM 10-K
TABLE OF CONTENTS
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PART I. PAGE NO.
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Item 1. Business................................................................. 1
Item 2. Properties............................................................... 6
Item 3. Legal Proceedings........................................................ 6
Item 4. Submission of Matters to a Vote of Security Holders...................... 6
Item 4A. Executive Officers of the Registrant..................................... 6
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.... 8
Item 6. Selected Financial Data.................................................. 8
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................ 9
Item 8. Financial Statements and Supplementary Data.............................. 14
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures................................................ 14
PART III.
Item 10. Directors and Executive Officers of Registrant........................... 30
Item 11. Executive Compensation................................................... 30
Item 12. Security Ownership of Certain Beneficial Owners and Management........... 30
Item 13. Certain Relationships and Related Transactions........................... 30
PART IV.
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K........... 31
Signatures ......................................................................... 35
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PART I
ITEM 1. BUSINESS
Overview
Prism Solutions, Inc. ("Prism" or the "Company") designs, develops, markets
and supports data warehouse management software that assists its customers in
developing, managing and maintaining data warehouses. Data warehouses are
separate databases that store historical data which is collected from an
enterprise's existing operational computer systems, then integrated and
transformed for use in business analysis and decision making. The Company's
products enable its customers to develop and maintain their data warehouses more
quickly than by manual programming methods. By using the Company's products,
customers can build an initial data warehouse in as little as three to six
months and significantly reduce ongoing maintenance costs. At the same time, the
Company's products collect and manage "meta data," contextual information
describing the data being stored in the warehouse. The meta data collection and
analysis capabilities provided by the Company's products allow for more reliable
analysis and decision making by providing users with the ability to determine
what data is in the warehouse, where it came from, how it was transformed and
how it has changed over time.
Prism's suite of Scaleable Data Warehousing Solutions packages provides a
point-and-click user interface for data warehousing projects, complementing
products offered by database, data access and systems integration providers. The
suite offers support for the construction and maintenance of data warehouses: an
iterative warehousing methodology, scaleable software solutions for rapid
economic implementation, and a flexible information architecture built on an
integrated meta data foundation. The Company supports its products with a range
of consulting and implementation services.
Prism was initially incorporated in California in 1991 and was
reincorporated in Delaware in January 1996. The Company maintains its executive
offices at 1000 Hamlin Court, Sunnyvale, California, 94089. Its telephone number
is (408) 752-1888.
Products and Services
Prism offers data warehouse management software products and related
services. Its Scaleable Data Warehousing Solutions packages are designed to meet
customer needs for data marts, department warehouses, enterprisewide warehouses
and conversion environments. Substantially all of the Company's license revenues
to date have been attributable to licenses for Prism Warehouse Manager and Prism
Directory Manager, the predecessors to Prism Warehouse Executive and Prism
Warehouse Directory, respectively. Customers can select from the following
packages to match their requirements:
The Prism Scaleable Data Mart package supports the construction of
scaleable data marts for workgroups or departments. It is typically used to
build a mart consisting of a single subject area of data within a single target
database, commonly sourcing UNIX operational systems and creating a data mart on
a UNIX platform. Prism's mart package also simplifies sourcing of more complex
legacy systems data.
The Prism Scaleable Warehouse package supports midrange warehousing
projects often requiring integration of data from multiple, heterogeneous source
databases to provide consistent information across departmental organizations.
Typically this includes sourcing multiple legacy files and targeting one or more
relational database environments.
The Prism Scaleable Enterprise package supports building and maintaining
large-scale data warehouses or operational data stores serving a wide variety of
users across the enterprise. It enables integration of several subject areas
from cross-enterprise data sources, as well as managed deployment of warehouses
on multiple heterogeneous databases, scaling from SQL to MPP configurations.
The Prism Scaleable Conversion package provides data conversion
capabilities for migrating data across one application domain. It integrates
data from multiple legacy sources into a single target database.
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Each of these packages is based on Prism Warehouse Executive and Prism
Warehouse Directory, except for the Prism Scaleable Conversion package, which
only contains Prism Warehouse Executive.
Prism Warehouse Executive has a drag-and-drop graphical user interface that
allows users to graphically model the flow of data from multiple data sources
into a target data warehouse, including all required data mappings and
transformations. The design documents and reports created with Prism Warehouse
Executive give the user an overview of a project's structure and workflow, and
help them gain visibility to the warehouse or mart construction process. Prism
Warehouse Executive extracts and integrates data from mainframe and UNIX-based
source databases. Built-in transformations allow users to perform the data
conversions, structural changes and summarizations needed to create a
consistent, historical perspective of information. Support for user-defined
business rules and user exit routines provides customers with the flexibility
needed to tailor the warehouse population processes to suit their particular
environments and data transformation requirements.
Prism Warehouse Executive's design and construction capabilities are joined
by a common layer of meta data. During the implementation process, technical
meta data describing the warehouse source files and output tables is
automatically captured, along with the data mappings and transformations
required for development. Common meta data enables users to move from planning
and design to actual warehouse implementation. Once the warehouse specifications
are complete, the meta data serves as the basis for generating programs to
integrate, transform and map source data to the target warehouse database.
The technical meta data collected by Prism Warehouse Executive is stored in
the Prism Warehouse Directory, which provides an open platform to integrate and
manage both business and technical information about warehouse changes across
the enterprise. Developers use this meta data to manage rapid, incremental
construction, while users rely on the meta data to help them navigate and access
business information. Prism Warehouse Directory's meta data can be read by a
variety of decision support tools and industry-standard Web browsers, giving
users access to warehouse information using their preferred tools.
Implementation and Consulting Services. Prism provides both implementation
services and longer term consulting services to assist in the sale and
installation of its products. Implementation services are marketed by the
Company as a standard component of the product license and delivery process,
thereby enhancing the likelihood of early-stage customer acceptance and
satisfaction. The implementation process, lasting approximately two weeks and
delivered by a systems engineering team familiar to the customer, includes an
on-site planning session, product training, a detailed design session and
implementation of a prototype or limited scope data warehouse.
Prism's Iterations(TM) methodology is a key underlying component of Prism's
Scaleable Data Warehousing Solutions. Iterations establishes an effective
development process that defines the ongoing parallel steps and cycles needed to
build data warehouses in reasonable timeframes. It details the activities
specific to the data warehouse development process, guiding users from the
startup phase to analysis and design, through to construction, testing and
implementation, then returning to evaluation and management of the subsequent
version.
In conjunction with the Iterations methodology, Prism has introduced a
suite of SureStart(TM) consulting programs to help customers achieve early,
visible results with their data warehousing projects. The SureStart Readiness
Assessment evaluates a company's technical and organizational preparedness to
proceed with a data warehouse initiative. The SureStart Mentored Pilot extends
the SureStart Readiness Assessment to guide an organization through its initial
data warehouse. Prism's SureStart Mart offering focuses on data marts that meet
departmental requirements.
Prism also is engaged in educating the market about the benefits,
technology and payback of data warehousing through seminars, an educational
curriculum and technical publications. Prism offers executive briefings and
seminars worldwide to help companies understand data warehousing strategies.
Additionally, Prism publishes a series of Tech Topics and Executive Briefings
that provide in-depth information on data warehouse strategy and implementation.
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Product Development
The Company believes that its future success will depend in part on its
ability to maintain and improve its current technologies, enhance its existing
products and develop new products that meet an expanding range of customer
requirements. The Company intends to expand its existing product offerings and
to introduce new data warehousing software products. To date, the Company has
relied primarily on internal development of its products, but expects that,
based on timing and cost considerations, it will also license or acquire
technology or products from third parties or consultants. For example, the
Company acquired its web access software from a third party. The Company intends
to continue to support industry standard operating environments, client-server
architectures and databases.
The Company is currently rewriting its software code base and plans to
incrementally incorporate the new code into its products over the next two
years. The first product element to incorporate the new code base was the
point-and-click user interface, which was introduced as part of Prism Warehouse
Executive in the fourth quarter of 1996. The Company believes that the new code
base will allow it to more easily maintain its software and more quickly add
additional functionality to its products.
As of December 31, 1996, the Company's product development staff consisted
of 45 full-time equivalent employees. The Company's total expenses for product
development for 1994, 1995 and 1996 were $2,436,000, $3,451,000 and $5,705,000,
respectively. The Company anticipates that it will continue to commit
substantial resources to product development in the future. To date, the Company
has not capitalized any software development costs as such costs required to be
capitalized have been immaterial.
The market for data warehouse software products is characterized by rapidly
changing technology and improvements in computer hardware, computer software and
databases. The Company's success will depend upon its ability to rewrite its
code base, maintain competitive technologies, enhance its current products and
develop new products in a timely and cost-effective manner that meet changing
market conditions, including evolving customer needs, new competitive product
offerings, emerging industry standards and changing technology. There can be no
assurance that the Company will be able to develop and market, on a timely basis
if at all, product enhancements or new products that respond to changing market
conditions or that they will be accepted by customers. The Company has
previously experienced delays in the development and introduction of new
products and product enhancements. The length of these delays has varied
depending upon the size and scope of the project and the nature of the problems
encountered. Any failure by the Company to anticipate or to respond adequately
to changing market conditions, or any significant delays in product development
or introduction, could cause customers to delay or decide against purchases of
the Company's products and would have a material adverse effect on the Company's
business, operating results and financial condition.
Sales, Marketing and Customer Support
The Company markets its software and services primarily through a direct
sales organization and, to a lesser extent, through third-party distributors and
other indirect sales channels. The Company employs skilled engineers and
technically proficient salespersons capable of serving the needs of its
customers' information and business management staffs. In addition to its direct
sales efforts, the Company utilizes advertising, direct mail and public
relations programs, participates in numerous industry trade shows and
individually or jointly organizes seminars and conferences to promote the
adoption of its products and methodologies. The Company currently has domestic
offices in the metropolitan areas of Atlanta, Boston, Chicago, Dallas, Los
Angeles, New York and Washington, D.C. In addition, the Company has offices in
Reading, United Kingdom; Paris, France; Munich, Germany; Madrid, Spain; Toronto,
Canada; and Mexico City, Mexico. Field offices are staffed with both sales and
technical pre-sales representatives. In 1997, the Company anticipates opening
offices in Hong Kong and Singapore.
The Company also has developed indirect distribution and marketing channels
with vendors whose products fit well strategically with those of the Company.
The Company believes that, in order to provide the most comprehensive and
competitive data warehouse management solutions for heterogeneous, open systems
computing environments, it will be necessary to develop, maintain and enhance
close associations with
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database, data access, hardware and operating system vendors. The Company
currently has marketing relationships with over 20 software and hardware vendors
and several systems integrators. However, there can be no assurance that the
Company will be able to maintain such existing relationships or enter into new
relationships. The Company's failure to do so could adversely affect the
portability of the Company's products to and compatibility with existing and new
platforms and databases and the timing of new and enhanced products into the
marketplace. In addition, failure to do so could affect the Company's ability to
leverage third party distribution channels and increase its market presence.
The Company engages distributors to serve certain international markets in
which the Company typically does not have a direct sales presence. The Company's
current distributors sublicense the Company's products in Australia, Belgium,
Denmark, Israel, Italy, Luxembourg, the Netherlands, Portugal, South Africa,
Spain and Sweden. In 1997, the Company added additional distributors in Brazil
and Mexico. These distributors license the Company's products at a discount for
relicensing and may provide training and consulting services to end users. The
Company intends to expand its operations in Europe, North America, Latin America
and Asia, which will require significant management attention and financial
resources. The Company has committed and continues to commit significant
resources to developing international sales and support channels and opening
international sales offices. There can be no assurance that the Company's
efforts to develop international sales and support channels will be successful.
The failure of such efforts could have a material adverse effect on the
Company's business, operating results and financial condition.
The Company believes that its ability to provide a high level of customer
service and technical support is crucial to its marketing efforts and to the
establishment of long-term customer relationships. The Company offers an annual
maintenance program to its licensees through the Company's internal support
organization that includes product updates and post-sales telephone and fax
hotline support. Substantially all of the Company's customers at the time of
initial software licensing contract for annual maintenance with the Company.
Annual maintenance fees are typically 15% of the license fees for the relevant
products. The Company also offers installation, consulting, education and
training services on a fee basis to assist customers in developing their data
warehouse projects. Education and training is offered at the Company's in-house
facilities and at customers' sites. The Company's distributors also offer
first-level customer support to their end users, while relying on the Company
for any additional support as needed.
The Company generally ships its products as orders are received. As a
result, the Company has relatively little backlog at any given time, and does
not consider backlog to be a meaningful indicator of future performance. The
Company's sales cycle can range from three months to over a year, depending on
factors such as transaction size, the length of the customer relationship, the
timing of new product releases, the level of sales management activity and
general economic conditions. Historically, a substantial majority of the
Company's revenues in a given quarter have been recorded in the third month of
that quarter, with a concentration of such revenues in the last two weeks of the
third month. Because of the relatively large dollar size of the Company's
typical software license, any delay in the closing of a transaction can have a
significant impact on the Company's operating results for a particular period.
At December 31, 1996, the Company had more than 200 active customers, some
with multiple installations. No customer accounted for more than 10% of the
Company's total revenues in 1995 or 1996. In 1994, Canadian Imperial Bank of
Commerce accounted for 11% of the Company's total revenues.
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. Notwithstanding the foregoing, all
competitors compete in each market segment. The Company expects to experience
additional competition from other established and emerging
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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.
The Company believes that the principal competitive factors affecting the
data warehouse market include technical performance and product attributes such
as functionality, portability, reliability, ease of use, adaptability and
scaleability, product reputation, quality, customer service and support, price,
ability to integrate with products produced by other vendors, the effectiveness
of sales and marketing efforts and company reputation. There can be no assurance
that the Company will be successful in competing in the future with respect to
these or other factors.
Some of the Company's current, and many of the Company's potential,
competitors have significantly greater financial, technical, marketing and other
resources than the Company. As a result, they may be able to respond more
quickly to new or emerging technologies and changes in customer requirements or
to devote greater resources to the development, promotion, sale and support of
their products than the Company. In addition, current and potential competitors
have established or may establish cooperative relationships among themselves or
with third parties to increase the ability of their products to address the
needs of the Company's prospective customers. Accordingly, it is possible that
new competitors or alliances among competitors may emerge and rapidly gain
significant market share. There can be no assurance that the Company will be
able to compete successfully against current and future competitors or that
competitive pressures faced by the Company will not have a material adverse
effect on its business, operating results and financial condition.
Intellectual Property and Other Proprietary Rights
The Company relies primarily on a combination of copyright and trademark
laws, trade secrets, confidentiality procedures and contractual provisions to
protect its proprietary technology. For example, the Company licenses its
software pursuant to signed license agreements, which impose certain
restrictions on the licensees' ability to utilize the software. In addition, the
Company seeks to avoid disclosure of its trade secrets, including requiring
those persons with access to the Company's proprietary information to execute
confidentiality agreements with the Company and restricting access to the
Company's source code. The Company seeks to protect its software, documentation
and other written materials under trade secret and copyright laws, which afford
only limited protection. The Company presently has no patents or patent
applications pending.
Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. Policing
unauthorized use of the Company's products is difficult, and, while the Company
is unable to determine the extent to which piracy of its software products
exists, software piracy can be expected to be a persistent problem. In addition,
the laws of many countries do not protect the Company's proprietary rights to as
great an extent as do the laws of the United States. There can be no assurance
that the Company's means of protecting its proprietary rights will be adequate
or that the Company's competitors will not independently develop similar
technology.
To date, the Company has not been notified that the Company's products
infringe the proprietary rights of third parties, but there can be no assurance
that third parties will not claim infringement by the Company with respect to
current or future products. The Company expects that data warehouse software
product developers will increasingly be subject to infringement claims as the
number of products and competitors in the Company's industry segment grows and
the functionality of products in different industry segments overlaps. Any such
claims, with or without merit, could be time-consuming, result in costly
litigation, cause product shipment delays or require the Company to enter into
royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company or at all,
which could have a material adverse effect upon the Company's business,
operating results and financial condition.
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Employees
As of December 31, 1996, the Company employed 193 full-time equivalent
persons, including 89 in sales, presales technical support, marketing and
related activities, 54 in product development and support, 26 in consulting and
educational services, and 24 in management, administration and finance. The
Company's success is highly dependent on its ability to attract and retain
qualified employees. Competition for employees is intense in the software
industry, and an inability to attract and retain qualified development and sales
personnel, in particular, could postpone product release schedules and adversely
affect the Company's ability to generate revenue.
None of the Company's employees is represented by a labor union or is the
subject of a collective bargaining agreement with respect to his or her
employment by the Company. The Company has never experienced a work stoppage and
believes that its employee relations are good.
ITEM 2. PROPERTIES
The Company's principal administrative, sales, marketing, support and
product development facility is located in approximately 38,000 square feet of
space in Sunnyvale, California. The lease on this office space expires in April
1998, but has a two-year renewal option. The Company also leases approximately
4,000 square feet of space in the United Kingdom under a lease agreement that
expires in July 1999. The Company currently leases small field offices in seven
United States cities, as well as in France, Germany, Spain, Canada and Mexico.
The Company believes that suitable additional or alternative space will be
available in the future on commercially reasonable terms as needed.
ITEM 3. LEGAL PROCEEDINGS
On March 5, 1997, a class action complaint 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 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 will vigorously defend itself.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1996, no matter was submitted to a vote of
security holders through the solicitation of proxies or otherwise.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, and their respective ages as of
March 18, 1997, are as follows:
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NAME AGE POSITION
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James W. Ashbrook........................ 54 Chairman of the Board of Directors
Warren M. Weiss.......................... 40 President and Chief Executive Officer
William B. Binch......................... 57 Vice President, North American Field
Operations
Samuel M. Hedgpeth III................... 50 Vice President, Finance and
Administration, Chief Financial Officer
and Secretary
Philip M. Sakakihara..................... 53 Vice President, Development
Cynthia F. Schmidt....................... 53 Vice President, Marketing
Donald N. Taylor......................... 43 Vice President, International
</TABLE>
Mr. Ashbrook has been a director since September 1991 and Chairman of the
Board of Directors since March 1995. He also served as President and Chief
Executive Officer of the Company from June 1991 to
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February 1997. From 1985 to May 1991, Mr. Ashbrook was employed by AST Research
("AST"), most recently as Senior Vice President, Marketing and, from 1983 to
1984, Mr. Ashbrook served as Vice President of Sales and Marketing for CXI,
Inc., a marketer of high performance hardware and software products. He has also
held executive and management positions at Momentum Computers, National Advanced
Systems and International Business Machines Corporation. Mr. Ashbrook holds
Bachelor of Science and Master of Science degrees in mechanical engineering from
the University of Illinois.
Mr. Weiss has been President, Chief Executive Officer and a Director of the
Company since February 1997. From June 1996 to February 1997, he served as
President and Chief Operating Officer of SQRIBE Technologies, a provider of
server-based reporting solutions. From April 1995 to May 1996, Mr. Weiss served
as President and Chief Executive Officer of Strategic Mapping, Inc., a software
development company. From 1993 to 1994, Mr. Weiss was employed by NeXT Computer,
Inc., a computer systems company, most recently as Vice President, Worldwide
Sales and Service. He has also held senior management positions at Continuum and
Management Science America. Mr. Weiss holds a Bachelor of Science in criminology
from Western Illinois University.
Mr. Binch joined the Company in January 1996 as Vice President, North
American Field Operations. From June 1994 to December 1995, he served as Vice
President, Sales at Business Objects, a computer software company. From January
1994 to June 1994, Mr. Binch served as Vice President, U.S. Sales at Interlink,
Inc., a computer software company. From 1988 to June 1993, he was employed by
Oracle Corporation, most recently as Vice President of Sales, Strategic
Accounts. He has also held positions at Itel Corporation and IBM Corporation.
Mr. Binch holds a Bachelor of Science degree in industrial engineering from the
University of Maryland.
Mr. Hedgpeth joined the Company in September 1994 as Vice President,
Finance and Administration and Chief Financial Officer. He became the Secretary
of the Company in December 1994. From 1990 to July 1994, Mr. Hedgpeth was Vice
President, Finance & Administration of Versant Object Technology, a computer
database company. From 1983 to 1990, Mr. Hedgpeth was employed by Silvar-Lisco,
a computer-automated engineering software company, as Vice President of Finance.
Mr. Hedgpeth holds a Bachelor of Science degree in business administration from
the University of California and a Master of Business Administration from the
University of California at Los Angeles.
Mr. Sakakihara joined the Company in December 1995 as Vice President,
Development. From July 1994 to December 1995, he served as Vice President,
Engineering at ViewStar Corporation, a computer software company. Mr. Sakakihara
was employed by Hewlett-Packard Company from 1972 to July 1994, most recently as
General Manager, Distributed Computing Products Operation. Mr. Sakakihara holds
a Bachelor of Arts degree in applied mathematics from San Jose State University
and a Master of Science degree in applied mathematics from Santa Clara
University.
Ms. Schmidt was a co-founder of the Company and has served as Vice
President, Marketing since March 1991. From 1988 to 1990, Ms. Schmidt served as
President of Earth Visions Gallery, an art gallery. From 1983 to 1987, Ms.
Schmidt was employed by CXI, Inc. as Marketing Communications Director and
continued in that position from 1987 to 1988 after Novell Corporation purchased
CXI, Inc. She has also held positions at Memorex Corporation and Qume
Corporation. Ms. Schmidt holds a Bachelor of Science degree in business
administration from Simmons College.
Mr. Taylor joined the Company in August 1995 as Vice President,
International. From January 1994 to August 1995, he was employed by Oracle U.K.
Ltd., where he served as Director of Marketing. Prior to joining Oracle U.K.
Ltd., Mr. Taylor was employed by Sun Microsystems, where he served as Director
of Marketing, Northern Europe from January 1992 to December 1993 and as Director
of Marketing, U.K. from November 1991 to January 1992. From 1989 to August 1991,
Mr. Taylor was Vice President, European General Manager at Netwise International
Ltd. He holds a Bachelor of Arts degree in history from Williams College.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Price Range of Common Stock
The Company's common stock is traded on the Nasdaq National Market under
the symbol PRZM. The following table sets forth, for the periods indicated, the
range of high and low sales prices since the Company completed its initial
public offering on March 15, 1996:
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FISCAL HIGH LOW
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1996
First Quarter (since March 15, 1996)....................... $ 26.50 $ 23.50
Second Quarter............................................. $ 36.75 $ 22.38
Third Quarter.............................................. $ 18.75 $ 8.50
Fourth Quarter............................................. $ 9.00 $ 4.25
</TABLE>
On March 18, 1997, there were approximately 136 record holders of Prism
Solutions, Inc. common stock.
Dividend Policy
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently anticipates that it will retain any future earnings
for use in its business and does not anticipate paying any cash dividends in the
foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data is qualified by reference to and
should be read in conjunction with the consolidated financial statements and
related notes thereto and the section captioned "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and other financial
information included elsewhere in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Total revenues.................... $ 1 $ 1,739 $ 8,227 $ 17,760 $ 30,424
Gross margin...................... 1 1,093 6,460 14,341 23,285
Loss from operations.............. (1,841) (4,096) (2,497) (2,767) (3,151)
Net loss.......................... $(1,816) $(4,063) $(2,538) $ (2,738) $ (1,839)
Pro forma net loss per share
(1)............................. $ (0.25) $ (0.14)
Pro forma shares used in per share
calculations (1)................ 11,036,385 12,750,729
BALANCE SHEET DATA:
Cash, cash equivalents and
short-term investments.......... $ 1,091 $ 3,049 $ 3,205 $ 1,861 $ 34,896
Working capital................... 1,000 2,972 3,247 904 34,498
Total assets...................... 1,316 4,329 7,257 10,493 46,299
Long-term obligations............. -- -- -- 271 --
Total stockholders' equity........ 1,089 3,142 3,623 2,054 36,508
</TABLE>
- ---------------
(1) For an explanation of the shares used in the pro forma per share
calculation, see Note 2 of Notes to Consolidated Financial Statements.
8
<PAGE> 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion in this report contains forward-looking statements that
involve risks and uncertainties. The Company's actual results may differ
materially from the results discussed in the forward-looking statements. Factors
that could cause or contribute to such differences include, but are not limited
to, those discussed in "Additional Factors That Might Affect Future Results."
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, in
December 1992 and Prism Directory Manager in April 1995. 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. Services and other
revenues accounted for the remaining revenues in 1996. The Company expects that
license revenues will continue to account for a majority of the Company's total
revenues for the foreseeable future.
Results of Operations
The following table sets forth selected consolidated statement of
operations data as a percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Revenues:
License........................................................... 76.5% 71.3% 61.4%
Services and other................................................ 23.5 28.7 38.6
----- ----- -----
Total revenues................................................. 100.0 100.0 100.0
----- ----- -----
Cost of revenues:
License........................................................... 1.4 1.3 2.5
Services and other................................................ 20.1 18.0 21.0
----- ----- -----
Total cost of revenues......................................... 21.5 19.3 23.5
----- ----- -----
Gross margin................................................. 78.5 80.7 76.5
----- ----- -----
Costs and expenses:
Sales and marketing............................................... 68.5 64.2 58.0
Research and development.......................................... 29.6 19.4 18.7
General and administrative........................................ 10.8 12.7 10.2
----- ----- -----
Total operating expenses....................................... 108.9 96.3 86.9
----- ----- -----
Loss from operations.............................................. (30.4) (15.6) (10.4)
Interest income, net................................................ 0.5 0.8 4.9
Other expense, net.................................................. (0.2) (0.3) (0.1)
----- ----- -----
Loss before income taxes.......................................... (30.1) (15.1) (5.6)
----- ----- -----
Provision for income taxes.......................................... 0.7 0.3 0.5
----- ----- -----
Net loss..................................................... (30.8)% (15.4)% (6.1)%
===== ===== =====
</TABLE>
9
<PAGE> 12
Revenues
Total revenues were $8,227,000, $17,760,000 and $30,424,000 in 1994, 1995
and 1996, respectively, representing increases of 115.9% from 1994 to 1995 and
71.3% from 1995 to 1996. 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. Fees for services are charged separately from license fees for the
Company's software.
License Revenues. Revenues from software licenses were $6,295,000,
$12,668,000 and $18,690,000 in 1994, 1995 and 1996, respectively, representing
increases of 101.2% from 1994 to 1995 and 47.5% from 1995 to 1996. The increases
in license revenues from 1994 to 1996 were primarily attributable to growing
acceptance of the Company's products and an increase in the number and tenure of
direct sales personnel, which led to increases in the number of units licensed.
In addition, license revenues in 1995 were favorably affected by the
introduction of Prism Directory Manager in April 1995, which increased the
average transaction size entered into by the Company. The Company's average
transaction size increased slightly from 1994 to 1995 and remained constant in
1996. In 1994, the Company's direct sales accounted for all of its license
revenues. In 1995 and 1996, the Company began to license a growing portion of
its products through indirect channels, which accounted for 8.4%, and 18.0% of
the Company's total license revenues, respectively.
Services and Other Revenues. Services and other revenues were $1,932,000,
$5,092,000 and $11,734,000 in 1994, 1995 and 1996, respectively, representing
increases of 163.6% from 1994 to 1995 and 130.4% from 1995 to 1996. The growth
from 1994 to 1996 was the result primarily of an increase in the number and size
of consulting engagements and, to a lesser extent, of increased licensing
activity and maintenance renewals. As a percentage of total revenues, services
and other revenue comprised 23.5%, 28.7% and 38.6% in 1994, 1995 and 1996,
respectively. A majority of services and other revenues in 1996 came from
consulting revenues. The Company expects that services and other revenues will
increase in absolute dollars and remain fairly constant as a percentage of
revenues if total revenues continue to increase.
International Revenues. International revenues accounted for 15.2%, 14.8%
and 30.8% of total revenues in 1994, 1995 and 1996, respectively. In 1994 and
1995, the majority of international sales were made in Canada. In 1996, the
majority of international sales were made in Europe, where the Company
significantly increased the number of direct sales personnel and the number of
international distributors and resellers marketing the Company's products.
During 1996, the Company established direct sales offices in France, Germany and
Mexico. A small portion of the Company's international sales are denominated in
foreign currencies and, accordingly, the Company is subject to foreign currency
exchange risk. The Company has not engaged in foreign currency hedging
activities. See "Foreign Currency Translation" under Note 2 of the Notes to
Consolidated Financial Statements for more information.
Cost of Revenues
Cost of License Revenues. Cost of license revenues consists primarily of
the costs of royalties paid to third-party vendors, product media and
duplication, shipping expenses, manuals and packaging materials. Cost of license
revenues was $113,000, $223,000 and $769,000 in 1994, 1995 and 1996,
respectively, representing 1.4%, 1.3% and 2.5% of total revenues for those
years. The increase both in absolute dollars and as a percentage of revenues
from 1995 to 1996 was primarily attributable to increased royalties and
commissions paid to third party vendors. The Company expects that the cost of
license revenues will increase both in absolute dollars and as a percentage of
license revenues 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. Cost
of services and other revenues was $1,654,000, $3,196,000 and $6,370,000 in
1994, 1995 and 1996, respectively, representing 20.1%, 18.0% and 21.0% of total
revenues for those years. The dollar amount of cost of services and other
revenues increased significantly from 1994 to 1996 primarily because of
increased personnel-related costs as the Company continued to expand its
consulting, customer support and training organizations to support an increase
in sales. The Company expects that the cost of services and other
10
<PAGE> 13
revenues will increase in absolute dollars and as a percentage of revenues if
the Company's services and other revenues continue to increase in absolute
dollars.
Operating Expenses
The Company's operating expenses were $8,957,000, $17,108,000 and
$26,436,000, or 108.9%, 96.3% and 86.9% of total revenues, in 1994, 1995 and
1996, respectively. The growth in operating expenses in absolute dollars
occurred primarily as a result of increases in salaries and benefits, resulting
from higher staffing levels, and the expansion of facilities. The decrease in
operating expenses as a percentage of revenues resulted from economies of scale
associated with the Company's growing revenues.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses paid to sales and marketing personnel and
promotional expenses. Sales and marketing expenses were $5,632,000, $11,395,000
and $17,637,000, or 68.5%, 64.2% and 58.0% of total revenues, in 1994, 1995 and
1996, respectively. The increases in dollar amounts in sales and marketing
expenses were primarily due to the expansion of the Company's sales operations
and increased marketing activities, including trade shows and promotional
expenses. The decrease in sales and marketing expenses as a percentage of total
revenues resulted primarily from increases in productivity as newly hired sales
personnel and system engineers became more experienced, and due to the benefits
of 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 decrease as a percentage of total revenues if the Company's
annual revenues continue to increase.
Research and Development. Research and development expenses consist
primarily of salaries paid to the engineering staff. Research and development
expenses were $2,436,000, $3,451,000 and $5,705,000, or 29.6%, 19.4% and 18.7%
of total revenues, in 1994, 1995 and 1996, respectively. The increases in dollar
amounts in research and development expenses since 1994 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." Under this standard, capitalization of software
development costs begins upon the establishment of technological feasibility and
ends when a product is available for general release to customers. 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
revenue if the Company's annual revenues continue to increase.
General and Administrative. General and administrative expenses consist
primarily of salary expenses for administration and executive staff. General and
administrative expenses were $889,000, $2,262,000 and $3,094,000, or 10.8%,
12.7% and 10.2% of total revenues, in 1994, 1995 and 1996, respectively. These
expenses increased in absolute dollars from 1994 to 1996 primarily as a result
of increases in staffing and an expansion of facilities. The Company expects
that its general and administrative expenses will increase in absolute dollars
as the Company's total workforce increases and will remain fairly constant as a
percentage of revenues if the Company's annual revenues continue to increase.
Provision for Income Taxes.
The provision for income taxes in 1994, 1995 and 1996 resulted primarily
from foreign withholding taxes. As of December 31, 1996, the Company had federal
and California net operating loss carryforwards of approximately $9,700,000 and
$1,900,000, respectively, and federal and California research and development
tax credit carryforwards of $360,000 and $135,000, respectively. These
carryforwards will expire between 1997 and 2010 if not utilized prior to that
time.
The Company determines its income tax liability in accordance with
Statement of Financial Accounting Standards No. 109 ("FAS 109"), "Accounting for
Income Taxes." Under FAS 109, the liability method is used to account for income
taxes. Under this method, deferred tax assets and liabilities are determined
based
11
<PAGE> 14
on differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. The Company has
established a valuation allowance to the extent of its deferred tax assets
because it is not more likely than not that a benefit can be realized in the
future due to the Company's recurring operating losses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and other short-term investments
increased to $34,896,000 as of December 31, 1996 from $1,861,000 as of December
31, 1995, due primarily to the Company's initial public offering in the first
quarter of 1996. During 1996, the Company repaid $703,000 of long-term debt. As
of December 31, 1996, the Company had $14,844,000 in cash and cash equivalents
and $20,052,000 in short-term investments, which are classified as available for
sale.
In 1994, 1995, and 1996, the Company used net cash in operating activities
primarily as a result of net losses and increases in accounts receivable
associated with increases in revenues.
In 1994 and 1995, the Company's investing activities consisted of purchases
of property and equipment, primarily computer workstations and file servers, in
the amount of $348,000 and $1,438,000, respectively. In 1996, the Company's
investing activities of $21,706,000 consisted primarily of purchases of
short-term financial instruments as well as purchases of property and equipment.
The Company expects that its capital expenditures will remain constant or
increase in absolute dollars as the Company's employee base grows. As of
December 31, 1996, the Company had no material commitments to make capital
expenditures. The Company's principal commitments consisted of non-cancelable
operating leases on its facilities.
The Company's financing activities provided $35,484,000 in 1996,
principally due to proceeds from the Company's initial public offering completed
in March 1996. In 1995, stockholder payments on a receivable and borrowings on
equipment lines of credit provided $1,735,000, net of repayments, in financing
activity. Financing activities provided $3,015,000 in 1994, primarily due to
proceeds from the sale of convertible preferred stock.
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.
ADDITIONAL FACTORS THAT MIGHT AFFECT FUTURE RESULTS
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 sustainable or indicative of future operating results. The
Company has never been profitable on an annual basis and currently believes that
it could 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.
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. From January 1, 1994 to
December 31, 1996, the size of the Company's professional staff increased from
39 to 193
12
<PAGE> 15
full-time equivalent employees. In addition, the Company expanded geographically
in 1996 by adding employees in Europe and Latin America. Further significant
increases in the number of employees are anticipated during 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'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. During 1996, Edward
Young, former Vice President of Strategy and Architecture, terminated his
employment with the Company and in early 1997, William Inmon, former Executive
Vice President of Technology, also terminated his employment with the Company.
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.
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. The Company believes the longer sales cycles are due to increased
competition, especially in the data mart segment. If the longer sales cycle
persists or continues to lengthen, the Company's future financial performance
could be adversely affected.
The market for the Company's products is highly competitive, and the
Company may experience increasing pricing pressures from its current competitors
and new market entrants. Any material reduction in the price of the Company's
products or in the size of an average transaction would materially adversely
affect the Company's business, operating results and financial condition if the
Company were unable to increase unit sales. See "Competition" under Item
1 -- Business.
Revenues from licensing of the Company's products and related services
outside the United States increased 257% from 1995 to 1996. 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.
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 in 1997. 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 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
13
<PAGE> 16
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 the new code base. There can be no
assurance that the Company will continue to be successful in these or any new or
enhanced products.
Throughout 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 in 1997 if there are no offsetting
increases in revenues or reductions in other operating expenses.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Consolidated Balance Sheets at December 31, 1996 and 1995............................. 15
Consolidated Statements of Operations for the three years ended December 31, 1996..... 16
Consolidated Statements of Stockholders' Equity for the three years ended December 31,
1996................................................................................ 17
Consolidated Statements of Cash Flows for the three years ended December 31, 1996..... 18
Notes to the Consolidated Financial Statements........................................ 20
Report of Coopers & Lybrand L.L.P., Independent Accountants........................... 29
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
14
<PAGE> 17
PRISM SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 1,861 $ 14,844
Short-term investments............................................ -- 20,052
Accounts receivable, net of allowance for doubtful accounts of
$356 in 1995 and $400 in 1996.................................. 6,813 8,392
Other receivables................................................. 23 151
Prepaid expenses and other current assets......................... 369 836
-------- --------
Total current assets........................................... 9,066 44,275
Property and equipment, net......................................... 1,298 1,861
Deposits............................................................ 129 163
-------- --------
Total assets.............................................. $ 10,493 $ 46,299
======== ========
LIABILITIES
Current liabilities:
Current portion of long-term debt................................. $ 432 $ --
Accounts payable.................................................. 632 1,298
Accounts payable to related party................................. 94 28
Accrued payroll and related....................................... 783 1,726
Accrued commissions............................................... 523 703
Deferred revenue.................................................. 4,775 4,752
Other accrued liabilities......................................... 923 1,270
-------- --------
Total current liabilities...................................... 8,162 9,777
Long-term debt, less current portion................................ 271 --
Other liabilities................................................... 6 14
-------- --------
Total liabilities......................................... 8,439 9,791
-------- --------
Commitments and contingencies (Note 5)
STOCKHOLDERS' EQUITY
Convertible preferred stock, par value $0.001 per share:
Authorized: 8,990,817 shares in 1995 and 1,000,000 shares in 1996
Issued and outstanding: 7,990,817 shares in 1995 and 0 shares in
1996 (Liquidation value: $0)...................................... 8 --
Common stock, par value $0.001 per share:
Authorized: 50,000,000 shares Issued and outstanding: 2,852,173
shares in 1995 and 13,275,215 in 1996............................. 3 14
Additional paid-in capital.......................................... 13,611 49,876
Receivables from stockholders....................................... (129) (104)
Accumulated deficit................................................. (11,439) (13,278)
-------- --------
Total stockholders' equity..................................... 2,054 36,508
-------- --------
Total liabilities and stockholders' equity................ $ 10,493 $ 46,299
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
15
<PAGE> 18
PRISM SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1994 1995 1996
---------- ----------- -----------
<S> <C> <C> <C>
Revenues:
License............................................ $ 6,295 $ 12,668 $ 18,690
Services and other................................. 1,932 5,092 11,734
---------- ----------- -----------
Total revenues..................................... 8,227 17,760 30,424
---------- ----------- -----------
Cost of revenues:
License............................................ 113 223 769
Services and other................................. 1,654 3,196 6,370
---------- ----------- -----------
Total cost of revenues............................. 1,767 3,419 7,139
---------- ----------- -----------
Gross margin....................................... 6,460 14,341 23,285
---------- ----------- -----------
Costs and expenses:
Sales and marketing................................ 5,632 11,395 17,637
Research and development........................... 2,436 3,451 5,705
General and administrative......................... 889 2,262 3,094
---------- ----------- -----------
Total operating expenses........................... 8,957 17,108 26,436
---------- ----------- -----------
Loss from operations............................... (2,497) (2,767) (3,151)
Interest income, net................................. 43 145 1,484
Other expense, net................................... (21) (60) (34)
---------- ----------- -----------
Loss before income taxes........................... (2,475) (2,682) (1,701)
Provision for income taxes........................... 63 56 138
---------- ----------- -----------
Net loss........................................... $ (2,538) $ (2,738) $ (1,839)
========== =========== ===========
Net loss per share................................... $ (0.90) $ (0.90) $ (0.16)
========== =========== ===========
Shares used in per share calculation................. 2,814,115 3,045,568 11,219,156
Pro forma net loss per share......................... $ (0.25) $ (0.14)
=========== ===========
Pro forma shares used in per share calculation....... 11,036,385 12,750,729
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
16
<PAGE> 19
PRISM SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLES
------------------- ------------------- PAID-IN FROM ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS DEFICIT TOTAL
---------- ------ ---------- ------ ---------- ------------ ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993.... 6,371,487 $ 6 1,562,316 $ 2 $ 9,296 $ (6,163) $ 3,141
Issuance of common stock under
stock option plan........... 11,113 2 2
Issuance of Series D preferred
stock, net of issuance
costs....................... 1,619,330 2 4,048 $ (1,032) 3,018
Net loss...................... (2,538) (2,538)
---------- --- ---------- --- ------ ------- -------- --------
Balance at December 31, 1994.... 7,990,817 8 1,573,429 2 13,346 (1,032) (8,701) 3,623
Issuance of common stock under
stock option plan........... 1,281,604 1 266 (129) 138
Issuance of common stock for
consulting purposes......... 16,541 4 4
Repurchase of common stock.... (19,401) (5) (5)
Payment received on
receivables from
stockholder................. 1,032 1,032
Net loss........................ (2,738) (2,738)
---------- --- ---------- --- ------ ------- -------- --------
Balance at December 31, 1995.... 7,990,817 8 2,852,173 3 13,611 (129) (11,439) 2,054
Conversion of preferred
stock....................... (7,990,817) (8) 7,990,817 8
Issuance of common stock in
initial public offering..... 2,325,500 3 35,610 35,613
Issuance of common stock under
stock option plan........... 116,324 78 78
Issuance of common stock under
stock purchase plan......... 42,751 491 491
Issuance of common stock for
consulting purposes......... 11,472 106 106
Repurchase of common stock.... (63,822) (20) (20)
Payments received on
receivables from
stockholders................ 25 25
Net loss...................... (1,839) (1,839)
---------- --- ---------- --- ------ ------- -------- --------
Balance at December 31, 1996.... -- $ -- 13,275,215 $ 14 $ 49,876 $ (104) $ (13,278) $36,508
========== === ========== === ====== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
17
<PAGE> 20
PRISM SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................... $(2,538) $(2,738) $ (1,839)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization........................... 168 501 1,160
Provision for doubtful accounts......................... 54 281 44
Loss on disposal of property and equipment.............. 2 48 --
Common stock issued for consulting services............. -- 4 --
Proceeds from stock issued for consulting purposes...... -- -- 106
Changes in operating assets and liabilities:
Accounts receivable................................... (2,409) (3,651) (1,623)
Other receivables..................................... (118) 95 (128)
Prepaid expenses and other assets..................... (94) (367) (501)
Accounts payable...................................... (88) 351 597
Accounts payable to related party..................... 19 38 (66)
Accrued payroll and related........................... 143 438 943
Accrued commissions................................... 331 103 180
Deferred revenue...................................... 1,885 2,475 (23)
Other accrued liabilities............................. 135 654 355
------- ------- --------
Net cash used in operating activities.............. (2,510) (1,768) (795)
------- ------- --------
Cash flows from investing activities:
Purchases of short-term investments........................ -- -- (20,052)
Purchases of property and equipment........................ (348) (1,438) (1,654)
------- ------- --------
Net cash used in investing activities.............. (348) (1,438) (21,706)
------- ------- --------
Cash flows from financing activities:
Borrowings on equipment lines of credit.................... -- 807 --
Repayments on equipment lines of credit.................... -- (104) (703)
Proceeds from sale of preferred stock, net................. 3,018 -- --
Proceeds from sale of common stock, net.................... -- -- 35,613
Proceeds from exercise of stock options.................... 2 138 78
Proceeds from stock sold through employee purchase plan.... -- -- 491
Repurchase of common stock................................. -- (5) (20)
Payments received on receivable from stockholder........... -- 1,032 25
Repayment of other liabilities............................. (5) (6) --
------- ------- --------
Net cash provided by financing activities.......... 3,015 1,862 35,484
------- ------- --------
Net increase (decrease) in cash and cash equivalents......... 157 (1,344) 12,983
Cash and cash equivalents at beginning of year............... 3,048 3,205 1,861
------- ------- --------
Cash and cash equivalents at end of year..................... $ 3,205 $ 1,861 $ 14,844
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
18
<PAGE> 21
PRISM SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1994 1995 1996
------ ---- ----
<S> <C> <C> <C>
Supplemental cash flow information:
Cash paid for income taxes........................................ $ 59 $ 58 $ 81
Cash paid for interest............................................ $ 4 $ 24 $ 22
Supplemental disclosure of noncash transactions:
Acquisition of equipment under capital lease obligation........... $ 23 $ -- $ --
Receivable from stockholder for Series D preferred stock.......... $1,032 $ -- $ --
Receipt of notes receivable from employees for common stock issued
under the stock option plan.................................... $ -- $129 $ --
Property and equipment included in accounts payable............... $ 2 $ 49 $ 69
Issuance of common stock for consulting services.................. $ -- $ 4 $106
Conversion of preferred stock into common stock in initial public
offering....................................................... $ -- $ -- $ 8
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
19
<PAGE> 22
PRISM SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. BUSINESS OF THE COMPANY
Prism Solutions, Inc. (the "Company") designs, develops, markets and
supports data warehouse management software that assists its customers in
developing, managing and maintaining data warehouses. The Company currently
markets its software products to a wide variety of businesses and other
organizations in North America, Europe, South Africa and Australia.
Substantially all of the Company's revenues to date have been attributable to
licenses of one of the Company's products and related services.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
In 1995, the Company established wholly-owned subsidiaries in the United
Kingdom, Germany, France and Spain. In 1996, the Company established
wholly-owned subsidiaries in Mexico and Canada. The consolidated financial
statements include the financial statements of Prism Solutions, Inc. and its
wholly-owned subsidiaries after elimination of intercompany accounts and
transactions.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that reflect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash, Cash Equivalents and Short Term Investments
The Company considers all highly liquid investments purchased with an
original or remaining maturity of three months or less to be cash equivalents.
Highly liquid investments with an original or remaining maturity beyond three
months are classified as short-term investments and carried at fair value, which
approximates cost.
Concentration of Credit Risk and Fair Value of Financial Instruments
As of December 31, 1996, the Company had cash and cash equivalents totaling
$894 deposited in five U.S. accounts of a major bank. Insurance for such a
deposit by the Federal Deposit Insurance Corporation is limited to $100 per
account. In addition, the Company maintained $13,695 of its cash and cash
equivalents at three national investment management companies in a variety of
financial instruments, such as money market accounts and government securities.
The balance of the Company's cash and cash equivalents was held in various
foreign banks. Through December 31, 1996, no material losses had been
experienced on such investments.
As of December 31, 1996, the Company had short term investments totaling
$20,052 which are available for sale. Short term investments principally consist
of municipal securities and corporate bonds. Through December 31, 1996, no
material losses had been experienced on such investments. The amortized cost of
debt securities is adjusted for amortization of premiums and accretion of
discounts to maturity, both of which are included in interest income. Realized
gains and losses are recorded on the specific identification method.
The Company markets its software products directly and through resellers,
and generally does not require collateral. The Company performs ongoing credit
evaluations of its customers and maintains an allowance for
20
<PAGE> 23
PRISM SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
doubtful accounts. As of December 31, 1995 and December 31, 1996, no one
customer accounted for more than 10% of accounts receivable.
For financial instruments consisting of cash and cash equivalents, accounts
receivable, other receivables, deposits, long-term debt, accounts payable,
accrued liabilities and receivables from stockholders included in
the Company's consolidated financial statements, the carrying amounts are
reasonable estimates of fair value.
Property and Equipment
Property and equipment are stated at cost and depreciated on a
straight-line basis over their estimated useful lives of two years. Leasehold
improvements are amortized on a straight-line basis over their estimated useful
lives or their lease terms, whichever is less.
Revenue Recognition
The Company's product revenues are derived from software licensing fees,
and the service revenues are derived from maintenance support services,
consulting, implementation and training. Product revenues are generally
recognized after execution of a licensing agreement, receipt of a purchase order
and shipment of the product, if no significant vendor obligations remain and
collection of the resulting receivables is deemed probable. The Company's
license agreements generally do not provide a right of return.
Service revenues from customer maintenance fees for ongoing customer
support and product updates are recognized ratably over the term of the service.
Payments for maintenance fees are generally received in advance and are
generally nonrefundable. Consulting, implementation and training revenues are
generally recognized following execution of a contract, performance of the
related services and if collection of the resulting receivables is deemed
probable.
Advertising Costs
Advertising costs, included in sales and marketing expenses, are expensed
as incurred and were $138, $410 and $380 in 1994, 1995 and 1996, respectively.
Research and Development
Research and development expenditures are expensed as incurred.
Software Development Costs
Software development costs have been expensed in accordance with Statement
of Financial Accounting Standards No. 86 ("FAS 86"), "Accounting for the Costs
of Computer Software to be Sold, Leased or Otherwise Marketed." Under FAS 86,
capitalization of software development costs begins upon the establishment of
technological feasibility and ends when a product is available for general
release to customers. Such costs have been immaterial to date.
Income Taxes
The Company determines its income tax liability in accordance with
Statement of Financial Accounting Standards No. 109 ("FAS 109"), "Accounting for
Income Taxes." Under FAS 109, the liability method is used to account for income
taxes. Under this method, deferred tax assets and liabilities are determined
based on differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. Valuation
21
<PAGE> 24
PRISM SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
allowances are established when necessary to reduce deferred tax assets to the
amounts more likely than not to be realized.
Foreign Currency Translation
All subsidiaries located outside the United States operate with the U.S.
dollar as the functional currency. Net nonmonetary assets are translated at
historical exchange rates, and net monetary assets are translated at current
exchange rates. Transaction and translation gains and losses are included in the
determination of the results of operations and were not material.
Net Loss Per Share and Pro Forma 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 as their effect is antidilutive, except that, pursuant to the
Securities and Exchange Commission Staff Accounting Bulletins, common and common
equivalent shares issued at prices below the public offering price during the 12
months immediately preceding the initial filing date have been included in the
calculation as if they were outstanding for all periods presented (using the
treasury stock method and the initial public offering price). Pro forma net loss
per share assumes the common shares issued upon conversion of the outstanding
convertible preferred stock had been outstanding during such period.
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 will become effective for the Company's year ending December 31, 1997.
The impact of adopting FAS 128 on the Company's financial statements has not yet
been determined.
3. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1996
------ ------
<S> <C> <C>
Computers and equipment.......................... $1,054 $2,424
Furniture and fixtures........................... 187 336
Software......................................... 321 712
Leasehold improvements........................... 290 103
------ ------
1,852 3,575
Less accumulated depreciation and amortization... 554 1,714
------ ------
$1,298 $1,861
====== ======
</TABLE>
4. LONG-TERM DEBT
In 1995, the Company entered into two revolving lines of credit loan
agreements, each permitting borrowings up to $500, for the purpose of acquiring
property and equipment. During 1996, the Company repaid all outstanding
long-term debt with a portion of the proceeds from the initial public offering.
22
<PAGE> 25
PRISM SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
5. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases its facilities under noncancelable operating leases that
expire through July 1999 with renewal options at fair market value for
additional periods. The Company is generally responsible for maintenance,
property taxes, liability and personal property insurance and utilities relating
to its facility leases.
Rent expense under the operating leases amounted to approximately $209,
$475 and $860 in 1994, 1995 and 1996, respectively.
Future minimum payments to be made under noncancelable operating leases and
future payments to be received under a sublease agreement are as follows:
<TABLE>
<CAPTION>
LEASE SUBLEASE
YEAR ENDING DECEMBER 31, PAYMENTS INCOME
----------------------------------------------- -------- --------
<S> <C> <C>
1997........................................... $ 757 $109
1998........................................... 355 19
1999........................................... 145 --
------ ----
$1,257 $128
====== ====
</TABLE>
Royalty Agreements
In April 1992, the Company entered into an agreement with Forest Rim
Technology, Inc. ("Forest Rim"), with which a director, stockholder and officer
of the Company is affiliated. Such person subsequently resigned as a director of
the Company in December, 1996, and as an officer of the Company in February,
1997. The agreement gives the Company the exclusive right to sell, license and
distribute Forest Rim's Licensed Data Models. In accordance with the agreement,
the Company pays a royalty fee for each Licensed Data Model sold. In addition,
there is a minimum performance standard that requires the Company to pay minimum
royalties to maintain exclusivity, subject to adjustments to be agreed upon by
the Company and Forest Rim. The Company has royalties payable to Forest Rim
Technologies, Inc. of $56, $94, and $28 at December 31, 1994, 1995 and 1996,
respectively, and expensed $51, $106 and $2 in 1994, 1995 and 1996,
respectively.
In addition, the Company is obligated to pay royalties based on sales from
other specified products under certain continuing license agreements. Royalty
expense was not material for 1994 and 1995 and was $140 for 1996.
Contingencies
On March 5, 1997, a class action complaint 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 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 will vigorously defend itself.
23
<PAGE> 26
PRISM SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
6. STOCKHOLDERS' EQUITY
Reincorporation
On February 2, 1996, the reincorporation of the Company as a Delaware
corporation was consummated. The certificate of incorporation provides for
8,990,817 authorized shares of preferred stock with a $0.001 par value per share
and for 50,000,000 authorized shares of common stock with a $0.001 par value per
share. The consolidated financial statements have been retroactively restated to
give effect to the reincorporation.
Common and Convertible Preferred Stock
On March 15, 1996, the Company sold 2,325,500 shares of common stock in its
initial public offering. Net proceeds to the Company, after deducting the
underwriting discount and offering expenses, were approximately $35,613. In
connection with such offering, all outstanding shares of preferred stock were
converted into 7,990,817 shares of common stock and the authorized shares of
preferred stock was reduced to 1,000,000 shares of preferred stock with a $0.001
par value.
Employee Stock Purchase Plan
In 1996, the Company's stockholders approved the adoption of the Employee
Stock Purchase Plan (the "Purchase Plan") wherein 500,000 shares were reserved
for issuance pursuant to such plan. The Purchase Plan is administered over
offering periods of 24 months each, with each offering period divided into four
consecutive six-month purchase periods beginning August 1 and February 1 of each
year. Eligible employees may designate not more than 10 percent of their cash
compensation to be deducted each pay period for the purchase of common stock
under the Purchase Plan. On the last business day of each purchase period,
shares of common stock are purchased with the employee's payroll deductions
accumulated during the six months, generally at a price per share of 85 percent
of the market price of the common stock on the employee's entry date of the
applicable offering period or the last day of the applicable offering period,
whichever is lower. The Purchase Plan will terminate no later than 2006. 42,751
shares were issued under the Purchase Plan in 1996.
Stock Option Plan
In 1996, the Company's stockholders approved an increase in the number of
common shares reserved under the 1992 Stock Option Plan (the "1992 Plan") by
400,000 shares. In addition, the Company's stockholders approved the adoption of
the 1996 Equity Incentive Plan and the 1996 Directors Stock Option Plan
(together known as the "1996 Plans") wherein 2,000,000 and 300,000 shares,
respectively, were reserved for issuance pursuant to these plans. The 1992 Plan
and the 1996 Plans together are known as "the Plans".
The Plans provide for the grant of incentive stock options and nonqualified
stock options to employees, directors and consultants of the Company at prices
ranging from 85% to 110% (depending on the type of grant and the individual
receiving the grant) of the fair market value of the common stock on the date of
grant as determined by the Board of Directors.
The vesting and exercise provisions of the option grants under the Plans
are determined by the Board of Directors. Options granted under the Plans are
generally immediately exercisable, but any shares acquired pursuant to exercises
are subject to repurchase by the Company until they have vested. Options
generally vest ratably over a four-year period commencing from the date of
grant, subject to one year of employment and expire ten years from date of
grant.
24
<PAGE> 27
PRISM SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Information with respect to the Plans is summarized as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
--------------------------------------
WEIGHTED
AVAILABLE NUMBER AVERAGE PRICE AGGREGATE
FOR GRANT OF SHARES PER SHARE PRICE
---------- ---------- ------------- ---------
<S> <C> <C> <C> <C>
Balance at December 31, 1993..................... 454,671 585,163 $ 0.20 $ 117
Additional shares reserved..................... 1,400,000 -- -- --
Granted........................................ (503,150) 503,150 $ 0.20 101
Canceled....................................... 65,337 (65,337) $ 0.20 (13)
Exercised...................................... -- (11,113) $ 0.20 (2)
--------- ------- -----
Balance at December 31, 1994..................... 1,416,858 1,011,863 $ 0.20 203
Granted........................................ (1,585,280) 1,585,280 $ 1.34 2,122
Canceled....................................... 176,781 (176,781) $ 0.25 (44)
Exercised...................................... (1,281,604) $ 0.23 (296)
---------- ---------- ---------
Balance at December 31, 1995..................... 8,359 1,138,758 $ 1.74 1,985
Additional shares reserved..................... 2,700,000 -- -- --
Granted........................................ (1,817,525) 1,817,525 $ 9.76 17,738
Canceled....................................... 873,843 (873,843) $ 12.63 (11,033)
Exercised...................................... -- (116,324) $ 0.67 (78)
---------- ---------- ---------
Balance at December 31, 1996..................... 1,764,677 1,966,116 $ 4.38 $ (8,612)
========= ========= ========
</TABLE>
As of December 31, 1996, the Company had reserved 3,730,793 shares of
common stock for future issuance under the Plans. As of December 31, 1996,
365,254 options outstanding under the Plans had vested and 306,739 shares of
common stock acquired under the Plans were subject to the Company's rights of
repurchase.
The following information concerning the Company's stock option and
employee stock purchase plans is provided in accordance with Statement of
Financial Accounting Standards No. 123 ("FAS 123"), "Accounting for Stock-Based
Compensation." The Company accounts for such plans in accordance with APB No. 25
and related interpretations.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------------
WEIGHTED OPTIONS EXERCISABLE
AVERAGE ------------------------
NUMBER REMAINING WEIGHTED WEIGHTED
RANGE OF OUTSTANDING CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE AT LIFE EXERCISE EXERCISABLE EXERCISE
PRICES 12/31/96 (YEARS) PRICE AT 12/31/96 PRICE
- ------------- ---------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.20-$ 3.00 712,662 8.23 $ 1.10 283,952 $ 0.69
$4.88-$ 4.88 842,784 9.64 $ 4.88 34,756 $ 4.88
$5.50-$24.75 410,670 9.17 $ 9.06 46,546 $ 5.75
- ------------ --------- ---- ----- ------- -----
$0.20-$24.75 1,966,116 9.03 $ 4.38 365,254 $ 1.87
</TABLE>
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1996 and 1995:
<TABLE>
<S> <C>
Risk-free interest rates............... 5.18%-7.71%
Expected life.......................... 4 years
Volatility............................. 0.00-0.44
Dividend yield......................... 0%
</TABLE>
25
<PAGE> 28
PRISM SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The weighted average expected life was based on the exercise behavior. The
weighted average fair value of those options granted in 1996 and 1995 was $10.65
and $1.34 per share, respectively.
At December 31, 1996, the Company had four stock-based compensation plans,
which are described above. As the Company applies APB Opinion 25 and related
interpretations in accounting for its plans, no compensation cost has been
recognized for its fixed stock option plans and its stock purchase plan.
Had compensation cost for the Company's four stock-based compensation plans
been determined consistent with FAS 123, the Company's net loss and loss per
share would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR 1996
----------------------------------------------------------- -------
<S> <C>
Net loss
As reported.............................................. $(1,839)
Pro forma................................................ (1,945)
Primary loss per share
As reported.............................................. $ (0.16)
Pro forma................................................ (0.17)
Fully diluted loss per share
As reported.............................................. $ (0.14)
Pro forma................................................ (0.15)
</TABLE>
The above pro forma effects on income may not be representative of the
effects on net income for future years as option grants typically vest over
several years and are generally granted each year. Due to the option vesting
schedule, the impact of FAS 123 on the Company's net income for 1995 is not
material.
7. INCOME TAXES
The components of the provision for income taxes for 1994, 1995 and 1996
were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Current:
State and Other................................................ $-- $-- $ 43
Foreign........................................................ 63 56 95
--- --- ----
$63 $56 $138
=== === ====
</TABLE>
26
<PAGE> 29
PRISM SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The principal items accounting for the difference between income taxes
computed at the United States statutory rate and the provision for income taxes
is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1994 1995 1996
------ ------ -----
<S> <C> <C> <C>
U.S. Federal statutory tax at 34%......................... $ (842) $ (912) $(578)
State taxes, net of U.S. federal income tax effect........ (54) (52) (51)
Tax credits............................................... (154) (247) (6)
Foreign withholding taxes................................. 63 56 95
Other..................................................... 32 60 43
Unbenefited net operating loss............................ 1,018 1,151 635
----- ----- -----
$ 63 $ 56 $ 138
===== ===== =====
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes. Significant components of
deferred tax assets for federal and state income taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1996
------- -------
<S> <C> <C>
Net operating loss carryforwards................................. $ 3,228 $ 3,241
Research credits................................................. 489 495
Capitalized research and development............................. 690 518
Other temporary differences...................................... 349 594
------- -------
Total deferred tax assets................................... 4,756 4,848
Valuation allowance for deferred tax assets...................... (4,756) (4,848)
------- -------
Net deferred tax assets..................................... $ -- $ --
======= =======
</TABLE>
The Company has established a valuation allowance to the extent of its
deferred tax assets because it is more likely than not that a benefit cannot be
realized in the future due to the Company's recurring operating losses.
As of December 31, 1996, the Company had federal and California net
operating loss carryforwards of approximately $9,700 and $1,900, respectively.
The Company also had federal and California research and development tax credit
carryforwards of $360 and $135, respectively. The net operating loss and credit
carryforwards will expire at various dates from 1997 through 2011, if not
utilized.
Utilization of the net operating losses and credits may be subject to an
annual limitation due to the ownership change limitations provided by the
Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.
8. EMPLOYEE BENEFIT PLAN
During 1994, the Company adopted a qualified profit sharing plan and trust
under Internal Revenue Service Code 401(k) (the "401(k) Plan"). The 401(k) Plan
provides for tax deferred salary deductions. Employees can elect to contribute
to the 401(k) Plan up to 15% of their salary, subject to current statutory
limits. The Company is not required to contribute to the 401(k) Plan and has
made no contributions since the inception of the 401(k) Plan.
27
<PAGE> 30
PRISM SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
During 1995, the Company committed to certain foreign employees to
contribute up to 5% of their salaries, subject to annual limitations, to a
defined contribution pension plan. As of December 31, 1996, the obligation for
this commitment was not material.
9. RELATED PARTY TRANSACTIONS
At December 31, 1996, the Company held notes receivable of $104, with
interest at 8.0% per annum, from three executive officers issued in connection
with the purchase of common stock under incentive and non-qualified stock option
plans. The principal and accrued interest on these notes are due in full in July
and August 2005.
10. SEGMENT INFORMATION
The Company operates in one industry segment. In 1994, one customer
accounted for 11% of the Company's total revenues. No customer accounted for
more than 10% of the Company's total revenues in 1995 or 1996.
The Company's U.S. and international revenues are generally denominated in
U.S. dollars and are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1994 1995 1996
------ ------- -------
<S> <C> <C> <C>
U.S............................................................ $6,976 $15,140 $21,058
International.................................................. 1,251 2,620 9,366
------ ------- -------
$8,227 $17,760 $30,424
====== ======= =======
</TABLE>
In 1994 and 1995, the majority of international sales were made in Canada.
In 1996, the majority of international sales were made in Europe, where the
Company significantly increased the number of direct sales personnel and the
number of international distributors and resellers marketing the Company's
products.
28
<PAGE> 31
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
Prism Solutions, Inc.
Sunnyvale, California
We have audited the accompanying consolidated balance sheets of Prism
Solutions, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 consolidated financial position of Prism
Solutions, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
San Jose, California
January 17, 1997, except for Note 5,
for which the date is March 5, 1997
29
<PAGE> 32
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item regarding the Company's directors is
incorporated herein by reference from the section entitled "Election of
Directors" of the Company's proxy statement to be delivered to stockholders with
the Company's Annual Report to Stockholders. Information regarding the Company's
executive officers may be found in Part I in the section entitled "Executive
Officers of the Company" and is incorporated by reference herein. Information
required by this Item concerning compliance with Section 16(a) of the Exchange
Act is incorporated herein by reference from the section entitled "Section 16(a)
Beneficial Ownership Reporting Compliance" contained in the Company's proxy
statement to be delivered to stockholders with the Company's Annual Report to
Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item is incorporated herein by reference from
the section entitled "Executive Compensation" of the Company's proxy statement
to be delivered to stockholders with the Company's Annual Report to
Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this Item is incorporated herein by reference from
the section entitled "Stock Ownership of Certain Beneficial Owners and
Management" of the Company's proxy statement to be delivered to stockholders
with the Company's Annual Report to Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item is incorporated herein by reference from
the section entitled "Certain Transactions" of the Company's proxy statement to
be delivered to stockholders with the Company's Annual Report to Stockholders.
30
<PAGE> 33
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements -- see Index to Consolidated Financial
Statements at Item 8 on page 14 of this Report.
2. Financial Statement Schedule:
Schedule II -- Valuation and Qualifying Account is filed on page 34 of
this Report on Form 10-K
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
omitted because they are not required under the related instructions or are
inapplicable.
The independent accountant's report with respect to the above listed
financial statements and financial statement schedule listed in Items 14(a)
is filed on page 29 and page 33, respectively, of this Report on Form 10-K.
3. Exhibits -- The following exhibits are filed as part of, or
incorporated by reference into, this Report:
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
- ------- -----------------------------------------------------------------------------------
<C> <C> <S>
2.01 -- Agreement and Plan of Merger by and between Prism Solutions, Inc., a Delaware
corporation, and Prism Solutions, Inc., a California corporation, and material
exhibits thereto.(1)
3.01 -- Company's Certificate of Incorporation(1)
3.02 -- Company's Amendment of Certificate of Incorporation(1)
3.03 -- Company's Certificate of Designation(1)
3.04 -- Company's Certificate of Retirement(1)
3.05 -- Company's Bylaws(1)
4.01 -- Amended and Restated Investor Rights Agreement dated December 19, 1994(1)
10.01 -- Company's 1992 Stock Option Plan(1)(2)
10.02 -- Company's 1996 Equity Incentive Plan(1)(2)
10.03 -- Company's 1996 Directors Stock Option Plan(1)(2)
10.04 -- Company's 1996 Employee Stock Purchase Plan(1)(2)
10.05 -- Company's 401(k) Plan(1)
10.06 -- Employment Agreement dated as of March 27, 1992 between Registrant and
James W. Ashbrook(1)(2)
10.07 -- Employment Agreement dated as of March 27, 1992 between Registrant and
Cynthia F. Schmidt(1)(2)
10.08 -- Employment Agreement dated as of March 27, 1992 between Registrant and
William H. Inmon(1)(2)
10.09 -- Employment Agreement dated as of March 27, 1992 between Registrant and
Edward T. Young(1)(2)
10.10 -- Employment Agreement dated as of July 10, 1995 between Registrant and
Donald N. Taylor(1)(2)
10.11 -- Employment Agreement dated as of December 8, 1995 between Registrant and
Philip M. Sakakihara(1)(2)
</TABLE>
31
<PAGE> 34
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
- ------- -----------------------------------------------------------------------------------
<C> <C> <S>
10.12 -- Employment Agreement dated as of December 22, 1995 between Registrant and
William B. Binch(1)(2)
10.13 -- Promissory Note Secured by Stock Pledge Agreement and Stock Pledge Agreement, both
dated as of July 10, 1995, delivered to Registrant by Edward T. Young(1)(2)
10.14 -- Promissory Note Secured by Stock Pledge Agreement and Stock Pledge Agreement, both
dated as of July 10, 1995, delivered to Registrant by Samuel M. Hedgpeth III(1)(2)
10.15 -- Promissory Note Secured by Stock Pledge Agreement and Stock Pledge Agreement, both
dated as of July 10, 1995, delivered to Registrant by William H. Inmon(1)(2)
10.16 -- Promissory Note Secured by Stock Pledge Agreement and Stock Pledge Agreement, both
dated as of July 18, 1995, delivered to Registrant by Cynthia F. Schmidt(1)(2)
10.17 -- Promissory Note Secured by Stock Pledge Agreement, dated as of August 15, 1995, and
Stock Pledge Agreement, dated as of August 18, 1995, delivered to Registrant by
James W. Ashbrook(1)(2)
10.18 -- Form of Indemnity Agreement to be entered into by Registrant with each of its
directors and executive officers(1)
10.19 -- License Agreement dated as of April 6, 1992, as amended April 28, 1994, August 10,
1995 and January 1, 1996, between Registrant and Forest Rim Technologies, Inc.(1)
10.20 -- Lease Agreement between Francisco Berrueta and Registrant, dated as of February
1995(1)
10.21 -- Lease from Smallbone & Co. (Devizes) Limited to Registrant, dated as of February
1996(1)
10.22 -- Loan Agreement, dated as of November 10, 1995, between Registrant and CivicBank of
Commerce and related documents(1)
10.23 -- Amended Employment Agreement dated as of February 27, 1996 between Registrant and
William H. Inmon(1)(2)
10.24 -- Modification to Lease Agreement between Francisco Berrueta and Registrant, dated as
of March 1996
10.25 -- Employment Agreement dated as of January 22, 1997 between Registrant and Warren M.
Weiss(2)
11.01 -- Computation of Net Loss per Share
16.01 -- Letter on change in independent auditors(1)
21.01 -- List of Registrant's subsidiaries
23.01 -- Consent of Coopers & Lybrand L.L.P., Independent Accountants
27.01 -- Financial Data Schedule
</TABLE>
- ---------------
(1) Incorporated by reference to the exhibit with the same number in the
Company's Registration Statement on Form SB-2 (File No. 33-1180-LA),
declared effective March 14, 1996.
(2) Management contract or compensatory plan
(b) Reports on Form 8-K -- No current reports on Form 8-K were filed in the
fiscal quarter ended December 31, 1996
(c) Exhibits: the Company hereby files as part of this Report the exhibits
listed in Item 14 (a) (3) as set forth above
(d) Financial Statement Schedules -- See Item 14 (a) (2) above.
32
<PAGE> 35
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors and Stockholders
Prism Solutions, Inc.
Sunnyvale, California
Our report on the consolidated financial statements of Prism Solutions,
Inc. is included on page 29 of this Form 10-K. In connection with our audits of
such financial statements, we have also audited the related financial statement
schedule listed on Item 14 (a)(2) of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
San Jose, California
January 17, 1997
33
<PAGE> 36
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER AT END
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS(1) OF PERIOD
---------- ---------- ---------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994
Allowance for doubtful
accounts....................... $ 21,500 $ 53,500 $ -- -- $ 75,000
Year ended December 31, 1995
Allowance for doubtful
accounts....................... $ 75,000 $106,000 $175,000 -- $ 356,000
Year ended December 31, 1996
Allowance for doubtful
accounts....................... $ 356,000 $140,031 -- $95,707 $ 400,324
</TABLE>
- ---------------
(1) Deductions represent accounts receivables written off during 1996.
The accompanying notes are an integral part of these consolidated financial
statements
34
<PAGE> 37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
PRISM SOLUTIONS, INC.
(Registrant)
By: /s/ WARREN M. WEISS
------------------------------------
Warren M. Weiss
President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report on Form 10-K has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------------------ ------------------------------- ---------------
<C> <S> <C>
/s/ WARREN M. WEISS President, Chief Executive March 18, 1997
- ------------------------------------------ Officer and Director
Warren M. Weiss
/s/ SAMUEL M. HEDGPETH III Vice President, Finance and March 18, 1997
- ------------------------------------------ Administration, Chief
Samuel M. Hedgpeth III Financial Officer and
Secretary
/s/ JAMES W. ASHBROOK Chairman of the Board March 18, 1997
- ------------------------------------------
James W. Ashbrook
/s/ KEVIN A. FONG Director March 18, 1997
- ------------------------------------------
Kevin A. Fong
/s/ E. FLOYD KVAMME Director March 18, 1997
- ------------------------------------------
Floyd E. Kvamme
/s/ PROMOD HAQUE Director March 18, 1997
- ------------------------------------------
Promod Haque
/s/ NANCY J. SCHOENDORF Director March 18, 1997
- ------------------------------------------
Nancy J. Schoendorf
/s/ NORRIS VAN DEN BERG Director March 18, 1997
- ------------------------------------------
Norris Van Den Berg
</TABLE>
35
<PAGE> 38
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. EXHIBIT PAGE
- ------- ------------------------------------------------------------------------- ------------
<C> <C> <S> <C>
2.01 -- Agreement and Plan of Merger by and between Prism Solutions, Inc., a
Delaware corporation, and Prism Solutions, Inc., a California
corporation, and material exhibits thereto.(1)...........................
3.01 -- Company's Certificate of Incorporation(1)................................
3.02 -- Company's Amendment of Certificate of Incorporation(1)...................
3.03 -- Company's Certificate of Designation(1)..................................
3.04 -- Company's Certificate of Retirement(1)...................................
3.05 -- Company's Bylaws(1)......................................................
4.01 -- Amended and Restated Investor Rights Agreement dated December 19,
1994(1)..................................................................
10.01 -- Company's 1992 Stock Option Plan(1)(2)...................................
10.02 -- Company's 1996 Equity Incentive Plan(1)(2)...............................
10.03 -- Company's 1996 Directors Stock Option Plan(1)(2).........................
10.04 -- Company's 1996 Employee Stock Purchase Plan(1)(2)........................
10.05 -- Company's 401(k) Plan(1).................................................
10.06 -- Employment Agreement dated as of March 27, 1992 between Registrant and
James W. Ashbrook(1)(2)..................................................
10.07 -- Employment Agreement dated as of March 27, 1992 between Registrant and
Cynthia F. Schmidt(1)(2).................................................
10.08 -- Employment Agreement dated as of March 27, 1992 between Registrant and
William H. Inmon(1)(2)...................................................
10.09 -- Employment Agreement dated as of March 27, 1992 between Registrant and
Edward T. Young(1)(2)....................................................
10.10 -- Employment Agreement dated as of July 10, 1995 between Registrant and
Donald N. Taylor(1)(2)...................................................
10.11 -- Employment Agreement dated as of December 8, 1995 between Registrant and
Philip M. Sakakihara(1)(2)...............................................
10.12 -- Employment Agreement dated as of December 22, 1995 between Registrant and
William B. Binch(1)(2)...................................................
10.13 -- Promissory Note Secured by Stock Pledge Agreement and Stock Pledge
Agreement, both dated as of July 10, 1995, delivered to Registrant by
Edward T. Young(1)(2)....................................................
10.14 -- Promissory Note Secured by Stock Pledge Agreement and Stock Pledge
Agreement, both dated as of July 10, 1995, delivered to Registrant by
Samuel M. Hedgpeth III(1)(2).............................................
10.15 -- Promissory Note Secured by Stock Pledge Agreement and Stock Pledge
Agreement, both dated as of July 10, 1995, delivered to Registrant by
William H. Inmon(1)(2)...................................................
10.16 -- Promissory Note Secured by Stock Pledge Agreement and Stock Pledge
Agreement, both dated as of July 18, 1995, delivered to Registrant by
Cynthia F. Schmidt(1)(2).................................................
10.17 -- Promissory Note Secured by Stock Pledge Agreement, dated as of August 15,
1995, and Stock Pledge Agreement, dated as of August 18, 1995, delivered
to Registrant by
James W. Ashbrook(1)(2)..................................................
10.18 -- Form of Indemnity Agreement to be entered into by Registrant with each of
its directors and executive officers(1)..................................
</TABLE>
<PAGE> 39
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. EXHIBIT PAGE
- ------- ------------------------------------------------------------------------- ------------
<C> <C> <S> <C>
10.19 -- License Agreement dated as of April 6, 1992, as amended April 28, 1994,
August 10, 1995 and January 1, 1996, between Registrant and Forest Rim
Technologies, Inc.(1)....................................................
10.20 -- Lease Agreement between Francisco Berrueta and Registrant, dated as of
February 1995(1).........................................................
10.21 -- Lease from Smallbone & Co. (Devizes) Limited to Registrant, dated as of
February 1996(1).........................................................
10.22 -- Loan Agreement, dated as of November 10, 1995, between Registrant and
CivicBank of Commerce and related documents(1)...........................
10.23 -- Amended Employment Agreement dated as of February 27, 1996 between
Registrant and William H. Inmon(1)(2)....................................
10.24 -- Modification to Lease Agreement between Francisco Berrueta and
Registrant, dated as of March 1996.......................................
10.25 -- Employment Agreement dated as of January 22, 1997 between Registrant and
Warren M. Weiss(2).......................................................
11.01 -- Computation of Net Loss per Share........................................
16.01 -- Letter on change in independent auditors(1)..............................
21.01 -- List of Registrant's subsidiaries........................................
23.01 -- Consent of Coopers & Lybrand L.L.P., Independent Accountants.............
27.01 -- Financial Data Schedule..................................................
</TABLE>
- ---------------
(1) Incorporated by reference to the exhibit with the same number in the
Company's Registration Statement on Form SB-2 (File No. 33-1180-LA),
declared effective March 14, 1996.
(2) Management contract or compensatory plan
(b) Reports on Form 8-K -- No current reports on Form 8-K were filed in the
fiscal quarter ended December 31, 1996
(c) Exhibits: the Company hereby files as part of this Report the exhibits
listed in Item 14 (a) (3) as set forth above
(d) Financial Statement Schedules -- See Item 14 (a) (2) above.
<PAGE> 1
EXHIBIT 10.24
LEASE MODIFICATION AGREEMENT
Reference is made to that Lease Agreement dated February____, 1995 by
and between FRANCISCO BERRUETA, a married man as his sole and separate
property, Landlord, and PRISM SOLUTIONS, INC., a California corporation, Tenant,
for those certain premises containing approximately twenty-eight thousand
eighty-seven (28,087 plus or minus) square feet commonly known and described
as 1000 Hamlin Court, Sunnyvale, California.
The parties agree that said Lease Agreement is hereby amended and
modified as follows:
1. PREMISES. Effective April 15, 1996, or upon completion of the
installation of carpeting and painting in the additional premises, the premises
shall be increased by approximately nine thousand five hundred thirteen
(9,513 plus or minus) square feet (the "additional premises"), currently
designated as 960 Hamlin Court, Sunnyvale, California, so that those premises
leased to Tenant shall contain a total of approximately thirty-seven thousand
six hundred (37,600 plus or minus) square feet. For the purposes of this
Lease, Tenant's address shall be 1000 Hamlin Court, Sunnyvale, California.
2. MINIMUM MONTHLY RENT: Minimum monthly rent, commencing April 1,
1996 shall be payable as follows:
(a) On the first day of April, 1996, the sum of
TWENTY-SEVEN THOUSAND FIVE HUNDRED THIRTY-ONE AND 14/100 DOLLARS ($27,531.14);
provided that in the event the painting and carpet and baseboard
improvements set forth in Paragraph 4 below are completed prior to April 15,
1996, the minimum monthly rent shall be adjusted upward by an additional amount
of TWO HUNDRED FIFTY-THREE AND 68/100 DOLLARS ($253.68) for each day prior to
April 15, 1996 that said work and improvements are completed. Said additional
rental shall be due only for the period from the date of completion through
April 14, 1996;
(b) Commencing May 1, 1996 and continuing on the first day
of each month thereafter through March 31, 1997, the sum of THIRTY-ONE THOUSAND
NINE HUNDRED SIXTY DOLLARS ($31,960.00);
(c) On the first day of April, 1997, the sum of THIRTY-TWO
THOUSAND NINE HUNDRED SIXTY-TWO AND 67/100 DOLLARS ($32,962.67);
(d) Commencing May 1, 1997 and continuing on the first day
of each month thereafter through March 31, 1998, the sum of THIRTY-THREE
THOUSAND EIGHT HUNDRED FORTY DOLLARS ($33,840.00); and
(e) On the first day of April, 1998, the sum of FIFTEEN
THOUSAND SEVEN HUNDRED NINETY-TWO DOLLARS ($15,792.00).
In addition to minimum monthly rent payments, Tenant shall pay,
concurrently with rental payments, on the first day of each month, any other
costs due and owing by Tenant in accordance with the terms of the Lease.
3. SECURITY DEPOSIT INCREASE: The security deposit referred to in
Paragraph 4.F., Security Deposit, on execution of this Lease Modification
Agreement, shall be increased to SIXTY-SEVEN THOUSAND SIX HUNDRED EIGHTY
DOLLARS ($67,680.00).
4. IMPROVEMENTS TO PREMISES: Landlord shall, prior to effective
date of rent, repair the lighting and HVAC systems and replace any damaged
ceiling tiles within the additional premises. In addition, within the additional
premises, the walls will be painted and carpet and baseboard will be installed,
to match the existing space occupied by Prism Solutions. The cost of such
painting, carpeting and any baseboard in the additional premises shall be shared
equally (50/50) by Landlord and Tenant. Tenant shall pay its share of all such
costs directly to Landlord upon completion of the work. Other than the repairs
and improvements to be made in accordance with this Paragraph 4, the Premises
are leased hereunder on an "as is, except for latent and hidden defects within
the first 60 days," basis and in the configuration shown on Exhibit "A".
Landlord shall not be required to make, nor be responsible for any other cost
in connection with any repair, restoration and/or improvement to the additional
Premises in order for this Lease to
Lease Modification Agreement Please initial: _JH_
Please initial: _FB_
<PAGE> 2
commence. Landlord makes no warranty or representation of any kind or nature
whatsoever as to the condition or repair of the Premises, nor as to the use
or occupancy which may be made thereof.
5. OPTION TO RENEW: Paragraph 47, subparagraph B, "Option to
Extend Lease for Two (2) Years", shall be amended with respect to the rent to
be paid by Tenant during such option periods. Such option period rent shall be
as follows:
<TABLE>
<CAPTION>
Option Period Monthly Rent
------------- ------------
<S> <C> <C>
4/15/98 - 4/14/99 $35,720.00
4/15/99 - 4/15/00 $37,600.00
</TABLE>
Subparagraph D, "Increased Security Deposit", shall be amended
to reflect that the security deposit shall be increased to SEVENTY-ONE THOUSAND
FOUR HUNDRED FORTY DOLLARS ($71,440.00) in the event the Lease is extended in
accordance with Paragraph 47.
6. DELETION OF PARAGRAPHS: Paragraph 48, "Right of First Refusal to
Lease Additional Space", shall be deleted in its entirety.
7. EFFECTIVENESS OF LEASE: Except as herein expressly set forth in
this Lease Modification Agreement, all of the provisions of the Lease Agreement
dated February______, 1995 shall remain unchanged and shall continue in full
force and effect.
Dated: March 31, 1996. LANDLORD:
/s/ FRANCISCO BERRUETA
______________________________
FRANCISCO BERRUETA
Dated: March 21, 1996 TENANT:
PRISM SOLUTIONS, INC., a
Delaware corporation
By: /s/ JERRY HARMON
---------------------------
By:___________________________
Lease Modification Agreement Please initial: _____
Please initial: _____
-2-
<PAGE> 1
EXHIBIT 10.25
[PRISM LOGO]
PRISM SOLUTIONS, INC.
1000 HAMLIN COURT
SUNNYVALE, CA 94089
January 20, 1997
Warren M. Weiss
90 Skywood Way
Woodside, CA 94062
Re: Employment With Prism Solutions, Inc.
Dear Warren,
Prism Solutions, Inc. (the "Company") is pleased to offer you a
position as President and Chief Executive Officer of the Company and a position
on its Board of Directors, on the terms set forth in this letter agreement,
effective as of January 23, 1997 upon your acceptance by execution of a
counterpart copy of this letter where indicated below.
1. Reporting; Duties and Responsibilities; Employment At Will; Employee
Invention Assignment and Confidentiality Agreement. In this position you will
report to the Board of Directors of the Company. This offer is for a full time
position, located at the offices of the Company, except as travel to other
locations may be necessary to fulfill your responsibilities. Your employment
with the Company is on an "at will" basis, and either you or the Company may
terminate your employment with the Company at any time, for any reason. You
will be required to enter into an Invention Assignment and Confidentiality
Agreement as described in paragraph 5 below. Upon your acceptance of this offer
to become the Company's Chief Executive Officer, the Board of Directors will
elect you to fill a position on the Company's Board of Directors, and while you
remain the Chief Executive Officer of the Company, the Board of Directors will
continue to nominate you for a position on the Board of Directors of the
Company.
2. Severance Payments Upon Termination. If the Board of Directors
terminates your employment with the Company for any reason other than your
gross misconduct or the acquisition of the Company, the Company will pay you as
agreed upon severance an amount equal to your then base salary for the lesser
of (i) twelve months; or (ii) the number of months of service with Company up
to the termination date. If your employment with the Company is terminated
because the Company is acquired, or if you terminate your employment after an
acquisition of the Company because you are offered a position with the
successor in interest to the Company in which your salary is reduced from that
existing prior to the acquisition or you no longer are responsible for managing
the Company's business, the Company will pay you as agreed upon severance your
then base salary for the lessor of (i) twelve months following such
termination; or (ii) the number of months before you obtain a position with
another firm. In addition, if your employment with the Company is terminated
because the Company is acquired, or if you terminate your employment after an
acquisition of the Company because you are offered a position with the
successor in interest to the Company, the vesting period of all options held by
you will
<PAGE> 2
be accelerated such that all outstanding options will become available for
exercise. If the Company is acquired and you choose not to remain with the
Company at your sole discretion, 50% of your then unvested options will become
available for exercise. You will be granted a period of twelve months to
exercise options in the event of your termination by the Board of Directors. You
agree that the payments set forth in this offer letter constitute all payments
that you shall be entitled to, and under any theory, in the event of any
termination of employment.
3. Salary; Bonus; Benefits and Vacation. Your initial base salary will
be $20,834.00 per month, subject to adjustment in good faith by the Company's
Board of Directors, payable in accordance with the Company's customary payroll
practice as in effect from time to time. You will be paid a signing bonus of
$50,000 if you commence employment with the Company on or before February 15,
1997. You will also be eligible to earn an annual bonus in the amount of
$100,000 based on the achievement of objectives which you and the Company's
Board of Directors will mutually determine in good faith. The objectives for
1997 will be determined promptly after your acceptance of this letter;
objectives for future years will be determined promptly after the beginning of
each fiscal year of the Company. You will also receive the Company's standard
employee benefits package, and will be subject to the Company's vacation
policy, as such package and policy are in effect from time to time.
4. Stock Options. Effective at the Company's Board of Directors meeting
next after your acceptance of the offer contained in this letter, the Board will
grant you two stock options, effective upon the date of your commencement of
employment pursuant to this letter agreement. All options will have an exercise
price equal to the then-current fair market value of the Company Common Stock at
the date of grant, such date to be within 15 days of your acceptance of this
letter. If the Company is acquired before your options are fully vested, then
the provisions described in paragraph 2 above will apply.
(a) The first option will be to purchase up to 650,000 shares of
the Company Common Stock pursuant to the Company's Stock Option Plan. The
option will become exercisable over a four-year exercise schedule at the rate
of 13,542 shares per month, at the close of each month during which you remain
employed with the Company. With this provision, the Board is waiving the usual
requirement in the Company's option program which calls for "cliff" vesting of
the first 25% after twelve months of service.
(b) The second option will be to purchase up to 50,000 shares of
the Company Common Stock pursuant to the Company's Stock Option Plan. The
option only will become capable of becoming exercisable ("Exercisable") upon
the earlier of (i) the Company's Common Stock having a closing price in excess
of $25.00 per share for more than 30 consecutive trading days; or (ii) eight
years after the date of grant. If such option becomes "Exercisable", its
vesting will be at the rate of 1,042 shares per month, at the close of each
month during which you remain employed with the Company. Again, with this
provision, the board is waiving the usual requirement in the Company's option
program which calls for "cliff" vesting of the first 25% after twelve months of
service.
5. Confidential Information. As an employee of the Company, you will
have access to certain Company confidential information and you may, during the
course of your employment, develop certain information or inventions which will
be the property of the Company. To protect the interest of the Company, you
will need to sign the Company's standard "Employee Inventions and
Confidentiality Agreement" as a condition of your employment. We wish to
impress upon you that we do not wish you to bring with you any confidential or
proprietary material of any former employer or to violate any other obligation
to your former employers.
<PAGE> 3
6. At-Will Employment. While we look forward to a long and profitable
relationship, should you decide to accept our offer, you will be an at-will
employee of the Company, which means the employment relationship can be
terminated by either of us for any reason at any time. Any statements or
representations to the contrary (and, indeed, any statements contradicting any
provision in this letter) should be regarded by you as ineffective. Further,
your participation in any stock option or benefit program is not to be regarded
as assuring you of continuing employment for any particular period of time.
7. Authorization to Work. Because of Federal regulations adopted in
the Immigration Reform and Control Act of 1986, you will need to present
documentation demonstrating that you have authorization to work in the United
States. If you have any questions about this requirement, which applies to U.S.
citizens and non-U.S. citizens alike, please contact our human resources
department.
8. Term of Offer. This offer will remain open until January 24, 1997.
If you decide to accept our offer, and I hope that you will, please sign the
enclosed copy of this letter in the space indicated and return it to me or to
Kevin Fong. Upon your signature below, this will become our binding agreement
with respect to the subject matter of this letter, superseding in their
entirety all other or prior agreements by you with the Company as to the
specific subjects of this letter, will be binding upon and inure to the benefit
of our respective successors and assigns, and your heirs, administrators and
executors, will be governed by California law, and may only be amended in a
writing signed by you and the Company.
We are excited to have you join us and look forward to working with
you. We will be required to announce your joining us in a timely manner and
will work on the details of our press announcements with you.
Sincerely,
/s/ E. FLOYD KVAMME
------------------------------------------
E. Floyd Kvamme, Director
for the Board of Directors
Acknowledged, Accepted and Agreed Date:
/s/ WARREN M. WEISS 1/22/97
- --------------------------------- -------------------------
Warren M. Weiss
<PAGE> 1
EXHIBIT 11.01
PRISM SOLUTIONS, INC.
COMPUTATION OF NET LOSS PER SHARE
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------
1994 1995 1996
----------- ----------- ------------
<S> <C> <C> <C>
Weighted average shares outstanding 2,814,115 3,045,568 10,962,977
Common equivalent shares
pursuant to SAB No. 83 -- -- 256,179
----------- ----------- ------------
Average common and common stock
equivalent shares outstanding 2,814,115 3,045,568 11,219,156
=========== =========== ============
Net loss $ (2,538) $ (2,738) $ (1,839)
=========== =========== ============
Net loss per share $ (0.90) $ (0.90) $ (0.16)
=========== =========== ============
</TABLE>
NOTE: THERE IS NO DIFFERENCE BETWEEN PRIMARY AND FULLY DILUTED NET
LOSS PER SHARE FOR ALL PERIODS PRESENTED. CONVERSION OF COMMON STOCK
EQUIVALENTS WAS NOT ASSUMED BECAUSE THE EFFECT IS
ANTI-DILUTIVE.
<PAGE> 1
EXHIBIT 21.01
LIST OF REGISTRANT'S SUBSIDIARIES
<TABLE>
<CAPTION>
Percentage Owned
Name Jurisdiction of Organization by Registrant
- ---- ---------------------------- ----------------
<S> <C> <C>
Prism Data Warehouse Solutions Limited England 100%
Prism Solutions Iberica S.L. Spain 100
Prism Solutions, GmbH Germany 100
Prism Solutions SARL France 100
Prism Solutions de Mexico, S.A. de C.V Mexico 100
Prism Solutions, Inc. Canada 100
</TABLE>
<PAGE> 1
EXHIBIT 23.01
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Prism Solutions, Inc. on Form S-8 (File Number 33-02380) of our report dated
January 17, 1997, except for Note 5, for which the date is March 5, 1997, on our
audits of the consolidated financial statements and financial statement schedule
of Prism Solutions, Inc. and subsidiaries as of December 31, 1996 and 1995, and
for each of the three years in the period ended December 31, 1996, which report
is included in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
San Jose, California
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 14,844
<SECURITIES> 20,052
<RECEIVABLES> 8,392
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 44,275
<PP&E> 1,861
<DEPRECIATION> 0
<TOTAL-ASSETS> 46,299
<CURRENT-LIABILITIES> 9,777
<BONDS> 0
0
0
<COMMON> 14
<OTHER-SE> 36,494
<TOTAL-LIABILITY-AND-EQUITY> 46,299
<SALES> 30,424
<TOTAL-REVENUES> 30,424
<CGS> 7,139
<TOTAL-COSTS> 7,139
<OTHER-EXPENSES> 26,436
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,484)
<INCOME-PRETAX> (1,701)
<INCOME-TAX> 138
<INCOME-CONTINUING> (1,839)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,839)
<EPS-PRIMARY> (.16)
<EPS-DILUTED> (.16)
</TABLE>
