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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1998.
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ______________ to ______________
COMMISSION FILE NUMBER: 0-27774
PRISM SOLUTIONS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 77-0282704
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1000 HAMLIN COURT
SUNNYVALE, CA 94089
(Address of principal executive offices, including zip code)
TELEPHONE NUMBER (408) 752-1888
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
Yes [X] No [ ]
As of July 24, 1998, there were 18,459,837 shares of the Registrant's Common
Stock outstanding.
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PRISM SOLUTIONS, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets
December 31, 1997 and June 30, 1998.......................................... 3
Consolidated Statements of Operations Three months ended June 30,
1997 and June 30, 1998 and
Six months ended June 30, 1997 and June 30, 1998............................. 4
Condensed Consolidated Statements of Cash Flows
Six months ended June 30, 1997 and June 30, 1998............................. 5
Notes to Consolidated Financial Statements................................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................................... 9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................... 14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS............................................................ 15
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.................................... 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................................. 17
SIGNATURES................................................................... 18
INDEX TO EXHIBITS............................................................ 19
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
PRISM SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
-------- --------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,351 $ 6,536
Short-term investments 15,355 4,082
Accounts receivable, net 14,186 16,111
Other receivables 650 832
Prepaid expenses and other assets 927 595
-------- --------
Total current assets 37,469 28,156
Property and equipment, net 3,517 4,193
Other assets 2,199 2,039
-------- --------
Total assets $ 43,185 $ 34,388
======== ========
LIABILITIES
Current liabilities:
Accounts payable $ 2,813 $ 1,519
Notes payable 262 317
Accrued commissions 1,169 763
Accrued payroll and related 2,335 2,725
Deferred revenue 5,221 6,206
Other accrued liabilities 3,417 2,930
-------- --------
Total current liabilities 15,217 14,460
Other liabilities 364 362
-------- --------
Total liabilities 15,581 14,822
-------- --------
Contingencies (Note 3)
STOCKHOLDERS' EQUITY
Common stock 18 18
Additional paid-in capital 57,380 58,311
Unrealized holding gains (losses) (29) 29
Receivables from stockholders (90) --
Accumulated deficit (29,675) (38,792)
-------- --------
Total stockholders' equity 27,604 19,566
-------- --------
Total liabilities and stockholders' equity $ 43,185 $ 34,388
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
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PRISM SOLUTIONS, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
1997 1998 1997 1998
-------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
License $ 5,582 $ 6,064 $ 12,196 $ 13,092
Services and other 6,780 7,244 11,964 15,180
-------- -------- -------- --------
Total revenues 12,362 13,308 24,160 28,272
-------- -------- -------- --------
Cost of revenues:
License 216 399 619 549
Services and other 3,757 5,561 6,378 10,659
-------- -------- -------- --------
Total cost of revenues 3,973 5,960 6,997 11,208
-------- -------- -------- --------
Gross margin 8,389 7,348 17,163 17,064
-------- -------- -------- --------
Costs and expenses:
Sales and marketing 5,486 7,777 11,186 14,662
Research and development 2,499 4,184 4,403 7,909
General and administrative 1,778 1,821 3,351 3,628
-------- -------- -------- --------
Total operating expenses 9,763 13,782 18,940 26,199
-------- -------- -------- --------
Loss from operations (1,374) (6,434) (1,777) (9,135)
Interest income, net 444 41 910 327
Other income (expense), net (53) (112) (182) (105)
-------- -------- -------- --------
Loss before income taxes (983) (6,505) (1,049) (8,913)
Provision for income taxes (35) (52) (70) (135)
-------- -------- -------- --------
Net loss $ (1,018) $ (6,557) $ (1,119) $ (9,048)
======== ======== ======== ========
Comprehensive loss, net $ (1,027) $ (6,540) $ (1,133) $ (8,990)
======== ======== ======== ========
Basic loss per share $ (0.06) $ (0.36) $ (0.07) $ (0.49)
======== ======== ======== ========
Shares used in per share calculation 16,298 18,375 16,513 18,315
======== ======== ======== ========
Dilutive loss per share $ (0.06) $ (0.36) $ (0.07) $ (0.49)
======== ======== ======== ========
Shares used in per share calculation 16,298 18,375 16,513 18,315
======== ======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
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PRISM SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------
1997 1998
-------- --------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net cash used in operating activities $ (891) $ (9,726)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (1,016) (2,314)
Purchases of short-term investments (7,314) (4,099)
Maturities of short-term investments -- 15,372
-------- --------
Net cash (used in) provided by investing activities (8,330) 8,959
-------- --------
Cash flows from financing activities:
Payments received (issued) on receivables from stockholders (39) 90
Proceeds from employee stock purchase plan 488 480
Proceeds from the exercise of employee stock options 106 451
Payment of preferred stock dividend of acquired company (75) (69)
Repurchase of common stock (2,010) --
-------- --------
Net cash provided by (used in) financing activities (1,530) 952
-------- --------
Net increase (decrease) in cash and cash equivalents (10,751) 185
Cash and cash equivalents at beginning of year 14,863 6,351
-------- --------
Cash and cash equivalents at end of period $ 4,112 $ 6,536
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS.
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PRISM SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
On May 13, 1998, Prism Solutions, Inc. (the Company) completed the acquisition
of Systems Techniques, Inc. (STI), which was accounted for as a pooling of
interests. All financial data of the Company, including the Company's previously
issued financial statements for the periods presented in this Form 10-Q have
been restated to include the historical financial information of STI in
accordance with generally accepted accounting principles and pursuant to
Regulation S-X.
The consolidated financial statements at June 30, 1998 are unaudited and reflect
all adjustments (consisting only of normal recurring adjustments) which are, in
the opinion of management, necessary for a fair presentation of the financial
position and operating results for the interim periods. The consolidated
financial statements should be read in conjunction with the notes thereto,
together with management's discussion and analysis of financial condition and
results of operations for the fiscal year ended December 31, 1997 and the six
months ended June 30, 1998. The results of operations for the three and six
months ended June 30, 1998 are not necessarily indicative of the results for the
entire year ending December 31, 1998. The previous year end's balance sheet data
was derived from audited financial statements but does not include all
disclosures required by generally accepted accounting principles.
2. BASIC AND DILUTED INCOME/ (LOSS) PER SHARE
Basic and Diluted income/ (loss) per share is computed in accordance with
Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"). In the
June 30, 1998 and 1997 computations, common equivalent shares are excluded from
diluted loss per share as their effect is antidilutive. Common equivalent shares
that could potentially dilute earnings per share in the future and that were not
included in the computation of diluted loss per share because of antidilution
were 726,159 and 841,330, for the three and six month periods ending June 30,
1997 and 1,407,292 and 1,029,153 for the three and six month periods ending June
30, 1998, respectively.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
1997 1998 1997 1998
-------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
BASIC EPS:
Net loss $ (1,018) $ (6,557) $ (1,119) $ (9,048)
Denominator: Average common shares outstanding 16,298 18,375 16,513 18,315
-------- -------- -------- --------
Net loss per share (basic) $ (0.06) $ (0.36) $ (0.07) $ (0.49)
DILUTED EPS:
Denominator: Average common shares outstanding 16,298 18,375 16,513 18,315
-------- -------- -------- --------
Common equivalent shares outstanding (options) -- -- -- --
-------- -------- -------- --------
Total shares 16,298 18,375 16,513 18,315
-------- -------- -------- --------
Net loss per share (dilutive) $ (0.06) $ (0.36) $ (0.07) $ (0.49)
</TABLE>
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3. CONTINGENCIES
On March 5, 1997, a class action complaint styled Adler et al., v. Prism
Solutions, Inc. et al., Case No. CV764547, was filed by the law firm of Milberg
Weiss Bershad Hynes & Lerach LLP ("Milberg Weiss"), in Superior Court of the
State of California, County of Santa Clara, against the Company, several of its
current and former officers and directors and the underwriters of its initial
public offering. The complaint (like all subsequently filed complaints) 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 alleged that
the defendants artificially inflated the demand for the common stock prior to
and after the initial public offering. The complaint sought damages in an
unspecified amount. On August 6, 1997, the Superior Court entered an order
sustaining demurrers to three California Corporation Code claims and a
California Civil Code claim with leave to amend and to two Federal Securities
Act of 1933 claims without leave to amend. On December 12, 1997, the plaintiff
filed a first amended complaint which included a California Corporation Code
Section 25400 claim and the Federal Securities Act of 1993 claims against only
the Company and certain of its current and former officers and directors. On
March 2, 1998, the court sustained the individual officer and director
defendants' demurrer with leave to amend as to the California Corporation Code
claim and the Federal claims. The court overruled the Company's demurrer to both
the California Corporation Code claim and the Federal claims. On December 24,
1997, Milberg Weiss filed a class action complaint in the United States District
Court for the Northern District of California. This action named the Company and
several current and former officers and directors as defendants, and was based
on the same allegations as the earlier filed State Court action. In April 1998,
the Federal Court action was dismissed. In March 1998, a new judge was assigned
to the state court action. On March 12, 1998, plaintiffs filed a second amended
state court complaint against the Company and certain of its officers and
directors. In response, the Company filed a motion for reconsideration of the
prior demurrer order which sustained plaintiffs' complaint against the Company
and the individual defendants filed a demurrer. On June 4, 1998, the court
sustained the individual defendants' demurrer to the California Corporation Code
claim without leave to amend and to the Federal claims with leave to amend. The
court also denied the Company's motion to reconsider the prior demurrer order.
On June 30, 1998, plaintiffs filed a third amended complaint which alleges a
California Corporations Code claim and the Federal Securities Act of 1933 claims
against the Company and alleges the Federal claims against all but one of the
same officers and director defendants. On July 31, 1998, the individual
defendants filed a demurrer to the Federal claims. The court will decide this
demurrer on September 29, 1998. The Company believes the remaining State Court
action has no merit and intends to vigorously defend the action. The Company is
also involved in other ongoing legal matters incidental to its business.
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4. ACQUISITIONS
On May 13, 1998, the Company completed the acquisition of Systems Techniques,
Inc. (STI) by issuing approximately 544,000 shares of common stock in exchange
for all outstanding common stock of STI. The transaction was accounted for as a
pooling of interests. STI, a specialist in data warehousing solutions for the
healthcare industry, offers application-specific bundled solutions, a
methodology and consulting services for the healthcare industry. All financial
data of the Company, including the Company's previously issued financial
statements for the periods presented in this Form 10-Q have been restated to
include the historical financial information of STI. The following information
has been prepared for comparative purposes only and does not purport to be
indicative of what would have occurred had this transaction not been effected on
the date indicated above or of the results which may occur in the future.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
-----------
<S> <C>
Revenues:
Prism $ 46,947
STI 4,444
--------
Combined 51,391
--------
Net Income (loss):
Prism (16,101)
STI (81)
--------
Combined (16,182)
--------
Earnings (loss) per share (on a dilutive basis):
Prism (0.97)
STI 0.00
--------
Combined (0.94)
--------
</TABLE>
Costs associated with the merger were charged to expense as incurred and were
not significant.
5. OTHER MATTERS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." ("SFAS 131"), which supercedes Statement of
Financial Accounting Standards, "Financial Reporting for Segments of a Business
Enterprise" ("SFAS 14"). SFAS 131 changes current practice under SFAS 14 by
establishing a new framework on which to base segment reporting and also
requires interim reporting of segment information. This statement is effective
for fiscal years beginning after December 15, 1997. The statement's interim
reporting disclosures are not required until the first quarter immediately
subsequent to the fiscal year in which SFAS 131 is effective.
The Company has adopted the provisions of Statement of Position 97-2, "Software
Revenue Recognition" ("SOP 97-2"), as amended by SOP 98-4, Deferral of the
Effective Date of Certain Provisions of SOP 97-2, effective January 1, 1998. SOP
97-2 supercedes Statement of Position 91-1 and delineates the accounting for
software product and maintenance revenues. Under SOP 97-2, the Company
recognizes product revenues and license fees upon shipment if a signed contract
exists, the fee is fixed and determinable, collection of resulting receivables
is probable and product returns are reasonably estimable. In addition, for
contracts with multiple obligations (e.g. deliverable and undeliverable
products, services and maintenance), revenue must be allocated to each component
of the contract based on evidence of its fair value which is specific to the
Company, or for products not being sold separately, the price established by
management.
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Revenue allocated to undelivered products is recognized when criteria for
product and license revenue set forth above are met. Revenue allocated to
maintenance fees for ongoing customer support and product updates is recognized
ratably over the period of the maintenance contract. Payments for maintenance
fees are generally made in advance and are non-refundable. Revenue allocated to
other services is recognized as the related services are performed.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
With the exception of historical facts, the statements contained in this
discussion are forward-looking statements within the meaning of Section 21E of
the Securities Exchange Act of 1934, as amended, and Section 27A of the
Securities of 1933, as amended. Such forward-looking statements include, but are
not limited to, statements that relate to the Company's future revenues, the
cost of those revenues, operating expenses, capital expenditures, investment
strategy and the sufficiency of financial resources to support future operations
and investments. Such statements are based on current expectations that involve
risks and uncertainties, including those discussed below and under the heading
Risk Factors, as well as those disclosed in the Company's Annual Report on Form
10-K for the year ended December 31, 1997, which are herein incorporated by
reference, that could cause actual results to differ materially from those
expressed. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to publicly release the results of any revisions to
these forward-looking statements which may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
OVERVIEW
Incorporated in California in March 1991 and reincorporated in Delaware in
February 1996, Prism Solutions, Inc. pioneered the data warehousing market to
help companies understand, manage and use information effectively. Today, Prism
provides comprehensive solutions to deliver business intelligence applications.
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(TM) and Prism Directory Manager(TM), in December 1992
and April 1995, respectively. In December 1996, Prism Warehouse Manager and
Prism Directory Manager were replaced with Prism Warehouse Executive(TM) and
Prism Warehouse Directory(TM), respectively, as the Company's next generation
software. In the fourth quarter of 1996, Prism also completed the first
transactions for Iterations(R), its consulting methodology. Over the course of
1997 Prism introduced additional components to its core products. These included
Prism Schedule Manager for operational planning and deployment, Prism Quality
Manager(TM) for auditing and improving data quality, Prism Fastload(TM)
replication offerings, and Prism Web Access(TM) for warehouse navigation and
data delivery. In the first quarter of 1998 Prism complemented its Warehouse
development solutions by offering its Customer Relationship Management
System(TM) (through the acquisition of Customer Focus International). This
offering consists of comprehensive data models, analytical and sales development
applications for customer relationship management in the financial services
industry. In April 1998, the Company introduced the Prism Executive Suite which
consists of Prism Warehouse Executive, Prism Warehouse Directory and Prism
Quality Manager. Most recently, through the acquisition of Systems Techniques,
Inc., the Company enhanced its ability of delivering greater business value to
customers through vertical data warehousing solutions by the establishment of a
data warehousing Center of Excellence for the healthcare industry. The Company's
total revenues to date have been derived from software license revenues and
consulting services revenues. Software license revenue accounted for 50% of
total revenues in 1997 and 46% of total revenues in the first six months of
1998. Services and other revenues accounted for the remaining revenues in 1997
and the first six months of 1998. The Company's core data warehouse products are
primarily enterprise related and they require a significant amount of consulting
and implementation time from qualified personnel. Because many companies are
experiencing increased demands for other Information Technology projects, most
companies are outsourcing the implementation of data warehouse projects.
Accordingly, the Company believes that the consulting services component of its
business will continue to be a significant portion of total revenues, with the
balance derived from license fees and the related maintenance revenue.
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The following table sets forth operating results as a percentage of total
revenues for the three month and six month periods ended June 30, 1997 and 1998:
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUES PERCENTAGE OF TOTAL REVENUES
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- -----------------------------
1997 1998 1997 1998
-------- ---------- --------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
License 45% 46% 50% 46%
Services and other 55 54 50 54
------ ------ ------ ------
Total revenues 100 100 100 100
------ ------ ------ ------
Cost of revenues:
License 2 3 3 2
Services and other 30 42 26 38
------ ------ ------ ------
Total cost of revenues 32 45 29 40
------ ------ ------ ------
Gross margin 68 55 71 60
------ ------ ------ ------
Costs and expenses:
Sales and marketing 45 58 46 52
Research and development 20 31 18 28
General and administrative 14 14 14 13
------ ------ ------ ------
Total operating expenses 79 103 78 93
------ ------ ------ ------
Loss from operations (11) (48) (7) (33)
Interest income, net 3 -- 3 1
Other expense, net -- (1) (1) --
------ ------ ------ ------
Loss before income taxes (8) (49) (5) (32)
Provision for income taxes -- -- -- --
------ ------ ------ ------
Net loss (8)% (49)% (5)% (32)%
====== ====== ====== ======
</TABLE>
REVENUES
The Company's revenues are derived from license fees for its software products
and fees for services complementing its products, including software maintenance
and support, implementation, consulting and training.
License Revenues. License revenues increased $482,000 or 8.6% from the second
quarter of 1997 to the same period of 1998 and $896,000 or 7.3% from the first
six months of 1997 to the same period of 1998. Sales to new customers accounted
for 73% of revenues in the second quarter compared to 74% for the first quarter
of 1998. New product sales accounted for 27% and 13% of sales in the first and
second quarters of 1998, respectively. License revenues increased only slightly
due to lower than expected sales during the second quarter of 1998. The lower
sales volume is believed to be primarily the result of lower than expected
product sales, and secondarily lower than expected sales into the pacific rim
territory due to the economic downturn in that region.
Services and Other Revenues. Services and other revenues increased $464,000 or
6.8% from the second quarter of 1997 to the same period of 1998 and $3,216,000
or 26.9% from the first six months of 1997 to the same period of 1998. The
growth in service and other revenue was primarily the result of an increase in
the number and scope of consulting engagements and the additional revenue due to
the aforementioned acquisitions of CFI and STI. Additionally, the Company's
consulting organization has continued to grow to meet customer demand. The
majority of services and other revenues in both periods came from consulting
revenues.
COST OF REVENUES
Cost of License Revenues. Cost of license revenues increased $183,000 or 84.7%
from the second quarter of 1997 to the same period of 1998 and decreased $70,000
or 11.3% from the first six months of 1997 to the same period of 1998. Cost of
license revenues consists primarily of royalties paid to third party vendors,
and expenses incurred for product media and duplication, shipping expenses,
printing of manuals and packaging materials. The increase in the second quarter
of 1998 was attributable to costs associated with the introduction of the
Company's new Prism Warehouse Executive Suite. The decrease in cost of license
revenue for the six month period was primarily the result of decreases in
certain distribution costs, and media and duplication costs as well as a
reduction in royalty
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payments and payments to marketing partners. The Company expects that the cost
of license revenues will increase in absolute dollars as the Company licenses
technology and products from third parties for which royalties are owed.
Cost of Services and Other Revenues. Cost of services and other revenues
increased $1,804,000 or 48.0% from the second quarter of 1997 to the same period
of 1998 and $4,281,000 or 67.1% from the first six months of 1997 to the same
period of 1998. Cost of services and other revenues consists primarily of
personnel related costs incurred in providing consulting and implementation
services, telephone support and training to customers. The increase in cost of
service and other revenues was primarily due to increased costs related to
growth of the consulting organization and the use of contractors in the
Company's consulting, customer support and training organizations. The Company
expects that the cost of services and other revenues will increase in absolute
dollars as the Company continues to add customers.
OPERATING EXPENSES
The growth in operating expenses occurred primarily as a result of increases in
salaries and benefits, resulting from higher staffing levels and the expansion
of facilities. The ratio of operating expenses to total revenues was
significantly impacted by the lower than expected sales during the second
quarter of 1998.
Sales and Marketing. Sales and marketing expenses increased $2,291,000 or 41.8%
from the second quarter of 1997 to the same period of 1998 and $3,476,000 or
31.1% from the first six months of 1997 to the same period of 1998. Sales and
marketing expenses consist primarily of salaries, commissions and bonuses paid
to sales and marketing personnel as well as promotional expenses. The increase
in dollar amount in sales and marketing expenses from the second quarter of 1997
to the same period of 1998 was primarily due to the expansion of the Company's
sales operations and the new product introduction. In addition, marketing
activities, including trade shows and promotional expenses, increased from the
same periods for 1997 as a result of the new product introductions. The
percentage increase from 1997 to 1998 in sales and marketing expenses resulted
primarily as a result of increases in salaries and benefits, resulting from
higher staffing levels and the expansion of sales office facilities. 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 total
revenues continue to increase.
Research and Development. Research and development expenses increased by
$1,685,000 or 67.4% from the second quarter of 1997 to the same period of 1998
and $3,506,000 or 79.6% from the first six months of 1997 to the same period of
1998. Research and development expenses consist primarily of salaries paid to
the engineering staff. The increases in research and development expenses in
absolute dollars and as a percentage of revenues from the second quarter of 1997
to the same period of 1998 were primarily attributable to increased staffing and
associated support for software engineers required to expand and develop the
Company's most recent product offerings. Software development costs have been
expensed in accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed." To date, costs incurred after establishment of technological
feasibility have been immaterial and, as a result, all research and development
costs have been expensed as incurred. The Company believes that a significant
level of investment for research and development is required to remain
competitive and, accordingly, the Company anticipates that research and
development expenses will increase in absolute dollars but decrease as a
percentage of total revenues if the Company's total revenues continue to
increase.
General and Administrative. General and administrative expenses increased
$43,000 or 2.4% from the second quarter of 1997 to the same period of 1998 and
$277,000 or 8.3% from the first six months of 1997 to the same period of 1998.
General and administrative expenses consist primarily of salary expenses for
administrative and executive staff. These expenses increased from the second
quarter of 1997 to the same period of 1998 primarily due to the Company's
increased finance and information systems department staffing and equipment
requirements. The Company expects that its general and administrative expenses
will increase in absolute dollars and decrease as a percentage of revenues if
the Company's total revenues continue to increase.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents and short-term investments decreased to
$10,618,000 as of June 30, 1998 from $21,706,000 as of December 31, 1997. The
decrease was attributable primarily to the use of approximately $2,314,000 for
the purchase of property and equipment, and the use of $9,726,000 in order to
fund operations during
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the six month period ended June 30, 1998. As of June 30, 1998, the Company had
$6,536,000 in cash and cash equivalents and $4,082,000 in short-term
investments, which are classified as available for sale.
Although operating activities may provide cash in certain periods, to the extent
the Company experiences continuing losses in the future as it has in the
previous two quarters, the Company will need to obtain additional debt or equity
financing which may not be available or may be dilutive.
The Company expects that capital expenditures will occur at a rate commensurate
with the growth of the Company's employee base. As of June 30, 1998, the Company
had no material commitments to make capital expenditures. The Company's
principal commitments consisted of non-cancelable operating leases on its
facilities.
To date, the Company has not invested in derivative securities or any other
financial instruments that involve a high level of complexity or risk.
Management expects that, in the future, cash in excess of current requirements
will be invested in short-term, interest-bearing, investment grade securities.
ADDITIONAL RISK FACTORS THAT MIGHT AFFECT FUTURE RESULTS
Limited Operating History; History of Losses
The Company's limited operating history makes the forecast of future operations
difficult. The Company has never been profitable on an annual basis and
currently believes that it could continue to experience operating losses in the
second half of 1998, and if it does incur these additional operating losses, the
net result may be the use of the remaining available cash. Future operating
results will depend on many factors, including the growth of the data
warehousing market, the length of the sales cycle, the level of product and
price competition, demand for the Company's products, transaction size, the
Company's success in expanding its direct sales force and indirect distribution
channels, the ability of the Company to support and maintain existing products,
develop and market new products and control costs, the ability to recruit and
retain software engineers and other key personnel, general economic conditions
and other factors.
Through the remainder of 1998, the Company will continue to make limited
investments in the sales and consulting services functions, and to a lesser
degree in customer services, marketing and research and development. The primary
investments will be in the form of personnel additions to the Company's sales
and consulting force worldwide. These additional expenses may adversely affect
the Company's operating margin if there are no offsetting increases in revenues
or reductions in other operating expenses.
Management of Growth and Integration of Acquired Companies
The Company has recently experienced 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. The further increase in the number of
employees that is anticipated during the remainder of 1998 is limited to the
sales and consulting services functions, and to a lesser degree in customer
services, marketing and research and development. The Company's ability to
manage its staff and facilities growth effectively will require it to continue
to improve its operational, financial and management controls, reporting systems
and procedures, and to train, motivate and manage its employees. If the
Company's management is unable to manage growth effectively and new employees
are unable to achieve performance levels, the Company's business, operating
results and financial condition could be adversely affected. The Company
recently made acquisitions of other smaller software and consulting companies.
Such acquisitions are expected to place further strains on the Company's
administrative, financial and operational resources as the acquired technology
and personnel are integrated into the Company. If the Company's management is
unable to effectively integrate and assimilate such acquisitions, the Company's
business, operating results and financial condition will be materially adversely
affected.
Lengthy Sales Cycle
The licensing of the Company's products by its customers typically involves a
significant technical evaluation and commitment of capital and other resources,
with the attendant delays frequently associated with customers' internal
procedures to approve large capital expenditures and to test and accept new
technologies that affect key operations. For these and other reasons, the sales
cycle associated with the licensing of the Company's products is typically
12
<PAGE> 13
lengthy and subject to a number of significant risks, including customers'
budgetary constraints and internal acceptance reviews, that are beyond the
Company's control. Throughout 1997, the Company continued to experience longer
sales cycles, which have continued through the second quarter of 1998. If the
longer sales cycle persists or continues to lengthen, the Company's future
financial performance will be materially adversely affected.
Competition
The data warehouse market is intensely competitive and subject to rapid change.
Competitors vary in size and in the scope of the products and services they
offer. The Company encounters competition from a number of sources, including
management information systems departments of customers and potential customers.
The most active competitors to the Company's development solutions for
warehousing are Evolutionary Technologies International, Informatica, Apertus
Carleton Corporation, PLATINUM Technology and several other small, private
companies. The Company expects to experience additional competition from other
established and emerging software companies, including some of the Company's
current marketing partners. Increased competition could result 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. Over time, the Company
expects competitors to emerge in the Customer Relationship Management segment as
well.
Product Concentration
Substantially all of the Company's revenues to date have been attributable to
licenses for Prism Warehouse Executive, Prism Warehouse Directory and related
services. The Company currently expects that revenue attributable to Prism
Warehouse Executive and Prism Warehouse Directory, including maintenance and
consulting services, will continue to account for a majority of the Company's
total revenues. A decline in demand for or failure to achieve broad market
acceptance of these products as a result of competition, technological change or
otherwise, would have a material adverse effect on the business, operating
results and financial condition of the Company. A decline in license revenues
from these products would also have a material adverse effect on sales of other
Company products. The Company's future financial performance will depend in part
on the successful development, introduction and customer acceptance of new
releases of Prism Warehouse Executive and Prism Warehouse Directory. There can
be no assurance that the Company will continue to be successful in these or any
new or enhanced products. Without customer acceptance of these products, the
Company's future financial performance will be materially adversely affected.
Dependence on Key Personnel
The Company's future success will depend in large part upon its ability to
attract, retain and motivate highly skilled employees. There is significant
competition for employees with the skills required to perform the services
offered by the Company, particularly for software development engineers, and
there can be no assurance that the Company will be able to continue to attract
and retain sufficient numbers of highly skilled employees. The loss of a
significant number of the Company's senior management or other key research,
development, sales and marketing personnel, particularly if lost to competitors,
could have a material adverse effect on the Company's business, operating
results and financial condition, including its ability to attract employees.
Risks Associated with International Operations
Revenue generated outside of North America accounted for 23.5% and 33.7% of the
Company's total revenues for 1997 and the second quarter of 1998, respectively.
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. The Company has experienced lower than expected revenues
from customers within the Pacific Rim region which it believes are primarily
attributable to the economic downturn within that region. 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.
13
<PAGE> 14
Year 2000 Impact on Information Technology Budgets
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates
from 20th century dates. As a result, in less than two years, computer systems
and/or software used by many companies may need to be upgraded to comply with
such "Year 2000" requirements. Significant uncertainty exists in the software
industry concerning the potential effects associated with such compliance. The
Company has recently commenced a program, to be substantially completed by the
Spring of 1999, to review the Year 2000 compliance status of the software and
systems used in its internal business processes, to obtain appropriate
assurances of compliance from the manufacturers of these products and agreement
to modify or replace all non-compliant products. In addition, the Company is
considering converting certain of its software and systems to commercial
products that are known to be Year 2000 compliant. Implementation of software
products of third parties, however, will require the dedication of substantial
administrative and management information resources, the assistance of
consulting personnel from third party software vendors and the training of the
Company's personnel using such systems. Based on the information available to
date, the Company believes it will be able to complete its Year 2000 compliance
review and make necessary modifications prior to the end of 1999. Software or
systems which are deemed critical to the Company's business are scheduled to be
Year 2000 compliant by the end of 1998. Nevertheless, particularly to the extent
the Company is relying on the products of other vendors to resolve Year 2000
issues, there can be no assurances that the Company will not experience delays
in implementing such products. If key systems, or a significant number of
systems were to fail as a result of Year 2000 problems or the Company were to
experience delays implementing Year 2000 compliant software products, the
Company could incur substantial costs and disruption of its business, which
would potentially have a material adverse effect on the Company's business and
results of operations. The Company in its ordinary course of business tests and
evaluates its own software products. The Company believes that its software
products are generally Year 2000 compliant, meaning that the use or occurrence
of dates on or after January 1, 2000 will not materially affect the performance
of the Company's software products with respect to four digit date dependent
data or the ability of such products to correctly create, store, process and
output information related to such date data. To the extent the Company's
software products are not fully Year 2000 compliant, there can be no assurance
that the Company's software products contain all necessary software routines and
codes necessary for the accurate calculation, display, storage and manipulation
of data involving dates. In addition, in certain circumstances, the Company has
warranted that the use or occurrence of dates on or after January 1, 2000 will
not adversely affect the performance of the Company's products with respect to
four digit date dependent data or the ability to create, store, process and
output information related to such data. If any of the Company's licensees
experience Year 2000 problems, such licensees could assert claims for damages
against the Company. The Company's license agreements in most cases limit
liability to prevent unlimited exposure from such claims. To date the Company
has not identified a separate budget for investigating and remedying issues
related to Year 2000 compliance whether involving the Company's own software
products or the software or systems used in its internal operations. There can
be no assurances that Company resources spent on investigating and remedying
Year 2000 compliance issues will not have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
the purchasing patterns of customers and potential customers may be affected by
Year 2000 issues. Many companies are expending significant resources to correct
their current software systems for Year 2000 compliance. These expenditures may
result in reduced funds available to purchase software products such as those
offered by the Company, which could have an adverse effect on the Company's
business, results of operations and financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
14
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 5, 1997, a class action complaint styled Adler et al., v. Prism
Solutions, Inc. et al., Case No. CV764547, was filed by the law firm of Milberg
Weiss Bershad Hynes & Lerach LLP ("Milberg Weiss"), in Superior Court of the
State of California, County of Santa Clara, against the Company, several of its
current and former officers and directors and the underwriters of its initial
public offering. The complaint (like all subsequently filed complaints) 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 alleged that
the defendants artificially inflated the demand for the common stock prior to
and after the initial public offering. The complaint sought damages in an
unspecified amount. On August 6, 1997, the Superior Court entered an order
sustaining demurrers to three California Corporation Code claims and a
California Civil Code claim with leave to amend and to two Federal Securities
Act of 1933 claims without leave to amend. On December 12, 1997, the plaintiff
filed a first amended complaint which included a California Corporation Code
Section 25400 claim and the Federal Securities Act of 1993 claims against only
the Company and certain of its current and former officers and directors. On
March 2, 1998, the court sustained the individual officer and director
defendants' demurrer with leave to amend as to the California Corporation Code
claim and the Federal claims. The court overruled the Company's demurrer to both
the California Corporation Code claim and the Federal claims. On December 24,
1997, Milberg Weiss filed a class action complaint in the United States District
Court for the Northern District of California. This action named the Company and
several current and former officers and directors as defendants, and was based
on the same allegations as the earlier filed State Court action. In April 1998,
the Federal Court action was dismissed. In March 1998, a new judge was assigned
to the state court action. On March 12, 1998, plaintiffs filed a second amended
state court complaint against the Company and certain of its officers and
directors. In response, the Company filed a motion for reconsideration of the
prior demurrer order which sustained plaintiffs' complaint against the Company
and the individual defendants filed a demurrer. On June 4, 1998, the court
sustained the individual defendants' demurrer to the California Corporation Code
claim without leave to amend and to the Federal claims with leave to amend. The
court also denied the Company's motion to reconsider the prior demurrer order.
On June 30, 1998, plaintiffs filed a third amended complaint which alleges a
California Corporations Code claim and the Federal Securities Act of 1933 claims
against the Company and alleges the Federal claims against all but one of the
same officers and director defendants. On July 31, 1998, the individual
defendants filed a demurrer to the Federal claims. The court will decide this
demurrer on September 29, 1998. The Company believes the remaining State Court
action has no merit and intends to vigorously defend the action. The Company is
also involved in other ongoing legal matters incidental to its business.
15
<PAGE> 16
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Sale of Equity Securities
On May 14, 1998, the Company issued an aggregate of 544,153 shares of its Common
Stock to the stockholders of Systems Techniques, Inc. ("STI") in exchange for
all of the outstanding capital stock of STI in connection with the acquisition
of STI. The issuance of Common Stock was made in reliance on Section 4(2) of the
Securities Act of 1933. The securities were sold to a limited number of people
with no general solicitation or advertising. The purchasers were sophisticated
investors with access to all relevant information necessary to evaluate the
investment who represented to the Registrant that the shares were being acquired
for investment.
Use of Proceeds from Initial Public Offering
On March 14, 1996, the Company's registration statement on Form SB-2 (File No.
333-1180-LA) related to the initial public offering of the Company's Common
Stock (the "Registration Statement") was declared effective by the Securities
and Exchange Commission. The net offering proceeds to the Company after expenses
was $35,718,369 (the "Offering Proceeds"). From the effective date of the
Registration Statement to June 30, 1998, the Offering Proceeds have been used
for the purposes listed below:
<TABLE>
<CAPTION>
Direct or indirect payments to Direct or indirect payments to others
directors, officers, general partners
of the Company or their associates;
to persons owning ten (10) percent or
more of any class of equity
securities of the Company; and to
affiliates of the Company
<S> <C> <C>
Construction of plant, building and
facility ---- $ 59,572
Purchase and installation of machinery
and equipment ---- 6,597,482
Repayment of indebtedness ---- 641,450
Acquired Businesses ---- 2,466,000
Working capital ---- 21,871,865
Purchase of short-term liquid securities ---- 4,082,000
-----------
$35,718,369
</TABLE>
16
<PAGE> 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following exhibits are filed as part of this Form 10-Q:
27.01 Financial Data Schedule - Form 10-Q dated June 30, 1998
(b) Reports on Form 8-K. No reports were filed during the quarter ended June
30, 1998
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATED: August 13, 1998
PRISM SOLUTIONS, INC.
(Registrant)
By: /S/ WARREN M. WEISS
----------------------------------------
Warren M. Weiss
President and Chief Executive Officer
By: /S/ EARL C. CHARLES
----------------------------------------
Earl C. Charles
Chief Financial Officer
18
<PAGE> 19
PRISM SOLUTIONS, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
-------
<S> <C>
27.01 FINANCIAL DATA SCHEDULE - Form 10-Q dated June 30, 1998
</TABLE>
19
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 6,536
<SECURITIES> 4,082
<RECEIVABLES> 16,111
<ALLOWANCES> (650)
<INVENTORY> 0
<CURRENT-ASSETS> 28,156
<PP&E> 4,193
<DEPRECIATION> 0
<TOTAL-ASSETS> 34,388
<CURRENT-LIABILITIES> 14,460
<BONDS> 0
0
0
<COMMON> 18
<OTHER-SE> 19,548
<TOTAL-LIABILITY-AND-EQUITY> 34,388
<SALES> 13,092
<TOTAL-REVENUES> 28,272
<CGS> 549
<TOTAL-COSTS> 11,208
<OTHER-EXPENSES> 26,199
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (8,913)
<INCOME-PRETAX> (8,913)
<INCOME-TAX> (135)
<INCOME-CONTINUING> (9,048)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,048)
<EPS-PRIMARY> (0.49)
<EPS-DILUTED> (0.49)
</TABLE>
