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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 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: 000-27774
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)
(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 November 6, 1998, there were 18,701,138 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>
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets
December 31, 1997 and September 30, 1998..................................... 3
Consolidated Statements of Operations
Three months ended September 30, 1997 and September 30, 1998 and
Nine months ended September 30, 1997 and September 30, 1998.................. 4
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 1997 and September 30, 1998.................. 5
Notes to Consolidated Financial Statements................................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................................... 8
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................... 13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS............................................................ 14
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.................................... 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................................. 16
SIGNATURES................................................................... 17
INDEX TO EXHIBITS............................................................ 18
</TABLE>
2
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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, SEPTEMBER 30,
1997 1998
-------- --------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,351 $ 3,022
Short-term investments 15,355 1,006
Accounts receivable, net 14,186 15,093
Other receivables 650 1,025
Prepaid expenses and other assets 927 466
-------- --------
Total current assets 37,469 20,612
Property and equipment, net 3,517 4,025
Other assets 2,199 1,953
-------- --------
Total assets $ 43,185 $ 26,590
======== ========
LIABILITIES
Current liabilities:
Accounts payable $ 2,813 $ 1,695
Notes payable 262 219
Accrued commissions 1,169 749
Accrued payroll and related 2,335 3,318
Deferred revenue 5,221 5,411
Other accrued liabilities 3,417 1,969
-------- --------
Total current liabilities 15,217 13,361
Other liabilities 364 328
-------- --------
Total liabilities 15,581 13,689
-------- --------
Contingencies (Note 3)
STOCKHOLDERS' EQUITY
Common stock 18 19
Additional paid-in capital 57,380 58,834
Other Comprehensive Losses (29) (5)
Receivables from stockholders (90) --
Accumulated deficit (29,675) (45,947)
-------- --------
Total stockholders' equity 27,604 12,901
-------- --------
Total liabilities and stockholders' equity $ 43,185 $ 26,590
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
3
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PRISM SOLUTIONS, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
1997 1998 1997 1998
-------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
License $ 5,356 $ 4,770 $ 17,552 $ 17,863
Services and other 7,664 7,041 19,628 22,220
-------- -------- -------- --------
Total revenues 13,020 11,811 37,180 40,083
-------- -------- -------- --------
Cost of revenues:
License 347 318 950 866
Services and other 4,289 5,784 10,683 16,445
-------- -------- -------- --------
Total cost of revenues 4,636 6,102 11,633 17,311
-------- -------- -------- --------
Gross margin 8,384 5,709 25,547 22,772
-------- -------- -------- --------
Costs and expenses:
Sales and marketing 6,258 7,275 17,445 21,937
Research and development 3,123 3,936 7,526 11,845
General and administrative 1,679 1,704 5,030 5,330
Purchased-in-process technology 8,558 -- 8,558 --
-------- -------- -------- --------
Total operating expenses 19,618 12,915 38,559 39,112
-------- -------- -------- --------
Loss from operations (11,234) (7,206) (13,012) (16,340)
Interest income, net 371 62 1,281 334
Other income (expense), net 37 (53) (145) (104)
-------- -------- -------- --------
Loss before income taxes (10,826) (7,197) (11,876) (16,110)
Provision for income taxes (15) (27) (85) (162)
-------- -------- -------- --------
Net loss $(10,841) $ (7,224) $(11,961) $(16,272)
======== ======== ======== ========
Comprehensive loss, net $(10,841) $ (7,229) $(11,979) $(16,296)
======== ======== ======== ========
Basic loss per share $ (0.62) $ (0.39) $ (0.71) $ (0.88)
======== ======== ======== ========
Shares used in per share calculation 17,549 18,593 16,961 18,402
======== ======== ======== ========
Dilutive loss per share $ (0.62) $ (0.39) $ (0.71) $ (0.88)
======== ======== ======== ========
Shares used in per share calculation 17,549 18,593 16,961 18,402
======== ======== ======== ========
</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>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1997 1998
-------- --------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net cash used in operating activities $ (5,805) $(16,207)
-------- --------
Cash flows from investing activities:
Purchase of in-process technology and assets, net of cash acquired (2,466) --
Purchases of property and equipment (2,049) (3,016)
Purchases of short-term investments -- (5,122)
Maturities of short-term investments 4,118 19,471
-------- --------
Net cash (used in) provided by investing activities (397) 11,333
-------- --------
Cash flows from financing activities:
Payments received on receivables from stockholders 14 90
Proceeds from employee stock purchase plan 864 1,019
Proceeds from the exercise of employee stock options 176 505
Payment of preferred stock dividend of acquired company -- (69)
Repurchase of common stock (2,014) --
-------- --------
Net cash (used in) provided by financing activities (960) 1,545
-------- --------
Net decrease in cash and cash equivalents (7,162) (3,329)
Cash and cash equivalents at beginning of year 14,844 6,351
-------- --------
Cash and cash equivalents at end of period $ 7,682 $ 3,022
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS.
5
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PRISM SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements at September 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 nine months ended September 30, 1998. The results of operations for the
three and nine months ended September 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.
The Company has sustained recurring losses related primarily to the costs
associated with the development and marketing of its products and lower than
anticipated new product sales. Management is actively pursuing additional
financing and has implemented certain cost reduction and cost containment
measures including reductions in its employee base. In the event that management
is unable to raise additional funds in the near term, operating activities may
be significantly curtailed.
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
September 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 1,285,699 and 1,021,363, for the three and nine month periods
ending September 30, 1997 and 434,367 and 782,462 for the three and nine month
periods ending September 30, 1998, respectively.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
1997 1998 1997 1998
-------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
BASIC EPS:
Net loss $(10,841) $ (7,224) $(11,961) $(16,272)
Denominator: Average common shares outstanding 17,549 18,593 16,961 18,402
-------- -------- -------- --------
Net loss per share (basic) $ (0.62) $ (0.39) $ (0.71) $ (0.88)
DILUTED EPS:
Denominator: Average common shares outstanding 17,549 18,593 16,961 18,402
-------- -------- -------- --------
Common equivalent shares outstanding (options) -- -- -- --
-------- -------- -------- --------
Total shares 17,549 18,593 16,961 18,402
-------- -------- -------- --------
Net loss per share (dilutive) $ (0.62) $ (0.39) $ (0.71) $ (0.88)
</TABLE>
3. CONTINGENCIES
See Item 1. Legal Proceedings.
6
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4. 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.
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.
7
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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 Act 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
Additional Risk Factors That Might Affect Future Results, 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
January 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
(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(TM)
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 46% of
total revenues in 1997 and 45% of total revenues in the first nine months of
1998. Services and other revenues accounted for the remaining revenues in 1997
and the first nine 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 nine month periods ended September 30, 1997 and
1998:
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUES PERCENTAGE OF TOTAL REVENUES
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------------- ---------------------------------
1997 1998 1997 1998
------------------- ------------------- ------------------- ------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
License 41% 40% 47% 45%
Services and other 59 60 53 55
----- ----- ----- -----
Total revenues 100 100 100 100
----- ----- ----- -----
Cost of revenues:
License 3 3 2 2
Services and other 33 49 29 41
----- ----- ----- -----
Total cost of revenues 36 52 31 43
----- ----- ----- -----
Gross margin 64 48 69 57
----- ----- ----- -----
Costs and expenses:
Sales and marketing 48 62 47 55
Research and development 24 33 20 30
General and administrative 12 14 14 13
Purchased-in-process technology 66 - 23 -
----- ----- ----- -----
Total operating expenses 150 109 104 98
----- ----- ----- -----
Loss from operations (86) (61) (35) (41)
Interest income, net 3 - 3 -
Other expense, net - - - -
----- ----- ----- -----
Loss before income taxes (83) (61) (32) (41)
Provision for income taxes - - - -
----- ----- ----- -----
Net loss (83)% (61)% (32)% (41)%
===== ===== ===== =====
</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 decreased $586,000 or 11% from the third
quarter of 1997 to the same period of 1998 and increased $311,000 or 2% from the
first nine months of 1997 to the same period of 1998. Sales to new customers
accounted for 68% of revenues in the third quarter of 1998 compared to 73% for
the second quarter of 1998. New product sales accounted for 27%, 13% and 12% of
sales in the first, second and third quarters of 1998, respectively. The lower
sales volume in the third quarter of 1998 compared to the same period of 1997,
is primarily the result of lower than expected new product sales, and, to a
lesser extent, lower than expected sales into the Pacific Rim territory due to
the economic downturn in that region. During the first nine months of 1998,
license revenues increased only slightly due to lower than expected sales
primarily in North America and Asia Pacific.
Services and Other Revenues. Services and other revenues decreased $623,000 or
8% from the third quarter of 1997 to the same period of 1998 and increased
$2,592,000 or 13% from the first nine months of 1997 to the same period of 1998.
The decrease in services and other revenue for the third quarter of 1998
compared to 1997 is primarily the result of lower than expected consulting
revenues from acquired entities. The growth in service and other revenue during
the first nine months of 1998 compared to 1997 was primarily the result of an
increase in the number and scope of consulting engagements and the additional
revenue due to the acquisitions of CFI and STI earlier in fiscal 1998.
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 decreased $29,000 or 8% from
the third quarter of 1997 to the same period of 1998 and $84,000 or 9% from the
first nine 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 decrease in cost of license revenue for the
three and
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nine month periods was primarily the result of decreases in certain distribution
costs, and media and duplication costs as well as a reduction in royalty
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 $1,495,000 or 35% from the third quarter of 1997 to the same period of
1998 and $5,762,000 or 54% from the first nine months of 1997 to the same period
of 1998. Cost of services and other revenues consists primarily of personnel
related costs such as salary expense and non-recoverable travel expenses
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 third quarter
of 1998. The Company has recently conducted a reduction in force which should
result in lower operating expenses in subsequent quarters. However, should the
Companies revenues grow substantially, staff levels may be higher and operating
expenses may increase.
Sales and Marketing. Sales and marketing expenses increased $1,017,000 or 16%
from the third quarter of 1997 to the same period of 1998 and $4,492,000 or 26%
from the first nine 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 third quarter of 1997
to the same period of 1998 was primarily due to the expansion of the Company's
sales operations and new product introductions. 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 be lower in absolute dollars in
the fourth quarter due to its cost reduction program and decrease as a
percentage of total revenues if the Company's total revenues increase.
Research and Development. Research and development expenses increased by
$813,000 or 26% from the third quarter of 1997 to the same period of 1998 and
$4,319,000 or 57% from the first nine months of 1997 to the same period of 1998.
Research and development expenses consist primarily of salaries paid to the
engineering staff. The increase in research and development expenses in absolute
dollars and as a percentage of revenues from the third 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. However, the Company anticipates that research and development
expenses will be lower in absolute dollars in the fourth quarter due to its cost
reduction program and decrease as a percentage of total revenues if the
Company's total revenues increase.
General and Administrative. General and administrative expenses increased
$25,000 or 1% from the third quarter of 1997 to the same period of 1998 and
$300,000 or 6% from the first nine 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 third
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 be lower in absolute dollars in the fourth quarter due to its cost
reduction program and decrease as a percentage of revenues if the Company's
total revenues increase.
Purchased-in-process technology. During the third quarter of 1997, the Company
incurred a one time charge of $8.5 million for the write-off of
purchased-in-process technology related to the aforementioned acquisitions.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents and short-term investments decreased to
$4,028,000 as of September 30, 1998 from $21,706,000 as of December 31, 1997.
The decrease was attributable primarily to the use of approximately $3,016,000
for the purchase of property and equipment, and the use of $16,207,000 in order
to fund operations during the nine month period ended September 30, 1998. As of
September 30, 1998, the Company had $3,022,000 in cash and cash equivalents and
$1,006,000 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 three quarters, the Company will need to obtain additional debt or
equity financing which may not be available or, if available, may not be on
favorable terms 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 September 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.
The Company believes, based on its current operating levels and cost reduction
and containment efforts, that it has sufficient cash resources at September 30,
1998 for operating activities through fiscal 1999. In the event the Company is
unable to turn around its financial performance of previous quarters it will
require additional resources. The Company is, therefore, aggressively pursuing
financing alternatives. There can be no assurance, however, that the Company
will obtain additional financing or achieve sufficient cost reductions. In the
event that management is unable to raise additional funds in the near term,
operating activities may be significantly curtailed.
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
fourth quarter 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.
Integration of Acquired Companies
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 and Allocation of Customer Budgets
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
11
<PAGE> 12
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 third quarter of 1998. If the longer
sales cycle persists or continues to lengthen, the Company's future financial
performance will be materially adversely affected. In addition, customer
software budgets are currently focused on Year 2000 and enterprise resource
planning (ERP) projects, which are delaying investments in warehousing
initiatives that are not mission-critical. Significant delays in decisions to
purchase data warehouse software could have a material adverse impact on the
Company's revenue growth.
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, inc. 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. New product
sales in the current and previous quarter have been lower than anticipated
primarily due to the economic downturn in the Asia Pacific region and due to the
allocation of customer budgets as noted above. 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 36.1% of the
Company's total revenues for fiscal 1997 and the first nine months 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.
Uncertainty surrounding global economic conditions could have a material adverse
impact on the Company's revenues. 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
12
<PAGE> 13
with a variety of foreign laws, greater difficulty in accounts receivable
collection, potentially adverse tax consequences, currency fluctuations and
political and economic instability.
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 end of the fourth quarter of 1998, to review the Year 2000 compliance status
of the software and systems used in its internal business processes and to
obtain appropriate assurances of compliance from the manufacturers of these
products and agreement to modify or replace all non-compliant products. 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 has not
completed its analysis of these potential costs. Additionally, the Company does
not yet have a documented contingency plan to address the year 2000 issues
should any of these efforts to become compliant fail.
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.
13
<PAGE> 14
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 August 3, 1998, the individual
defendants filed a demurrer to the Federal claims, which the Court overruled on
September 29, 1998. On October 30, 1998, the Company and the four remaining
individual defendants filed a joint answer to the third amended complaint. The
Company believes the third amended complaint's claims have no merit and intends
to vigorously defend the State Court action. The Company is also involved in
other ongoing legal matters incidental to its business.
14
<PAGE> 15
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
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 September 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 ____ 7,299,482
Repayment of indebtedness ____ 710,450
Acquired Businesses ____ 2,466,000
Working capital ____ 24,176,865
Purchase of short-term liquid securities ____ 1,006,000
-----------
$35,718,369
</TABLE>
15
<PAGE> 16
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
10.19 Employment Agreement with Michael O. Hunt dated September 29, 1998
(b) Reports on Form 8-K. No reports were filed during the quarter ended
September 30, 1998
16
<PAGE> 17
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: November 16, 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
17
<PAGE> 18
PRISM SOLUTIONS, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
-------
<S> <C>
27.01 FINANCIAL DATA SCHEDULE
10.19 Employment Agreement with Michael O. Hunt dated September 29, 1998
</TABLE>
18
<PAGE> 1
EXHIBIT 10.19
PRISM SOLUTIONS, INC.
1000 Hamlin Court
Sunnyvale, CA 94089
September 29, 1998
Michael O. Hunt
Wisteria Cottage
Aston Lane
Aston Oxon, RG 93 DS,
United Kingdom
Re: Employment With Prism Solutions, Inc.
Dear Michael:
Prism Solutions, Inc. (the "Company") is pleased to offer you a position as
VP International of the Company on the terms set forth in this letter agreement,
effective as of October 1, 1998 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 Chief Executive Officer 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.
2. Termination Provisions.
(a) Severance Payments. 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 during which you have been employed by
Company up to your date of termination. In the event that (i) your employment
with the Company is terminated because the Company is acquired; (ii) you
terminate your employment with the Company after an acquisition of the Company
because you are not offered a position with the successor in interest of the
Company comparable in salary and responsibility to the position with the Company
which you held prior to such acquisition; or (iii) you terminate your employment
with the Company at your own discretion after an acquisition of the Company in
which you are offered a position with the successor in interest of the Company
comparable in salary and responsibility to the position with the Company which
you held prior to such acquisition, then 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.
<PAGE> 2
Michael O. Hunt
September 29, 1998
Page 2
(b) Acceleration of Vesting of Stock Options. If (i) your employment
with the Company is terminated because the Company is acquired or (ii) you
terminate your employment with the Company after an acquisition of the Company
because you are not offered a position with the successor in interest of the
Company comparable in salary and responsibility to the position with the Company
which you held prior to such acquisition, then each option to purchase shares of
the Company's Common Stock under the Company's 1996 Equity Incentive Plan or a
successor plan which you hold, including the option described in Section 4 of
this agreement, shall become vested as to one hundred percent (100%) of the
Shares as to which such option is unvested as of such time, and you will be
permitted to exercise each such option, to the extent (and only to the extent)
that it has not yet been exercised as of your date of termination, at any time
until the earlier to occur of (i) twelve (12) months after your date of
termination or (ii) the expiration date of such option. If you terminate your
employment with the Company at your own discretion after an acquisition of the
Company in which you are offered a position with the successor in interest of
the Company comparable in salary and responsibility to the position with the
Company which you held prior to such acquisition, then each option to purchase
shares of the Company's Common Stock under the Company's 1996 Equity Incentive
Plan or a successor plan which you hold, including the option described in
Section 4 of this agreement, shall become vested as to fifty percent (50%) of
the Shares as to which such option is unvested as of such time, and you will be
permitted to exercise each such option, to the extent (and only to the extent)
that it is vested and has not yet been exercised as of your date of termination,
at any time until the earlier to occur of (i) twelve (12) months after your date
of termination or (ii) the expiration date of such option.
(c) No Additional Payments. 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
POUNDS STERLING 8,600.00 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 also be eligible to
earn an annual variable compensation in the amount of POUNDS STERLING 78,800
based on the achievement of objectives which you and the Company's Chief
Executive Officer with agreement of the Board of Directors will mutually
determine in good faith. The objectives for the remainder of 1998 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. You will be entitled to receive a car allowance
of POUNDS STERLING 730.00 per month. The Company provides contributions to a
group personal pension plan which you are invited to join. The Company will make
a pension contribution of 5% of your earnings(such contribution not to exceed
POUNDS STERLING 6,100 annually), provided that you make a similar contribution.
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 a stock option, effective upon the date of your commencement of
employment pursuant to this letter agreement.
<PAGE> 3
Michael O. Hunt
September 29, 1998
Page 3
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. The stock option will be to purchase up to 100,000 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 2,500
shares per month, at the close of each month during which you remain employed
with the Company.
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.
6. At-Will Employing . 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 October 1, 1998. 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. 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 not only be amended in a writing signed by you and the
Company.
<PAGE> 4
Michael O. Hunt
September 29, 1998
Page 4
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,
Warren M. Weiss, Director
for the Board of Directors
Acknowledged, Accepted and Agreed
- ----------------------------
Michael O. Hunt Date:
----------------------
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 3,022,000
<SECURITIES> 1,006,000
<RECEIVABLES> 15,093,000
<ALLOWANCES> (650,000)
<INVENTORY> 0
<CURRENT-ASSETS> 20,612,000
<PP&E> 4,025,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 26,590,000
<CURRENT-LIABILITIES> 13,361,000
<BONDS> 328,000
0
0
<COMMON> 19,000
<OTHER-SE> 12,882,000
<TOTAL-LIABILITY-AND-EQUITY> 26,590,000
<SALES> 4,770,000
<TOTAL-REVENUES> 11,811,000
<CGS> 318,000
<TOTAL-COSTS> 6,102,000
<OTHER-EXPENSES> 12,915,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,000
<INCOME-PRETAX> (7,197,000)
<INCOME-TAX> 27,000
<INCOME-CONTINUING> (7,224,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,224,000)
<EPS-PRIMARY> (0.39)
<EPS-DILUTED> (0.39)
</TABLE>
