<PAGE> 1
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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 March 31, 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 April 29, 1998, there were 17,863,227 shares of the Registrant's Common
Stock outstanding.
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<PAGE> 2
PRISM SOLUTIONS, INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
PAGE
----
NO.
---
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS:
<S> <C>
Consolidated Balance Sheets
December 31, 1997 and March 31, 1998......................................... 3
Consolidated Statements of Operations and Comprehensive Income (Loss)
Three months ended March 31, 1997 and March 31, 1998 ........................ 4
Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 1997 and 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 .................. 12
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS............................................................ 12
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.................................... 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ......................... 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................................. 15
SIGNATURES................................................................... 16
INDEX TO EXHIBITS............................................................ 17
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
PRISM SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
-------- --------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,929 $ 11,261
Short-term investments 15,355 6,466
Accounts receivable, net 13,705 14,117
Other receivables 650 1,301
Prepaid expenses and other assets 905 804
-------- --------
Total current assets 36,544 33,949
Property and equipment, net 3,253 3,731
Other assets 2,166 2,167
-------- --------
Total assets $ 41,963 $ 39,847
======== ========
LIABILITIES
Current liabilities:
Accounts payable $ 2,668 $ 1,884
Notes payable 109 154
Accrued commissions 1,169 1,397
Accrued payroll and related 2,335 2,075
Deferred revenue 5,221 5,816
Other accrued liabilities 2,811 2,495
-------- --------
Total current liabilities 14,313 13,821
Other liabilities 248 191
-------- --------
Total liabilities 14,561 14,012
-------- --------
Contingencies (Note 3)
STOCKHOLDERS' EQUITY
Common stock 18 18
Additional paid-in capital 55,880 56,414
Unrealized holding gains (losses) (29) 12
Receivables from stockholders (90) (90)
Accumulated deficit (28,377) (30,519)
-------- --------
Total stockholders' equity 27,402 25,835
-------- --------
Total liabilities and stockholders' equity $ 41,963 $ 39,847
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE> 4
PRISM SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------------
1997 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
Revenues:
License $ 6,614 $ 7,028
Services and other 4,335 7,199
------------ ------------
Total revenues 10,949 14,227
------------ ------------
Cost of revenues:
License 403 150
Services and other 2,238 4,545
------------ ------------
Total cost of revenues 2,641 4,695
------------ ------------
Gross margin 8,308 9,532
------------ ------------
Costs and expenses:
Sales and marketing 5,478 6,642
Research and development 1,693 3,583
General and administrative 1,287 1,629
------------ ------------
Total operating expenses 8,458 11,854
------------ ------------
Loss from operations (150) (2,322)
Interest income, net 499 256
Other income (expense), net (54) 8
------------ ------------
Income (loss) before income taxes 295 (2,058)
Provision for income taxes 35 84
------------ ------------
Net income (loss) $ 260 $ (2,142)
============ ============
Comprehensive income (loss), net $ 260 $ (2,101)
============ ============
Basic income/ (loss) per share $ 0.02 $ (0.13)
============ ============
Shares used in per share calculation 15,933,866 16,794,879
============ ============
Dilutive income/ (loss) per share $ 0.02 $ (0.13)
============ ============
Shares used in per share calculation 16,827,245 16,794,879
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE> 5
PRISM SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1997 1998
-------- --------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net cash used in operating activities $ (1,161) $ (2,887)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (515) (1,204)
(Purchases) maturities of short-term investments (7,843) 8,889
-------- --------
Net cash (used in)/provided by investing
activities (8,358) 7,685
-------- --------
Cash flows from financing activities:
Payments received on receivable from stockholder (36) --
Proceeds from employee stock purchase plan 485 480
Proceeds from the exercise of employee stock options 45 54
Repurchase of common stock (10) --
-------- --------
Net cash provided by financing activities 484 534
-------- --------
Net increase (decrease) in cash and cash equivalents (9,035) 5,332
Cash and cash equivalents at beginning of period 14,855 5,929
-------- --------
Cash and cash equivalents at end of period $ 5,820 $ 11,261
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
5
<PAGE> 6
PRISM SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
On January 30, 1998, Prism Solutions, Inc. (the Company) completed the
acquisition of Customer Focus International, Inc. (CFI), 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 CFI in accordance with generally accepted accounting principles
and pursuant to Regulation S-X.
The consolidated financial statements at March 31, 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 three months ended March 31, 1998. The results of operations for the
three months ended March 31, 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
March 31, 1998 computation, 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 830,891 for the period ending March 31, 1998. The March 31, 1997 dilutive
earnings per share computation includes 893,379 common equivalent shares.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------------
1997 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
BASIC EPS:
Net income (loss) $ 260 $ (2,142)
Denominator: Average common shares outstanding 15,933,866 16,794,879
------------ ------------
Net income (loss) per share (basic) $ 0.02 $ (0.13)
DILUTED EPS:
Denominator: Average common shares outstanding 15,933,866 16,794,879
Common equivalent shares outstanding (options) 893,379 --
------------ ------------
Total shares 16,827,245 16,794,879
Net income (loss) per share (basic) $ 0.02 $ (0.13)
</TABLE>
6
<PAGE> 7
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 in Superior Court of the State of California,
County of Santa Clara, against the Company and several of its current and former
officers and directors and the underwriters of its initial public offering. The
complaint was filed on behalf of those persons who purchased or otherwise
acquired the common stock of the Company from March 14 through October 14, 1996,
and alleges that the defendants artificially inflated the demand for the common
stock prior to and after the initial public offering. The complaint seeks
damages in an unspecified amount. On August 6, 1997, the Superior Court entered
an order sustaining demurrers to the California Corporation Code claims with
leave to amend and the Federal Securities Act of 1933 claims without leave to
amend. On December 12, 1997, the plaintiff filed an amended complaint which
included both the California Corporation Code claims and the Federal Securities
Act of 1933 claims against only the Company and certain of its current and
former officers and directors. The Company has demurred to the amended
complaint. On March 2, 1998, the court sustained the demurrer with leave to
amend as to the California Corporation Code claims and denied the demurrer to
the Federal claims. On December 24, 1997, Milberg Weiss Bershad Hynes & Lerach
LLP 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. On March 12, 1998, plaintiffs filed a second
amended complaint to which defendants have demurred. 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.
4. ACQUISITIONS
On January 30, 1998, the Company completed the acquisition of Customer Focus
International, Inc. (CFI) by issuing approximately 2,877,500 shares of common
stock in exchange for all outstanding common stock of CFI. The transaction was
accounted for as a pooling of interests. CFI designs, markets, integrates, and
supports enterprise customer relationship management software for the financial
services industry, primarily banking. 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 CFI. 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>
DECEMBER 31,
1997
--------
<S> <C>
Revenues:
Prism $ 43,433
CFI 3,514
--------
Combined $ 46,947
--------
Net Income (loss):
Prism $(16,152)
CFI 49
--------
Combined $(16,103)
--------
Earnings (loss) per share
(on a dilutive basis):
Prism $ (1.16)
CFI 0.00
--------
Combined $ (0.97)
--------
</TABLE>
Costs associated with the merger were charged to expense as incurred and were
not significant.
7
<PAGE> 8
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.
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 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
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. Most recently, in April 1998, the Company introduced the Prism
Executive Suite which consists of Prism Warehouse Executive, Prism Warehouse
Directory and Prism Quality Manager. The Company does not expect to recognize
revenue from the Prism Executive Suite until late 1998. The Company's total
revenues to date have mostly been derived from software license revenues and
consulting services revenues. Software license revenue accounted for 51% of
8
<PAGE> 9
total revenues in 1997 and 49% of total revenues in the first three months of
1998. Services and other revenues accounted for the remaining revenues in 1997
and the first three months of 1998. The Company expects that license revenues
will account for a majority of the Company's revenues for the foreseeable
future.
On May 13, 1998, the Company acquired Systems Techniques, Inc. ("STI"), a
Georgia based company specializing in data warehousing solutions for the
healthcare industry for approximately 545,000 shares of Prism Common Stock. This
transaction will be accounted for as a pooling of interests. STI had a net loss
of $81,000 on revenues of $4,400,000 for 1997.
The following table sets forth operating results as a percentage of total
revenues for the three-month period ended March 31, 1997 and 1998:
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUES
-----------------------------
THREE MONTHS ENDED
MARCH 31,
-----------------------------
1997 1998
-------------- ------------
(unaudited) (unaudited)
<S> <C> <C>
Revenues:
License 60% 49%
Services and other 40 51
---- ----
Total revenues 100 100
---- ----
Cost of revenues:
License 4 1
Services and other 20 32
---- ----
Total cost of revenues 24 33
---- ----
Gross margin 76 67
---- ----
Costs and expenses:
Sales and marketing 50 47
Research and development 15 25
General and administrative 12 11
---- ----
Total operating expenses 77 83
---- ----
Income (loss) from operations (1) (16)
Interest income, net 4 2
Other expense, net -- --
---- ----
Income (loss) before income taxes 3 (14)
Provision for income taxes -- 1
---- ----
Net income (loss) 2% (15)%
==== ====
</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 $414,000 or 6.3% from the first
quarter of 1997 to the same period of 1998. License revenues increased only
slightly due to a shift in the product sales mix as the Company introduced new
products during the second half of fiscal 1997 and products acquired through the
acquisition of CFI in January 1998. Unit sales of the Company's core products
decreased in the first quarter of 1998 compared to the first quarter of 1997,
while unit sales of new products more than offset the decrease in this period.
New product sales accounted for 27.0% of sales in the first quarter of 1998.
Services and Other Revenues. Services and other revenues increased $2,864,000 or
66.1% from the first quarter of 1997 to the same period of 1998. The growth in
services and other revenue was primarily the result of an increase in the number
and scope of consulting engagements. 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 $253,000 or 62.8%
from the first quarter 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 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.
9
<PAGE> 10
Cost of Services and Other Revenues. Cost of services and other revenues
increased $2,307,000 or 103.1% from the first quarter 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 personnel as the
Company continued to expand its 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.
Sales and Marketing. Sales and marketing expenses increased $1,164,000 or 21.2%
from the first quarter 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 first quarter of 1997 to the
same period of 1998 was primarily due to the expansion of the Company's sales
operations and increased commissions due to revenue growth year over year. In
addition, marketing activities, including trade shows and promotional expenses,
increased from the same periods for 1997. The percentage decrease from 1997 to
1998 in sales and marketing expenses compared to total revenues resulted
primarily from the economies of scale associated with the increase in total
revenues. The Company expects that sales and marketing expenses will continue to
increase in absolute dollars but slightly decrease as a percentage of total
revenues if the Company's total revenues continue to increase.
Research and Development. Research and development expenses increased by
$1,890,000 or 111.6% from the first quarter 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 first 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 enhance the
Company's product line. Software development costs have been expensed in
accordance with Statement of Financial Accounting Standards No. 86, "Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed." To
date, costs incurred after establishment of technological feasibility have been
immaterial and, as a result, all research and development costs have been
expensed as incurred. The Company believes that a significant level of
investment for research and development is required to remain competitive and,
accordingly, the Company anticipates that research and development expenses will
increase in absolute dollars but slightly decrease as a percentage of total
revenues if the Company's total revenues continue to increase.
General and Administrative. General and administrative expenses increased
$342,000 or 22.6% from the first quarter 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 first
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 decrease from the first quarter of 1997 to the first quarter
of 1998 in general and administrative expenses as a percentage of total revenues
was principally caused by the realization of economies of scale, despite legal
fees related to the shareholder lawsuit and costs related to management
turnover, in particular recruiting and severance costs. The Company expects that
its general and administrative expenses will increase in absolute dollars and
decrease as a percentage of revenues if the Company's total revenues continue to
increase.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and short-term investments decreased to
$17,727,000 as of March 31, 1998 from $21,284,000 as of December 31, 1997, due
primarily to the use of approximately $1,204,000 for the purchase of property
and equipment, and the use of $2,852,000 in order to fund operations during the
first quarter of 1998. As of March 31, 1998, the Company had $11,261,000 in cash
and cash equivalents and $6,466,000 in short-term investments, which are
classified as available for sale.
The Company expects that capital expenditures will occur at a rate commensurate
with the growth of the Company's employee base. As of March 31, 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.
10
<PAGE> 11
The Company believes its current cash balances and cash flow from operations, if
any, will be sufficient to meet its working capital and capital expenditure
requirements for at least the next twelve months. Although operating activities
may provide cash in certain periods, to the extent the Company experiences
growth in the future, the Company anticipates that its operating and investing
activities may use cash. Consequently, any such future growth may require the
Company to obtain additional equity or debt financing, which may not be
available or may be dilutive.
ADDITIONAL 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. Although the Company has experienced significant growth in revenues
in recent periods, the Company does not believe that this growth rate is
indicative of future operating results. The Company has never been profitable on
an annual basis and currently believes that it could continue to experience
operating losses in 1998. 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 invest more 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
The Company is currently experiencing a period of rapid growth that has placed
and is expected to continue to place a strain on the Company's administrative,
financial and operational resources. Further increases in the number of
employees are anticipated during the remainder of 1998. The Company's ability to
manage its staff and facilities growth effectively will require it to continue
to improve its operational, financial and management controls, reporting systems
and procedures, and to train, motivate and manage its employees. If the
Company's management is unable to manage growth effectively and new employees
are unable to achieve performance levels, the Company's business, operating
results and financial condition could be adversely affected. The Company
recently made acquisitions of other smaller software and consulting companies.
Such acquisitions are expected to place further strains on the Company's
administrative, financial and operational resources as the acquired technology
and personnel are integrated into the Company. If the Company's management is
unable to effectively integrate and assimilate such acquisitions, the Company's
business, operating results and financial condition could be adversely affected.
Lengthy Sales Cycle
The licensing of the Company's products by its customers typically involves a
significant technical evaluation and commitment of capital and other resources,
with the attendant delays frequently associated with customers' internal
procedures to approve large capital expenditures and to test and accept new
technologies that affect key operations. For these and other reasons, the sales
cycle associated with the licensing of the Company's products is typically
lengthy and subject to a number of significant risks, including customers'
budgetary constraints and internal acceptance reviews, that are beyond the
Company's control. Throughout 1997, the Company continued to experience longer
sales cycles, which have continued through the first quarter of 1998. If the
longer sales cycle persists or continues to lengthen, the Company's future
financial performance could 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.
11
<PAGE> 12
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, including
new versions incorporating a new code base which is currently being written.
There can be no assurance that the Company will continue to be successful in
these or any new or enhanced products.
Dependence on Key Personnel
The Company's future success will depend in large part upon its ability to
attract, retain and motivate highly skilled employees. There is significant
competition for employees with the skills required to perform the services
offered by the Company, particularly for software development engineers, and
there can be no assurance that the Company will be able to continue to attract
and retain sufficient numbers of highly skilled employees. The loss of a
significant number of the Company's senior management or other key research,
development, sales and marketing personnel, particularly if lost to competitors,
could have a material adverse effect on the Company's business, operating
results and financial condition, including its ability to attract employees.
Risks Associated with International Operations
Revenue generated outside of North America accounted for 23.5% and 30.3% of the
Company's total revenues for 1997 and the first 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. There can be no assurance that the Company's efforts to
develop international sales and support channels will be successful, and the
failure of such efforts could have a material adverse effect on the Company's
business, operating results and financial condition. International sales are
subject to a number of risks, including longer payment cycles, unexpected
changes in regulatory requirements, import and export restrictions and tariffs,
difficulties in staffing and managing foreign operations, the burden of
complying with a variety of foreign laws, greater difficulty in accounts
receivable collection, potentially adverse tax consequences, currency
fluctuations and political and economic instability.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 5, 1997, a 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 in Superior Court of the State of California,
County of Santa Clara, against the Company and several of its current and former
officers and directors and the underwriters of its initial public offering. The
complaint was filed on behalf of those persons who purchased or otherwise
acquired the common stock of the Company from March 14 through October 14, 1996,
and alleges that the defendants artificially inflated the demand for the common
stock prior to and after the initial public offering. The complaint seeks
damages in an unspecified amount. On August 6, 1997, the Superior Court entered
an order sustaining demurrers to the California Corporation Code claims with
leave to amend and the Federal Securities Act of 1933 claims without leave to
amend. On December 12, 1997, the plaintiff filed an amended complaint which
included both the California Corporation Code claims and the Federal Securities
Act of 1933 claims against only the Company and certain of its current and
former officers and directors. The Company has demurred to the amended
complaint. On March 2, 1998, the court sustained the demurrer with leave to
amend as to the California Corporation Code claims and denied the demurrer to
the Federal claims. On December 24, 1997, Milberg Weiss Bershad Hynes & Lerach
LLP 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. On March 12, 1998, plaintiffs filed a second
amended complaint to which defendants have demurred. 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.
12
<PAGE> 13
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Sale of Equity Securities
On January 30, 1998, the Company issued an aggregate of 2,877,500 shares of its
Common Stock to the stockholders of Customer Focus International, Inc. ("CFI")
in exchange for all of the outstanding capital stock of CFI in connection with
the acquisition of CFI. 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 March 31, 1998, the Offering Proceeds have been used
for the purposes listed below:
<TABLE>
<S> <C> <C>
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
Construction of plant, building and ____ $ 59,572
facility
Purchase and installation of machinery
and equipment ____ 4,625,482
Repayment of indebtedness ____ 611,450
Acquired Businesses ____ 2,466,000
Working capital ____ 10,228,865
Purchase of short-term liquid securities ____ 17,727,000
-----------
$35,718,369
</TABLE>
13
<PAGE> 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its 1998 Annual Meeting of Stockholders (the "Annual Meeting")
on March 20, 1998. At the Annual Meeting, the Company's stockholders elected
James W. Ashbrook, Kevin A. Fong, Promod Haque, E. Floyd Kvamme, Thuan D. Phan,
Nancy S. Schoendorf, Norris van den Berg and Warren M. Weiss to the Company's
Board of Directors and approved certain proposals described more fully below.
Proxies were solicited by the Company pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended. As of February 16, 1998, the record
date for the Annual Meeting, there were approximately 17,761,760 shares of the
Company's Common Stock outstanding, of which 15,973,751 shares, or 89.9%, were
present in person or by proxy at the Annual Meeting.
The following matters were brought before the Annual Meeting:
1. Election of Directors. Each of the following persons was elected as a
director of the Company, to serve until the next annual meeting of the
Company's stockholders and until his or her successor has been elected
and qualified or until his or her earlier resignation and removal:
<TABLE>
<CAPTION>
Shares in Favor Shares Witheld
--------------- --------------
<S> <C> <C>
James W. Ashbrook 15,678,300 295,451
Kevin A. Fong 15,706,013 267,738
Promod Haque 15,706,513 267,238
E. Floyd Kvamme 15,706,413 267,338
Thuan D. Phan 15,681,556 292,195
Nancy S. Schoendorf 15,705,980 267,771
Norris van den Berg 15,706,513 267,238
Warren M. Weiss 15,677,556 296,195
</TABLE>
2. Amendment of Equity Incentive Plan. The amendment of the Company's 1996
Equity Incentive Plan to increase the total number of shares of the
Company's Common Stock reserved for issuance under the plan from
3,500,000 shares to 7,500,000 shares, an increase of 4,000,000 shares,
was voted on and approved by the stockholders as follows:
<TABLE>
Shares in Favor Shares Against Shares Abstaining Broker Non-Vote
--------------- -------------- ----------------- ---------------
<S> <C> <C> <C>
12,765,793 549,675 10,851 2,647,432
</TABLE>
3. Amendment of Employee Stock Purchase Plan. The amendment of the
Company's 1996 Employee Stock Purchase Plan to increase the total
number of shares of the Company's Common Stock reserved for issuance
under the Plan from 500,000 shares to 1,100,000 shares, an increase of
600,000 shares, was voted on and approved by the stockholders as
follows:
<TABLE>
Shares in Favor Shares Against Shares Abstaining Broker Non-Vote
--------------- -------------- ----------------- ---------------
<S> <C> <C> <C>
13,197,832 300,302 9,851 2,465,766
</TABLE>
4. Ratification of Selection of Independent Accountants. The selection of
Coopers and Lybrand, L.L.P. as the Company's independent accountants
for the fiscal year ending December 31, 1998 was voted on and ratified
by the Company's stockholders as follows:
<TABLE>
Shares in Favor Shares Against Shares Abstaining
--------------- -------------- -----------------
<S> <C> <C>
15,805,582 154,759 13,410
</TABLE>
14
<PAGE> 15
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 March 31, 1998
27.02 Financial Data Schedule - form 10-K dated December 31, 1997
27.03 Financial Data Schedule - form 10-Q dated September 30, 1997
27.04 Financial Data Schedule - form 10-Q dated June 30, 1997
27.05 Financial Data Schedule - form 10-Q dated March 31, 1997
(b) Reports on Form 8-K:
The Company filed a Form 8-K on February 18, 1998 in order to
disclose the acquisition of CFI under Item 2 of Form 8-K and an amendment to
such Form 8-K on April 1, 1998 to include the required financial statements
related to the acquisition under Item 7. of the Form 8-K.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment No.1 to this report to be signed on
its behalf by the undersigned thereunto duly authorized.
DATED: May 15, 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
16
<PAGE> 17
PRISM SOLUTIONS, INC.
INDEX TO EXHIBITS
EXHIBIT
-------
27.01 FINANCIAL DATA SCHEDULE - form 10-Q dated March 31, 1998
27.02 FINANCIAL DATA SCHEDULE - form 10-K dated December 31, 1997
27.03 FINANCIAL DATA SCHEDULE - form 10-Q dated September 30, 1997
27.04 FINANCIAL DATA SCHEDULE - form 10-Q dated June 30, 1997
27.05 FINANCIAL DATA SCHEDULE - form 10-Q dated March 31, 1997
17
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<PERIOD-START> JAN-01-1998
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0
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<TOTAL-LIABILITY-AND-EQUITY> 39,847
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<TOTAL-COSTS> 4,695
<OTHER-EXPENSES> 11,854
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (256)
<INCOME-PRETAX> (2,058)
<INCOME-TAX> 84
<INCOME-CONTINUING> (2,142)
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<NET-INCOME> (2,142)
<EPS-PRIMARY> (0.13)
<EPS-DILUTED> (0.13)
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<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
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<CASH> 5,929
<SECURITIES> 15,355
<RECEIVABLES> 13,705
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<CURRENT-ASSETS> 36,544
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<NET-INCOME> (16,102)
<EPS-PRIMARY> (0.96)
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<PERIOD-TYPE> 9-MOS
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<PP&E> 2,839
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<TOTAL-ASSETS> 44,167
<CURRENT-LIABILITIES> 14,012
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0
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<COMMON> 17
<OTHER-SE> 29,996
<TOTAL-LIABILITY-AND-EQUITY> 44,167
<SALES> 33,921
<TOTAL-REVENUES> 33,921
<CGS> 10,513
<TOTAL-COSTS> 10,513
<OTHER-EXPENSES> 36,382
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<INTEREST-EXPENSE> (1,351)
<INCOME-PRETAX> (11,718)
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<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
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<SECURITIES> 27,366
<RECEIVABLES> 9,719
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 42,616
<PP&E> 2,116
<DEPRECIATION> 0
<TOTAL-ASSETS> 46,232
<CURRENT-LIABILITIES> 11,008
<BONDS> 0
0
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<COMMON> 17
<OTHER-SE> 35,193
<TOTAL-LIABILITY-AND-EQUITY> 46,232
<SALES> 22,090
<TOTAL-REVENUES> 22,090
<CGS> 6,269
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<INTEREST-EXPENSE> (499)
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<NET-INCOME> 260
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
</TABLE>
