ITEM 1. BUSINESS
Overview
Prism Solutions, Inc. ("Prism" or the "Company") designs, develops, markets and supports data warehouse management software that assists its customers in developing, managing and maintaining data warehouses. Data warehouses are separate databases that store historical data which is collected from an enterprise's existing operational computer systems, then integrated and transformed for use in business analysis and decision making. The Company's products enable its customers to develop and maintain their data warehouses more quickly than by manual programming methods. By using the Company's products, customers can build an initial data warehouse in as little as three to six months and significantly reduce ongoing maintenance costs. At the same time, the Company's products collect and manage "meta data," contextual information describing the data being stored in the warehouse. The meta data collection and analysis capabilities provided by the Company's products allow for more reliable analysis and decision making by providing users with the ability to determine what data is in the warehouse, where it came from, how it was transformed and how it has changed over time.
Prism's suite of Scaleable Data Warehousing Solutions packages provides a point-and-click user interface for data warehousing projects, complementing products offered by database, data access and systems integration providers. The suite offers support for the construction and maintenance of data warehouses: an iterative warehousing methodology, scaleable software solutions for rapid economic implementation, and a flexible information architecture built on an integrated meta data foundation. The Company supports its products with a range of consulting and implementation services.
Prism was initially incorporated in California in 1991 and was reincorporated in Delaware in January 1996. The Company maintains its executive offices at 1000 Hamlin Court, Sunnyvale, California, 94089. Its telephone number is (408) 752-1888.
Products and Services
Prism offers data warehouse management software products and related services. Its Scaleable Data Warehousing Solutions packages are designed to meet customer needs for data marts, department warehouses, enterprisewide warehouses and conversion environments. Substantially all of the Company's license revenues to date have been attributable to licenses for Prism Warehouse Manager and Prism Directory Manager, the predecessors to Prism Warehouse Executive and Prism Warehouse Directory, respectively. Customers can select from the following packages to match their requirements:
The Prism Scaleable Data Mart package supports the construction of scaleable data marts for workgroups or departments. It is typically used to build a mart consisting of a single subject area of data within a single target database, commonly sourcing UNIX operational systems and creating a data mart on a UNIX platform. Prism's mart package also simplifies sourcing of more complex legacy systems data.
The Prism Scaleable Warehouse package supports midrange warehousing projects often requiring integration of data from multiple, heterogeneous source databases to provide consistent information across departmental organizations. Typically this includes sourcing multiple legacy files and targeting one or more relational database environments.
The Prism Scaleable Enterprise package supports building and maintaining large-scale data warehouses or operational data stores serving a wide variety of users across the enterprise. It enables integration of several subject areas from cross-enterprise data sources, as well as managed deployment of warehouses on multiple heterogeneous databases, scaling from SQL to MPP configurations.
The Prism Scaleable Conversion package provides data conversion capabilities for migrating data across one application domain. It integrates data from multiple legacy sources into a single target database.
Each of these packages is based on Prism Warehouse Executive and Prism Warehouse Directory, except for the Prism Scaleable Conversion package, which only contains Prism Warehouse Executive.
Prism Warehouse Executive has a drag-and-drop graphical user interface that allows users to graphically model the flow of data from multiple data sources into a target data warehouse, including all required data mappings and transformations. The design documents and reports created with Prism Warehouse Executive give the user an overview of a project's structure and workflow, and help them gain visibility to the warehouse or mart construction process. Prism Warehouse Executive extracts and integrates data from mainframe and UNIX-based source databases. Built-in transformations allow users to perform the data conversions, structural changes and summarizations needed to create a consistent, historical perspective of information. Support for user-defined business rules and user exit routines provides customers with the flexibility needed to tailor the warehouse population processes to suit their particular environments and data transformation requirements.
Prism Warehouse Executive's design and construction capabilities are joined by a common layer of meta data. During the implementation process, technical meta data describing the warehouse source files and output tables is automatically captured, along with the data mappings and transformations required for development. Common meta data enables users to move from planning and design to actual warehouse implementation. Once the warehouse specifications are complete, the meta data serves as the basis for generating programs to integrate, transform and map source data to the target warehouse database.
The technical meta data collected by Prism Warehouse Executive is stored in the Prism Warehouse Directory, which provides an open platform to integrate and manage both business and technical information about warehouse changes across the enterprise. Developers use this meta data to manage rapid, incremental construction, while users rely on the meta data to help them navigate and access business information. Prism Warehouse Directory's meta data can be read by a variety of decision support tools and industry-standard Web browsers, giving users access to warehouse information using their preferred tools.
Implementation and Consulting Services. Prism provides both implementation services and longer term consulting services to assist in the sale and installation of its products. Implementation services are marketed by the Company as a standard component of the product license and delivery process, thereby enhancing the likelihood of early-stage customer acceptance and satisfaction. The implementation process, lasting approximately two weeks and delivered by a systems engineering team familiar to the customer, includes an on-site planning session, product training, a detailed design session and implementation of a prototype or limited scope data warehouse.
Prism's Iterations(TM) methodology is a key underlying component of Prism's Scaleable Data Warehousing Solutions. Iterations establishes an effective development process that defines the ongoing parallel steps and cycles needed to build data warehouses in reasonable timeframes. It details the activities specific to the data warehouse development process, guiding users from the startup phase to analysis and design, through to construction, testing and implementation, then returning to evaluation and management of the subsequent version.
In conjunction with the Iterations methodology, Prism has introduced a suite of SureStart(TM) consulting programs to help customers achieve early, visible results with their data warehousing projects. The SureStart Readiness Assessment evaluates a company's technical and organizational preparedness to proceed with a data warehouse initiative. The SureStart Mentored Pilot extends the SureStart Readiness Assessment to guide an organization through its initial data warehouse. Prism's SureStart Mart offering focuses on data marts that meet departmental requirements.
Prism also is engaged in educating the market about the benefits, technology and payback of data warehousing through seminars, an educational curriculum and technical publications. Prism offers executive briefings and seminars worldwide to help companies understand data warehousing strategies. Additionally, Prism publishes a series of Tech Topics and Executive Briefings that provide in-depth information on data warehouse strategy and implementation.
Product Development
The Company believes that its future success will depend in part on its ability to maintain and improve its current technologies, enhance its existing products and develop new products that meet an expanding range of customer requirements. The Company intends to expand its existing product offerings and to introduce new data warehousing software products. To date, the Company has relied primarily on internal development of its products, but expects that, based on timing and cost considerations, it will also license or acquire technology or products from third parties or consultants. For example, the Company acquired its web access software from a third party. The Company intends to continue to support industry standard operating environments, client-server architectures and databases.
The Company is currently rewriting its software code base and plans to incrementally incorporate the new code into its products over the next two years. The first product element to incorporate the new code base was the point-and-click user interface, which was introduced as part of Prism Warehouse Executive in the fourth quarter of 1996. The Company believes that the new code base will allow it to more easily maintain its software and more quickly add additional functionality to its products.
As of December 31, 1996, the Company's product development staff consisted of 45 full-time equivalent employees. The Company's total expenses for product development for 1994, 1995 and 1996 were $2,436,000, $3,451,000 and $5,705,000, respectively. The Company anticipates that it will continue to commit substantial resources to product development in the future. To date, the Company has not capitalized any software development costs as such costs required to be capitalized have been immaterial.
The market for data warehouse software products is characterized by rapidly changing technology and improvements in computer hardware, computer software and databases. The Company's success will depend upon its ability to rewrite its code base, maintain competitive technologies, enhance its current products and develop new products in a timely and cost-effective manner that meet changing market conditions, including evolving customer needs, new competitive product offerings, emerging industry standards and changing technology. There can be no assurance that the Company will be able to develop and market, on a timely basis if at all, product enhancements or new products that respond to changing market conditions or that they will be accepted by customers. The Company has previously experienced delays in the development and introduction of new products and product enhancements. The length of these delays has varied depending upon the size and scope of the project and the nature of the problems encountered. Any failure by the Company to anticipate or to respond adequately to changing market conditions, or any significant delays in product development or introduction, could cause customers to delay or decide against purchases of the Company's products and would have a material adverse effect on the Company's business, operating results and financial condition.
Sales, Marketing and Customer Support
The Company markets its software and services primarily through a direct sales organization and, to a lesser extent, through third-party distributors and other indirect sales channels. The Company employs skilled engineers and technically proficient salespersons capable of serving the needs of its customers' information and business management staffs. In addition to its direct sales efforts, the Company utilizes advertising, direct mail and public relations programs, participates in numerous industry trade shows and individually or jointly organizes seminars and conferences to promote the adoption of its products and methodologies. The Company currently has domestic offices in the metropolitan areas of Atlanta, Boston, Chicago, Dallas, Los Angeles, New York and Washington, D.C. In addition, the Company has offices in Reading, United Kingdom; Paris, France; Munich, Germany; Madrid, Spain; Toronto, Canada; and Mexico City, Mexico. Field offices are staffed with both sales and technical pre-sales representatives. In 1997, the Company anticipates opening offices in Hong Kong and Singapore.
The Company also has developed indirect distribution and marketing channels with vendors whose products fit well strategically with those of the Company. The Company believes that, in order to provide the most comprehensive and competitive data warehouse management solutions for heterogeneous, open systems computing environments, it will be necessary to develop, maintain and enhance close associations with
database, data access, hardware and operating system vendors. The Company currently has marketing relationships with over 20 software and hardware vendors and several systems integrators. However, there can be no assurance that the Company will be able to maintain such existing relationships or enter into new relationships. The Company's failure to do so could adversely affect the portability of the Company's products to and compatibility with existing and new platforms and databases and the timing of new and enhanced products into the marketplace. In addition, failure to do so could affect the Company's ability to leverage third party distribution channels and increase its market presence.
The Company engages distributors to serve certain international markets in which the Company typically does not have a direct sales presence. The Company's current distributors sublicense the Company's products in Australia, Belgium, Denmark, Israel, Italy, Luxembourg, the Netherlands, Portugal, South Africa, Spain and Sweden. In 1997, the Company added additional distributors in Brazil and Mexico. These distributors license the Company's products at a discount for relicensing and may provide training and consulting services to end users. The Company intends to expand its operations in Europe, North America, Latin America and Asia, which will require significant management attention and financial resources. The Company has committed and continues to commit significant resources to developing international sales and support channels and opening international sales offices. There can be no assurance that the Company's efforts to develop international sales and support channels will be successful. The failure of such efforts could have a material adverse effect on the Company's business, operating results and financial condition.
The Company believes that its ability to provide a high level of customer service and technical support is crucial to its marketing efforts and to the establishment of long-term customer relationships. The Company offers an annual maintenance program to its licensees through the Company's internal support organization that includes product updates and post-sales telephone and fax hotline support. Substantially all of the Company's customers at the time of initial software licensing contract for annual maintenance with the Company. Annual maintenance fees are typically 15% of the license fees for the relevant products. The Company also offers installation, consulting, education and training services on a fee basis to assist customers in developing their data warehouse projects. Education and training is offered at the Company's in-house facilities and at customers' sites. The Company's distributors also offer first-level customer support to their end users, while relying on the Company for any additional support as needed.
The Company generally ships its products as orders are received. As a result, the Company has relatively little backlog at any given time, and does not consider backlog to be a meaningful indicator of future performance. The Company's sales cycle can range from three months to over a year, depending on factors such as transaction size, the length of the customer relationship, the timing of new product releases, the level of sales management activity and general economic conditions. Historically, a substantial majority of the Company's revenues in a given quarter have been recorded in the third month of that quarter, with a concentration of such revenues in the last two weeks of the third month. Because of the relatively large dollar size of the Company's typical software license, any delay in the closing of a transaction can have a significant impact on the Company's operating results for a particular period.
At December 31, 1996, the Company had more than 200 active customers, some with multiple installations. No customer accounted for more than 10% of the Company's total revenues in 1995 or 1996. In 1994, Canadian Imperial Bank of Commerce accounted for 11% of the Company's total revenues.
Competition
The data warehouse market is intensely competitive and subject to rapid change. Competitors vary in size and in the scope of the products and services they offer. The Company encounters competition from a number of sources, including management information systems departments of customers and potential customers. The most active competitors to the Company's Prism Scaleable Enterprise and Prism Scaleable Warehouse packages are Evolutionary Technologies International, Carleton Corporation, and PLATINUM Technology. The most active competitor to the Company's Prism Scaleable Data Mart package is Informatica and several other small, private companies. Notwithstanding the foregoing, all competitors compete in each market segment. The Company expects to experience additional competition from other established and emerging
software companies, including some of the Company's current marketing partners. Increased competition has resulted in the lengthening of sales cycles and price reductions, and could result in reduced transaction sizes, fewer customer orders, reduced gross margins and loss of market share, any of which could have a material adverse effect on the Company's business, operating results and financial condition.
The Company believes that the principal competitive factors affecting the data warehouse market include technical performance and product attributes such as functionality, portability, reliability, ease of use, adaptability and scaleability, product reputation, quality, customer service and support, price, ability to integrate with products produced by other vendors, the effectiveness of sales and marketing efforts and company reputation. There can be no assurance that the Company will be successful in competing in the future with respect to these or other factors.
Some of the Company's current, and many of the Company's potential, competitors have significantly greater financial, technical, marketing and other resources than the Company. As a result, they may be able to respond more quickly to new or emerging technologies and changes in customer requirements or to devote greater resources to the development, promotion, sale and support of their products than the Company. In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their products to address the needs of the Company's prospective customers. Accordingly, it is possible that new competitors or alliances among competitors may emerge and rapidly gain significant market share. There can be no assurance that the Company will be able to compete successfully against current and future competitors or that competitive pressures faced by the Company will not have a material adverse effect on its business, operating results and financial condition.
Intellectual Property and Other Proprietary Rights
The Company relies primarily on a combination of copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect its proprietary technology. For example, the Company licenses its software pursuant to signed license agreements, which impose certain restrictions on the licensees' ability to utilize the software. In addition, the Company seeks to avoid disclosure of its trade secrets, including requiring those persons with access to the Company's proprietary information to execute confidentiality agreements with the Company and restricting access to the Company's source code. The Company seeks to protect its software, documentation and other written materials under trade secret and copyright laws, which afford only limited protection. The Company presently has no patents or patent applications pending.
Despite the Company's efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of the Company's products or to obtain and use information that the Company regards as proprietary. Policing unauthorized use of the Company's products is difficult, and, while the Company is unable to determine the extent to which piracy of its software products exists, software piracy can be expected to be a persistent problem. In addition, the laws of many countries do not protect the Company's proprietary rights to as great an extent as do the laws of the United States. There can be no assurance that the Company's means of protecting its proprietary rights will be adequate or that the Company's competitors will not independently develop similar technology.
To date, the Company has not been notified that the Company's products infringe the proprietary rights of third parties, but there can be no assurance that third parties will not claim infringement by the Company with respect to current or future products. The Company expects that data warehouse software product developers will increasingly be subject to infringement claims as the number of products and competitors in the Company's industry segment grows and the functionality of products in different industry segments overlaps. Any such claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays or require the Company to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company or at all, which could have a material adverse effect upon the Company's business, operating results and financial condition.
Employees
As of December 31, 1996, the Company employed 193 full-time equivalent persons, including 89 in sales, presales technical support, marketing and related activities, 54 in product development and support, 26 in consulting and educational services, and 24 in management, administration and finance. The Company's success is highly dependent on its ability to attract and retain qualified employees. Competition for employees is intense in the software industry, and an inability to attract and retain qualified development and sales personnel, in particular, could postpone product release schedules and adversely affect the Company's ability to generate revenue.
None of the Company's employees is represented by a labor union or is the subject of a collective bargaining agreement with respect to his or her employment by the Company. The Company has never experienced a work stoppage and believes that its employee relations are good.
ITEM 2.
ITEM 2. PROPERTIES
The Company's principal administrative, sales, marketing, support and product development facility is located in approximately 38,000 square feet of space in Sunnyvale, California. The lease on this office space expires in April 1998, but has a two-year renewal option. The Company also leases approximately 4,000 square feet of space in the United Kingdom under a lease agreement that expires in July 1999. The Company currently leases small field offices in seven United States cities, as well as in France, Germany, Spain, Canada and Mexico. The Company believes that suitable additional or alternative space will be available in the future on commercially reasonable terms as needed.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
On March 5, 1997, a class action complaint was filed by the law firm of Milberg Weiss Bershad Hynes & Lerach LLP in Superior Court of the State of California, County of Santa Clara, against the Company and several of its current and former officers and directors and the underwriters of its initial public offering. The complaint was filed on behalf of those persons who purchased or otherwise acquired the common stock of the Company from March 14 through October 14, 1996, and alleges that the defendants artificially inflated the demand for the common stock prior to and after the initial public offering. The complaint seeks damages in an unspecified amount. The Company believes the complaint has no merit and will vigorously defend itself.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1996, no matter was submitted to a vote of security holders through the solicitation of proxies or otherwise.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, and their respective ages as of March 18, 1997, are as follows:
Mr. Ashbrook has been a director since September 1991 and Chairman of the Board of Directors since March 1995. He also served as President and Chief Executive Officer of the Company from June 1991 to
February 1997. From 1985 to May 1991, Mr. Ashbrook was employed by AST Research ("AST"), most recently as Senior Vice President, Marketing and, from 1983 to 1984, Mr. Ashbrook served as Vice President of Sales and Marketing for CXI, Inc., a marketer of high performance hardware and software products. He has also held executive and management positions at Momentum Computers, National Advanced Systems and International Business Machines Corporation. Mr. Ashbrook holds Bachelor of Science and Master of Science degrees in mechanical engineering from the University of Illinois.
Mr. Weiss has been President, Chief Executive Officer and a Director of the Company since February 1997. From June 1996 to February 1997, he served as President and Chief Operating Officer of SQRIBE Technologies, a provider of server-based reporting solutions. From April 1995 to May 1996, Mr. Weiss served as President and Chief Executive Officer of Strategic Mapping, Inc., a software development company. From 1993 to 1994, Mr. Weiss was employed by NeXT Computer, Inc., a computer systems company, most recently as Vice President, Worldwide Sales and Service. He has also held senior management positions at Continuum and Management Science America. Mr. Weiss holds a Bachelor of Science in criminology from Western Illinois University.
Mr. Binch joined the Company in January 1996 as Vice President, North American Field Operations. From June 1994 to December 1995, he served as Vice President, Sales at Business Objects, a computer software company. From January 1994 to June 1994, Mr. Binch served as Vice President, U.S. Sales at Interlink, Inc., a computer software company. From 1988 to June 1993, he was employed by Oracle Corporation, most recently as Vice President of Sales, Strategic Accounts. He has also held positions at Itel Corporation and IBM Corporation. Mr. Binch holds a Bachelor of Science degree in industrial engineering from the University of Maryland.
Mr. Hedgpeth joined the Company in September 1994 as Vice President, Finance and Administration and Chief Financial Officer. He became the Secretary of the Company in December 1994. From 1990 to July 1994, Mr. Hedgpeth was Vice President, Finance & Administration of Versant Object Technology, a computer database company. From 1983 to 1990, Mr. Hedgpeth was employed by Silvar-Lisco, a computer-automated engineering software company, as Vice President of Finance. Mr. Hedgpeth holds a Bachelor of Science degree in business administration from the University of California and a Master of Business Administration from the University of California at Los Angeles.
Mr. Sakakihara joined the Company in December 1995 as Vice President, Development. From July 1994 to December 1995, he served as Vice President, Engineering at ViewStar Corporation, a computer software company. Mr. Sakakihara was employed by Hewlett-Packard Company from 1972 to July 1994, most recently as General Manager, Distributed Computing Products Operation. Mr. Sakakihara holds a Bachelor of Arts degree in applied mathematics from San Jose State University and a Master of Science degree in applied mathematics from Santa Clara University.
Ms. Schmidt was a co-founder of the Company and has served as Vice President, Marketing since March 1991. From 1988 to 1990, Ms. Schmidt served as President of Earth Visions Gallery, an art gallery. From 1983 to 1987, Ms. Schmidt was employed by CXI, Inc. as Marketing Communications Director and continued in that position from 1987 to 1988 after Novell Corporation purchased CXI, Inc. She has also held positions at Memorex Corporation and Qume Corporation. Ms. Schmidt holds a Bachelor of Science degree in business administration from Simmons College.
Mr. Taylor joined the Company in August 1995 as Vice President, International. From January 1994 to August 1995, he was employed by Oracle U.K. Ltd., where he served as Director of Marketing. Prior to joining Oracle U.K. Ltd., Mr. Taylor was employed by Sun Microsystems, where he served as Director of Marketing, Northern Europe from January 1992 to December 1993 and as Director of Marketing, U.K. from November 1991 to January 1992. From 1989 to August 1991, Mr. Taylor was Vice President, European General Manager at Netwise International Ltd. He holds a Bachelor of Arts degree in history from Williams College.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Price Range of Common Stock
The Company's common stock is traded on the Nasdaq National Market under the symbol PRZM. The following table sets forth, for the periods indicated, the range of high and low sales prices since the Company completed its initial public offering on March 15, 1996:
On March 18, 1997, there were approximately 136 record holders of Prism Solutions, Inc. common stock.
Dividend Policy
The Company has never declared or paid any cash dividends on its capital stock. The Company currently anticipates that it will retain any future earnings for use in its business and does not anticipate paying any cash dividends in the foreseeable future.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data is qualified by reference to and should be read in conjunction with the consolidated financial statements and related notes thereto and the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other financial information included elsewhere in this Annual Report on Form 10-K.
- --------------- (1) For an explanation of the shares used in the pro forma per share calculation, see Note 2 of Notes to Consolidated Financial Statements.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion in this report contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in "Additional Factors That Might Affect Future Results."
Overview
Prism designs, develops, markets and supports data warehouse management software that assists customers in developing, managing and maintaining data warehouses. The Company was incorporated in California in March 1991 and reincorporated in Delaware in February 1996. Through the end of 1992, the Company was in the development stage and was engaged primarily in research and development and the establishment of a sales and marketing infrastructure. The Company began shipping its principal products, Prism Warehouse Manager, in December 1992 and Prism Directory Manager in April 1995. In December 1996, Prism Warehouse Manager and Prism Directory Manager were replaced with Prism Warehouse Executive and Prism Warehouse Directory, respectively, as the Company's next generation software. In the fourth quarter of 1996, Prism also completed the first transactions for Iterations, its consulting methodology. The majority of the Company's total revenues to date have been derived from software license revenues, which accounted for 61% of total revenues in 1996. Services and other revenues accounted for the remaining revenues in 1996. The Company expects that license revenues will continue to account for a majority of the Company's total revenues for the foreseeable future.
Results of Operations
The following table sets forth selected consolidated statement of operations data as a percentage of total revenues for the periods indicated:
Revenues
Total revenues were $8,227,000, $17,760,000 and $30,424,000 in 1994, 1995 and 1996, respectively, representing increases of 115.9% from 1994 to 1995 and 71.3% from 1995 to 1996. The Company's revenues are derived from license fees for its software products and fees for services complementing its products, including software maintenance and support, implementation, consulting and training. Fees for services are charged separately from license fees for the Company's software.
License Revenues. Revenues from software licenses were $6,295,000, $12,668,000 and $18,690,000 in 1994, 1995 and 1996, respectively, representing increases of 101.2% from 1994 to 1995 and 47.5% from 1995 to 1996. The increases in license revenues from 1994 to 1996 were primarily attributable to growing acceptance of the Company's products and an increase in the number and tenure of direct sales personnel, which led to increases in the number of units licensed. In addition, license revenues in 1995 were favorably affected by the introduction of Prism Directory Manager in April 1995, which increased the average transaction size entered into by the Company. The Company's average transaction size increased slightly from 1994 to 1995 and remained constant in 1996. In 1994, the Company's direct sales accounted for all of its license revenues. In 1995 and 1996, the Company began to license a growing portion of its products through indirect channels, which accounted for 8.4%, and 18.0% of the Company's total license revenues, respectively.
Services and Other Revenues. Services and other revenues were $1,932,000, $5,092,000 and $11,734,000 in 1994, 1995 and 1996, respectively, representing increases of 163.6% from 1994 to 1995 and 130.4% from 1995 to 1996. The growth from 1994 to 1996 was the result primarily of an increase in the number and size of consulting engagements and, to a lesser extent, of increased licensing activity and maintenance renewals. As a percentage of total revenues, services and other revenue comprised 23.5%, 28.7% and 38.6% in 1994, 1995 and 1996, respectively. A majority of services and other revenues in 1996 came from consulting revenues. The Company expects that services and other revenues will increase in absolute dollars and remain fairly constant as a percentage of revenues if total revenues continue to increase.
International Revenues. International revenues accounted for 15.2%, 14.8% and 30.8% of total revenues in 1994, 1995 and 1996, respectively. In 1994 and 1995, the majority of international sales were made in Canada. In 1996, the majority of international sales were made in Europe, where the Company significantly increased the number of direct sales personnel and the number of international distributors and resellers marketing the Company's products. During 1996, the Company established direct sales offices in France, Germany and Mexico. A small portion of the Company's international sales are denominated in foreign currencies and, accordingly, the Company is subject to foreign currency exchange risk. The Company has not engaged in foreign currency hedging activities. See "Foreign Currency Translation" under Note 2 of the Notes to Consolidated Financial Statements for more information.
Cost of Revenues
Cost of License Revenues. Cost of license revenues consists primarily of the costs of royalties paid to third-party vendors, product media and duplication, shipping expenses, manuals and packaging materials. Cost of license revenues was $113,000, $223,000 and $769,000 in 1994, 1995 and 1996, respectively, representing 1.4%, 1.3% and 2.5% of total revenues for those years. The increase both in absolute dollars and as a percentage of revenues from 1995 to 1996 was primarily attributable to increased royalties and commissions paid to third party vendors. The Company expects that the cost of license revenues will increase both in absolute dollars and as a percentage of license revenues as the Company licenses additional technology and products from third parties for inclusion in its product line.
Cost of Services and Other Revenues. Cost of services and other revenues consists primarily of personnel-related costs incurred in providing consulting and implementation services, telephone support and training to customers. Cost of services and other revenues was $1,654,000, $3,196,000 and $6,370,000 in 1994, 1995 and 1996, respectively, representing 20.1%, 18.0% and 21.0% of total revenues for those years. The dollar amount of cost of services and other revenues increased significantly from 1994 to 1996 primarily because of increased personnel-related costs as the Company continued to expand its consulting, customer support and training organizations to support an increase in sales. The Company expects that the cost of services and other
revenues will increase in absolute dollars and as a percentage of revenues if the Company's services and other revenues continue to increase in absolute dollars.
Operating Expenses
The Company's operating expenses were $8,957,000, $17,108,000 and $26,436,000, or 108.9%, 96.3% and 86.9% of total revenues, in 1994, 1995 and 1996, respectively. The growth in operating expenses in absolute dollars occurred primarily as a result of increases in salaries and benefits, resulting from higher staffing levels, and the expansion of facilities. The decrease in operating expenses as a percentage of revenues resulted from economies of scale associated with the Company's growing revenues.
Sales and Marketing. Sales and marketing expenses consist primarily of salaries, commissions and bonuses paid to sales and marketing personnel and promotional expenses. Sales and marketing expenses were $5,632,000, $11,395,000 and $17,637,000, or 68.5%, 64.2% and 58.0% of total revenues, in 1994, 1995 and 1996, respectively. The increases in dollar amounts in sales and marketing expenses were primarily due to the expansion of the Company's sales operations and increased marketing activities, including trade shows and promotional expenses. The decrease in sales and marketing expenses as a percentage of total revenues resulted primarily from increases in productivity as newly hired sales personnel and system engineers became more experienced, and due to the benefits of economies of scale associated with the increase in total revenues. The Company expects that sales and marketing expenses will continue to increase in absolute dollars but decrease as a percentage of total revenues if the Company's annual revenues continue to increase.
Research and Development. Research and development expenses consist primarily of salaries paid to the engineering staff. Research and development expenses were $2,436,000, $3,451,000 and $5,705,000, or 29.6%, 19.4% and 18.7% of total revenues, in 1994, 1995 and 1996, respectively. The increases in dollar amounts in research and development expenses since 1994 were primarily attributable to increased staffing and associated support for software engineers required to expand and enhance the Company's product line. Software development costs have been expensed in accordance with Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed." Under this standard, capitalization of software development costs begins upon the establishment of technological feasibility and ends when a product is available for general release to customers. To date, costs incurred after establishment of technological feasibility have been immaterial and, as a result, all research and development costs have been expensed as incurred. The Company believes that a significant level of investment for research and development is required to remain competitive and, accordingly, the Company anticipates that research and development expenses will increase in absolute dollars and remain fairly constant as a percentage of revenue if the Company's annual revenues continue to increase.
General and Administrative. General and administrative expenses consist primarily of salary expenses for administration and executive staff. General and administrative expenses were $889,000, $2,262,000 and $3,094,000, or 10.8%, 12.7% and 10.2% of total revenues, in 1994, 1995 and 1996, respectively. These expenses increased in absolute dollars from 1994 to 1996 primarily as a result of increases in staffing and an expansion of facilities. The Company expects that its general and administrative expenses will increase in absolute dollars as the Company's total workforce increases and will remain fairly constant as a percentage of revenues if the Company's annual revenues continue to increase.
Provision for Income Taxes.
The provision for income taxes in 1994, 1995 and 1996 resulted primarily from foreign withholding taxes. As of December 31, 1996, the Company had federal and California net operating loss carryforwards of approximately $9,700,000 and $1,900,000, respectively, and federal and California research and development tax credit carryforwards of $360,000 and $135,000, respectively. These carryforwards will expire between 1997 and 2010 if not utilized prior to that time.
The Company determines its income tax liability in accordance with Statement of Financial Accounting Standards No. 109 ("FAS 109"), "Accounting for Income Taxes." Under FAS 109, the liability method is used to account for income taxes. Under this method, deferred tax assets and liabilities are determined based
on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company has established a valuation allowance to the extent of its deferred tax assets because it is not more likely than not that a benefit can be realized in the future due to the Company's recurring operating losses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and other short-term investments increased to $34,896,000 as of December 31, 1996 from $1,861,000 as of December 31, 1995, due primarily to the Company's initial public offering in the first quarter of 1996. During 1996, the Company repaid $703,000 of long-term debt. As of December 31, 1996, the Company had $14,844,000 in cash and cash equivalents and $20,052,000 in short-term investments, which are classified as available for sale.
In 1994, 1995, and 1996, the Company used net cash in operating activities primarily as a result of net losses and increases in accounts receivable associated with increases in revenues.
In 1994 and 1995, the Company's investing activities consisted of purchases of property and equipment, primarily computer workstations and file servers, in the amount of $348,000 and $1,438,000, respectively. In 1996, the Company's investing activities of $21,706,000 consisted primarily of purchases of short-term financial instruments as well as purchases of property and equipment. The Company expects that its capital expenditures will remain constant or increase in absolute dollars as the Company's employee base grows. As of December 31, 1996, the Company had no material commitments to make capital expenditures. The Company's principal commitments consisted of non-cancelable operating leases on its facilities.
The Company's financing activities provided $35,484,000 in 1996, principally due to proceeds from the Company's initial public offering completed in March 1996. In 1995, stockholder payments on a receivable and borrowings on equipment lines of credit provided $1,735,000, net of repayments, in financing activity. Financing activities provided $3,015,000 in 1994, primarily due to proceeds from the sale of convertible preferred stock.
To date, the Company has not invested in derivative securities or any other financial instruments that involve a high level of complexity or risk. Management expects that, in the future, cash in excess of current requirements will be invested in short-term, interest-bearing, investment grade securities.
The Company believes its current cash balances and cash flow from operations, if any, will be sufficient to meet its working capital and capital expenditure requirements for at least the next 12 months. Although operating activities may provide cash in certain periods, to the extent the Company experiences growth in the future, the Company anticipates that its operating and investing activities may use cash. Consequently, any such future growth may require the Company to obtain additional equity or debt financing, which may not be available or may be dilutive.
ADDITIONAL FACTORS THAT MIGHT AFFECT FUTURE RESULTS
The Company's limited operating history makes the prediction of future operating results difficult. Although the Company has experienced significant growth in revenues in recent periods, the Company does not believe that this growth rate is sustainable or indicative of future operating results. The Company has never been profitable on an annual basis and currently believes that it could experience operating losses in 1997. Future operating results will depend on many factors, including the growth of the data warehousing market, the length of the sales cycle, the level of product and price competition, demand for the Company's products, transaction size, the Company's success in expanding its direct sales force and indirect distribution channels, the ability of the Company to support and maintain existing products, develop and market new products and control costs, the ability to recruit and retain software engineers and other key personnel, general economic conditions and other factors.
The Company is currently experiencing a period of rapid growth that has placed and is expected to continue to place a strain on the Company's administrative, financial and operational resources. From January 1, 1994 to December 31, 1996, the size of the Company's professional staff increased from 39 to 193
full-time equivalent employees. In addition, the Company expanded geographically in 1996 by adding employees in Europe and Latin America. Further significant increases in the number of employees are anticipated during 1997. The Company's ability to manage its staff and facilities growth effectively will require it to continue to improve its operational, financial and management controls, reporting systems and procedures, and to train, motivate and manage its employees. If the Company's management is unable to manage growth effectively and new employees are unable to achieve performance levels, the Company's business, operating results and financial condition could be adversely affected.
The Company's future success will depend in large part upon its ability to attract, retain and motivate highly skilled employees. There is significant competition for employees with the skills required to perform the services offered by the Company, particularly for software development engineers, and there can be no assurance that the Company will be able to continue to attract and retain sufficient numbers of highly skilled employees. During 1996, Edward Young, former Vice President of Strategy and Architecture, terminated his employment with the Company and in early 1997, William Inmon, former Executive Vice President of Technology, also terminated his employment with the Company. The loss of a significant number of the Company's senior management or other key research, development, sales and marketing personnel, particularly if lost to competitors, could have a material adverse effect on the Company's business, operating results and financial condition, including its ability to attract employees.
The licensing of the Company's products by its customers typically involves a significant technical evaluation and commitment of capital and other resources, with the attendant delays frequently associated with customers' internal procedures to approve large capital expenditures and to test and accept new technologies that affect key operations. For these and other reasons, the sales cycle associated with the licensing of the Company's products is typically lengthy and subject to a number of significant risks, including customers' budgetary constraints and internal acceptance reviews, that are beyond the Company's control. During 1996, the Company began to experience longer sales cycles. The Company believes the longer sales cycles are due to increased competition, especially in the data mart segment. If the longer sales cycle persists or continues to lengthen, the Company's future financial performance could be adversely affected.
The market for the Company's products is highly competitive, and the Company may experience increasing pricing pressures from its current competitors and new market entrants. Any material reduction in the price of the Company's products or in the size of an average transaction would materially adversely affect the Company's business, operating results and financial condition if the Company were unable to increase unit sales. See "Competition" under Item 1 -- Business.
Revenues from licensing of the Company's products and related services outside the United States increased 257% from 1995 to 1996. The Company intends to continue to expand its operations in Europe and into Asia and Latin America, which will require significant management attention and financial resources. There can be no assurance that the Company's efforts to develop international sales and support channels will be successful, and the failure of such efforts could have a material adverse effect on the Company's business, operating results and financial condition. International sales are subject to a number of risks, including longer payment cycles, unexpected changes in regulatory requirements, import and export restrictions and tariffs, difficulties in staffing and managing foreign operations, the burden of complying with a variety of foreign laws, greater difficulty in accounts receivable collection, potentially adverse tax consequences, currency fluctuations and political and economic instability.
Substantially all of the Company's revenues to date have been attributable to licenses for Prism Warehouse Manager (replaced by Prism Warehouse Executive), Prism Directory Manager (replaced by Prism Warehouse Directory) and related services. The Company currently expects that revenues attributable to Prism Warehouse Executive and Prism Warehouse Directory, including maintenance and consulting services, will continue to account for a majority of the Company's total revenues in 1997. A decline in demand for or failure to achieve broad market acceptance of these products as a result of competition, technological change or otherwise, would have a material adverse effect on the business, operating results and financial condition of the Company. A decline in license revenues from these products would also have a material adverse effect on sales of other Company products. The Company's future financial performance will depend
in part on the successful development, introduction and customer acceptance of new releases of Prism Warehouse Executive and Prism Warehouse Directory, including new versions incorporating the new code base. There can be no assurance that the Company will continue to be successful in these or any new or enhanced products.
Throughout 1997, the Company will continue to invest more in customer services, marketing and research and development, and make personnel additions to the Company's sales force worldwide. These additional expenses may adversely affect the Company's operating margin in 1997 if there are no offsetting increases in revenues or reductions in other operating expenses.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
PRISM SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The accompanying notes are an integral part of these consolidated financial statements.
PRISM SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The accompanying notes are an integral part of these consolidated financial statements.
PRISM SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
The accompanying notes are an integral part of these consolidated financial statements
PRISM SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
The accompanying notes are an integral part of these consolidated financial statements.
PRISM SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
The accompanying notes are an integral part of these consolidated financial statements.
PRISM SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. BUSINESS OF THE COMPANY
Prism Solutions, Inc. (the "Company") designs, develops, markets and supports data warehouse management software that assists its customers in developing, managing and maintaining data warehouses. The Company currently markets its software products to a wide variety of businesses and other organizations in North America, Europe, South Africa and Australia. Substantially all of the Company's revenues to date have been attributable to licenses of one of the Company's products and related services.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
In 1995, the Company established wholly-owned subsidiaries in the United Kingdom, Germany, France and Spain. In 1996, the Company established wholly-owned subsidiaries in Mexico and Canada. The consolidated financial statements include the financial statements of Prism Solutions, Inc. and its wholly-owned subsidiaries after elimination of intercompany accounts and transactions.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that reflect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash, Cash Equivalents and Short Term Investments
The Company considers all highly liquid investments purchased with an original or remaining maturity of three months or less to be cash equivalents. Highly liquid investments with an original or remaining maturity beyond three months are classified as short-term investments and carried at fair value, which approximates cost.
Concentration of Credit Risk and Fair Value of Financial Instruments
As of December 31, 1996, the Company had cash and cash equivalents totaling $894 deposited in five U.S. accounts of a major bank. Insurance for such a deposit by the Federal Deposit Insurance Corporation is limited to $100 per account. In addition, the Company maintained $13,695 of its cash and cash equivalents at three national investment management companies in a variety of financial instruments, such as money market accounts and government securities. The balance of the Company's cash and cash equivalents was held in various foreign banks. Through December 31, 1996, no material losses had been experienced on such investments.
As of December 31, 1996, the Company had short term investments totaling $20,052 which are available for sale. Short term investments principally consist of municipal securities and corporate bonds. Through December 31, 1996, no material losses had been experienced on such investments. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity, both of which are included in interest income. Realized gains and losses are recorded on the specific identification method.
The Company markets its software products directly and through resellers, and generally does not require collateral. The Company performs ongoing credit evaluations of its customers and maintains an allowance for
PRISM SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
doubtful accounts. As of December 31, 1995 and December 31, 1996, no one customer accounted for more than 10% of accounts receivable.
For financial instruments consisting of cash and cash equivalents, accounts receivable, other receivables, deposits, long-term debt, accounts payable, accrued liabilities and receivables from stockholders included in the Company's consolidated financial statements, the carrying amounts are reasonable estimates of fair value.
Property and Equipment
Property and equipment are stated at cost and depreciated on a straight-line basis over their estimated useful lives of two years. Leasehold improvements are amortized on a straight-line basis over their estimated useful lives or their lease terms, whichever is less.
Revenue Recognition
The Company's product revenues are derived from software licensing fees, and the service revenues are derived from maintenance support services, consulting, implementation and training. Product revenues are generally recognized after execution of a licensing agreement, receipt of a purchase order and shipment of the product, if no significant vendor obligations remain and collection of the resulting receivables is deemed probable. The Company's license agreements generally do not provide a right of return.
Service revenues from customer maintenance fees for ongoing customer support and product updates are recognized ratably over the term of the service. Payments for maintenance fees are generally received in advance and are generally nonrefundable. Consulting, implementation and training revenues are generally recognized following execution of a contract, performance of the related services and if collection of the resulting receivables is deemed probable.
Advertising Costs
Advertising costs, included in sales and marketing expenses, are expensed as incurred and were $138, $410 and $380 in 1994, 1995 and 1996, respectively.
Research and Development
Research and development expenditures are expensed as incurred.
Software Development Costs
Software development costs have been expensed in accordance with Statement of Financial Accounting Standards No. 86 ("FAS 86"), "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed." Under FAS 86, capitalization of software development costs begins upon the establishment of technological feasibility and ends when a product is available for general release to customers. Such costs have been immaterial to date.
Income Taxes
The Company determines its income tax liability in accordance with Statement of Financial Accounting Standards No. 109 ("FAS 109"), "Accounting for Income Taxes." Under FAS 109, the liability method is used to account for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Valuation
PRISM SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
allowances are established when necessary to reduce deferred tax assets to the amounts more likely than not to be realized.
Foreign Currency Translation
All subsidiaries located outside the United States operate with the U.S. dollar as the functional currency. Net nonmonetary assets are translated at historical exchange rates, and net monetary assets are translated at current exchange rates. Transaction and translation gains and losses are included in the determination of the results of operations and were not material.
Net Loss Per Share and Pro Forma Net Loss Per Share
The net loss per share, on a historical basis, is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Common equivalent shares are excluded from the computation as their effect is antidilutive, except that, pursuant to the Securities and Exchange Commission Staff Accounting Bulletins, common and common equivalent shares issued at prices below the public offering price during the 12 months immediately preceding the initial filing date have been included in the calculation as if they were outstanding for all periods presented (using the treasury stock method and the initial public offering price). Pro forma net loss per share assumes the common shares issued upon conversion of the outstanding convertible preferred stock had been outstanding during such period.
Recent Pronouncements
During February 1997, the Financial Accounting Standards Board issued Statement No. 128 ("FAS 128"), "Earnings per Share," which specifies the computation, presentation and disclosure requirements for earnings per share. FAS 128 will become effective for the Company's year ending December 31, 1997. The impact of adopting FAS 128 on the Company's financial statements has not yet been determined.
3. PROPERTY AND EQUIPMENT
4. LONG-TERM DEBT
In 1995, the Company entered into two revolving lines of credit loan agreements, each permitting borrowings up to $500, for the purpose of acquiring property and equipment. During 1996, the Company repaid all outstanding long-term debt with a portion of the proceeds from the initial public offering.
PRISM SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
5. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases its facilities under noncancelable operating leases that expire through July 1999 with renewal options at fair market value for additional periods. The Company is generally responsible for maintenance, property taxes, liability and personal property insurance and utilities relating to its facility leases.
Rent expense under the operating leases amounted to approximately $209, $475 and $860 in 1994, 1995 and 1996, respectively.
Future minimum payments to be made under noncancelable operating leases and future payments to be received under a sublease agreement are as follows:
Royalty Agreements
In April 1992, the Company entered into an agreement with Forest Rim Technology, Inc. ("Forest Rim"), with which a director, stockholder and officer of the Company is affiliated. Such person subsequently resigned as a director of the Company in December, 1996, and as an officer of the Company in February, 1997. The agreement gives the Company the exclusive right to sell, license and distribute Forest Rim's Licensed Data Models. In accordance with the agreement, the Company pays a royalty fee for each Licensed Data Model sold. In addition, there is a minimum performance standard that requires the Company to pay minimum royalties to maintain exclusivity, subject to adjustments to be agreed upon by the Company and Forest Rim. The Company has royalties payable to Forest Rim Technologies, Inc. of $56, $94, and $28 at December 31, 1994, 1995 and 1996, respectively, and expensed $51, $106 and $2 in 1994, 1995 and 1996, respectively.
In addition, the Company is obligated to pay royalties based on sales from other specified products under certain continuing license agreements. Royalty expense was not material for 1994 and 1995 and was $140 for 1996.
Contingencies
On March 5, 1997, a class action complaint was filed by the law firm of Milberg Weiss Bershad Hynes & Lerach LLP in Superior Court of the State of California, County of Santa Clara, against the Company and several of its current and former officers and directors and the underwriters of its initial public offering. The complaint was filed on behalf of those persons who purchased or otherwise acquired the common stock of the Company from March 14 through October 14, 1996 and alleges that the defendants artificially inflated the demand for the common stock prior to and after the initial public offering. The complaint seeks damages in an unspecified amount. The Company believes the complaint has no merit and will vigorously defend itself.
PRISM SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
6. STOCKHOLDERS' EQUITY
Reincorporation
On February 2, 1996, the reincorporation of the Company as a Delaware corporation was consummated. The certificate of incorporation provides for 8,990,817 authorized shares of preferred stock with a $0.001 par value per share and for 50,000,000 authorized shares of common stock with a $0.001 par value per share. The consolidated financial statements have been retroactively restated to give effect to the reincorporation.
Common and Convertible Preferred Stock
On March 15, 1996, the Company sold 2,325,500 shares of common stock in its initial public offering. Net proceeds to the Company, after deducting the underwriting discount and offering expenses, were approximately $35,613. In connection with such offering, all outstanding shares of preferred stock were converted into 7,990,817 shares of common stock and the authorized shares of preferred stock was reduced to 1,000,000 shares of preferred stock with a $0.001 par value.
Employee Stock Purchase Plan
In 1996, the Company's stockholders approved the adoption of the Employee Stock Purchase Plan (the "Purchase Plan") wherein 500,000 shares were reserved for issuance pursuant to such plan. The Purchase Plan is administered over offering periods of 24 months each, with each offering period divided into four consecutive six-month purchase periods beginning August 1 and February 1 of each year. Eligible employees may designate not more than 10 percent of their cash compensation to be deducted each pay period for the purchase of common stock under the Purchase Plan. On the last business day of each purchase period, shares of common stock are purchased with the employee's payroll deductions accumulated during the six months, generally at a price per share of 85 percent of the market price of the common stock on the employee's entry date of the applicable offering period or the last day of the applicable offering period, whichever is lower. The Purchase Plan will terminate no later than 2006. 42,751 shares were issued under the Purchase Plan in 1996.
Stock Option Plan
In 1996, the Company's stockholders approved an increase in the number of common shares reserved under the 1992 Stock Option Plan (the "1992 Plan") by 400,000 shares. In addition, the Company's stockholders approved the adoption of the 1996 Equity Incentive Plan and the 1996 Directors Stock Option Plan (together known as the "1996 Plans") wherein 2,000,000 and 300,000 shares, respectively, were reserved for issuance pursuant to these plans. The 1992 Plan and the 1996 Plans together are known as "the Plans".
The Plans provide for the grant of incentive stock options and nonqualified stock options to employees, directors and consultants of the Company at prices ranging from 85% to 110% (depending on the type of grant and the individual receiving the grant) of the fair market value of the common stock on the date of grant as determined by the Board of Directors.
The vesting and exercise provisions of the option grants under the Plans are determined by the Board of Directors. Options granted under the Plans are generally immediately exercisable, but any shares acquired pursuant to exercises are subject to repurchase by the Company until they have vested. Options generally vest ratably over a four-year period commencing from the date of grant, subject to one year of employment and expire ten years from date of grant.
PRISM SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Information with respect to the Plans is summarized as follows:
As of December 31, 1996, the Company had reserved 3,730,793 shares of common stock for future issuance under the Plans. As of December 31, 1996, 365,254 options outstanding under the Plans had vested and 306,739 shares of common stock acquired under the Plans were subject to the Company's rights of repurchase.
The following information concerning the Company's stock option and employee stock purchase plans is provided in accordance with Statement of Financial Accounting Standards No. 123 ("FAS 123"), "Accounting for Stock-Based Compensation." The Company accounts for such plans in accordance with APB No. 25 and related interpretations.
The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 1996 and 1995:
PRISM SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The weighted average expected life was based on the exercise behavior. The weighted average fair value of those options granted in 1996 and 1995 was $10.65 and $1.34 per share, respectively.
At December 31, 1996, the Company had four stock-based compensation plans, which are described above. As the Company applies APB Opinion 25 and related interpretations in accounting for its plans, no compensation cost has been recognized for its fixed stock option plans and its stock purchase plan.
Had compensation cost for the Company's four stock-based compensation plans been determined consistent with FAS 123, the Company's net loss and loss per share would have been increased to the pro forma amounts indicated below:
The above pro forma effects on income may not be representative of the effects on net income for future years as option grants typically vest over several years and are generally granted each year. Due to the option vesting schedule, the impact of FAS 123 on the Company's net income for 1995 is not material.
7. INCOME TAXES
The components of the provision for income taxes for 1994, 1995 and 1996 were as follows:
PRISM SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The principal items accounting for the difference between income taxes computed at the United States statutory rate and the provision for income taxes is as follows:
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount used for income tax purposes. Significant components of deferred tax assets for federal and state income taxes are as follows:
The Company has established a valuation allowance to the extent of its deferred tax assets because it is more likely than not that a benefit cannot be realized in the future due to the Company's recurring operating losses.
As of December 31, 1996, the Company had federal and California net operating loss carryforwards of approximately $9,700 and $1,900, respectively. The Company also had federal and California research and development tax credit carryforwards of $360 and $135, respectively. The net operating loss and credit carryforwards will expire at various dates from 1997 through 2011, if not utilized.
Utilization of the net operating losses and credits may be subject to an annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization.
8. EMPLOYEE BENEFIT PLAN
During 1994, the Company adopted a qualified profit sharing plan and trust under Internal Revenue Service Code 401(k) (the "401(k) Plan"). The 401(k) Plan provides for tax deferred salary deductions. Employees can elect to contribute to the 401(k) Plan up to 15% of their salary, subject to current statutory limits. The Company is not required to contribute to the 401(k) Plan and has made no contributions since the inception of the 401(k) Plan.
PRISM SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
During 1995, the Company committed to certain foreign employees to contribute up to 5% of their salaries, subject to annual limitations, to a defined contribution pension plan. As of December 31, 1996, the obligation for this commitment was not material.
9. RELATED PARTY TRANSACTIONS
At December 31, 1996, the Company held notes receivable of $104, with interest at 8.0% per annum, from three executive officers issued in connection with the purchase of common stock under incentive and non-qualified stock option plans. The principal and accrued interest on these notes are due in full in July and August 2005.
10. SEGMENT INFORMATION
The Company operates in one industry segment. In 1994, one customer accounted for 11% of the Company's total revenues. No customer accounted for more than 10% of the Company's total revenues in 1995 or 1996.
The Company's U.S. and international revenues are generally denominated in U.S. dollars and are summarized as follows:
In 1994 and 1995, the majority of international sales were made in Canada. In 1996, the majority of international sales were made in Europe, where the Company significantly increased the number of direct sales personnel and the number of international distributors and resellers marketing the Company's products.
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders Prism Solutions, Inc. Sunnyvale, California
We have audited the accompanying consolidated balance sheets of Prism Solutions, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Prism Solutions, Inc. and subsidiaries as of December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
San Jose, California January 17, 1997, except for Note 5, for which the date is March 5, 1997
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item regarding the Company's directors is incorporated herein by reference from the section entitled "Election of Directors" of the Company's proxy statement to be delivered to stockholders with the Company's Annual Report to Stockholders. Information regarding the Company's executive officers may be found in Part I in the section entitled "Executive Officers of the Company" and is incorporated by reference herein. Information required by this Item concerning compliance with Section 16(a) of the Exchange Act is incorporated herein by reference from the section entitled "Section 16(a) Beneficial Ownership Reporting Compliance" contained in the Company's proxy statement to be delivered to stockholders with the Company's Annual Report to Stockholders.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item is incorporated herein by reference from the section entitled "Executive Compensation" of the Company's proxy statement to be delivered to stockholders with the Company's Annual Report to Stockholders.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this Item is incorporated herein by reference from the section entitled "Stock Ownership of Certain Beneficial Owners and Management" of the Company's proxy statement to be delivered to stockholders with the Company's Annual Report to Stockholders.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item is incorporated herein by reference from the section entitled "Certain Transactions" of the Company's proxy statement to be delivered to stockholders with the Company's Annual Report to Stockholders.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements -- see Index to Consolidated Financial Statements at Item 8 on page 14 of this Report.
2. Financial Statement Schedule:
Schedule II -- Valuation and Qualifying Account is filed on page 34 of this Report on Form 10-K
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are omitted because they are not required under the related instructions or are inapplicable.
The independent accountant's report with respect to the above listed financial statements and financial statement schedule listed in Items 14(a) is filed on page 29 and page 33, respectively, of this Report on Form 10-K.
3. Exhibits -- The following exhibits are filed as part of, or incorporated by reference into, this Report:
- --------------- (1) Incorporated by reference to the exhibit with the same number in the Company's Registration Statement on Form SB-2 (File No. 33-1180-LA), declared effective March 14, 1996.
(2) Management contract or compensatory plan
(b) Reports on Form 8-K -- No current reports on Form 8-K were filed in the fiscal quarter ended December 31, 1996
(c) Exhibits: the Company hereby files as part of this Report the exhibits listed in Item 14 (a) (3) as set forth above
(d) Financial Statement Schedules -- See Item 14 (a) (2) above.
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors and Stockholders Prism Solutions, Inc. Sunnyvale, California
Our report on the consolidated financial statements of Prism Solutions, Inc. is included on page 29 of this Form 10-K. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed on Item 14 (a)(2) of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
San Jose, California January 17, 1997
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
- --------------- (1) Deductions represent accounts receivables written off during 1996.
The accompanying notes are an integral part of these consolidated financial statements
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
PRISM SOLUTIONS, INC. (Registrant)
By: /s/ WARREN M. WEISS ------------------------------------ Warren M. Weiss President, Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
INDEX TO EXHIBITS
- --------------- (1) Incorporated by reference to the exhibit with the same number in the Company's Registration Statement on Form SB-2 (File No. 33-1180-LA), declared effective March 14, 1996.
(2) Management contract or compensatory plan
(b) Reports on Form 8-K -- No current reports on Form 8-K were filed in the fiscal quarter ended December 31, 1996
(c) Exhibits: the Company hereby files as part of this Report the exhibits listed in Item 14 (a) (3) as set forth above
(d) Financial Statement Schedules -- See Item 14 (a) (2) above.