SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
[X] QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
Commission File No. 0-21713
PRISM SOFTWARE CORPORATION
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(Exact name of small business issuer as specified in its charter)
Delaware 95-2621719
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
23696 Birtcher, Lake Forest, California 92630
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(Address of principal executive offices)
(949) 855-3100
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(Issuer's telephone number)
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date:
Title of Each Class of Common Stock Outstanding at October 31, 2003
- ----------------------------------- -------------------------------
Common Stock, par value $.01 per share 141,591,534
Transitional Small Business Disclosure Format (check one) ( ) Yes; (X) No.
PRISM SOFTWARE CORPORATION
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Condensed Balance Sheet as of September 30, 2003 (Unaudited) 3
Condensed Statements of Operations for the Three and Nine
Months Ended September 30, 2003 and 2002 (Unaudited) 4
Condensed Statements of Cash Flows for the Nine
Months Ended September 30, 2003 and 2002 (Unaudited) 5
Notes to Condensed Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis or Plan of Operation 9
Item 3. Controls and Procedures 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities and Use of Proceeds 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
2
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
PRISM SOFTWARE CORPORATION
CONDENSED BALANCE SHEET
(UNAUDITED)
SEPTEMBER 30,
2003
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ASSETS
Current assets
Cash $ 17,377
Accounts receivable, net of allowance
for doubtful accounts of $4,369 46,025
Inventory 427
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Total current assets 63,829
Equipment 21,622
Other 9,621
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$ 95,072
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LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Notes payable - stockholders $ 7,089,268
Accrued interest - stockholders 538,852
Accrued expenses - stockholders 30,203
Notes payable 38,700
Accounts payable 349,700
Accrued expenses 399,158
Deferred revenue 90,971
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Total current liabilities 8,536,852
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Commitments and contingencies --
Stockholders' deficit
Preferred stock - 5,000,000 shares authorized, $.01 par value
Series A - 78,800 shares issued and outstanding 788
Common stock - 300,000,000 shares authorized, $.01 par value
141,591,534 shares issued and outstanding 1,415,915
Additional paid-in capital 8,234,993
Accumulated deficit (18,093,476)
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Total stockholders' deficit (8,441,780)
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$ 95,072
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
3
PRISM SOFTWARE CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- ---------------------------------
2003 2002 2003 2002
-------------- -------------- -------------- --------------
Net sales
Products $ 72,399 $ 50,563 $ 168,901 $ 185,877
Services 61,580 66,926 208,792 209,725
-------------- -------------- -------------- --------------
133,979 117,489 377,693 395,602
-------------- -------------- -------------- --------------
Cost of sales
Products 222 1,785 16,687 38,921
Services 15,381 17,287 52,795 56,725
-------------- -------------- -------------- --------------
15,603 19,072 69,482 95,646
-------------- -------------- -------------- --------------
Gross profit 118,376 98,417 308,211 299,956
-------------- -------------- -------------- --------------
Operating expenses
Selling and administrative 393,939 426,973 1,245,855 1,569,907
Research and development 67,924 67,973 195,245 241,119
-------------- -------------- -------------- --------------
461,863 494,946 1,441,100 1,811,026
-------------- -------------- -------------- --------------
Loss from operations (343,487) (396,529) (1,132,889) (1,511,070)
Interest expense - stockholders (142,523) (97,642) (402,599) (269,300)
Interest expense (968) (1,105) (2,902) (3,906)
-------------- -------------- -------------- --------------
Net loss $ (486,978) $ (495,276) $ (1,538,390) $ (1,784,276)
============== ============== ============== ==============
Basic and diluted net loss per common share $ (0.00) $ (0.00) $ (0.01) $ (0.01)
============== ============== ============== ==============
Basic and diluted weighted average
number of common shares outstanding 140,982,838 140,091,534 140,060,398 140,091,534
============== ============== ============== ==============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
4
PRISM SOFTWARE CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
2003 2002
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CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,538,390) $(1,784,276)
Adjustments to reconcile net loss to net cash
used by operating activities:
Loss on disposal of assets 1,787 104,977
Depreciation 10,475 42,154
Issuance of stock options -- 34,563
Cashless exercise of stock options 2,800 --
Amortization of beneficial conversion feature 10,000 --
(Increase) decrease in assets
Accounts receivable (11,709) (10,442)
Inventory 65 (1,000)
Licenses and other assets 2,012 (4,419)
Increase (decrease) in liabilities
Accounts payable (1,472) 121,771
Accrued expenses 478,616 311,175
Deferred revenue (21,787) (28,157)
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Net cash used by operating activities (1,067,603) (1,213,654)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment (3,798) (3,810)
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable - stockholders 1,081,000 1,195,900
Payments on notes -- (12,324)
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Net cash provided by financing activities 1,081,000 1,183,576
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Net increase (decrease) in cash 9,599 (33,888)
Cash, beginning of period 7,778 42,513
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Cash, end of period $ 17,377 $ 8,625
============ ============
Supplemental disclosures:
Cash paid for interest $ -- $ --
Cash paid for income tax $ -- $ --
Non-cash investing and financing activities:
Conversion of stockholders interest payable to notes payable $ 737,938 $ --
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
5
PRISM SOFTWARE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
- ------------------------------
The accompanying financial statements have been prepared by the Company
without audit. In the opinion of management, all adjustments, consisting of
only normal recurring adjustments, necessary to present fairly the
financial position of the Company and the results of its operations and
cash flows for the interim periods have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these
condensed financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's December 31, 2002
audited financial statements. Certain amounts from prior periods have been
reclassified to be consistent with the presentation of the current period.
The results of operations for the interim periods are not necessarily
indicative of the operating results for the full years.
NOTE 2 - STOCK-BASED COMPENSATION
- ---------------------------------
Stock options issued under stock-based compensation plans are accounted for
under the recognition and measurement principles of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations.
The Company has elected to continue to account for stock-based compensation
using the intrinsic value method. Accordingly, compensation is measured as
the excess, if any, of the quoted market price of the Company's common
stock at the date of grant over the amount an employee is required to pay
to acquire the stock. The following compensation costs were incurred in the
interim periods presented:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2003 2002 2003 2002
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$ -- $ 5,645 $ -- $ 34,563
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NOTE 3 - BASIC AND DILUTED NET LOSS PER SHARE
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Net loss per common share is calculated in accordance with SFAS No. 128,
Earning per Share. Basic net loss per share is based upon the weighted
average number of common shares outstanding during the period. Diluted loss
per share is based upon the assumption that all dilutive convertible shares
and stock options were converted or exercised. Dilution is computed by
applying the treasury stock method. Under this method, options are assumed
to be exercised at the beginning of the period (or time of issuance, if
later) and as if funds obtained thereby were used to purchase common stock
at the average market price during the period.
The following table illustrates the reconciliation of the numerators and
denominators of the basic and diluted loss per share computations.
Incremental common shares associated with outstanding options, warrants and
convertible debt are not included in the denominators as their effect would
be anti-dilutive; thus, basic loss per share equals diluted loss per share.
Options to purchase 1,997,093 and 17,894,532 shares of common stock were
outstanding at September 30, 2003 and September 30, 2002, respectively.
Warrants to purchase 2,790,000 and 5,940,000 shares of common stock were
outstanding at September 30, 2003 and September 30, 2002, respectively.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- ---------------------------------
2003 2002 2003 2002
-------------- -------------- -------------- --------------
Numerator
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Net loss $ (486,978) $ (495,276) $ (1,538,390) $ (1,784,276)
Preferred dividends -- -- (19,700) (19,700)
-------------- -------------- -------------- --------------
$ (486,978) $ (495,276) $ (1,558,090) $ (1,803,976)
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Denominator
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Basic and diluted weighted
average number of common
shares outstanding during
the period 140,982,838 140,091,534 140,060,398 140,091,534
-------------- -------------- -------------- --------------
Basic and diluted net loss per share $ (0.00) $ (0.00) $ (0.01) $ (0.01)
============== ============== ============== ==============
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NOTE 4 - GOING CONCERN
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The Company's continued operating losses, limited capital and stockholders'
deficit raise substantial doubt about its ability to continue as a going
concern. Management's plans to continue strengthening the Company's
financial condition and operations include: restructuring the Company's
debt and other liabilities, monitoring costs and cash flow activities,
expanding operations through potential joint ventures, continuing to
upgrade sales and marketing efforts and upgrading customer service and
product development efforts. The Company also intends to continue raising
capital to fund its operations, but no assurance can be given that such
funding will be available.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
GENERAL
Certain of the statements contained in this report, including those
under "Management's Discussion and Analysis or Plan of Operation," and
especially those contained under "Liquidity and Capital Resources" may be
"forward-looking statements" that involve risks and uncertainties. All
forward-looking statements included in this report are based on information
available to Prism Software Corporation ("the Company") on the date hereof and
the Company assumes no obligation to update any such forward-looking statements.
The actual future results of the Company could differ materially from those
statements. Factors that could cause or contribute to such differences include,
but are not limited to, those discussed in the Company's Annual Report on Form
10-KSB as well as risks associated with managing the Company's growth. While the
Company believes that these statements are accurate, the Company's business is
dependent upon general economic conditions and various conditions specific to
the document and content management industry and future trends and results
cannot be predicted with certainty.
RESULTS OF OPERATIONS (THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE
MONTHS ENDED SEPTEMBER 30, 2002)
For the quarter ended September 30, 2003, the Company reported a loss
of approximately $487,000, or $0.00 per share, compared with a loss of
approximately $495,000, or $0.00 per share, for the quarter ended September 30,
2002. The loss decreased approximately $8,000 due primarily to the following:
o Product and service revenue increased approximately $16,000
due primarily to higher sales of a proprietary product line.
In addition, there was a shift in revenue from sales made
directly to end users to sales made through resellers.
o Cost of sales decreased approximately $3,000 from
approximately $19,000, or about 16% of revenue, to
approximately $16,000, or about 12% of revenue. The decrease
in the cost of sales percentage was due to a different mix of
products being sold.
o Total operating expenses decreased approximately $33,000 due
primarily to lower expenses for personnel and professional
services, resulting mainly from general cost reduction
measures.
o Interest expense increased approximately $45,000 due primarily
to an increase in the Company's indebtedness.
9
RESULTS OF OPERATIONS (NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 2002)
For the nine months ended September 30, 2003, the Company reported a
loss of approximately $1,538,000, or $0.01 per share, compared with a loss of
approximately $1,784,000, or $0.01 per share, for the nine months ended
September 30, 2002. The loss decreased approximately $246,000 due primarily to
the following:
o Product and service revenue decreased approximately $18,000
due primarily to a decrease in revenue related to the selling
of certain third-party products and services, which was mostly
offset by increased sales of the Company's proprietary
products and services. This decrease occurred in the quarter
ended March 31, 2003 in comparison to the quarter ended March
31, 2002; sales for the quarter ended September 30, 2003
increased in comparison to the quarter ended September 30,
2002. In addition, there was a shift in revenue from sales
made directly to end users to sales made through resellers.
o Cost of sales decreased approximately $26,000 from
approximately $96,000, or about 24% of revenue, to
approximately $69,000, or about 18% of revenue. This was due
primarily to the decrease in revenue related to the selling of
certain third-party products and services which have a cost of
sales percentage that is higher than that of the Company's
proprietary products and services.
o Total operating expenses decreased approximately $370,000 due
primarily to the following:
1. In the quarter ended June 30, 2002, the Company
incurred a one-time loss of approximately $104,000 in
writing down assets from a licensing agreement.
2. In the quarter ended June 30, 2002, the Company
accrued a one-time expense of approximately $72,000
for minimum royalties under the aforementioned
licensing agreement.
3. The remaining decrease in operating expenses was due
mostly to lower expenses for personnel and
professional services, resulting mainly from general
cost reduction measures.
o Interest expense increased approximately $132,000 due
primarily to an increase in the Company's indebtedness.
10
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2003, the Company had cash and cash equivalents of
approximately $17,000. The principal source of liquidity in the nine months
ended September 30, 2003 was approximately $1,081,000 of additional borrowings,
all of which are convertible into Common Stock at the lenders' option. The
conversion rate on $20,000 of such borrowings is below the quoted market price
of the Common Stock at the time the debt was incurred. The value of this
beneficial conversion feature (discount) on each such loan was limited to being
no greater than the face value of such loan and was fully amortized when the
debt was incurred. As of September 30, 2003, the aggregate unamortized discount
on such loans was $0 and the Company had recorded approximately $10,000 as
additional paid-in capital for the accumulated amortization of the discount. The
amortization expense is included as part of the caption "Interest expense -
stockholders" in the accompanying statements of operations. For the three months
ended September 30, 2003 and September 30, 2002, this amortization expense was
$10,000 and $0, respectively.
Management anticipates that additional capital will be required to
finance the Company's operations. The Company believes that expected cash flow
from operations plus the anticipated proceeds from sales of securities will be
sufficient to finance the Company's operations at currently anticipated levels
for a period of at least twelve months. However, there can be no assurance that
the Company will not encounter unforeseen difficulties that may deplete its
capital resources more rapidly than anticipated.
ITEM 3. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our Chief Executive
and Financial Officer, we conducted an evaluation of our disclosure controls and
procedures, as such term is defined under Rule 13a-14(c) promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), within 90 days
of the filing date of this report. Based on this evaluation, our Chief Executive
and Financial Officer concluded that the Company's disclosure controls and
procedures are effective. Disclosure controls and procedures are designed to
ensure that information required to be disclosed in reports under the Exchange
Act are processed and reported within the time periods specified by law.
Since the date of the evaluation described above, there have been no
significant changes in our internal controls or in other factors that could
significantly affect these controls.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In the quarter ended September 30, 2003, E. Ted Daniels, the Company's
President and Chief Executive Officer, exercised options to purchase 2,000,000
shares of the Company's Common Stock at no cost pursuant to the terms of an
employment agreement between Mr. Daniels and the Company.
In the quarter ended September 30, 2003, the Company borrowed an
aggregate of $320,000 under a Credit Agreement with the Conrad von Bibra
Revocable Trust. The borrowings are secured by the Company's assets, are due
upon demand, bear interest at the rate of 8% per annum and are convertible upon
default into shares of Common Stock at the rate of $0.05 per share (subject to
certain anti-dilution adjustments) at the option of the holder. Upon the
conversion of all or any portion of these borrowings into Common Stock, the
Company will also issue to the holder a warrant to purchase additional shares of
Common Stock (equal to the number of shares issued upon such conversion) at an
exercise price of $0.12 per share (subject to certain anti-dilution
adjustments). No commissions were paid in connection with this transaction. Mr.
von Bibra is an affiliate of the Company by virtue of having beneficial
ownership of more than 5% of the outstanding Common Stock of the Company.
The Company believes that such sales were exempt from the registration
requirements of the Securities Act of 1933, as amended, by virtue of Section
4(2) thereof or Regulation D promulgated thereunder, as a transaction by an
issuer not involving a public offering.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As of October 31, 2003, the Company was in default on certain notes
payable totaling approximately $605,000, including accrued interest.
Approximately $273,000 of this amount is convertible into approximately 3.5
million shares of Common Stock.
As a result of these defaults, each holder of the debt obligations has
the right to demand payment in full of such obligations at any time and exercise
any rights or remedies available under the notes. If holders of any substantial
portion of the notes were to demand payment, the Company does not currently have
sufficient resources to respond to any such demand.
12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31 Certificate of Chief Executive and Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
32 Certificate of Chief Executive and Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
(b) Reports on Form 8-K
None.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PRISM SOFTWARE CORPORATION
Dated: November 18, 2003 By: /s/ E. Ted Daniels
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President, Chief Executive Officer,
Chief Financial Officer and Director
(Principal Executive Officer and Principal
Financial and Principal Accounting Officer)
13