UNITED STATES
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 JUNE 30, 2004
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.)
15500-C Rockfield Blvd., Irvine, CA 92618
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(Address of principal executive offices)
(949) 855-3100
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(Issuer's telephone number)
23696 Birtcher, Lake Forest, CA 92630
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(Former address, if changed since last report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes [x] No [ ]
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 July 31, 2004
- ----------------------------------- ----------------------------
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. Financial Statements
Condensed Balance Sheet as of June 30, 2004 (Unaudited) 4
Condensed Statements of Operations for the Three and Six
Months Ended June 30, 2004 and 2003 (Unaudited) 5
Condensed Statements of Cash Flows for the Six
Months Ended June 30, 2004 and 2003 (Unaudited) 6
Notes to Condensed Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis or Plan of Operation 10
Item 3. Controls and Procedures 12
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 13
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 14
Signatures 14
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
3
PRISM SOFTWARE CORPORATION
Condensed Balance Sheet
(Unaudited)
JUNE 30,
2004
-------------
ASSETS
Current assets
Cash $ 62,814
Accounts receivable, net of allowance
for doubtful accounts of $4,369 53,359
Inventory 210
-------------
Total current assets 116,383
Equipment, net 22,426
Other 19,917
-------------
$ 158,726
=============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Notes payable - stockholders $ 8,089,268
Accrued interest - stockholders 997,848
Accrued expenses - stockholders 30,203
Notes payable - other 38,700
Accounts payable 328,588
Accrued expenses 485,710
Deferred revenue 119,678
-------------
Total current liabilities 10,089,995
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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 11,394,263
Accumulated deficit (22,742,235)
-------------
Total stockholders' deficit (9,931,269)
-------------
$ 158,726
=============
The accompanying notes are an integral part of these financial statements
4
PRISM SOFTWARE CORPORATION
Condensed Statements of Operations
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- -------------------------------
2004 2003 2004 2003
-------------- -------------- -------------- --------------
Net sales
Products $ 99,195 $ 42,097 $ 198,476 $ 96,502
Services 75,228 80,877 131,377 147,212
-------------- -------------- -------------- --------------
174,423 122,974 329,853 243,714
-------------- -------------- -------------- --------------
Cost of sales 21,626 28,837 54,116 53,878
-------------- -------------- -------------- --------------
Gross profit 152,797 94,137 275,737 189,836
-------------- -------------- -------------- --------------
Operating expenses
Selling and administrative 380,423 399,727 769,304 851,914
Research and development 69,360 69,540 128,277 127,322
-------------- -------------- -------------- --------------
449,783 469,267 897,581 979,236
-------------- -------------- -------------- --------------
Loss from operations (296,986) (375,130) (621,844) (789,400)
Interest expense - stockholders (157,869) (157,559) (309,344) (2,974,646)
Interest expense (957) (968) (1,924) (1,935)
-------------- -------------- -------------- --------------
Net loss $ (455,812) $ (533,657) $ (933,112) $ (3,765,981)
============== ============== ============== ==============
Basic and diluted net loss per common share $ (0.00) $ (0.00) $ (0.01) $ (0.03)
============== ============== ============== ==============
Basic and diluted weighted average
number of common shares outstanding 141,591,534 139,591,534 141,591,534 139,591,534
============== ============== ============== ==============
The accompanying notes are an integral part of these financial statements
5
PRISM SOFTWARE CORPORATION
Condensed Statements of Cash Flows
(Unaudited)
SIX MONTHS ENDED
JUNE 30,
---------------------------
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (933,112) $(3,765,981)
Adjustments to reconcile net loss to net cash
used by operating activities:
Loss on disposal of assets -- 1,787
Depreciation 6,837 8,093
Amortization of beneficial conversion feature -- 2,724,570
(Increase) decrease in assets
Accounts receivable (6,736) (35,471)
Inventory 241 (157)
Licenses and other assets (11,328) 1,878
Increase (decrease) in liabilities
Accounts payable (75,482) 28,602
Accrued expenses 360,015 307,246
Deferred revenue 14,421 (31,918)
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Net cash used by operating activities (645,144) (761,351)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment (4,066) (1,460)
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable - stockholders 700,000 761,000
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Net cash provided by financing activities 700,000 761,000
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Net increase (decrease) in cash 50,790 (1,811)
Cash, beginning of period 12,024 7,778
------------ ------------
Cash, end of period $ 62,814 $ 5,967
============ ============
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
6
PRISM SOFTWARE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2004
(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, 2003
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 Six Months Ended
June 30, June 30,
2004 2003 2004 2003
-------- -------- -------- --------
$ -- $ -- $ -- $ --
7
NOTE 3 - BASIC AND DILUTED NET LOSS PER SHARE
- ---------------------------------------------
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.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- -------------------------------
2004 2003 2003 2002
-------------- -------------- -------------- --------------
Numerator
---------
Net loss $ (455,812) $ (533,657) $ (933,112) $ (3,765,981)
Preferred dividends (19,700) (19,700) (19,700) (19,700)
-------------- -------------- -------------- --------------
$ (475,512) $ (553,357) $ (952,812) $ (3,785,681)
============== ============== ============== ==============
Denominator
-----------
Basic and diluted weighted
average number of common
shares outstanding during
the period 141,591,534 139,591,534 141,591,534 139,591,534
-------------- -------------- -------------- --------------
Basic and diluted net loss per share $ (0.00) $ (0.00) $ (0.01) $ (0.03)
============== ============== ============== ==============
The following incremental common shares associated with outstanding
options, warrants and convertible debt are not included in the denominators
above as their effect would be anti-dilutive.
Equivalent Number of
Common Shares
at June 30,
-------------------------------------
2004 2003
----------------- ------------------
Options 1,685,000 2,988,760
Warrants 2,500,000 5,690,000
Convertible debt 783,980,319 144,100,494
8
NOTE 4 - GOING CONCERN
- ----------------------
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 cooperative 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.
9
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 JUNE 30, 2004 COMPARED TO THREE MONTHS
ENDED JUNE 30, 2003)
For the quarter ended June 30, 2004, the Company reported a loss of
approximately $456,000, or $0.00 per share, compared with a loss of
approximately $534,000, or $0.00 per share, for the quarter ended June 30, 2003.
The loss decreased approximately $78,000 due primarily to the following:
o Operating revenue increased approximately $51,000 due primarily to
higher sales of a proprietary product line.
o The cost of sales decreased approximately $7,000 from
approximately $29,000 to approximately $22,000.
o Total operating expenses decreased approximately $19,000 due
primarily to lower expenses for personnel and professional
services.
o Interest expense changed little, due primarily to the following:
1. An expense of about $25,000 was recognized in the
quarter ended June 30, 2003 from amortizing a beneficial
conversion feature on certain convertible notes. No such
expense was incurred in the quarter ended June 30, 2004.
(See "Liquidity and Capital Resources.")
2. An increase of approximately $25,000 in aggregate face
value interest expense due to an increase in the
Company's indebtedness.
10
RESULTS OF OPERATIONS (SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS
ENDED JUNE 30, 2003)
For the six months ended June 30, 2004, the Company reported a loss of
approximately $933,000, or $0.01 per share, compared with a loss of
approximately $3,766,000, or $0.03 per share, for the six months ended June 30,
2003. The loss decreased approximately $2,833,000 due primarily to the
following:
o Operating revenue increased approximately $86,000 due primarily to
higher sales of a proprietary product line.
o The cost of sales remained at approximately $54,000 in both
periods.
o Total operating expenses decreased approximately $82,000 due
primarily to lower expenses for personnel and professional
services.
o Interest expense decreased approximately $2,665,000 due primarily
to the following:
1. An expense of about $2,725,000 was recognized in the six
months ended June 30, 2003 (primarily in the quarter
ended March 31, 2003) from amortizing a beneficial
conversion feature on certain convertible notes. No such
expense was incurred in the six months ended June 30,
2004. (See "Liquidity and Capital Resources.")
2. An increase of approximately $59,000 in aggregate face
value interest expense due to an increase in the
Company's indebtedness.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2004, the Company had cash and cash equivalents of
approximately $63,000. The principal source of liquidity in the six months ended
June 30, 2004 was approximately $700,000 of non-convertible debt.
Approximately $3,997,000 of borrowings made during or prior to the
fiscal year ended December 31, 2003 are convertible into Common Stock at a rate
that 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 conversion rate went into effect. As of June 30,
2004, the aggregate unamortized discount on such loans was $0 and the Company
had recorded approximately $3,172,000 as additional paid-in capital for the
accumulated amortization of the discount. This non-cash amortization expense is
included as part of the caption "Interest expense - stockholders" in the
accompanying statements of operations. For the three months ended June 30, 2004
and June 30, 2003, this amortization expense was $0 and approximately $25,000,
respectively.
11
Management anticipates that additional capital will be required to
finance the Company's operations. The Company believes that expected cash flow
from operations, borrowing, and the possible 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.
At the end of the period covered by this Form 10-QSB, the Company's
management, including the Chief Executive and Chief Financial Officers,
conducted an evaluation of the effectiveness of the Company's disclosure
controls and procedures. Based on this evaluation, the Chief Executive and Chief
Financial Officers have determined that such controls and procedures are
effective to ensure that information relating to the Company required to be
disclosed in reports that it files or submits under the Securities Exchange Act
of 1934 is recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the Securities and Exchange Commission.
There have been no changes in the Company's internal controls over financial
reporting that were identified during the evaluation that occurred during the
Company's last fiscal quarter that have materially affected, or are reasonably
likely to materially affect, the Company's internal control over financial
reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is currently in a dispute with Mr. E. Ted Daniels, its
former President and Chief Executive Officer. This dispute is discussed in the
"Legal Proceedings" disclosure of the Company's Form 10-KSB/A (Amendment No. 2)
for the fiscal year ended December 31, 2003, and no material developments have
occurred in this matter since the date of such filing, except that the
arbitration hearing has been set for December 2004.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
In the quarter ended June 30, 2004, the Company borrowed an aggregate
of $300,000 under a non-convertible Consolidated Promissory Note with the Conrad
von Bibra Revocable Trust. The note is secured by the Company's assets, is due
upon demand, and bears interest at the rate of 8% per annum beginning July 1,
2004. 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, and being a
director and officer of the Company.
12
The Company believes that such transactions 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 July 31, 2004, the Company was in default on certain notes
payable totaling approximately $634,000, including accrued interest.
Approximately $290,000 of this amount is convertible into approximately 3.7
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of Stockholders was held on May 20, 2004. Since
certain members of the Board of Directors owned an aggregate of more than 50% of
the outstanding voting shares of the Company, a quorum was available without the
Company incurring the expense of soliciting proxies. Stockholders holding an
aggregate of 99,573,356 shares attended the meeting. The following actions were
brought before the meeting:
1. Carl von Bibra, David Ayres and Conrad von Bibra were
elected as the three members of the Board of Directors,
each to hold office until the next annual meeting of
stockholders and until their successors are elected and
qualified. The vote for each was 95,123,356 shares in
favor, no shares against and 4,450,000 shares
abstaining.
2. Cacciamatta Accountancy Corporation was ratified as the
Company's Independent Auditor. The vote was 99,573,356
shares in favor, no shares against and no shares
abstaining.
ITEM 5. OTHER INFORMATION.
In August 2004, the Company is moving its office to 15500-C Rockfield
Blvd., Irvine, CA 92618.
13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.1 Non-convertible Consolidated Promissory Note dated June 30,
2004 by and between the Conrad von Bibra Revocable Trust and
Prism Software
10.2 Code of Ethics
31.1 Certificate of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2 Certificate of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.1 Certificate of Chief Executive and Chief 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: August 16, 2004 By: /s/ David Ayres
-----------------------------------
David Ayres, Director and President
(Principal Executive Officer)
Dated: August 16, 2004 By: /s/ Michael Cheever
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Michael Cheever, Treasurer
14