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 SEPTEMBER 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)
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 October 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 September 30, 2004 (Unaudited) 3
Condensed Statements of Operations for the Three and Nine
Months Ended September 30, 2004 and 2003 (Unaudited) 4
Condensed Statements of Cash Flows for the Nine
Months Ended September 30, 2004 and 2003 (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 11
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 12
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 13
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
PRISM SOFTWARE CORPORATION
CONDENSED BALANCE SHEET
(UNAUDITED)
SEPTEMBER 30,
2004
-------------
ASSETS
Current assets
Cash $ 74,854
Accounts receivable, net of allowance
for doubtful accounts of $4,369 119,367
Inventory 7,834
-------------
Total current assets 202,055
Equipment, net 33,928
Other 19,938
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$ 255,921
=============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Notes payable - stockholders $ 8,399,062
Accrued interest - stockholders 1,150,584
Accrued expenses - stockholders 30,203
Notes payable - other 38,700
Accounts payable 405,753
Accrued expenses 507,337
Deferred revenue 123,094
-------------
Total current liabilities 10,654,733
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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, $.01 par value;
141,591,534 shares issued and outstanding 1,415,915
Additional paid-in capital 11,394,263
Accumulated deficit (23,209,778)
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Total stockholders' deficit (10,398,812)
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$ 255,921
=============
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,
--------------------------------- ---------------------------------
2004 2003 2004 2003
-------------- -------------- -------------- --------------
Net sales
Products $ 117,462 $ 72,399 $ 315,938 $ 168,901
Services 112,245 61,580 243,622 208,792
-------------- -------------- -------------- --------------
229,707 133,979 559,560 377,693
-------------- -------------- -------------- --------------
Cost of sales 100,633 88,703 298,949 277,682
-------------- -------------- -------------- --------------
Gross profit 129,074 45,276 260,611 100,011
-------------- -------------- -------------- --------------
Operating expenses
Selling and administrative 370,597 318,428 995,702 1,035,242
Research and development 72,316 67,924 200,593 195,245
-------------- -------------- -------------- --------------
442,913 386,352 1,196,295 1,230,487
-------------- -------------- -------------- --------------
Loss from operations (313,839) (341,076) (935,684) (1,130,476)
Gain from forgiveness of accrued liabilities 12,852 -- 12,852 --
Interest expense - stockholders (165,588) (392,523) (474,932) (3,367,169)
Interest expense (968) (968) (2,892) (2,903)
-------------- -------------- -------------- --------------
Net loss $ (467,543) $ (734,567) $ (1,400,656) $ (4,500,548)
============== ============== ============== ==============
Basic and diluted net loss per common share $ (0.00) $ (0.01) $ (0.01) $ (0.03)
============== ============== ============== ==============
Basic and diluted weighted average
number of common shares outstanding 141,591,534 140,982,838 141,591,534 140,060,398
============== ============== ============== ==============
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,
-----------------------------
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,400,656) $(4,500,548)
Adjustments to reconcile net loss to net cash used by operating activities:
Loss on disposal of assets 477 1,787
Depreciation 11,387 10,475
Gain from forgiveness of accrued liabilities (12,852) --
Amortization of beneficial conversion feature -- 2,974,570
(Increase) decrease in assets
Accounts receivable (72,744) (11,709)
Inventory (7,383) 65
Licenses and other assets (10,515) 2,012
Increase (decrease) in liabilities
Accounts payable 1,683 (1,472)
Accrued expenses 547,230 479,004
Deferred revenue 17,837 (21,787)
------------ ------------
Net cash used by operating activities (925,536) (1,067,603)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment (21,428) (3,798)
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable - stockholders 1,050,000 1,081,000
Payments on notes - stockholders (40,206) --
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Net cash provided by financing activities 1,009,794 1,081,000
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Net increase (decrease) in cash 62,830 9,599
Cash, beginning of period 12,024 7,778
------------ ------------
Cash, end of period $ 74,854 $ 17,377
============ ============
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, 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
$ -- $ -- $ -- $ --
6
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- ---------------------------------
2004 2003 2004 2003
-------------- -------------- -------------- --------------
Numerator
---------
Net loss $ (467,543) $ (734,567) $ (1,400,656) $ (4,500,548)
Preferred dividends (19,700) (19,700) (19,700) (19,700)
-------------- -------------- -------------- --------------
$ (487,243) $ (754,267) $ (1,420,356) $ (4,520,248)
============== ============== ============== ==============
Denominator
-----------
Basic and diluted weighted
average number of common
shares outstanding during
the period 141,591,534 140,982,838 141,591,534 140,060,398
-------------- -------------- -------------- --------------
Basic and diluted net loss per share $ (0.00) $ (0.01) $ (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 SEPTEMBER 30,
-----------------------------
2004 2003
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Options 1,635,000 1,988,760
Warrants 0 2,790,000
Convertible debt 797,189,934 153,393,449
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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.
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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, 2004 COMPARED TO THREE
MONTHS ENDED SEPTEMBER 30, 2003)
For the quarter ended September 30, 2004, the Company reported a loss
of approximately $468,000, or $0.00 per share, compared with a loss of
approximately $735,000, or $0.01 per share, for the quarter ended September 30,
2003. The loss decreased approximately $267,000 due primarily to the following:
o Operating revenue increased approximately $96,000 due
primarily to higher sales through resellers and original
equipment manufacturers (OEM's).
o The cost of sales increased approximately $12,000 from
approximately $89,000 to approximately $101,000.
o Total operating expenses increased approximately $57,000 due
primarily to an expected settlement of a terminated agreement.
(See "Legal Proceedings.")
o A gain of approximately $13,000 was recognized in the quarter
ended September 30, 2004 due to certain accrued interest being
forgiven. (See "Changes in Securities and Use of Proceeds.")
o Interest expense decreased approximately $227,000, due
primarily to the following:
1. An expense of about $250,000 was recognized in the
quarter ended September 30, 2003 from amortizing a
beneficial conversion feature on certain convertible
notes. No such expense was incurred in the quarter
ended September 30, 2004. (See "Liquidity and Capital
Resources.")
2. An increase of approximately $23,000 in aggregate
face value interest expense due to an increase in the
Company's indebtedness.
9
RESULTS OF OPERATIONS (NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 2003)
For the nine months ended September 30, 2004, the Company reported a
loss of approximately $1,401,000, or $0.01 per share, compared with a loss of
approximately $4,501,000, or $0.03 per share, for the nine months ended
September 30, 2003. The loss decreased approximately $3,100,000 due primarily to
the following:
o Operating revenue increased approximately $182,000 due
primarily to higher sales through resellers and OEM's.
o The cost of sales increased approximately $21,000 from
approximately $278,000 to approximately $299,000.
o Total operating expenses decreased approximately $34,000 due
primarily to lower expenses for personnel and professional
services. This was partially offset by an additional expense
accrued for the expected settlement of a terminated agreement.
(See "Legal Proceedings.")
o A gain of approximately $13,000 was recognized in the quarter
ended September 30, 2004 due to certain accrued interest being
forgiven. (See "Changes in Securities and Use of Proceeds.")
o Interest expense decreased approximately $2,892,000 due
primarily to the following:
1. An expense of about $2,975,000 was recognized in the
nine months ended September 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 nine
months ended September 30, 2004. (See "Liquidity and
Capital Resources.")
2. An increase of approximately $82,000 in aggregate
face value interest expense due to an increase in the
Company's indebtedness.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2004, the Company had cash and cash equivalents of
approximately $75,000. The principal source of liquidity in the nine months
ended September 30, 2004 was approximately $1,050,000 of non-convertible debt.
Approximately $3,997,000 of borrowings made during or prior to the
fiscal year ended December 31, 2003 is 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 September
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 September 30,
2004 and September 30, 2003, this amortization expense was $0 and approximately
$250,000, respectively.
10
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.
The Company is in the process of reaching a settlement on payment owed
under a terminated agreement. (The other party had recently filed for
arbitration of the matter.) The Company expects to make the settlement payment
in November 2004, and the amount has been accrued in the accompanying financial
statements. (See "Results of Operations" for the three and nine months ended
September 30, 2003.)
11
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
In the quarter ended September 30, 2004, the Company borrowed an
aggregate of $350,000 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 October 1, 2004.
In the quarter ended September 30, 2004, the Company paid $34,794 to
the Conrad von Bibra Revocable Trust and $5,412 to Carl von Bibra on the
principal of certain previously issued notes. Aggregate accrued interest of
$12,852 was forgiven in connection with these principal payments.
No commissions were paid in connection with the above transactions.
Both Conrad von Bibra and Carl von Bibra are affiliates of the Company by virtue
of having beneficial ownership of more than 5% of the outstanding Common Stock
of the Company, and being directors and officers of the Company.
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 October 31, 2004, the Company was in default on certain notes
payable totaling approximately $591,000, including accrued interest.
Approximately $243,000 of this amount is convertible into approximately 2.7
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.
None.
12
ITEM 5. OTHER INFORMATION.
In August 2004, the Company moved its office to 15500-C Rockfield
Blvd., Irvine, CA 92618. The initial term of the lease is for three years,
expiring August 31, 2007, with options to extend for up to two additional
three-year terms. The rent is approximately $5,200/month in the first year,
approximately $5,400/month in the second year and approximately $5,600/month in
the third year, with provisions for being adjusted if the lease is extended. The
Company has the option to cancel the lease no sooner than the end of the first
year, with ninety (90) days notice. The office has approximately 4,700 square
feet in a one-story building.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
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.
One Form 8-K was filed under Item 1.01 (Relating to
the non-convertible Consolidated Promissory Note dated
September 29, 2004 by and between the Conrad von Bibra
Revocable Trust and the Company).
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 15, 2004 By: /s/ David Ayres
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David Ayres, Director and President
(Principal Executive Officer)
Dated: November 15, 2004 By: /s/ Michael Cheever
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Michael Cheever, Treasurer
13