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, 2005 Commission File No. 0-21713 PRISM SOFTWARE CORPORATION -------------------------------------------------- (Exact name of small business issuer as specified in its charter) Delaware 95-2621719 - ------------------------------- ------------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 15500-C Rockfield Blvd., Irvine, CA 92618 ----------------------------------------------------------------- (Address of principal executive offices) 949-855-3100 -------------------------------------------------------------------- (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 July 31, 2005 - ----------------------------------- ---------------------------- 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, 2005 (Unaudited) 3 Condensed Statements of Operations for the Three and Six Months Ended June 30, 2005 and 2004 (Unaudited) 4 Condensed Statements of Cash Flows for the Three and Six Months Ended June 30, 2005 and 2004 (Unaudited) 5 Notes to Condensed Financial Statements (Unaudited) 6 Item 2. Management's Discussion and Analysis or Plan of Operation 8 Item 3. Controls and Procedures 9 PART II. OTHER INFORMATION Item 1. Legal Proceedings 10 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 10 Item 3. Defaults Upon Senior Securities 10 Item 4. Submission of Matters to a Vote of Security Holders 10 Item 5. Other Information 10 Item 6. Exhibits 11 Signatures 11 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. PRISM SOFTWARE CORPORATION Condensed Balance Sheet (Unaudited) JUNE 30, 2005 ------------- ASSETS Current assets Cash $ 105,709 Accounts receivable, net of allowance for doubtful accounts of $14,369 301,193 Inventory 5,425 ------------- Total current assets 412,327 Equipment, net 50,283 Other 31,662 ------------- $ 494,272 ============= LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities Notes payable - stockholders $ 41,696 Accrued interest - stockholders 79,872 Accrued expenses - stockholders 30,203 Accounts payable 174,188 Accrued expenses 342,137 Deferred revenue 119,929 ------------- Total current liabilities 788,025 ------------- Long-term liabilities Notes payable - stockholders $ 9,664,838 Accrued interest - stockholders 873,331 Deferred revenue 5,646 ------------- Total long-term liabilities 10,543,815 ------------- 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 (23,648,534) ------------- Total stockholders' deficit (10,837,568) ------------- $ 494,272 ============= The accompanying notes are an integral part of these financial statements 3 PRISM SOFTWARE CORPORATION Condensed Statements of Operations (Unaudited) THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------------------- ---------------------------------- 2005 2004 2005 2004 -------------- -------------- -------------- -------------- Net sales Products $ 101,476 $ 99,195 $ 610,606 $ 198,476 Services 69,951 75,228 173,064 131,377 -------------- -------------- -------------- -------------- 171,427 174,423 783,670 329,853 -------------- -------------- -------------- -------------- Cost of sales Products 10,703 1,325 11,478 17,533 Services 106,889 91,201 208,072 180,783 -------------- -------------- -------------- -------------- 117,592 92,526 219,550 198,316 -------------- -------------- -------------- -------------- Gross profit 53,835 81,897 564,120 131,537 -------------- -------------- -------------- -------------- Operating expenses Selling and administrative 316,529 309,523 603,962 631,030 Research and development 90,012 69,360 211,152 128,277 -------------- -------------- -------------- -------------- 406,541 378,883 815,114 759,307 -------------- -------------- -------------- -------------- Loss from operations (352,706) (296,986) (250,994) (627,770) Gain - settling or writing off accounts payable -- -- 17,095 5,926 Interest expense - stockholders (116,902) (157,869) (231,680) (309,344) Interest expense -- (957) -- (1,924) -------------- -------------- -------------- -------------- Net loss $ (469,608) $ (455,812) $ (465,579) $ (933,112) ============== ============== ============== ============== Basic and diluted net loss per common share $ (0.00) $ (0.00) $ (0.00) $ (0.01) ============== ============== ============== ============== Basic and diluted weighted average number of common shares outstanding 141,592,000 141,592,000 141,592,000 141,592,000 ============== ============== ============== ============== The accompanying notes are an integral part of these financial statements 4 PRISM SOFTWARE CORPORATION Condensed Statements of Cash Flows (Unaudited) SIX MONTHS ENDED JUNE 30, -------------------------- 2005 2004 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(465,579) $(933,112) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation 14,533 6,837 Gain - settling or writing off accounts payable (17,095) (5,926) (Increase) decrease in assets Accounts receivable (230,533) (6,736) Inventory 175 241 Licenses and other assets (13,321) (11,328) Increase (decrease) in liabilities Accounts payable (41,643) (69,556) Accrued expenses 56,829 360,015 Deferred revenue (177,013) 14,421 ---------- ---------- Net cash used by operating activities (873,647) (645,144) CASH FLOWS FROM INVESTING ACTIVITIES Purchase of equipment (25,453) (4,066) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of notes payable - stockholders 615,000 700,000 ---------- ---------- Net cash provided by financing activities 615,000 700,000 ---------- ---------- Net increase (decrease) in cash (284,100) 50,790 Cash, beginning of period 389,809 12,024 ---------- ---------- Cash, end of period $ 105,709 $ 62,814 ========== ========== Supplemental disclosures: Cash paid for interest $ -- $ -- Cash paid for income tax $ -- $ -- The accompanying notes are an integral part of these financial statements 5 PRISM SOFTWARE CORPORATION NOTES TO CONDENSED FINANCIAL STATEMENTS JUNE 30, 2005 (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, 2004 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 - REVENUE RECOGNITION - ---------------------------- Revenues from the licensing of computer software products are recognized upon delivery of the products to customers, as there are no significant obligations remaining after the delivery date. Revenues related to maintenance agreements are deferred and recognized on a straight line basis over the terms of the related agreements, generally 12 months. Payments are generally due within 30 days. Management's review of collectibility is an ongoing process, and reserves are made based on the Company's historical experience with each customer and its knowledge of each receivable. NOTE 3 - 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. No options were granted or vested during the interim periods presented, therefore no compensation costs were incurred and the actual net income (or loss) equals the pro forma net income (or loss) for such periods. 6 NOTE 4 - BASIC AND DILUTED NET LOSS PER SHARE - --------------------------------------------- Earnings per common share is calculated in accordance with SFAS No. 128, Earnings per Share. Basic earnings per share is based upon the weighted average number of common shares outstanding during the period. Diluted earnings 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 at the 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 earnings per share computations. THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------------------- - ---------------------------------- 2005 2004 2005 2004 -------------- -------------- -------------- -------------- Numerator Net loss $ (469,608) $ (455,812) $ (465,579) $ (933,112) Preferred dividends (19,700) (19,700) (19,700) (19,700) -------------- -------------- -------------- -------------- $ (489,308) $ (475,512) $ (485,279) $ (952,812) ============== ============== ============== ============== Denominator Basic and diluted weighted average number of common shares outstanding 141,592,000 141,592,000 141,592,000 141,592,000 ============== ============== ============== ============== Basic and diluted net loss per common share $ (0.00) $ (0.00) $ (0.00) $ (0.01) ============== ============== ============== ============== 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, ------------------------------------- 2005 2004 ----------------- ------------------ Options 2,985,000 1,685,000 Warrants 0 2,500,000 Convertible debt 94,488,356 783,980,319 7 NOTE 5 - 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. 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, 2005 COMPARED TO THREE MONTHS ENDED JUNE 30, 2004) For the quarter ended June 30, 2005, the Company reported a loss of approximately $470,000, or $0.00 per share, compared with a loss of approximately $456,000, or $0.00 per share, for the quarter ended June 30, 2004. The loss increased approximately $14,000 due primarily to the following: o Operating revenue decreased approximately $3,000. o The cost of sales increased approximately $25,000 from approximately $93,000 to approximately $118,000 due primarily to a higher cost for services. o Total operating expenses increased approximately $28,000. o Interest expense decreased approximately $42,000 due primarily to lower interest rates on the Company's debt. 8 RESULTS OF OPERATIONS (SIX MONTHS ENDED JUNE 30, 2005 COMPARED TO SIX MONTHS ENDED JUNE 30, 2004) For the six months ended June 30, 2005, the Company reported a loss of approximately $466,000, or $0.00 per share, compared with a loss of approximately $933,000, or $0.01 per share, for the six months ended June 30, 2004. The loss decreased approximately $468,000 due primarily to the following: o Operating revenue increased approximately $454,000 due primarily to higher sales through resellers and original equipment manufacturers (OEM's), including one sale of over $400,000 made in the quarter ended March 31, 2005. o The cost of sales increased approximately $21,000 from approximately $198,000 to approximately $220,000 due primarily to a higher cost for services. o Total operating expenses increased approximately $56,000. o Interest expense decreased approximately $80,000 due primarily to lower interest rates on the Company's debt. LIQUIDITY AND CAPITAL RESOURCES As of June 30, 2005, the Company had cash and cash equivalents of approximately $106,000. The principal source of liquidity in the six months ended June 30, 2005 was approximately $615,000 of additional borrowings. 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. 9 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. None. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. As of July 31, 2005, the Company was in default on certain notes payable totaling approximately $93,000, including accrued interest. 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 June 14, 2005. 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 97,123,356 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 97,123,356 shares in favor, no shares against and no shares abstaining. 2. Cacciamatta Accountancy Corporation was ratified as the Company's Independent Auditor. The vote was 95,123,356 shares in favor, no shares against and 2,000,000 shares abstaining. ITEM 5. OTHER INFORMATION. None. 10 ITEM 6. EXHIBITS. (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 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 15, 2005 By: /s/ David Ayres ---------------------------------------- David Ayres, Director and President (Principal Executive Officer) Dated: August 15, 2005 By: /s/ Michael Cheever ----------------------------------------- Michael Cheever, Treasurer (Principal Accounting and Financial Officer) 11