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, 2005
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:
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [x]
Title of Each Class of Common Stock Outstanding at October 31, 2005
- ----------------------------------- -------------------------------
Common Stock, par value $.01 per share 141,591,534
Transitional Small Business Disclosure Format (Check One): Yes [ ] No [x]
PRISM SOFTWARE CORPORATION
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheet as of September 30, 2005 (Unaudited) 3
Condensed Statements of Operations for the Three and Nine
Months Ended September 30, 2005 and 2004 (Unaudited) 4
Condensed Statements of Cash Flows for the Three and Nine
Months Ended September 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 10
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 11
Item 6. Exhibits 11
Signatures 11
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
SEPTEMBER 30,
2005
-------------
ASSETS
Current assets
Cash $ 80,811
Accounts receivable, net of allowance
for doubtful accounts of $244,369 84,428
Inventory 5,119
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Total current assets 170,358
Equipment, net 57,398
Other 27,302
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$ 255,058
=============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Notes payable - stockholders 41,696
Accrued interest - stockholders 81,527
Accrued expenses - stockholders 30,203
Accounts payable 151,932
Accrued expenses 347,643
Deferred revenue 117,897
-------------
Total current liabilities 770,898
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Long-term liabilities
Notes payable - stockholders $ 9,949,838
Accrued interest - stockholders 994,094
Deferred revenue 7,451
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Total long-term liabilities 10,951,383
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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, $.01 par
value; 141,591,534 shares issued and outstanding 1,415,915
Additional paid-in capital 11,394,263
Accumulated deficit (24,278,189)
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Total stockholders' deficit (11,467,223)
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$ 255,058
=============
3
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- --------------------------------
2005 2004 2005 2004
------------- ------------- ------------- -------------
Net sales
Products $ 110,095 $ 117,462 $ 720,701 $ 315,938
Services 93,202 112,245 266,266 243,622
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203,297 229,707 986,967 559,560
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Cost of sales
Products 1,711 7,627 13,189 25,160
Services 99,952 93,006 308,024 273,789
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101,663 100,633 321,213 298,949
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Gross profit 101,634 129,074 665,754 260,611
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Operating expenses
Selling and administrative 258,213 370,597 862,176 1,001,628
Research and development 110,657 72,316 321,809 200,593
Allowance for potentially uncollectible sales 240,000 -- 240,000 --
------------- ------------- ------------- -------------
608,870 442,913 1,423,985 1,202,221
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Loss from operations (507,236) (313,839) (758,231) (941,610)
Gain - settling or writing off debt and interest -- 12,852 -- 12,852
Gain - settling or writing off accounts payable -- -- 17,095 5,926
Interest expense - stockholders (122,418) (165,588) (354,098) (474,932)
Interest expense -- (968) -- (2,892)
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Net loss $ (629,654) $ (467,543) $ (1,095,234) $ (1,400,656)
============= ============= ============= =============
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 141,592,000 141,592,000 141,592,000 141,592,000
============= ============= ============= =============
4
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
2005 2004
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CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,095,234) $(1,400,656)
Increase (decrease) in allowance for doubtful accounts receivable 240,000 --
Adjustments to reconcile net loss to net cash used by operating activities:
Loss on disposal of assets -- 477
Depreciation 23,906 11,387
Gain - settling or writing off debt and interest -- (12,852)
Gain - settling or writing off accounts payable (17,095) (5,926)
(Increase) decrease in assets
Accounts receivable (253,768) (72,744)
Inventory 481 (7,383)
Licenses and other assets (10,961) (10,515)
Increase (decrease) in liabilities
Accounts payable (63,899) 7,609
Accrued expenses 184,753 547,230
Deferred revenue (177,240) 17,837
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Net cash used by operating activities (1,169,057) (925,536)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment (39,941) (21,428)
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable - stockholders 900,000 1,050,000
Payments on notes - stockholders -- (40,206)
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Net cash provided by financing activities 900,000 1,009,794
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Net increase (decrease) in cash (308,998) 62,830
Cash, beginning of period 389,809 12,024
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Cash, end of period $ 80,811 $ 74,854
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Supplemental disclosures:
Cash paid for interest $ -- $ --
Cash paid for income tax $ -- $ --
5
PRISM SOFTWARE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 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.
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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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- --------------------------------
2005 2004 2005 2004
------------- ------------- ------------- -------------
Numerator
- ---------
Net loss $ (629,654) $ (467,543) $ (1,095,234) $ (1,400,656)
Preferred dividends -- -- (19,700) (19,700)
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$ (629,654) $ (467,543) $ (1,114,934) $ (1,420,356)
============= ============= ============= =============
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) $ (0.01) $ (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 September 30,
------------------------------------
2005 2004
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Options 2,985,000 1,635,000
Convertible debt 94,488,356 797,189,934
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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 SEPTEMBER 30, 2005 COMPARED TO THREE
MONTHS ENDED SEPTEMBER 30, 2004)
For the quarter ended September 30, 2005, the Company reported a loss of
approximately $630,000, or $0.00 per share, compared with a loss of
approximately $468,000, or $0.00 per share, for the quarter ended September 30,
2004. The loss increased approximately $162,000 due primarily to the following:
o Operating revenue decreased approximately $26,000 due
primarily to a decrease in service revenue.
o The cost of sales increased approximately $1,000 from
approximately $101,000 to approximately $102,000.
o Total operating expenses increased approximately $166,000. In
the quarter ended September 30, 2005, the Company accrued a
reserve of approximately $240,000 where the conditions for the
full collection of a sale subsequently changed significantly
for reasons outside the Company's control. (The Company is
8
actively working to satisfy such conditions.) Also, in the
quarter ended September 30, 2004, the Company had accrued an
expense of approximately $52,000 for the settlement of a
terminated agreement.
o A gain of approximately $13,000 was recognized in the quarter
ended September 30, 2004 due to certain accrued stockholder
interest being forgiven.
o Interest expense decreased approximately $44,000 due primarily
to lower interest rates on the Company's debt.
RESULTS OF OPERATIONS (NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 2004)
For the nine months ended September 30, 2005, the Company reported a loss of
approximately $1,095,000, or $0.01 per share, compared with a loss of
approximately $1,401,000, or $0.01 per share, for the nine months ended
September 30, 2004. The loss decreased approximately $305,000 due primarily to
the following:
o Operating revenue increased approximately $427,000 due
primarily to one sale of over $400,000.
o The cost of sales increased approximately $22,000 from
approximately $299,000 to approximately $321,000 due primarily
to a higher cost for services.
o Total operating expenses increased approximately $222,000. In
the quarter ended September 30, 2005, the Company accrued a
reserve of approximately $240,000 where the conditions for the
full collection of a sale subsequently changed significantly
for reasons outside the Company's control. (The Company is
actively working to satisfy such conditions.)
o A gain of approximately $13,000 was recognized in the nine
months ended September 30, 2004 due to certain accrued
stockholder interest being forgiven.
o Gains from settling or writing off accounts payable increased
approximately $11,000 from approximately $6,000 to
approximately $17,000.
o Interest expense decreased approximately $124,000 due
primarily to lower interest rates on the Company's debt.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2005, the Company had cash and cash equivalents of
approximately $81,000. The principal source of liquidity in the nine months
ended September 30, 2005 was approximately $900,000 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.
9
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.
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
As of October 31, 2005, the Company was in default on certain notes payable
totaling approximately $94,000, 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.
None.
10
ITEM 5. OTHER INFORMATION.
None.
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: November 18, 2005 By: /s/ David Ayres
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David Ayres, Director and President
(Principal Executive Officer)
Dated: November 18, 2005 By: /s/ Michael Cheever
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Michael Cheever, Treasurer
(Principal Accounting and Financial Officer)
11