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 MARCH 31, 2006
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 [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [x]
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 April 30, 2006
- ----------------------------------- -----------------------------
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 March 31, 2006 (Unaudited) 3
Condensed Statements of Operations for the Three
Months Ended March 31, 2006 and 2005 (Unaudited) 4
Condensed Statements of Cash Flows for the Three
Months Ended March 31, 2006 and 2005 (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 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 11
Item 3. Defaults Upon Senior Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits 12
Signatures 12
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
PRISM SOFTWARE COPRORATION
CONDENSED BALANCE SHEET
(UNAUDITED)
MARCH 31,
2006
------------
ASSETS
Current assets
Cash $ 67,122
Accounts receivable, net of allowance
for doubtful accounts of $244,369 55,741
Inventory 5,581
------------
Total current assets 128,444
Equipment, net 51,425
Other 30,780
------------
$ 210,649
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Notes payable - stockholders 10,486,534
Accrued interest - stockholders 1,331,538
Accrued expenses - stockholders 30,203
Accounts payable 150,282
Accrued expenses 348,955
Deferred revenue 118,902
------------
Total current liabilities 12,466,414
------------
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 (25,066,731)
------------
Total stockholders' deficit (12,255,765)
------------
$ 210,649
============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
3
PRISM SOFTWARE COPRORATION
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
--------------------------------
2006 2005
------------- -------------
Net sales
Products $ 101,967 $ 509,129
Services 85,430 103,114
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187,397 612,243
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Cost of sales
Products 7,426 3,906
Services 104,294 101,183
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111,720 105,089
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Gross profit 75,677 507,154
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Operating expenses
Selling and administrative 267,238 287,434
Research and development 103,541 118,008
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370,779 405,442
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Income (loss) from operations (295,102) 101,712
Gain - settling or writing off accounts payable -- 17,095
Interest expense - stockholders (128,528) (114,778)
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Net income (loss) $ (423,630) $ 4,029
============= =============
Basic net income (loss) per common share $ (0.00) $ 0.00
============= =============
Diluted net income (loss) per common share $ (0.00) $ 0.00
============= =============
Basic weighted average number of common
shares outstanding 141,592,000 141,592,000
============= =============
Diluted weighted average number of common
shares outstanding 141,592,000 145,011,000
============= =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
4
PRISM SOFTWARE COPRORATION
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
--------------------------------
2006 2005
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (423,630) $ 4,029
Adjustments to reconcile net loss to net cash used by operating activities:
Loss on disposal of assets 1,977 --
Depreciation and amortization 10,929 6,602
Gain - settling or writing off accounts payable -- (17,095)
(Increase) decrease in assets
Accounts receivable 23,940 (259,727)
Inventory 327 (445)
Other assets (10,371) 1,656
Increase (decrease) in liabilities
Accounts payable 14,886 (34,901)
Accrued expenses 108,753 (50,107)
Deferred revenue (25,479) (206,872)
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Net cash used by operating activities (298,668) (556,860)
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CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposal of equipment 930 --
Purchase of equipment (11,054) (18,204)
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Net cash used by financing activities (10,124) (18,204)
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable - stockholders 295,000 275,000
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Net cash provided by financing activities 295,000 275,000
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Net increase (decrease) in cash (13,792) (300,064)
Cash, beginning of period 80,914 389,809
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Cash, end of period $ 67,122 $ 89,745
============= =============
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
MARCH 31, 2006
(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, 2005 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 service agreements are
deferred and recognized over the terms of the related agreements, generally no
more than 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.
6
NOTE 3 - SHARE-BASED PAYMENTS
- -----------------------------
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 123 (Revised 2004), SHARE-BASED PAYMENT ("SFAS 123R"), on January
1, 2006. Accordingly, compensation costs for all share-based awards to employees
are measured based on the grant-date fair value of those awards and recognized
over the period during which the employee is required to perform service in
exchange for the award (generally over the vesting period of the award). The
Company has no awards with market or performance conditions. Excess tax benefits
as defined by SFAS 123R will be recognized as an addition to additional
paid-in-capital. Effective January 1, 2006 and for all periods subsequent to
that date, SFAS 123R supersedes the Company's previous accounting under
Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES ("APB 25"). In March 2005, the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 107 ("SAB 107") relating to SFAS 123R. The
Company has applied the provisions of SAB 107 in its adoption of SFAS 123R.
The Company adopted SFAS 123R using the modified prospective transition method,
which provides for certain changes to the method for valuing share-based
compensation. The valuation provisions of SFAS 123R apply to new awards and to
awards that are outstanding at the effective date and subsequently modified or
cancelled. Estimated compensation expense for awards outstanding at the
effective date will be recognized over the remaining service period using the
compensation cost calculated for pro forma disclosure purposes under FASB
Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION ("SFAS 123"). In
accordance with the modified prospective transition method, the Company's
consolidated financial statements for prior periods were not restated to
reflect, and do not include, the impact of SFAS 123R.
No options were granted or vested during the interim periods presented, and all
options previously granted had completely vested before January 1, 2005,
therefore no compensation costs were incurred under SFAS 123R and the actual net
income (or loss) equals the pro forma net income (or loss) for such interim
periods.
7
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
MARCH 31,
--------------------------------
2006 2005
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Numerator
- ---------
Net loss $ (423,630) $ 4,029
Preferred dividends -- --
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$ (423,630) $ 4,029
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Denominator
- -----------
Basic weighted average number of
common shares outstanding 141,592,000 141,592,000
Effect of dilutive securities:
Conversion of preferred stock -- 3,419,000
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Dilutive potential common shares 141,592,000 145,011,000
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Basic net income (loss) per common share $ (0.00) $ 0.00
============= =============
Diluted net income (loss) per common share $ (0.00) $ 0.00
============= =============
8
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 MARCH 31,
-----------------------------
2006 2005
------------ ------------
Options 2,920,000 2,985,000
Convertible debt 94,488,356 94,488,356
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.
9
RESULTS OF OPERATIONS (THREE MONTHS ENDED MARCH 31, 2006 COMPARED TO THREE
MONTHS ENDED MARCH 31, 2005)
For the quarter ended March 31, 2006, the Company reported a loss of
approximately $424,000, or $0.00 per share, compared with net income of
approximately $4,000, or $0.00 per share (basic and diluted), for the quarter
ended March 31, 2005. The decrease of approximately $428,000 was due primarily
to the following:
o Operating revenue decreased approximately $425,000. In the
quarter ended March 31, 2005, there was one sale of over
$400,000. (Subsequently, in the quarter ended September 30,
2005, the Company accrued a reserve of approximately $240,000
against this sale when the Company determined that the
conditions for full collection had changed significantly for
reasons outside the Company's control. The Company is actively
working to satisfy such conditions.)
o The cost of sales increased approximately $7,000 from
approximately $105,000 to approximately $112,000. Even though
revenue decreased significantly, the cost of sales changed
little primarily because lower-cost products comprised a
greater share of product sales in the prior year period.
o Total operating expenses decreased approximately $35,000 due
primarily to a decrease in personnel costs.
o Interest expense increased approximately $14,000 due primarily
to an increase in the Company's debt.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2006, the Company had cash and cash equivalents of approximately
$67,000. The principal source of liquidity in the three months ended March 31,
2006 was approximately $295,000 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
10
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 April 30, 2006, the Company was in default on certain notes payable
totaling approximately $96,000, 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.
ITEM 5. OTHER INFORMATION.
In the quarter ended March 31, 2006, the Company borrowed an aggregate of
$295,000 under a Consolidated Promissory Note with the Conrad von Bibra
Revocable Trust ("Conrad von Bibra"). Such debt is due March 1, 2007, bears
simple interest at the rate of 5% per annum beginning April 1, 2006, and is
secured by the Company's assets.
No commissions were paid in connection with the above transactions. Conrad 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 an officer of the Company.
11
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 6. EXHIBITS.
(a) Exhibits.
10.1 Consolidated Promissory Note dated March 31, 2006 by
and between the Conrad von Bibra Revocable Trust and
the Company
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: May 12, 2006 By: /s/ David Ayres
---------------
David Ayres, Director and President
(Principal Executive Officer)
Dated: May 12, 2006 By: /s/ Michael Cheever
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Michael Cheever, Treasurer
(Principal Accounting and Financial Officer)
12