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, 2006 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 [ ] 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 July 31, 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 June 30, 2006 (Unaudited) 3 Condensed Statements of Operations for the Three and Six Months Ended June 30, 2006 and 2005 (Unaudited) 4 Condensed Statements of Cash Flows for the Six Months Ended June 30, 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 11 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 12 Item 4. Submission of Matters to a Vote of Security Holders 12 Item 5. Other Information 12 Item 6. Exhibits 13 Signatures 13 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. PRISM SOFTWARE CORPORATION CONDENSED BALANCE SHEET (UNAUDITED) JUNE 30, 2006 ------------ ASSETS Current assets Cash $ 67,409 Accounts receivable, net of allowance for doubtful accounts of $244,369 81,251 Inventory 5,216 ------------ Total current assets 153,876 Equipment, net 57,585 Other 28,903 ------------ $ 240,364 ============ LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities Notes payable - stockholders 10,746,534 Accrued interest - stockholders 1,430,967 Accounts payable 105,923 Accrued expenses 238,328 Deferred revenue 141,308 ------------ Total current liabilities 12,663,060 ------------ 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 (25,233,662) ------------ Total stockholders' deficit (12,422,696) ------------ $ 240,364 ============ 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, ------------------------------ ------------------------------ 2006 2005 2006 2005 ------------- ------------- ------------- ------------- Net sales Products $ 129,952 $ 101,476 $ 231,919 $ 610,606 Services 110,930 69,951 196,361 173,064 ------------- ------------- ------------- ------------- 240,882 171,427 428,280 783,670 ------------- ------------- ------------- ------------- Cost of sales Products 10,964 14,061 18,390 17,967 Services 101,821 106,889 206,115 208,072 ------------- ------------- ------------- ------------- 112,785 120,950 224,505 226,039 ------------- ------------- ------------- ------------- Gross profit 128,097 50,477 203,775 557,631 ------------- ------------- ------------- ------------- Operating expenses Selling and administrative 254,230 316,529 521,469 603,962 Research and development 94,783 86,654 198,324 204,663 ------------- ------------- ------------- ------------- 349,013 403,183 719,793 808,625 ------------- ------------- ------------- ------------- Loss from operations (220,916) (352,706) (516,018) (250,994) Gain - settling or writing off accrued expenses and accrued interest 145,876 - 145,876 - Gain - settling or writing off accounts payable 38,569 - 38,569 17,095 Interest expense - stockholders (130,460) (116,902) (258,988) (231,680) ------------- ------------- ------------- ------------- Net loss $ (166,931) $ (469,608) $ (590,561) $ (465,579) ============= ============= ============= ============= Basic and diluted net loss per common share $ (0.00) $ (0.00) $ (0.00) $ (0.00) ============= ============= ============= ============= 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 CORPORATION CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) SIX MONTHS ENDED JUNE 30, ---------------------- 2006 2005 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(590,561) $(465,579) Adjustments to reconcile net loss to net cash used by operating activities: Loss on disposal of assets 1,977 - Depreciation and amortization 22,108 14,533 Gain - settling or writing off accrued expenses and accrued interest (145,876) - Gain - settling or writing off accounts payable (38,569) (17,095) (Increase) decrease in assets Accounts receivable (1,570) (230,533) Inventory 692 175 Other assets (11,327) (13,321) Increase (decrease) in liabilities Accounts payable 9,096 (41,643) Accrued expenses 213,228 56,829 Deferred revenue (3,073) (177,013) --------- --------- Net cash used by operating activities (543,875) (873,647) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from disposal of equipment 930 - Purchase of equipment (25,560) (25,453) --------- --------- Net cash used by financing activities (24,630) (25,453) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of notes payable - stockholders 555,000 615,000 --------- --------- Net cash provided by financing activities 555,000 615,000 --------- --------- Net decrease in cash (13,505) (284,100) Cash, beginning of period 80,914 389,809 --------- --------- Cash, end of period $ 67,409 $ 105,709 ========= ========= 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, 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 SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------------ ------------------------------ 2006 2005 2006 2005 ------------- ------------- ------------- ------------- Numerator - --------- Net loss $ (166,931) $ (469,608) $ (590,561) $ (465,579) Preferred dividends (19,700) (19,700) (19,700) (19,700) ------------- ------------- ------------- ------------- $ (186,631) $ (489,308) $ (610,261) $ (485,279) ============= ============= ============= ============= 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) $ (0.00) ============= ============= ============= ============= 8 The following incremental common shares associated with outstanding options and convertible debt are not included in the denominators above since their effect would be anti-dilutive. EQUIVALENT NUMBER OF Common Shares at June 30, --------------------------- 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 JUNE 30, 2006 COMPARED TO THREE MONTHS ENDED JUNE 30, 2005) For the quarter ended June 30, 2006, the Company reported a loss of approximately $167,000, or $0.00 per share, compared with a loss of approximately $470,000, or $0.00 per share, for the quarter ended June 30, 2005. The loss decreased approximately $303,000 due primarily to the following: o Operating revenue increased approximately $69,000, mostly from service revenue. o The cost of sales decreased approximately $8,000. Even though revenue increased, the cost of sales changed little primarily because lower-cost products comprised a greater share of sales in the current year period. o Total operating expenses decreased approximately $54,000 due primarily to a decrease in general office costs. o In the quarter ended June 30, 2006, the Company recognized gains of approximately $184,000 from settling or writing off certain accounts payable, accrued expenses and accrued interest. (The write-offs were on liabilities that were determined to be no longer enforceable.) No such gains were recognized in the prior year period. o Interest expense increased approximately $14,000 due primarily to an increase in the Company's debt. RESULTS OF OPERATIONS (SIX MONTHS ENDED JUNE 30, 2006 COMPARED TO SIX MONTHS ENDED JUNE 30, 2005) For the six months ended June 30, 2006, the Company reported a loss of approximately $591,000, or $0.00 per share, compared with a loss of approximately $466,000, or $0.00 per share, for the six months ended June 30, 2005. The loss increased approximately $125,000 due primarily to the following: o Operating revenue decreased approximately $355,000. In the quarter ended March 31, 2005, there was one sale of over $400,000 of products. (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 decreased approximately $2,000. 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 $89,000 due primarily to a decrease in personnel costs. o In the six months ended June 30, 2006, the Company recognized gains of approximately $184,000 from settling or writing off certain accounts payable, accrued expenses and accrued interest. (The write-offs were on liabilities that were determined to be no longer enforceable.) In the prior year period, the Company recognized a gain of approximately $17,000 from settling or writing off accounts payable. o Interest expense increased approximately $27,000 due primarily to an increase in the Company's debt. 10 LIQUIDITY AND CAPITAL RESOURCES As of June 30, 2006, the Company had cash and cash equivalents of approximately $67,000. The principal source of liquidity in the six months ended June 30, 2006 was approximately $555,000 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. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. None. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. None. 11 ITEM 3. DEFAULTS UPON SENIOR SECURITIES. As of July 31, 2006, the Company was in default on certain notes payable totaling approximately $97,000, 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 May 31, 2006. 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 95,124,914 shares attended the meeting. 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 95,124,914 shares in favor, no shares against and no shares abstaining. No other actions were brought before the meeting. ITEM 5. OTHER INFORMATION. In the quarter ended June 30, 2006, the Company borrowed an aggregate of $260,000 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 July 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. 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. 12 ITEM 6. EXHIBITS. (a) Exhibits. 10.1 Consolidated Promissory Note dated June 30, 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: August 14, 2006 By: /s/ David Ayres -------------------------------------------- David Ayres, Director and President (Principal Executive Officer) Dated: August 14, 2006 By: /s/ Michael Cheever -------------------------------------------- Michael Cheever, Treasurer (Principal Accounting and Financial Officer) 13