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
[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended March 31, 1996
Commission File No. 0-19987
PRISM GROUP INC.
(Exact name of small business issuer as specified in its charter)
Florida 65-0143407
(State or other jurisdiction of I.R.S. (IRS Employer
incorporation or organization Number) Identification No.)
15530 Woodinville-Redmond Road, Woodinville, WA 98072
(Address of principal executive offices)
206/881-1609
(Issuer's telephone number)
Securities registered pursuant to Section 12 (g) of the Act:
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 the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No__
APPLICABLE ONLY TO issuers INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by court. Yes No__
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 984,057 Transitional Small
Business Disclosure Format (check one); Yes__ No X
1 of a Total of 14 Pages
<PAGE>
PART I - FINANCIAL INFORMATION
Item I. Financial Statements.
Set forth below are the unaudited financial statements reflecting the
Company's financial condition, results of operations and cash flows for
the fiscal quarter ended March 31, 1996.
[THE BALANCE OF THIS PAGE INTENTIONALLY LEFT BLANK]
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<TABLE>
<S> <C> <C>
PRISM GROUP, INC ..........................................
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited
ASSETS
March 31, December 31,
1996 1995
Cash ...................................................................................... $ 98,399 222,713
Accounts receivable, net .................................................................. 1,596,784 2,298,373
Inventories ............................................................................... 742,061 1,294,703
Other current assets ...................................................................... 288,942 128,969
----------- -----------
Total current assets ........ 2,726,186 3,944,758
Equipment - At cost ....................................................................... 5,628,957 5,633,543
Less accumulated depreciation and
amortization ........ 3,808,784 3,635,449
----------- -----------
1,820,173 1,998,094
Goodwill, net of accumulated amortization ................................................. 2,597,658 2,635,848
Other ..................................................................................... 20,901 16,926
----------- -----------
$ 7,164,918 $ 8,595,626
LIABILITIES AND STOCK HOLDERS' EQUITY
Note Payable .............................................................................. $ 1,038,123 $ 913,866
Current maturities of long-term obligations ............................................... 316,876 335,533
Accounts payable .......................................................................... 3,489,948 3,918,978
Accrued liabilities ....................................................................... 695,228 857,250
----------- -----------
Total current liabilities ........................................................ 5,540,175 6,025,627
Long-term obligations ..................................................................... 1,188,984 1,261,274
Stockholders' equity (deficit):
Preferred stock, $.01 par value ........ -- --
Convertible Preferred stock, $100.00 par value ........ 2,573,500 2,573,500
Common stock, $.01 par value ........ 78,723 78,723
Additional paid-in capital ........ 5,322,744 5,322,744
Retained deficit ........ (7,539,208) (6,666,242)
----------- -----------
435,759 1,308,745
$ 7,164,918 $ 8,595,626
</TABLE>
See accompanying notes
<PAGE>
PRISM GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
Three Months Ended March 31 1995
Net sales $2,736,078 $6,080,828
Cost of goods sold 2,617,238 4,962,524
--------- ---------
Gross profit 118,840 1,118,304
Selling, general and administrative 869,854 1,182,661
------- ---------
Operating loss (751,014) (64,357)
Other income (expense)
Interest expense (154,632) (155,460)
Interest income and other 32,679 2,092
--------- -----
Loss before income taxes $ (872,967) $ (291,855)
Provision (benefit) for income taxes ---------- ----------
Net loss $(872,967) $(291,855)
========== =========
Loss per common and common
equivalent share $(.0.89) $(.0.61)
====== ========
See accompanying notes
<PAGE>
PRISM GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
For the Three Months ended March 31,
Unaudited
1996 1995
Cash flows from operating activities:
Net loss $(872,967) $ (291,855)
Adjustments to reconcile net loss
to net cash provided by (used in) operating
activities:
Depreciation and amortization 216,111 236,498
Increase (decrease) in cash from:
Trade and other receivables 701,589 1,580,020
Inventories and other current assets 392,669 (98,936)
Accounts payable and accrued liabilities (591,052) (1,122,841)
Net cash provided by (used in) operating activities (153,650) 302,886
Cash flows from investing activities:
Capital expenditures ------ (47,052)
Reduction (increase) in other assets (3,975) 2,956
Net cash used in investing activities (3,975) (44,096)
Cash flows from financing activities:
Note payable, net 124,257 (125,154)
Payments on long-term obligations (90,947) (191,250)
Net cash provided by (used in) financing activities 33,311 (316,404)
Net increase (decrease) in cash (124,314) (57,614)
Cash at beginning of period 222,713 464,017
------- -------
Cash at end of period $98,399 $406,403
======== ========
see accompanying notes
<PAGE>
PRISM GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying condensed consolidated financial statements are unaudited
and should be read in conjunction with the financial statement disclosures
included in the Company's fiscal 1995 Annual Report on Form 10-KSB, as
amended. Operating results for the three month period ended March 31, 1996
are not necessarily indicative of the results that may be expected for the
full year. In the opinion of management, all adjustments necessary for a
fair presentation of interim operating results are of a normal recurring
nature and are reflected herein.
2. Loss Per Share
Net loss per share is based upon common and common equivalent shares
outstanding during each period using the modified treasury method. For the
three months ended March 31, 1996 and 1995, no common stock equivalents
were considered to be outstanding as they would be anti-dilutive. The
Company undertook an 8 to 1 reverse stock split effective April 15, 1996.
The weighted average and number of common and common equivalent shares
outstanding for 1996 and 1995 has been retroactively adjusted for this
reverse stock split. The common and common equivalent shares outstanding,
after retroactive adjustment for the split, at March 31, 1996 and March 31,
1995 were 984,057 and 482,291, respectively.
3. Supplemental Cash Flow Information
Interest paid during the three-month periods ended March 31, 1996 and 1995
totaled approximately $150,000 and $125,000, respectively. There were no
payments for income taxes made for the three month periods ended March 31,
1996 and 1995.
4. Inventories
Inventories consisted of the following at March 31, 1996 and December 31,
1995:
March 31, December 31,
1996 1995
Raw materials $302,767 $576,158
Work in process 7,031 7,162
Finished goods 432,263 711,383
------- -------
$742,061 $1,294,703
======== ==========
5. Income Taxes
The Company has established a valuation allowance against its deferred tax
assets because it believes that some uncertainty may exist with respect to
future realization of net operating loss carry forwards. The valuation
allowance totaled approximately $2,210,000 and $1,821,000 at March 31, 1996
and December 31, 1995, respectively. The Company believes that the
recapitalization of security holder debt described in the Company's 1995
Annual Report on Form 10-KSB, as amended, may significantly reduce the
Company's ability to use its net operating loss carryforwards.
6. Adoption of SFAS 123
The Company adopted, effective January 1, 1996, Statement of Financial
Standards 123, Accounting for Stock-Based Compensation (SFAS 123). The
Company is continuing to account for employee stock options under APB 25,
Accounting for Stock Issued to Employees (APB 25), and will disclose the
proforma effects on net earnings and earnings per share had compensation
cost for the plan been determined based on the market value of the options
at the grant dates.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Overview
As more fully described in the Company's 1995 Annual Report on Form 10-KSB, as
amended, the Company consolidated its two software manufacturing operations in
the third quarter of 1995 to reduce underutilized capacity and costs. In
addition, beginning in the spring of 1995, the Company made a number of
significant new changes in management. As part of such changes, late in the
fourth quarter of 1995, the Company began adding sales and marketing personnel
to its staff. As a result of such restructuring, the Company believes it has a
more cost-effective and sales oriented operation. However, partly because of a
general slowdown in the software publishing business and partly because the
Company's ability to retain and attract customers has been adversely affected by
its financial difficulties, the Company did not experience the needed increased
sales in the first quarter of 1996 that are necessary to, among other things,
deal with the obligations to the vendors of Microdisk Services and Software
Production, Inc., as discussed below.
Net Sales
Net sales decreased 55% to $2.7 million in the first quarter of 1996 from $6.1
million in the comparable 1995 quarter. The decrease in net sales from the three
month period ending March 31, 1995 is attributable primarily to the loss of a
major customer in the third quarter of 1995, and generally slower sales in the
software manufacturing division, reflecting in part a slowdown in software
publishing, decreased sales from the Company's order processing and fulfillment
services, and the May, 1995 sale of the Company's division which sold formatted
and privately labeled diskettes. In addition, the Company's ability to attract
and retain customers has been adversely affected by the Company's financial
difficulties, which in turn adversely impacts the Company's net sales, its net
income, and its ability to meet its financial obligations.
Prism's sales are affected by a number of factors, including the cyclical and
unpredictable release of new products and enhancements to existing products by
software publishing companies. Currently the company's primary geographic market
is the Pacific Northwest which is experiencing increasing competition and price
pressure as software manufacturing sales have been generally slower than normal
for the first quarter. The Company's business is partly characterized by the
need to produce and distribute large volumes of software products just prior to
and following a new product release or upgrade to an existing product by its
customers. Consequently, although the Company's business is not seasonal, sales
may vary from quarter to quarter and year to year, depending on its customers,
and product releases and upgrades, which are not predictable. The Company is
making efforts to expand its customer base to include industries outside the
software industry, but this effort has not added significantly to its revenues.
In the software industry, many of the Company's contracts are awarded by a
competitive bidding process in which a number of firms submit proposals in
response to a customer's request for proposals. As a result of this and the
other factors discussed above, management is unable to comment on the outlook
for future sales.
Gross Profits
Gross profit, as a percentage of net sales, decreased to 4% in the first quarter
of 1996 from 18% in the first quarter of 1995. The decrease for the three months
ended March 31, 1996 from the comparable quarter in 1995 is due to a gross loss
in the Company's fulfillment and distribution division and decreased gross
profit in the software manufacturing division, both resulting from lower
revenues.
Each of the Company's contracts are negotiated independently as to pricing and
services to be provided. In order to meet the cyclical software manufacturing
and delivery needs of its customers, Prism maintains a base capacity. The timing
and actual performance by the Company of its services affects the Company's
gross profit.
Due to increased competition, the Company expanding the number of offered
services and the cyclical nature of the manufacturing and delivery needs of its
customers, the Company cannot predict whether its gross profit percentage will
increase, decrease or remain steady in future quarters.
Expenses
Selling, general and administrative expenses, as a percentage of net sales,
increased to 32% during the first quarter of 1996 from 19% for the comparable
quarter in 1995. Actual selling, general and administrative expenses decreased
from $1.2 million in 1995 to $870 thousand during the first quarter of 1996. The
actual expense decrease was primarily due to the Company's restructuring efforts
and the sale of its formatted and private labeled diskette division.
Net interest expense decreased from $230 thousand during the first quarter of
1995 to $155 thousand for the first quarter of 1996. The decrease in interest
costs is attributable primarily to reduced borrowings by Prism, in spite of
significantly higher interest rates.
Net Losses
Net losses increased in the first quarter of 1996 to a loss of $873 thousand
from a loss of $292 thousand in the first quarter of 1995. The increase in
losses in 1996 from 1995 is due to significantly lower revenues in the 1996
period.
Liquidity and Capital Resources
Background: The Company has financed its development and operations from the
sale of securities, the issuance of debt, and the sale of assets. As described
in the Company's 1995 Annual Report on Form 10-KSB, as amended, in 1995, the
Company (a) sold the Corporate Services Division of Microdisk Services in May,
(b) repaid lines of credit and term debt with U. S. Bank of Washington, (c)
converted approximately $4.3 million in short-term indebtedness, plus $412
thousand of other obligations accounted for as equity, into preferred and common
stock of the Company, and (d) acquired a new accounts receivable line of credit
from CAPCO Financial Company, Inc. ("CAPCO").
Renaissance Debenture: In connection with the debt resturcturings described
above, $2.5 million in debt owing by the Company to Renaissance Capital Partners
II, Ltd. ("Renaissance") was converted into capital stock of the Company. With
respect to the balance of the debt to Renaissance (including accrued interest),
the Company issued a new 12% Convertible Debenture with a principal amount of
$1,288,516. The unpaid balance of this debenture is convertible into shares of
the Company's common stock at a rate of $4.00 per share, as adjusted for the 8
to 1 reverse stock split undertaken by the Company effective April 15, 1996.
This conversion rate is subject to adjustment if the Company issues common stock
or rights thereto at a price less than $4.00 per share.
On January 1, 1996, the Company began principal payments to Renaissance on the
debenture. However, the Company is in default of certain covenants of the
debenture. Renaissance has granted a waiver of these defaults through December
31, 1996 in exchange for a four warrant warrant to purchase 12,500 shares of the
Company's common stock at $4.00 per share
CAPCO: On December 31, 1995, the Company executed new line of credit agreements
with CAPCO that extend until December 31, 1996. The lines of credit are for $3.5
million for Prism Software Production, L.L.C. ("PSP") and $500 thousand for
Prism Direct, Inc. ("PDI"). The monthly rate of interest under both lines is
2.7% (32.4% annually) on the first $1.5 million outstanding. This rate
represents a significant increase in the Company's historical cost of borrowing,
which, in future periods, can be expected to increase interest expense. As of
March 29, 1996, the balance of the combined CAPCO lines was $1,142,729. This
balance does not account for payments of approximately $104 thousand received,
but not credited to the line by that date. Unlike prior lines of credit, the
CAPCO lines provide financing only against the Company's accounts receivable,
not its inventory.
The Company has been to date unable to arrange a new line of credit that would
reduce its interest expense and provide it with greater availability.
General; Trade Debt and Other Matters: As of March 31, 1996, the Company had
limited cash available and was relying on, among other things, the CAPCO lines
of credit.
As of March 31, 1996 and December 31,1995, the Company and its subsidiaries had
approximately $1 million and $1.7 million, respectively, of accounts payable
that were current; $743 thousand and $483 thousand, respectively, extended to
between 31 and 60 days; and approximately $1.7 million and $1.5 million,
respectively, extended over 61 days. The level of extended accounts payable
results in part from the decision by the Company to manage closely both its cash
resources and accounts payable. As a result of such decision, a number of trade
creditors are experiencing significant delays in payment. Some vendors have
required the Company to pay cash upon delivery, although to date, the Company
has not failed to meet a delivery commitment due to supply problems with its
vendors. The Company however believes that the delays in paying suppliers has
made it more difficult to attract new customers.
The Company has received demand letters from certain vendors requesting
immediate payment of amounts owing to them, aggregating approximately $1.6
million. Many of these initiated lawsuits. One such vendor threatened to
challenge the formation of PSP. The Company believes that the formation of PSP
complied with applicable law and was a practical method for eventual payment of
vendors of SPI and Microdisk Services, the entities whose operations were
consolidated in connection with the formation of PSP. Many of the lawsuits and
demands, representing about 63% of the claims, have been settled with the
vendors agreeing to payment over a period of time; the promised level of
payments was based on Company expectations of future sales, which were not
realized in the first quarter of 1996. If the Company is unable to continue
making the required payments, the Company can expect further legal action. Under
a bulk of the settlements of the lawsuits, the Company has stipulated to
judgments that can be entered and executed upon if agreed upon payments have not
been made, after in most cases notice and an opportunity to cure.
The Company is considering various alternatives, including the raising of equity
capital and a sale of assets. In addition, the Company is seeking a new, more
beneficial line of credit. However, there can be no assurance that the Company
will be successful in such efforts or that a sale of assets would generate
sufficient funds to satisfy indebtedness and vendors. If the Company is unable
to quickly raise sufficient equity capital, arrange a sale of assets, or
generate enough additional sales and income in connection with renegotiated
arrangements that would satisfy vendors, one or more of the Company's
subsidiaries, or the Company itself, could be subject to involuntary bankruptcy
proceedings or the Company could commence such proceedings. In addition, in
order to consummate a sale of assets, the Company may need to consider a sale
through bankruptcy proceedings.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
In 1995, the Company received notice from Sony claiming that the Company would
be infringing on Sony's patent for 3 1/2" floppy diskettes, if the Company
purchased diskettes from manufacturers not licensed by Sony. The Company is
still evaluating the claim, but has discovered that one of its vendors for
diskettes is unlicensed. However that vendor is in negotiations with Sony and
the Company has communicated the circumstances to Sony counsel. Because the
negotiations are ongoing, the Company has requested several weeks of forbearance
from Sony while the vendor and Sony continue to negotiate a licensing agreement.
The Company has also communicated its expectation to the vendor that this matter
be resolved promptly.
Beginning in the fall of 1995, a number of lawsuits were brought by vendors to
Microdisk Services (MDS), Software Production, Inc. (SPI) and Prism Software
Productions (PSP), claiming a total of approximately $767 thousand. These
lawsuits were brought in courts in the Seattle area. Approximately 62% of the
claims the subject of lawsuits (about $474 thousand in claims) have been
resolved through settlements in which the Company agrees to make payments over
time, all as further discussed in the Management's Discussion and Analysis. In
addition, as discussed in the Management's Discussion and Analysis, the Company
has received demand letters from a number of other vendors, but litigation has
not yet ensued.
Item 2. Changes in Securities.
The Company's stock is listed on the NASDAQ Small Cap Market. The
trading market for the Company's common stock could be characterized as volatile
and from time to time of low volume. Under NASDAQ listing rules, to remain
listed, the Company must maintain a minimum bid price of $1 per share (together
with other applicable requirements, including $1 million in capital and surplus
and $2 million in assets) or, as an alternative, if the bid price is less than
$1 per share, the Company must maintain capital and surplus of $2,000,000 and a
market value of public float of $1,000,000. In 1995, the Company was subject to
delisting proceedings by NASDAQ but averted delisting by converting much of its
debt to equity. Because the Company's stock traded at less than $1 per share
during much of the fourth quarter of 1995 and the Company's capital and surplus
were less than $2,000,000, the Company has once again been subject to delisting
proceedings. On March 28, 1996, NASDAQ advised the Company that it would be
delisted on April 12, 1996. The Company has appealed the NASDAQ decision. As
part of that appeal strategy, the Company undertook an 8 to 1 reverse stock
split, effective April 15, 1996. Through May 10, 1996, the stock has generally
traded in excess of $2 per share, but the Company's capital and surplus has
recently gone below $1 million. A hearing before NASDAQ will be held on May 14,
1996.
Item 3. Defaults Upon Senior Securities.
On June 30, 1995 the Company issued 25,735 shares of Series A Convertible
Preferred Stock with a par value of $100.00 per share. The holders of the Series
A Stock are entitled to a 4% cumulative dividend and certain liquidation and
redemption preferences. In addition, in the event that the Company for any two
consecutive quarters fails to declare and pay the cumulative dividends, such
holders shall have the right to vote as a class to elect directors to two new
director positions, that the Company is then obligated to create. The Company
has determined that it would not be prudent to pay dividends while it has
non-current obligations in light of provisions of law that prohibit the payment
of dividends by a corporation, if after giving affect to the dividend, the
corporation would not be able to pay debts as they come due in the usual course
of business. Accordingly, dividends for the quarters ended September 30 and
December 31, 1995 and March 31, 1996, totaling $77,205, have not been declared
or paid by the Company.
The Company has delayed making a principal and interest payment on the 12%
Convertible Debenture of $25,325.18 to Renaissance Capital Partners II, Ltd.,
which was due on May 10, 1996.
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K.
Not Applicable
<PAGE>
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 GROUP, INC.
May 14, 1996 By /s/ K.C. Aly
Date K.C. Aly
Chief Executive Officer
May 14, 1996 By /s/ N.M. (Joe) Morris
- ------------ ---------------------
Date N.M. (Joe)
President and Chief Operating Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1996
<CASH> 98,399
<SECURITIES> 0
<RECEIVABLES> 1,670,166
<ALLOWANCES> 73,382
<INVENTORY> 742,061
<CURRENT-ASSETS> 288,942
<PP&E> 5,628,957
<DEPRECIATION> 3,808,784
<TOTAL-ASSETS> 7,164,918
<CURRENT-LIABILITIES> 5,540,175
<BONDS> 1,188,984
0
2,573,500
<COMMON> 78,723
<OTHER-SE> (2,216,464)
<TOTAL-LIABILITY-AND-EQUITY> 7,164,918
<SALES> 2,736,078
<TOTAL-REVENUES> 2,736,078
<CGS> 2,617,238
<TOTAL-COSTS> 3,487,092
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 121,973
<INCOME-PRETAX> (872,987)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (872,987)
<EPS-PRIMARY> (0.89)
<EPS-DILUTED> (0.89)
</TABLE>
