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, 2000
Commission File No. 0-21713
PRISM SOFTWARE CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 95-2621719
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
23696 Birtcher; Lake Forest, California 92630
---------------------------------------------
(Address of principal executive offices)
(949) 855-3100
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or 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 [ ] No [X]
Indicate 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 October 31, 2000
-------------------------------------- -------------------------------
Common Stock, par value $.01 per share 134,151,354
<PAGE>
PRISM SOFTWARE CORPORATION
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheet as of September 30, 2000 (Unaudited) 4
Statements of Operations for the Three and Nine
Months Ended September 30, 2000 and 1999 (Unaudited) 5
Statements of Cash Flows for the Nine Months
Ended September 30, 2000 and 1999 (Unaudited) 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 2. Changes in Securities and Use of Proceeds 10
Item 3. Defaults upon Senior Securities 11
Item 4. Submission of Matters to a Vote of
Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
3
<PAGE>
PRISM SOFTWARE CORPORATION
BALANCE SHEET
(UNAUDITED)
SEPTEMBER 30, 2000
ASSETS
Current assets:
Cash $ 260,766
Trade accounts receivable, net of allowance for doubtful
accounts of $2,518 85,389
Inventories 20,516
Other 10,868
-------------
Total current assets 377,539
Equipment, net of accumulated depreciation of $225,660 56,232
Other 6,925
-------------
$ 440,696
=============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion of long-term debt $ 1,847,839
Accounts payable 202,664
Accrued expenses 579,373
Deferred revenue 179,416
-------------
Total current liabilities 2,809,292
-------------
Long-term liabilities:
Deferred revenue 10,496
Notes payable 15,391
-------------
Total long term liabilities 25,887
-------------
Stockholders' deficit:
Preferred stock - 5,000,000 shares authorized, $.01 par value
Series A - 100,000 shares issued, 99,000 shares outstanding 990
Series B - 27,777 shares issued and outstanding 278
Common stock - 300,000,000 shares authorized, $.01 par
value; 134,151,354 shares issued and outstanding 1,341,514
Additional paid-in capital 7,852,666
Unamortized stock options (22,100)
Accumulated deficit (11,567,831)
-------------
Total stockholders' deficit (2,394,483)
-------------
$ 440,696
=============
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
<TABLE>
PRISM SOFTWARE CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- --------------------------------
2000 1999 2000 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenue $ 190,689 $ 162,564 $ 437,192 $ 494,792
Cost of sales 27,796 3,739 75,023 36,810
-------------- -------------- -------------- --------------
Gross profit 162,893 158,825 362,169 457,982
Operating expenses:
Selling, general and administrative 448,326 402,465 1,275,560 1,305,728
Research and development 29,328 34,984 103,278 94,044
-------------- -------------- -------------- --------------
Total operating expenses 477,654 437,449 1,378,838 1,399,772
-------------- -------------- -------------- --------------
Loss from operations (314,761) (278,624) (1,016,669) (941,790)
Interest expense 38,820 40,235 139,702 97,559
Amortization of embedded interest 370,042 - 747,504 -
-------------- -------------- -------------- --------------
Net loss $ (723,623) $ (318,859) $ (1,903,875) $ (1,039,349)
============== ============== ============== ==============
Basic and diluted
net loss per common share $ (0.01) $ (0.01) $ (0.02) $ (0.02)
============== ============== ============== ==============
Basic and diluted
weighted average number
of common shares outstanding 133,542,657 60,123,272 92,816,398 60,123,272
============== ============== ============== ==============
The accompanying notes are an integral part of these financial statements.
5
</TABLE>
<PAGE>
PRISM SOFTWARE CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
2000 1999
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,903,875) $ (1,039,349)
Adjustments to reconcile net income to net
cash used by operating activities:
Depreciation 25,357 29,312
Issuance of stock options 142,277 179,323
Amortization of interest embedded in
convertible notes payable 747,504 -
(Increase) decrease in assets:
Accounts receivable (39,201) 134,167
Inventories (12,725) (4,499)
Other assets (2,656) (10,836)
Increase (decrease) in liabilities:
Accounts payable (2,643) 70,099
Accrued expenses 131,287 117,704
Deferred revenue 41,040 (18,382)
------------- -------------
Net cash used by operating activities (873,635) (542,461)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (18,170) (26,918)
------------- -------------
Net cash used by investing activities (18,170) (26,918)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable 873,206 582,000
Payments on notes payable (6,658) (3,618)
Proceeds from issuance of common stock 267,894 -
------------- -------------
Net cash provided by financing activities 1,134,442 578,382
------------- -------------
Net increase in cash 242,637 9,003
Cash, beginning of period 18,129 7,491
------------- -------------
Cash, end of period $ 260,766 $ 16,494
============= =============
Cash paid for interest $ 4,685 $ 670
============= =============
Supplemental disclosure of non-cash investing
and financing activities:
Fixed assets purchased on capital leases $ - $ 35,423
Notes payable and accrued interest converted
to stock $ 1,152,938 $ -
============= =============
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
PRISM SOFTWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
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 as of September 30, 2000 and the results of its operations and cash
flows for the presented interim periods ended September 30, 2000 and 1999 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, 1999 audited financial
statements. The results of operations for the interim periods ended September
30, 2000 and 1999 are not necessarily indicative of the operating results for
the full years.
NOTE 2 - 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 joint 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.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Prism Software Corporation (the "Company") has formulated its business
plans and strategies based on certain assumptions made by the Company's
management regarding the size of the market for the Company's products and
services, the Company's anticipated share of the market and the estimated prices
for and acceptance of the Company's products and services. These plans and
strategies are based on the best estimates of management and are subject to the
assumptions stated therein, so there can be no assurance that these assessments
will prove to be correct. Any future success that the Company might enjoy will
depend upon many factors, including factors which may be beyond the control of
the Company or which cannot be predicted at this time. These factors may include
product obsolescence, increased levels of competition, including the entry of
additional competitors and increased success by existing competitors, changes in
general economic conditions, increases in operating costs including cost of
supplies, personnel and equipment, reduced margins caused by competitive
pressures and other factors, and changes in governmental regulation imposed
under federal, state or local laws.
The Company's operating results may vary significantly due to a variety
of factors including changing customers profiles, the availability and cost of
supplies and equipment, the introduction of new products or services by the
Company or its competitors, the timing of the Company's advertising and
promotional campaigns, pricing pressures, general economic and industry
conditions that affect customer demand and other factors.
RESULTS OF OPERATIONS (THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE
MONTHS ENDED SEPTEMBER 30, 1999)
For the quarter ended September 30, 2000, the Company reported a loss
of approximately $724,000, or $0.01 per share. This compares with a loss of
approximately $319,000, or $0.01 per share, for the quarter ended September 30,
1999. The increase in the loss was due primarily to the following:
o Revenue increased approximately $28,000 due primarily to an
increase of about $24,000 in service revenue.
o The cost of sales increased approximately $24,000 due
primarily to costs incurred for sales of a third-party line of
software products that was not sold in the prior year.
o Total operating expenses increased approximately $40,000 due
primarily to a higher book expense being accrued on the
granting of options to employees, including the President and
Chief Executive Officer.
o Interest expense decreased approximately $1,000. The Company's
average outstanding indebtedness did increase from the same
quarter in the prior year, but the effect on interest expense
was offset by a decrease in the average interest rate.
8
<PAGE>
o An expense of approximately $370,000 was booked for the
amortization of interest embedded in convertible notes payable
as of September 30, 2000. See "Liquidity and Capital
Resources."
RESULTS OF OPERATIONS (NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 1999)
For the nine months ended September 30, 2000, the Company reported a
loss of approximately $1,904,000, or $0.02 per share. This compares with a loss
of approximately $1,039,000, or $0.02 per share, for the nine months ended
September 30, 1999. The increase in the loss was due primarily to the following:
o Revenue decreased approximately $58,000 due primarily to a
decrease of about $74,000 in product sales, which was
partially offset by an increase of about $12,000 in service
revenue. Most of the decrease in revenue occurred in the three
months ended March 31, 2000 and 1999.
o The cost of sales increased approximately $38,000, even though
revenue decreased. This increase was due almost entirely to
costs incurred for sales of a third-party line of software
products that was not sold in the prior year.
o Interest expense increased approximately $42,000 due to an
increase in the Company's average outstanding indebtedness.
o An expense of approximately $748,000 was booked for the
amortization of interest embedded in convertible notes payable
as of September 30, 2000. See "Liquidity and Capital
Resources."
LIQUIDITY AND CAPITAL RESOURCES
On September 30, 2000, the Company had cash and cash equivalents of
approximately $261,000. The principal source of liquidity in the nine months
ended September 30, 2000 was additional borrowings in the amount of $873,000.
$833,000 of this debt is convertible into Common Stock at $0.05 per share, a
conversion rate below the market price of the Common Stock at the time the loans
were made. The discount on each note will be amortized over one year, which is
the holding period until each note can first be converted. The aggregate
unamortized discount on these notes was $1,437,925. As of September 30, 2000,
the Company recorded $747,504 as additional paid-in capital for the discount
related to the amortization of embedded interest in the convertible debentures.
The interest expense is included in the caption "Embedded interest expense" in
the accompanying September 30, 2000 statement of operations.
Management anticipates that additional capital will be required to
finance the Company's operations. The Company believes that expected cash flow
from operations plus the anticipated 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
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In or about April 1999, Arthur Wilkes, a co-founder and former
President and Chief Executive Officer of the Company, filed a demand for
arbitration against the Company with the American Arbitration Association. Mr.
Wilkes contends that the Company breached the terms of an April 1995 Settlement
Agreement ("1995 Agreement") between him and the Company by (1) failing to make
payments under a Promissory Note for $64,000 and (2) interfering with his
ability to sell his shares in the Company.
The Company responded to the arbitration demand by serving a
counter-demand based on Mr. Wilkes' failure to provide the Company with a copy
of software the Company contends Mr. Wilkes has developed and made available to
his current company, American Printware. Under the terms of the 1995 Agreement,
Mr. Wilkes is obligated to provide the Company with a non-exclusive license to
software and software derivatives based on a product Mr. Wilkes began to develop
while still employed by the Company. Mr. Wilkes has denied the allegations of
the counter-demand.
An arbitrator had been selected and a hearing had been scheduled with
the American Arbitration Association for June 2000. That hearing has since been
postponed and a new arbitrator is being selected. No new date for the hearing
has been set. The Company believes that Mr. Wilkes' allegations concerning
interference with his ability to sell his stock in the Company are without
merit, and intends to vigorously defend those claims. The Company has not paid
Mr. Wilkes the payments described in the $64,000 Promissory Note, and contends
that any amounts owing under that Note must be offset by damages caused by Mr.
Wilkes' breach of the Settlement Agreement. The liability for the $64,000
Promissory Note is already accrued in the Company's financial statements.
Management does not believe that the outcome of this action will have a material
adverse effect upon the financial position or results of operations of the
Company.
Other than with respect to the foregoing matter, the Company does not
believe that it is or has been involved in any litigation or proceeding that
will, individually or in the aggregate, have a material adverse effect on its
financial condition, results of operations or cash flow.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In the quarter ended September 30, 2000, pursuant to a private
placement, the Company sold 2,900,000 shares of Common Stock for $290,000, or
$0.10 per share, and issued warrants to purchase an additional 2,900,000 shares
of Common Stock at an exercise price of $0.12 per share to eight individual
investors.
10
<PAGE>
In connection with these transactions, the Company paid finder's fees of $31,800
and will issue a warrant to the finder to purchase an additional 265,000 shares
of Common Stock at an exercise price of $0.l25 per share.
In the quarter ended September 30, 2000, the Company issued Convertible
Promissory Notes in the aggregate principal amount of $115,206 to two investors.
The notes bear interest at the rate of 8% per annum (with payment of accrued
interest due at maturity) and mature at various dates from July to September
2001. $75,000 of these notes are convertible upon maturity into shares of Common
Stock at the rate of $0.05 per share at the option of the holder. The remaining
$40,206 of these notes are convertible upon default into shares of Common Stock
at the rate of $0.05 per share at the option of the holder. The notes were
issued to Threshold Technology Partners ($5,412) and Conrad von Bibra ($109,194
in the aggregate). Neither Threshold Technology Partners, nor any of its
directors, officers or affiliates, is an affiliate of the Company (other than as
a principal stockholder). Mr. von Bibra is not an affiliate of the Company
(other than as a principal stockholder). No commissions were paid in connection
with these transactions.
The Company believes that such sales 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 3. DEFAULTS UPON SENIOR SECURITIES
As of November 15, 2000, the Company was in default on certain notes
payable totaling approximately $1,100,000. Approximately $717,000 of these notes
are convertible into approximately 12.8 million shares of Common Stock. The
Company believes that all of the past due convertible notes will be converted
within 60 days, but there can be no assurance that such conversion will occur.
The defaults are primarily attributable to the former and current
financial instability of the Company, which has rendered the Company unable to
make the payments and other expenditures necessary in order to comply with all
of the provisions of the notes. As a result of these defaults, each holder of
such defaulted debt obligations has the right to demand payment in full of such
obligations.
While no such holder has made any presentment or demand for payment as
of the date of this Form 10-QSB, there can be no assurance that any such holder
will not make a presentment or demand for payment in the future or otherwise
exercise any rights or remedies it may have with respect to such obligations. If
any or all of such holders were to make any such presentment or demand or
otherwise exercise any rights or remedies available to them under their
respective debt obligations and/or related agreements with the Company, such
action could have a material adverse effect on the business, financial condition
and results of operations of the Company.
11
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the period the Company solicited the vote of shareholders on a
proposed amendment to the Certificate of Incorporation, increasing the
authorized number of shares of Common Stock from 200,000,000 shares to
300,000,000 shares. The Company received consents from shareholders with a total
of 36,613,000 shares. Accordingly, the Amendment to the Certificate of
Incorporation was filed with the Delaware Secretary of State on September 19,
2000.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Amendment dated September 18, 2000 to Certificate
of Incorporation
27. Financial Data Schedule
(b) Reports on Form 8-K
Not applicable.
12
<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.
Date: November 16, 2000
Prism Software Corporation
By:/s/ E. Ted Daniels
----------------------------------------------
E. Ted Daniels, President, Chief Executive
Officer, Chief Financial Officer and Director
(Principal Executive Officer and Principal
Financial and Principal Accounting Officer)
13
