U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Amendment No. 2
FORM 10-KSB/A
(MARK ONE)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
COMMISSION FILE NUMBER 0-21713
PRISM SOFTWARE CORPORATION
(Name of small business issuer in its charter)
Delaware 95-2621719
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
23696 Birtcher
Lake Forest, California 92630
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(Address of principal executive offices) (Zip code)
Issuer's telephone number (including area code): (949) 855-3100
Securities registered under Section 12(b) of the Exchange Act:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE EXCHANGE ACT:
Common Stock, par value $.01 per share
--------------------------------------
(Title of Class)
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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB [ ]
The registrant's revenues for the year ended December 31, 2003 were $490,838
The aggregate market value of the voting stock held by non-affiliates of the
registrant on March 31, 2004 was approximately $651,437.
The number of shares outstanding of the registrant's only class of Common Stock,
par value $.01 per share was 141,591,534 on March 31, 2004. The common shares
are traded on the OTC Bulletin Board under the symbol "PSOF".
INDEX
PART I
Item 1. Description of Business.
Item 2. Description of Property.
Item 3. Legal Proceedings.
Item 4. Submission of Matters to Vote of Security Holders.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
Item 6. Management's Discussion and Analysis or Plan of Operation.
Item 7. Financial Statements.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Item 8A. Controls and Procedures.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act.
Item 10. Executive Compensation.
Item 11. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.
Item 12. Certain Relationships and Related Transactions.
Item 13. Exhibits and Reports on Form 8-K.
Item 14. Principal Accountant Fees and Services.
Signatures
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
COMPANY OVERVIEW
Prism Software Corporation (the "Company") was organized under the laws of
Delaware in 1992. The Company specializes in enterprise document and content
management solutions. The Company's products and expertise lie in electronic
document formation, document management, and print stream conversion solutions.
The Company's customer base includes organizations that use its solutions in
managing high-volume, large scale document printing. These customers are in a
variety of markets, such as financial services, health care, service bureau
printing, government, education and manufacturing.
The Company distributes its products primarily in North America, through direct
sales, resellers, value-added resellers ("VARs") and printer manufacturers.
Marketing, sales, training and technical support are provided from its Lake
Forest, California corporate headquarters.
The Company's principal executive office is located at 23696 Birtcher, Lake
Forest, California 92630, and its telephone number is (949) 855-3100. The
Company's website is located at "www.prism-software.com."
CURRENT PRODUCTS
The following is a brief summary of the Company's two primary products: DocForm
and PrintConsole Pro. More detailed information about both of these two products
can be found on the company's website at www.prism-software.com. The information
on the Company's website is not a part of this Report.
DOCFORM
DocForm is a powerful, low-cost and easy-to-use software tool for the
design, dynamic creation, and real-time delivery of all electronic
documents, forms, and reports for every industry. Its primary purposes are
to (1) reduce costs by eliminating pre-printed forms, (2) enable users to
dynamically create complex and personalized documents and reports, and (3)
create one-to-one personalized sales and marketing messages.
PRINTCONSOLE PRO
PrintConsole Pro (1) manages corporate print and document output, and (2)
can transform various print stream formats into other formats. Transforming
print stream formats is of value to many organizations that want to utilize
and redirect mainframe print streams designed for older and often outdated
printers to newer, more modern printers.
DEPENDENCE ON MAJOR CUSTOMERS
For the fiscal years ended December 31, 2003 and December 31, 2002, the three
largest customers in each year accounted for about 42% and about 34%,
respectively, of the Company's sales. None of the three largest customers in
either fiscal year were the same. A significant reduction in sales from any of
the three largest customers from 2003 could have a material adverse effect on
the Company's future operations.
The Company does not have any long-term sales contracts with any of its
customers.
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RESEARCH AND DEVELOPMENT
For the fiscal years ended December 31, 2003 and December 31, 2002, research and
development expenses were approximately $262,000 (about 53% of net sales) and
approximately $306,000 (about 56% of net sales), respectively. None of the
research and development expenses in either fiscal year were borne directly by
customers.
INTELLECTUAL PROPERTY
The Company currently does not hold any patents and relies on a combination of
contract, copyright, trademark and trade secret laws, licenses and
confidentiality agreements and software security measures to protect its
proprietary intellectual property. Despite these precautions, the Company
believes that existing laws provide limited protection for the Company's
technologies. However, because of the rapid pace of technological change in the
Company's industry, the legal intellectual property protection for products is
a less significant factor in its success than the knowledge, abilities and
experience of the Company's employees, the frequency of its product
enhancements, the effectiveness of its marketing activities and the timeliness
and quality of its support services. There can be no assurance that the
Company's means of protecting its proprietary rights will prevent others from
misappropriating or otherwise gaining access to valuable information, such as
software source codes, or that others will not develop technologies similar or
superior to the Company's technologies. In addition, effective intellectual
property protection may be unavailable or limited in certain foreign countries.
The Company generally enters into confidentiality or license agreements with
its employees, consultants, customers and vendors and generally controls access
to and distribution of its software, documentation and other proprietary
information. Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or
to obtain and use information that the Company regards as proprietary. Policing
unauthorized use of the Company's products is difficult. There can be no
assurance that the steps taken by the Company will prevent misappropriation of
its technology. In addition, litigation may be necessary in the future to
enforce the Company's intellectual property rights, to protect the Company's
trade secrets or to determine the validity and scope of the proprietary rights
of others.
The Company owns, licenses or has otherwise obtained the right to use certain
technologies incorporated in its products. While the Company believes that its
software products and proprietary rights do not infringe the rights of others,
there can be no assurance that third parties will not assert infringement claims
against the Company or that any such claims will not require the Company to
enter into royalty or license arrangements or result in costly litigation,
regardless of the merits of the claims.
EMPLOYEES
As of March 31, 2004, the Company had 13 employees. The Company's employees are
not represented by any collective bargaining organization and the Company has
never experienced a work stoppage. The Company believes that its relations with
its employees are good.
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ITEM 2. DESCRIPTION OF PROPERTY.
The Company's principal administrative, development, manufacturing and shipping
facilities are located in one facility in Lake Forest, California. The Company
believes its facilities are adequate for its current needs and that suitable
additional or substitute space will be available as and if needed.
ITEM 3. LEGAL PROCEEDINGS.
E. TED DANIELS
On April 21, 1995 the Company and Mr. Daniels entered into an Amended
and Restated Employment Agreement and stock option agreement replacing
the original agreement of September 30, 1994 which provided that during
the term of the agreement, Mr. Daniels would be the President and Chief
Executive Officer of the Company and would receive an annual base
salary of $120,000 (subject to annual review and increases), an annual
bonus equal to 10% of the Company's consolidated operating income
before interest, taxes, bonus payments and certain other fringe
benefits, 320,000 shares of Common Stock at no cost and a non-qualified
stock option to acquire a number of shares of Common Stock equal to the
greater of (i) 640,000 or (ii) the difference between 8% of the diluted
Common shares outstanding from time to time and the 320,000 Common
shares previously issued to Mr. Daniels (subject to certain
anti-dilution adjustments) at an exercise price of $0.25 per share. The
term of the employment contract went through September 30, 1998.
In December 1995, the Board of Directors approved the acceleration of
the vesting of such options to become fully vested and immediately
exercisable, provided that as of such date (i) the Company has not
terminated Mr. Daniels for cause pursuant to the Employment Agreement
and (ii) Mr. Daniels has not voluntarily resigned from the Company.
Also in December 1995, the Company approved that all options granted
under this Agreement are issued pursuant to Rule 701 of the Securities
Act. In May 1996, the Board of Directors waived the payment by Mr.
Daniels of the exercise price with respect to 1,150,430 shares issuable
upon exercise of such options. In August 1996, one Board director
resigned, leaving only two directors, one of them being Mr. Daniels.
The third director's seat remained vacant for approximately seven
years.
Mr. Daniels claims that in May 1997, the Board of Directors approved
that the exercise price of all options granted to Mr. Daniels under
this agreement be reduced to $0.04 per share. Mr. Daniels claims that
in December 1997, the Board of Directors amended the agreement to
provide for an annual increase cost of living adjustment of 10%
retroactive to the date of Mr. Daniels' original contract of September
1994. The Company did not pay Mr. Daniels the full amount of salary due
under this formula but at his direction accrued the unpaid balance. He
also claims that in December 1997, the Board approved that all options
issuable to Mr. Daniels under this agreement be exercisable at no cost
and that the agreement be extended to September 30, 2000, that in
October 1998, the Board extended the agreement to September 14, 2002,
and that in August 2000, the Board extended the agreement to September
14, 2004.
The Company disputes the claims by Mr. Daniels because all the
purported Board actions to amend or extend his Amended and Restated
1995 Employment Contract and stock options from August 1996 to October
2003 failed to be approved by a majority of the directors present and
are invalid and void. Therefore his Employment Contract expired
September 30, 1998 by its own terms. Mr. Daniels claims the vote of
just one of two directors present was sufficient and that he is
entitled to the additional salary.
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In addition, except for options to purchase 2,000,000 shares of Common
Stock that were subsequently exercised in 2003, as of December 31,
2002, Mr. Daniels had voluntarily cancelled all rights to such options
that had previously been granted and any additional such options that
would have otherwise been granted to him in the future under his
agreement. However, Mr. Daniels claims that he is entitled to receive
replacement options (that would expire in October 2004) on modified
terms that would be similar to the ones he had previously cancelled.
Mr. Daniels has called for arbitration of the dispute, but the
arbitration proceedings have not been scheduled.
Additionally, Mr. Daniels has sued the other two directors (Carl von
Bibra and Conrad von Bibra) serving at the time his services as
President and Chief Executive Officer terminated on January 23, 2004.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock of the Company is quoted on the National Association of
Securities Dealers, Inc. ("NASD") OTC Bulletin Board ("OTCBB") under the symbol
"PSOF." The OTCBB is a quotation service for subscribing members and is
regulated by the Securities and Exchange Commission ("SEC") and the NASD. OTCBB
securities are traded by a community of market makers that enter quotes and
trade reports through a closed computer network. Set forth below are the high
ask and low bid prices of the Company's Common Stock during each quarter of the
fiscal years ended December 31, 2002 and December 31, 2003, as reported by a
member firm of the NASD that effects transactions in stocks quoted on the OTCBB
and acts as one of the market makers for the Company's Common Stock. The
quotations listed below reflect interdealer prices, without retail mark-up,
mark-down or commissions, and may not necessarily represent actual transactions.
High/Ask Low/Bid
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Quarter ended March 31, 2002 0.021 0.013
Quarter ended June 30, 2002 0.017 0.0051
Quarter ended September 30, 2002 0.010 0.0055
Quarter ended December 31, 2002 0.017 0.003
Quarter ended March 31, 2003 0.016 0.008
Quarter ended June 30, 2003 0.016 0.007
Quarter ended September 30, 2003 0.035 0.004
Quarter ended December 31, 2003 0.027 0.010
As of March 31, 2004, there were approximately 710 stockholders of record of the
Company's Common Stock.
The Company has never paid cash dividends on its Common Stock and does not
intend to pay cash dividends in the foreseeable future.
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During 2003 the Company issued 2,000,000 shares of its Common Stock to E. Ted
Daniels upon the exercise of stock options. The Company believes this issuance
was exempt from the registration requirements of the Securities Act of 1933, as
amended, by reason of Section 4(2) thereof.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto included elsewhere
in this Annual Report on Form 10-KSB. Except for the historical information
contained herein, the following discussion contains certain forward-looking
statements that involve risks and uncertainties, such as statements of the
Company's plans, objectives, expectations and intentions. The cautionary
statements made in this Annual Report on Form 10-KSB should be read as being
applicable to all related forward-looking statements wherever they appear in
this Annual Report on Form 10-KSB. The Company's actual results may differ
materially from the results discussed in the forward-looking statements.
RESULTS OF OPERATIONS
COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2002
For the fiscal year ended December 31, 2003, the Company reported a loss of
approximately $5,254,000, or $0.04 per common share, compared with a loss of
approximately $2,307,000, or $0.02 per share, for the fiscal year ended December
31, 2002. The loss increased approximately $2,947,000 due primarily to the
following:
o Operating revenue decreased approximately $53,000. Due to the
Company's focus on developing its reseller sales channel,
there was a shift in the revenue mix from direct end-user
sales to sales made through resellers. In addition, there was
a shift in revenue to a new proprietary product line.
o The cost of sales decreased approximately $41,000 from
approximately $130,000, or about 24% of revenue, to
approximately $89,000, or about 18% of revenue. The decrease
in the cost of sales percentage was due primarily to a
different mix of products being sold.
o Total operating expenses decreased approximately $396,000 due
primarily to the following:
1. In 2002, the Company incurred a one-time loss of
approximately $104,000 in writing down assets from a
licensing agreement
2. In 2002, the Company accrued a one-time expense of
approximately $72,000 for minimum royalties under the
aforementioned licensing agreement
3. The remaining decrease in operating expenses was due
mostly to lower expenses for personnel and
professional services, resulting mainly from general
cost reduction measures.
o Interest expense increased approximately $3,332,000 due
primarily to the following:
1. An expense of about $3,172,000 was recognized in 2003
from amortizing a beneficial conversion feature on
certain convertible notes. No such expense was
incurred in 2002. (See "Liquidity and Capital
Resources.")
2. An increase of approximately $160,000 in aggregate
face value interest expense due to an increase in the
Company's indebtedness.
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LIQUIDITY AND CAPITAL RESOURCES
On December 31, 2003, the Company had cash and cash equivalents of approximately
$12,000. The principal source of liquidity in the fiscal year ended December 31,
2003 was approximately $1,381,000 of additional borrowings, all of which are
convertible into Common Stock at the lenders' option.
When $690,000 of such borrowings were made during the fiscal year ended December
31, 2003, the conversion rate was lower than the quoted market price of the
Common Stock. The value of this beneficial conversion feature (discount) on each
such loan was limited to being no greater than the face value of such loan and
was fully amortized when the debt was incurred.
In addition, due to the terms of a debt restructuring agreement, the conversion
rate on an additional $78,000 of such borrowings made during the fiscal year
ended December 31, 2003, and on $3,229,000 of borrowings made prior to the
fiscal year ended December 31, 2003, was reduced to below the quoted market
price of the Common Stock at the time the original debt was incurred. The value
of this beneficial conversion feature (discount) on each such loan was limited
to being no greater than the face value of such loan and was fully amortized
when the reduced conversion rate went into effect.
As of December 31, 2003, the aggregate unamortized discount on such loans was $0
and the Company had recorded approximately $3,172,000 as additional paid-in
capital for the accumulated amortization of the discount. This non-cash
amortization expense is included as part of the caption "Interest expense -
stockholders" in the accompanying statements of operations. For the fiscal years
ended December 31, 2003 and December 31, 2002, this amortization expense was
approximately $3,172,000 and $0, respectively.
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.
EFFECT OF INFLATION
The Company believes that inflation has not had a material effect on its net
sales or profitability in recent years.
FORWARD-LOOKING STATEMENTS; CAUTIONARY STATEMENT
Certain of the statements contained in this report, including those under
"Description of Business" and "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 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 this 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 its industry and
future trends and results cannot be predicted with certainty.
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ITEM 7. FINANCIAL STATEMENTS.
The financial statements of the Company are submitted as a separate section of
this Annual Report on Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 8A. CONTROLS AND PROCEDURES.
Under the supervision and with the participation of our Chief Executive and
Financial Officers, we conducted an evaluation of our disclosure controls and
procedures, as such term is defined under Rule 13a-14(c) promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), within 90 days
of the filing date of this report. Based on this evaluation, our Chief Executive
and Financial Officers concluded that the Company's disclosure controls and
procedures are effective. Disclosure controls and procedures are designed to
ensure that information required to be disclosed in reports under the Exchange
Act are processed and reported within the time periods specified by law. The
design of any such system of controls is based in part on assumptions about the
likelihood of future events, and there can be no assurance that any such system
of controls will succeed in all circumstances.
Since the date of the evaluation described above, there have been no significant
changes in our internal controls or in other factors that could significantly
affect these controls.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
DIRECTORS AND EXECUTIVE OFFICERS:
Carl S. von Bibra 42 Director and Chairman of the Board
David Ayres 49 Director and President
Conrad von Bibra 74 Director and Secretary
E. Ted Daniels 63 Director and Past President
Michael Cheever 35 Controller
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Carl S. von Bibra has served the Company as a director and Chairman since
October 31, 2003. From March 1993 through May 1994, Mr. von Bibra was a board
member of ADcom Information Services, Inc. and, since December 1992, has been
corporate secretary of OCI Communication, Inc. Mr. von Bibra received his
engineering degree from Stanford University. Carl von Bibra is the son of Conrad
von Bibra and is a private investor.
David Ayres joined the Company in May 2002. He has over thirteen years of
experience in the printer industry, and over twenty years in senior management
positions. Prior to joining the Company he was CEO of an industry-leading
supplier to the OEM printer market. He was also Sr. Product Group Manager for
Canon in their Canon Computers Systems division. He has served as President of
the Company since January 23, 2004 and as a director since February 13, 2004.
Conrad von Bibra was born and raised in Los Angeles, graduating from Stanford
University with a degree in chemical engineering. From 1962 to 1984, he served
as President of Exeter Oil Company Ltd., a drilling and production company whose
stock was listed on the American Stock Exchange in 1981. He is now a private
investor. He is the father of Carl S. von Bibra. He became a director and
Secretary of the Company starting October 31, 2003.
E. Ted Daniels joined the Board of Directors of the Company in September 1994
and was President, Chief Executive Officer and interim Chief Financial Officer
until January 23, 2004. He was employed by Eureka Capital Management from 1993
to 1994 where he was the Managing Director. Previously, he was President and
Chief Operating Officer for Roberts Consolidated Industries.
Michael Cheever joined the Company in October 1993 and became an officer on
October 31, 2003. He has over thirteen years of accounting experience and was
formerly with the accounting firm of Deloitte & Touche LLP.
DIRECTORS' COMPENSATION
The members of the Board of Directors do not receive any cash compensation for
their service as directors, but are eligible for reimbursement of their expenses
incurred in connection with attendance at Board meetings in accordance with
Company policy.
AUDIT COMMITTEE
The Company does not have an Audit Committee. This function is fulfilled by the
Board of Directors.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires that directors and officers of the
Company and persons who beneficially own more than 10% of the Common Stock file
with the SEC initial reports of beneficial ownership and reports of changes in
beneficial ownership of the Common Stock of the Company. Directors, officers and
greater than 10% beneficial owners are required by SEC regulations to furnish
the Company with copies of all Section 16(a) forms they file.
The Company received no copies of any Section 16(a) forms filed by officers,
directors or 10% beneficial owners during 2003, other than the Form 4 Reports to
the SEC filed during 2003 by Conrad von Bibra and Carl von Bibra and Form 3 and
Form 4 Reports covering purchases in 2003 filed by David Ayres following his
election to President in 2004. Based solely on its review of the copies of the
Section 16(a) forms received by it, and on representations from certain
reporting persons, the Company believes that, during the last fiscal year, all
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Section 16(a) filing requirements applicable to its officers, directors and
greater than 10% beneficial owners were complied with, except that, to the
knowledge of the Company, E. Ted Daniels, its former President and a director,
did not file a Form 4 with respect to the shares acquired by him during 2003
upon exercise of options.
CODE OF ETHICS
The Company is in the process of preparing a Code of Ethics for its officers and
directors and will discuss it at the next meeting of its Board of Directors. It
will be attached as an exhibit to the first quarterly report on Form 10-QSB that
the Company will file after adopting the Code.
ITEM 10. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table sets forth certain compensation awarded or paid by the
Company to its executive officers during the fiscal years ended December 31,
2003, December 31, 2002 and December 31, 2001. No other executive officer's
total annual salary and bonus for services to the Company exceeded $100,000.
LONG-TERM COMPENSATION
----------------------------------------------
Annual Compensation Awards Payouts
------------------------------------------- --------------------------------- ------------
Other All
Annual Securities Other
Compen- Stock Underlying Compen-
Name and Fiscal Salary (1) Bonus sation (2) Awards Options (#) sation
Principal Position Year ($) ($) ($) ($) (3) ($)
---------------------------- -------- ------------- ----------- -------------- ------------- ---------------- ------------
E. Ted Daniels (1) 2003 $178,435 $0 $16,203 $16,000 0 $0
Past President and 2002 $172,273 $0 $14,607 $0 0 $0
Chief Executive Officer 2001 $224,280 $0 $12,246 $0 1,688,456 $0
David Ayres 2003 $137,551 $0 $0 $0 500,000 $0
President 2002 $89,640 $0 $0 $0 0 $0
Michael Cheever 2003 $66,054 $0 $0 $0 100,000 $0
Controller
(1) The salary amounts shown for Mr. Daniels do not include additional
amounts totalling approximately $171,000 (through his last day of
employment on January 23, 2004) for past wages being claimed by
Mr. Daniels and disputed by the Company. (See "Legal Proceedings")
(2) Includes auto allowances, insurance and other fringe benefits.
(3) Includes shares of Common Stock issuable upon exercise of options
granted to Mr. Daniels. Prior to January 23, 2004, Mr. Daniels had
exercised options to acquire an aggregate of approximately
4,130,000 shares of the Company's Common Stock, of which 2,000,000
shares were acquired at no cost by Mr. Daniels in 2003. (Also see
"Legal Proceedings" and "Management Options of E. Ted Daniels")
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OPTION EXERCISES AND FISCAL YEAR-END VALUES
Show below is information with respect to the number of shares of the Company's
Common Stock acquired upon the exercise of options during the fiscal year ended
December 31, 2003, the value realized therefor, the number of unexercised
options at December 31, 2002 and the value of unexercised in-the-money options
at December 31, 2003 for the Company's executive officers in the Summary
Compensation Table above. The Company's executive officers did not hold any
stock appreciation rights ("SARs") during the fiscal year ended December 31,
2003.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT FISCAL OPTIONS AT FISCAL
ACQUIRED ON VALUE YEAR-END (#) YEAR-END ($)
NAME EXERCISE (#) REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
----------------------- ------------- -------------- --------------------------- ---------------------------
E. Ted Daniels 2,000,000 $16,000 0/0 $0/$0
David Ayres 0 $0 500,000/0 $0/$0
Michael Cheever 0 $0 240,000/0 $0/$0
EMPLOYMENT AGREEMENTS
There are currently no employment agreements between the Company and any of its
directors, officers or significant employees. See "Legal Proceedings" regarding
the former employment of past President and Chief Executive Officer E. Ted
Daniels.
STOCK OPTION PLANS
1993 STOCK OPTION PLAN
In February 1993, the Board of Directors adopted the Company's 1993 Stock
Option Plan. Due to subsequent changes to the Internal Revenue Code (the
"Code") and for other reasons, the Board of Directors decided to amend many
provisions of this plan. As a consequence, the Board of Directors adopted
an Amended and Restated 1993 Stock Option Plan (the "1993 Plan") in May
1996. The 1993 Plan authorized the granting of options to purchase up to a
maximum 630,000 shares of Common Stock to qualified officers, key
employees, directors and employees of companies that do business with the
Company. As of December 31, 2003, options for 62,500 shares of Common Stock
available for grant under the 1993 Plan had been exercised and
approximately 80,000 shares of Common Stock were reserved for issuance upon
exercise of outstanding options. Except as to options previously granted
and outstanding under it, the 1993 Plan terminated at midnight on February
1, 2003.
The 1993 Plan provided for the grant of both incentive stock options
("ISOs") and non-qualified stock options ("NQOs"). ISOs granted under the
1993 Plan are intended to qualify as "incentive stock options" within the
meaning of Section 422 of the Code of 1986, as amended. NQOs granted under
the 1993 Plan are intended not to qualify as ISOs under the Code. Options
granted under the 1993 Plan generally have a term of not more that 10 years
and vest no sooner than 6 months after the date of grant.
No ISO could be granted under the 1993 Plan to any person who, at the time
of the grant, owned (or was deemed to own) stock possessing more than 10%
of the total combined voting power of all classes of stock of the Company
or any affiliate of the Company, unless the option exercise price was at
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least 110% of the fair market value of the stock subject to the option on
the date of grant, and the term of the option did not exceed five years
from the date of grant. For incentive stock option grants, the aggregate
fair market value, determined at the time of grant, of the shares of Common
Stock with respect to which such options were exercisable for the first
time by an optionee during any calendar year (under all such plans of the
Company and its affiliates) may not exceed $100,000.
The Company did not grant any options to its executive officers under the
1993 Plan during the fiscal year ended December 31, 2003 nor during the
fiscal year ended December 31, 2002.
1996 STOCK OPTION PLAN
In May 1996, the Board of Directors adopted the 1996 Stock Option Plan (the
"1996 Plan"). The 1993 Plan authorizes the granting of options to purchase
up to a maximum 600,000 shares of Common Stock to qualified officers, key
employees, directors and employees of companies that do business with the
Company. As of December 31, 2003, none of the options available for grant
under the 1996 Plan had been exercised and no shares of Common Stock were
reserved for issuance upon exercise of outstanding options. The 1996 Plan
terminated at midnight on February 1, 2003.
The Company did not grant any options to its executive officers under the
1996 Plan during the fiscal year ended December 31, 2003 nor during the
fiscal year ended December 31, 2002.
2000 NONSTATUTORY STOCK OPTION PLAN
In May 2000, the Board of Directors adopted the Prism Software Corporation
2000 Nonstatutory Stock Option Plan (the "2000 Plan"). The 2000 Plan
authorizes the granting of options to purchase up to a maximum of 3,000,000
shares of Common Stock to qualified employees and directors of the Company.
As of December 31, 2003, none of the options available for grant under the
2000 Plan had been exercised, approximately 1,720,000 shares of Common
Stock were reserved for issuance upon exercise of outstanding options and
approximately 1,280,000 shares of Common Stock remained available for grant
thereunder. Except as to options previously granted and outstanding under
it, the 2000 Plan will terminate on May 4, 2010, unless sooner terminated
by the Board of Directors.
The 2000 Plan provides only for the grant of non-qualified stock options.
Options granted under the 2000 Plan generally have a term of not more that
10 years. Vesting periods, if any, are at the discretion of the Board of
Directors at the time of grant. The exercise price of options granted under
the 2000 Plan is to be at least 85% of the fair market value of the
Company's Common Stock at the date of grant, as determined by the Board of
Directors. The 2000 Plan provides for "cashless exercise" of the options,
so the optionee has the choice of paying cash to exercise the options,
surrendering Common Stock owned by him with a value equal to the exercise
price, or issuing a promissory note for the exercise price.
The Company granted options to purchase 600,000 shares of its Common Stock
to its executive officers under the 2000 Plan during the fiscal year ended
December 31, 2003. The Company did not grant any options to its executive
officers under the 2000 Plan during the fiscal year ended December 31,
2002.
-14-
MANAGEMENT OPTIONS OF E. TED DANIELS
Under his employment agreement, and distinct from the Company's other
option plans, Mr. Daniels had been granted non-qualified options to
purchase shares of the Company's Common Stock, such as to maintain
ownership of 8% of the Company's fully-diluted Common Stock (subject to
certain anti-dilution adjustments). Except for options to purchase
2,000,000 shares that were subsequently exercised in 2003, as of December
31, 2002, Mr. Daniels had voluntarily cancelled all rights to such options
that had previously been granted and any additional such options that would
have otherwise been granted to him in the future under his employment
agreement, therefore no such options existed as of December 31, 2003.
However, in February 2004, Mr. Daniels claimed that he is entitled to
receive replacement options (that would expire in October 2004) on modified
terms that would be similar to the ones he had previously cancelled. (Also
see "Legal Proceedings")
-15-
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The following table sets forth information regarding the beneficial ownership of
the Common Stock of the Company as of March 31, 2004, by (i) each person known
by the Company to beneficially own 5% or more of the outstanding Common Stock of
the Company; (ii) each of the Company's directors; (iii) each of the Company's
Executive Officers; and (iv) all directors and Executive Officers of the Company
as a group.
COMMON STOCK TOTAL NUMBER OF PERCENTAGE OF
PERCENTAGE OF EQUIVALENTS OF SHARES SHARES OF COMMON
NAME AND ADDRESS OF OUTSTANDING COMMON SHARES OPTIONS OR BENEFICIALLY STOCK BENEFICIALLY
BENEFICIAL OWNER STOCK OUTSTANDING NOTES OWNED (1) OWNED (1)
-----------------------------------------------------------------------------------------------------------------------
E. Ted Daniels 4,440,000 3% 0 4,440,000 3%
42240 Adams Street
Bermuda Dunes, CA 92201
David Ayres
c/o Prism Software
Corporation 615,000 * 500,000 1,115,000 1%
23696 Birtcher
Lake Forest, CA 92630
Carl S. von Bibra 33,607,500 24% 272,639,461 306,246,961 74%
1637 Spruce Street
South Pasadena, CA 91030
The Conrad von Bibra
Revocable Trust 60,880,856 43% 497,228,225 558,109,081 87%
1415 Milan Ave.
South Pasadena, CA 91030
Michael Cheever
c/o Prism Software
Corporation 20,000 * 240,000 260,000 *
23696 Birtcher
Lake Forest, CA 92630
All Directors and
Executive Officers of the 99,563,356 70% 770,607,686 870,171,042 95%
Company as a Group (5
persons)
-16-
* Less than 0.5%
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of Common Stock
subject to securities currently convertible, or convertible within 60
days after March 31, 2004, are deemed to be outstanding in calculating
the percentage ownership of a person or group but are not deemed to be
outstanding as to any other person or group. Except as indicated by
footnote, and subject to community property laws where applicable, the
persons named in the table above have sole voting and investment power
with respect to all shares of Common Stock shown as beneficially owned
by them. Currently there are 300,000,000 shares of Common Stock
authorized of which 141,591,534 are issued and outstanding. The
percentage column of common stock beneficially owned shows the percent
each person would own if he exercised all his conversion or option
privileges and all of the others did not.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
REPURCHASE OF COMMON STOCK
In December 2002, the Company repurchased 500,000 shares of its Common
Stock from Carl von Bibra for $2,500, or $0.005 per share. Mr. von Bibra is
affiliate of the Company by virtue of his beneficial ownership of more than
5% of the Company's outstanding Common Stock.
CERTAIN NOTES AND NOTE CONVERSIONS
From January 2002 to February 2003, the Company borrowed approximately
$1,014,000 from the Conrad von Bibra Revocable Trust ("Conrad von Bibra"),
and approximately $732,000 from Carl von Bibra. All such debt was
restructured under a Loan Agreement in March 2003 (see below).
In March 2003, the Company refinanced most of its debt and related accrued
interest with Conrad von Bibra and Carl von Bibra under a Loan Agreement,
and entered into a Credit Agreement with Conrad von Bibra. From March to
December 2003, the Company borrowed approximately $1,060,000 from Conrad
von Bibra under the Credit Agreement. All debt under these agreements are
due upon demand, bear interest at the rate of 8% per annum and were
convertible into shares of Common Stock at the initial rate of $0.05 per
share (subject to certain anti-dilution adjustments) at the option of the
holder. In accordance with the anti-dilution provisions of these
agreements, the conversion rate on this debt was subsequently adjusted to
$0.01 per share upon the issuance of a separate note in March 2003 (see
below). In addition, these agreements included provisions for warrants that
were subsequently waived by Conrad von Bibra and Carl von Bibra in light of
the conversion rate being reduced to $0.01 per share. Borrowings made under
the Credit Agreement are secured by the Company's assets in accordance with
a related Security Agreement.
Also in March 2003, the Company borrowed an additional $100,000 from Conrad
von Bibra under a separate Convertible Promissory Note that is secured by
the Company's assets. This debt is due upon demand, bears interest at the
rate of 8% per annum and is convertible into shares of Common Stock at the
rate of $0.01 per share (subject to certain anti-dilution adjustments) at
the option of the holder.
No commissions were paid in connection with any of these transactions.
Conrad von Bibra and Carl von Bibra are affiliates of the Company by virtue
of their beneficial ownership of more than 5% of the Company's outstanding
Common Stock.
-17-
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 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
3.1. Certificate of Incorporation of Prism Software Corporation ("the
Company") (1) (Exhibit 3.1)
3.2. Bylaws of the Company (1) (Exhibit 3.2)
3.3. Amendments dated February 24, 1998 and May 5, 1999 to the Company's
Certificate of Incorporation (2) (Exhibit 3.3)
3.4. Amendment dated September 18, 2000 to the Company's Certificate of
Incorporation (4) (Exhibit 10.1)
4.1. Specimen Common Stock certificate of the Company (1) (Exhibit 4.1)
4.2. Certificate of Designation of $5.00, 10% Class A Cumulative Convertible
Preferred Stock, as amended to date (2) (Exhibit 4.3)
4.3. Form of Warrant for Common Stock, issued 2000-2001 (5) (Exhibit 4.5)
10.1. Prism Software Corporation Amended and Restated 1993 Stock Option Plan
("1993 Plan") (1) (Exhibit 10.1)
10.2. Form of Employee Installment Incentive Stock Option and Nonstatutory
Stock Option Agreement pertaining to the 1993 Plan (1) (Exhibit 10.2)
10.3. Prism Software Corporation 2000 Nonstatutory Stock Option Plan ("2000
Plan") (3) (Exhibit 10.1)
10.4. Form of Stock Option Agreement pertaining to the 2000 Plan (3) (Exhibit
10.2)
10.5. Office lease dated April 21, 1994, by and between the Company and the
Mort Herrmann Family Trust (1) (Exhibit 10.6)
10.6. Amendments dated April 15, 1999 to the April 21, 1994 office lease by
and between the Company and the Mort Herrmann Family Trust (2) (Exhibit
10.7)
10.7. Promissory Note dated August 9, 1991, made to the order of George E.
Williams in the principal amount of $22,000 (2) (Exhibit 10.11)
10.8. Promissory Note dated December 9, 1991, made to the order of Personal
Computer Products, Inc. in the principal amount of $40,000 (2) (Exhibit
10.12)
10.9. Promissory Note dated April 15, 1993, made to the order of James or
Judith Bone in the principal amount of $63,031 (2) (Exhibit 10.13)
-18-
10.10. Promissory Note dated February 17, 1994, made to the order of Shirley
McGarvey in the principal amount of $35,000 (2) (Exhibit 10.14)
10.11. Promissory Note dated December 31, 1994, made to the order of James
Bone in the principal amount of $70,168 (2) (Exhibit 10.15)
10.12. Promissory Note dated December 31, 1994, made to the order of Allard
Villere in the principal amount of $15,996 (2) (Exhibit 10.16)
10.13. Convertible Promissory Note dated July 29, 1995, made to the order of
Northstar Capital Partners, LP in the principal amount of $40,000; note
is currently held by Carl von Bibra (1) (Exhibit 10.15)
10.14. Amendment dated October 20, 1997 to the July 29, 1995 Convertible
Promissory Note made to the order of Northstar Capital Partners, LP in
the principal amount of $40,000; note is currently held by Carl von
Bibra (2) (Exhibit 10.18)
10.15. Convertible Promissory Note dated July 29, 1995, made to the order of
Peachtree Capital Partners, LP in the principal amount of $60,000; note
is currently held by Carl von Bibra (1) (Exhibit 10.14)
10.16. Amendment dated October 20, 1997 to the July 29, 1995 Convertible
Promissory Note made to the order of Peachtree Capital Partners, LP in
the principal amount of $60,000; note is currently held by Carl von
Bibra (2) (Exhibit 10.20)
10.17. Form of Convertible Promissory Notes dated September 25, 2000 and
September 29, 2000, aggregate principal amount of $40,206; notes are
currently held by Carl von Bibra and Conrad von Bibra (5) (Exhibit
10.24)
10.18. Form of Convertible Promissory Notes dated October 4, 2000, aggregate
principal amount of $19,330; notes are currently held by Carl von Bibra
(5) (Exhibit 10.25)
10.19. Letter Agreement dated December 31, 2002 with E. Ted Daniels to cancel
all but 2,000,000 of the options under his April 21, 1995 Non-Qualified
Stock Option Agreement, as amended (6) (Exhibit 10.30)
10.20. Loan Agreement dated March 13, 2003 by and between the Conrad von Bibra
Revocable Trust and Carl von Bibra and Prism Software (7) (Exhibit
10.1)
10.21. Credit Agreement dated March 15, 2003 by and between the Conrad von
Bibra Revocable Trust and Prism Software (7) (Exhibit 10.3)
10.22. Promissory Note dated March 27, 2003 by and between the Conrad von
Bibra Revocable Trust and Prism Software (7) (Exhibit 10.4)
10.23. Security Agreement dated March 27, 2003 by and between the Conrad von
Bibra Revocable Trust and Prism Software (7) (Exhibit 10.5)
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
-19-
32.1 Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
-------------------
(1) Incorporated by reference to the Exhibit identified in
parentheses, filed as an exhibit in the Company's Registration
Statement on Form SB-2 (SEC File No. 333-5450-LA).
(2) Incorporated by reference to the Exhibit identified in
parentheses, filed as an exhibit in the Company's Annual
Report on Form 10-KSB for the fiscal year ended December 31,
1998.
(3) Incorporated by reference to the Exhibit identified in
parentheses, filed as an exhibit in the Company's Quarterly
Report on Form 10-QSB for the quarter ended June 30, 2000.
(4) Incorporated by reference to the Exhibit identified in
parentheses, filed as an exhibit in the Company's Quarterly
Report on Form 10-QSB for the quarter ended September 30,
2000.
(5) Incorporated by reference to the Exhibit identified in
parentheses, filed as an exhibit in the Company's Annual
Report on Form 10-KSB for the fiscal year ended December 31,
2000.
(6) Incorporated by reference to the Exhibit identified in
parentheses, filed as an exhibit in the Company's Annual
Report on Form 10-KSB for the fiscal year ended December 31,
2002.
(7) Incorporated by reference to the Exhibit identified in
parentheses, filed as an exhibit in the Company's Quarterly
Report on Form 10-QSB for the quarter ended March 31, 2003.
(b) Reports on Form 8-K
None.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The Company incurred Audit Fees of $38,400 with its principal accountant in the
fiscal year ended December 31, 2003. The Company incurred Audit Fees of $38,400
with its principal accountant in the fiscal year ended December 31, 2002. The
Company incurred no other fees with its principal accountant in either of the
two fiscal years referenced.
The Company has no audit committee. The Board of Directors' policy is to
pre-approve all audit and permissible non-audit services provided by the
independent auditors. These services may include audit services, audit-related
services, tax services and other services. Pre-approval would generally be
provided for up to one year and any pre-approval would be detailed as to the
particular service or category of services, and would be subject to a specific
budget. The independent auditors and management are required to periodically
report to the Board of Directors regarding the extent of services provided by
the independent auditors in accordance with this pre-approval, and the fees for
the services performed to date. The Board of Directors may also pre-approve
particular services on a case-by-case basis.
-20-
SIGNATURES
In accordance with Section 13 or 15(d) 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: April 14, 2004 By: /s/ David Ayres
---------------
David Ayres, Director and President
(Principal Executive Officer)
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
Dated: April 14, 2004 By: /s/ Carl S. von Bibra
---------------------
Carl S. von Bibra, Director and Chairman
of the Board
Dated: April 14, 2004 By: /s/ David Ayres
---------------------
David Ayres, Director and President
(Principal Executive Officer)
Dated: April 14, 2004 By: /s/ Conrad von Bibra
---------------------
Conrad von Bibra, Director and Secretary
Dated: April 14, 2004 By: /s/ Michael Cheever
---------------------
Michael Cheever, Controller
-21-
PRISM SOFTWARE CORPORATION
FINANCIAL STATEMENTS
DECEMBER 31, 2003
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
The Board of Directors and Stockholders
Prism Software Corporation
We have audited the accompanying balance sheet of Prism Software Corporation
(the "Company") as of December 31, 2003, and the related statements of
operations, stockholders' deficit and cash flows for each of the years in the
two-year period ended December 31, 2003. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Prism Software Corporation as
of December 31, 2003 and the results of its operations and cash flows for each
of the years in the two-year period ended December 31, 2003 in conformity with
generally accepted accounting principles in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 12 to the
financial statements, 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 in regard to this matter are also
described in Note 12. The accompanying financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/S/ CACCIAMATTA ACCOUNTANCY CORPORATION
Irvine, California
April 12, 2004
F-2
PRISM SOFTWARE CORPORATION
Balance Sheet
DECEMBER 31,
2003
-------------
ASSETS
Current assets
Cash $ 12,024
Accounts receivable, net of allowance
for doubtful accounts of $4,369 46,623
Inventory 451
-------------
Total current assets 59,098
Equipment, net 23,809
Other 9,978
-------------
$ 92,885
=============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Notes payable - stockholders $ 7,389,268
Accrued interest - stockholders 688,504
Accrued expenses - stockholders 30,203
Notes payable - other 38,700
Accounts payable 404,070
Accrued expenses 435,039
Deferred revenue 105,257
-------------
Total current liabilities 9,091,041
-------------
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 (21,809,122)
-------------
Total stockholders' deficit (8,998,156)
-------------
$ 92,885
=============
The accompanying notes are an integral part of these financial statements.
F-3
PRISM SOFTWARE CORPORATION
Statements of Operations
YEAR ENDED DECEMBER 31,
--------------------------------
2003 2002
-------------- --------------
Net sales
Products $ 220,068 $ 254,837
Services 270,770 288,659
-------------- --------------
490,838 543,496
-------------- --------------
Cost of sales
Products 18,023 50,566
Services 70,918 79,653
-------------- --------------
88,941 130,219
-------------- --------------
Gross profit 401,897 413,277
-------------- --------------
Operating expenses
Selling and administrative 1,675,957 2,027,774
Research and development 261,786 306,241
-------------- --------------
1,937,743 2,334,015
-------------- --------------
Loss from operations (1,535,846) (1,920,738)
Interest expense - stockholders (3,714,321) (381,762)
Interest expense (3,869) (4,871)
-------------- --------------
Net loss $ (5,254,036) $ (2,307,371)
============== ==============
Basic and diluted net loss per common share $ (0.04) $ (0.02)
============== ==============
Basic and diluted weighted average
number of common shares outstanding 140,446,000 140,089,000
============== ==============
The accompanying notes are an integral part of these financial statements.
F-4
PRISM SOFTWARE CORPORATION
Stockholders' Deficit
Years Ended December 31, 2003 and 2002
SERIES A
PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL
--------------------- -------------------------- PAID-IN ACCUMULATED STOCKHOLDERS
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT DEFICIT
---------- ------------------------ ------------- -------------- --------------- ---------------
Balance, December 31, 2001 78,800 788 140,091,534 1,400,915 8,205,130 (14,247,715) (4,640,882)
Repurchase of common stock for
cash - - (500,000) (5,000) 2,500 - (2,500)
Issuance of stock options - - - - 34,563 - 34,563
Net loss - - - - - (2,307,371) (2,307,371)
---------- ---------- ------------- ------------- -------------- --------------- ---------------
Balance, December 31, 2002 78,800 $ 788 139,591,534 $1,395,915 $ 8,242,193 $ (16,555,086) $ (6,916,190)
========== ========== ============= ============= ============== =============== ===============
Intrinsic value of beneficial
conversion feature - - - - 3,172,070 - 3,172,070
Exercise of stock options - - 2,000,000 20,000 (20,000) - -
Net loss - - - - - (5,254,036) (5,254,036)
---------- ---------- ------------- ------------- -------------- --------------- ---------------
Balance, December 31, 2003 78,800 $ 788 141,591,534 $ 1,415,915 $ 11,394,263 $ (21,809,122) $ (8,998,156)
========== ========== ============= ============= ============== =============== ===============
The accompanying notes are an integral part of these financial statements.
F-5
PRISM SOFTWARE CORPORATION
Statements of Cash Flows
YEAR ENDED DECEMBER 31,
------------------------------
2003 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(5,254,036) $(2,307,371)
Adjustments to reconcile net loss to net cash used by operating activities:
Loss on disposal of assets 1,787 106,366
Depreciation 13,124 48,013
Issuance of stock options -- 34,563
Amortization of beneficial conversion feature 3,172,070 --
(Increase) decrease in assets
Accounts receivable (12,307) 12,327
Inventory 41 432
Licenses and other assets 1,655 2,834
Increase (decrease) in liabilities
Accounts payable 52,898 111,346
Accrued expenses 664,149 461,681
Deferred revenue (7,501) (10,387)
------------ ------------
Net cash used by operating activities (1,368,120) (1,540,196)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment (8,634) (4,615)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable - stockholders 1,381,000 1,524,900
Payments on notes -- (12,324)
Repurchase of common stock -- (2,500)
------------ ------------
Net cash provided by financing activities 1,381,000 1,510,076
------------ ------------
Net increase (decrease) in cash 4,246 (34,735)
Cash, beginning of period 7,778 42,513
------------ ------------
Cash, end of period $ 12,024 $ 7,778
============ ============
Supplemental disclosures:
Cash paid for interest $ -- $ --
Cash paid for income tax $ -- $ --
Non-cash investing and financing activities:
Conversion of stockholders interest payable to notes payable $ 737,938 $ --
The accompanying notes are an integral part of these financial statements.
F-6
PRISM SOFTWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
----------------------------------------------------------------
Organization
------------
Prism Software Corporation (the "Company") was organized under the laws of
Delaware in 1992. The Company specializes in enterprise document and
content management solutions. The Company's products and expertise lie in
electronic document formation, document management, and print stream
conversion solutions. The Company's customer base includes organizations
that use its solutions in managing high-volume, large scale document
printing in a variety of markets.
Concentrations of risk
----------------------
In 2003 and 2002 the three largest customers accounted for 42% and 34%,
respectively, of sales. At December 31, 2003 and 2002, the three largest
accounts receivable totaled 83% and 80%, respectively.
Use of estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
Inventory
---------
Inventory is reported at the lower of cost (determined on the
first-in-first-out method) or market and consists principally of finished
goods.
Equipment
---------
Equipment is recorded at cost. Depreciation is provided over the estimated
useful lives of the related assets, generally three to five years, using
the straight-line method.
Software Development Costs
--------------------------
Development costs related to new software products and enhancements to
existing software products are expensed as incurred until technological
feasibility has been established. After technological feasibility is
established, any additional costs are capitalized in accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed." The
Company believes the establishment of technological feasibility occurs
concurrently with the completion of software development. Accordingly, no
costs have been capitalized as of December 31, 2003.
F-7
PRISM SOFTWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
----------------------------------------------------------------------------
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 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.
Income taxes
------------
The Company accounts for income taxes under the asset and liability method.
Deferred income taxes are recognized for the tax consequences of temporary
differences by applying enacted statutory rates applicable to future years
to the difference between the financial statement carrying amounts and the
tax basis of existing assets and liabilities.
Stock-based compensation
------------------------
The Company has elected to continue to account for stock-based compensation
using the intrinsic value method, as described in Accounting Principles
Board Opinion 25. 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. Compensation costs reported in 2003 and 2002 were $0 and $34,563,
respectively. Companies using APB 25 to report stock-based compensation are
required under SFAS 123 to disclose the estimated fair value of options
granted.
As prescribed under SFAS 123, the Company used the Black-Scholes Option
Pricing Model to estimate the fair value of the options granted in 2003 and
2002 using the following assumptions.
2003 2002
---- ----
Expected life (years) 10 years 10 years
Risk-free interest rate 1.875% 6.04%
Volatility 50% 50%
Had the Company chosen to report the stock-based compensation at its
estimated fair value, net loss and net loss per share would have increased
slightly.
F-8
PRISM SOFTWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
----------------------------------------------------------------------------
2003 2002
------------ ------------
Net loss
As reported $(5,254,036) $(2,307,371)
Estimated fair value of compensation (7,729) (18,149)
------------ ------------
Pro forma $(5,261,765) $(2,325,520)
Basic and diluted loss per share
As reported $ (0.04) $ (0.02)
Pro forma $ (0.04) $ (0.02)
Cash and equivalents
--------------------
The Company considers all liquid investments with a maturity of three
months or less from the date of purchase that are readily convertible into
cash to be cash equivalents. Balances in bank accounts may, from time to
time, exceed federally insured limits. The Company believes that its loss
exposure is limited.
Advertising costs
-----------------
Advertising costs are expensed as incurred. During 2003 and 2002,
advertising costs totalled approximately $19,600 and $47,500, respectively.
Basic and diluted net loss per share
------------------------------------
Basic net loss per share is based upon the weighted average number of
common shares outstanding. Diluted net loss per share is based on 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 and warrants 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.
Fair value of financial instruments
-----------------------------------
The fair value of the notes payable to stockholders cannot be determined
due to the related party nature of the obligations. The fair value of notes
payable are based on interest rates available to the Company at quoted
prices.
Research and development costs
------------------------------
Research and development costs are charged to expense as incurred.
F-9
PRISM SOFTWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
----------------------------------------------------------------------------
Recent accounting pronouncements
--------------------------------
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. This Statement
is effective for financial statements issued for fiscal years beginning
after June 15, 2002. The Company's reported operating results, financial
position and existing financial statement disclosure have not been affected
by SFAS 143.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets and broadens the definition of what constitutes a
discontinued operation and how the results of a discontinued operation are
to be measured and presented. The provisions of SFAS 144 became effective
for financial statements issued for fiscal years beginning after December
15, 2001. The Company's reported operating results, financial position and
financial statement disclosures have not been affected by SFAS 144.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 requires most gains and losses on extinguishment
of debt to be classified as income or loss from continuing operations
rather than as extraordinary items as previously required. SFAS No. 145
also amends SFAS No. 13 "Accounting for leases", to require certain lease
modifications to be treated as sale-leaseback transactions. Certain
provisions of SFAS No. 145 are effective for transactions occurring after
May 15, 2002, while other provisions are effective for fiscal years
beginning after May 15, 2002. The Company's reported operating results,
financial position and financial statement disclosures have not been
affected by SFAS 145.
In July 2002, the FASB issued SFAS 146, "Accounting for Costs Associated
with Exit or Disposal Activities" FAS 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies the Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity Including Certain Costs Incurred in a Restructuring." FAS
146 requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred, whereas
EITF 94-3 had recognized the liability at the commitment date to an exit
plan. The provisions of SFAS 146 became effective for exit or disposal
activities initiated after December 31, 2002 and did not materially impact
the Company's financial position or results of operations.
F-10
PRISM SOFTWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
----------------------------------------------------------------------------
Recent accounting pronouncements (continued)
--------------------------------------------
In November 2002, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (an interpretation of FASB Statements No. 5, 57 and
107 and rescission of FASB Interpretation No. 34)". FIN 45 clarifies the
requirements of FASB Statement No. 5, "Accounting for Contingencies". It
requires that upon issuance of a guarantee, the guarantor must recognize a
liability for the fair value of the obligation it assumes under that
guarantee regardless of whether or not the guarantor receives separate
identifiable consideration (i.e., a premium). The Company adopted the
disclosure requirements in 2002 and the initial recognition and measurement
provisions in 2003. The adoption of FIN 45 did not have a material impact
on the Company's financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity".
This statement establishes standards for the classification and measurement
of financial instruments that possess characteristics similar to both
liability and equity instruments. SFAS No. 150 also addresses the
classification of certain financial instruments that include an obligation
to issue equity shares. On October 29, 2003, the FASB voted to defer, for
an indefinite period, the application of certain provisions of the guidance
in SFAS No. 150. The FASB decided to defer the application of certain
aspects of Statement 150 until it could consider some of the resulting
implementation issues. The Company has adopted certain provisions of SFAS
No. 150 which did not have a material impact on the Company's financial
condition or results of operations. The Company does not believe the effect
of the provisions of SFAS No. 150 that have been deferred to future periods
will have a material impact on the Company's financial statements.
2. EQUIPMENT
--------------
Furniture and equipment $ 28,107
Computer equipment and software 183,782
----------
211,889
Accumulated depreciation and amortization (188,080)
----------
$ 23,809
==========
Depreciation expense charged to operations was $13,124 and $48,013 in 2003
and 2002, respectively.
F-11
PRISM SOFTWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
3. ACCRUED EXPENSES
---------------------
Wages and benefits $ 241,398
Interest other 41,157
Sales commissions 81,159
Other 71,325
-------------
$ 435,039
=============
4. NOTES PAYABLE
------------------
All notes are unsecured unless otherwise described.
Stockholders
------------
9% to 10%, past due August 1996 $ 129,894
8%, convertible into common stock at $.10 per share at holders' option,
past due December 1999 100,000
8%, convertible into common stock at $.05 per share at holders' option,
past due December 2001 59,536
8%, convertible into common stock at $.01 per share at holders' option,
due upon demand 5,939,838
8%, convertible into common stock at $.01 per share at holders' option,
due upon demand, secured by the Company's assets 1,160,000
-----------
$7,389,268
===========
Other $ 38,700
===========
Certain portions of the $5,939,838 and the $1,160,000 borrowings described
above contain a beneficial conversion feature equal to or less than the
face value of each applicable borrowing, which is reflected in additional
paid-in capital in the accompanying financial statements. During 2003 and
2002, $3,172,070 and $0, respectively, of the beneficial conversion feature
was amortized and included as part of the caption "Interest expense -
stockholders" in the accompanying statements of operations.
F-12
PRISM SOFTWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
5. PREFERRED STOCK
--------------------
The Company has authorized 5,000,000 shares of $0.01 par value preferred
stock, of which 100,000 shares have been designated as $5.00 Series A 10%
cumulative convertible preferred stock (Series A).
The holders of Series A are entitled to receive, when and as declared by
the Company's Board of Directors (the Board), cumulative annual dividends
of $0.50 per share commencing upon issuance and payable semi-annually.
Series A has a liquidation preference of $5.00 per share plus any accrued
but unpaid dividends. Series A is redeemable at the Company's election upon
30 days' notice at a price per share of $5.50 plus accrued but unpaid
dividends thereon. The 78,800 shares of Series A outstanding at December
31, 2003 are currently convertible at the election of the holders into
3,419,920 shares of common stock. The conversion rate is subject to the
adjustments set forth in the certificate of designation for Series A based
on the current market price of the Company's common stock. The holders of
the Series A are entitled to cast one non-cumulative vote per share of
Series A in all matters presented to the shareholders, and the majority of
holders of Series A, voting as a class, have certain protective rights
relating to their dividends and preference rights. No amounts have been
accreted in relation to the Series A redemption as the likelihood of the
Company electing to repurchase is remote.
At December 31, 2003, the amount of undeclared dividends in arrears on the
Series A was $454,850 ($5.77 per share).
6. COMMON STOCK
-----------------
In 2003, the Company issued 2,000,000 shares of common stock to its
then-current President and Chief Executive Officer upon the exercise of
options.
7. STOCK OPTIONS
------------------
Financing Options
-----------------
In 1994, the Company issued options to certain lenders to acquire up to
325,093 shares of the Company's common stock in connection with loans made
to the Company. The options vested at issuance, were exercisable at $2.00
per share and expired in January 2004.
1993 Stock Option Plan
----------------------
The Company's 1993 Stock Option Plan provides for the issuance of options
to employees, directors, officers, and advisors of the Company to acquire
up to 630,000 shares of the Company's common stock. Options issued under
this plan are generally granted at estimated market value, vest at varying
rates and expire within ten years from the date of grant or within 90 days
after termination of employment. Except as to options previously granted
and outstanding under it, the 1993 Stock Option Plan terminated at midnight
on February 1, 2003.
F-13
PRISM SOFTWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
7. STOCK OPTIONS (CONTINUED)
------------------------------
2000 Stock Option Plan
----------------------
The Company's 2000 Stock Option Plan provides for the issuance of options
to employees, directors, officers and advisors of the Company to acquire up
to 3,000,000 shares of common stock. Options issued under this plan are
generally exercisable at 85% of the market value on the date of grant, vest
over three years and expire within ten years from the date of grant or
within 90 days after termination of employment. Except as to options
previously granted and outstanding under it, the 2000 Stock Option Plan
will terminate on May 4, 2010, unless sooner terminated by the Board of
Directors.
Other Management Options
------------------------
Under his employment agreement, the Company's previous President and Chief
Executive Officer had been granted non-qualified options to purchase shares
of the Company's common stock, such as to maintain ownership of 8% of the
Company's fully diluted common stock (subject to certain anti-dilution
adjustments). In 2002, this executive voluntarily cancelled his rights to
all but 2,000,000 options previously granted and any additional options
that would have been granted to him under his employment agreement. During
2003, this executive exercised the remaining 2,000,000 options under his
agreement. Therefore, no such options were outstanding at December 31,
2003. However, in February 2004, this former executive claimed that he is
entitled to receive replacement options (that would expire in October
2004) on modified terms that would be similar to the ones he had previously
cancelled.
F-14
PRISM SOFTWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
7. STOCK OPTIONS (CONTINUED)
------------------------------
Stock option activity for the years ended December 31, 2003 and 2002
follows:
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE OTHER AVERAGE
FINANCING OPTION 1993 OPTION 2000 OPTION MANAGEMENT OPTION
OPTIONS PRICE PLAN PRICE PLAN PRICE OPTIONS PRICE
-------------------------- -------------------------- -------------------------- --------------------------
December 31, 2001 197,093 2.00 228,600 1.60 1,865,000 0.04 13,859,498 -
-------------------------- -------------------------- -------------------------- --------------------------
Granted - - 25,000 0.05 75,000 0.05 2,694,341 -
Expired or Cancelled - - - - (1,025,000) 0.03 (14,553,839) -
Exercised - - - - - - - -
-------------------------- -------------------------- -------------------------- --------------------------
December 31, 2002 197,093 2.00 253,600 1.45 915,000 0.05 2,000,000 -
========================== ========================== ========================== ==========================
Granted - - - - 1,000,000 0.03 - -
Expired or Cancelled - - (173,600) 1.99 (195,000) 0.05 - -
Exercised - - - - - - (2,000,000) -
-------------------------- -------------------------- -------------------------- -------------------------
December 31, 2003 197,093 2.00 80,000 0.28 1,720,000 0.04 - -
========================== ========================== ========================== ==========================
The following information applies to options outstanding at December 31,
2003:
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL LIFE EXERCISE NUMBER EXERCISE
OUTSTANDING (YEARS) PRICE EXERCISABLE PRICE
----------------- -------------------- ---------------- ----------------- ----------------
Financing options 197,093 1 $ 2.00 197,093 $ 2.00
1993 stock option plan 80,000 2 $ 0.28 80,000 $ 0.28
2000 stock option plan 1,720,000 8 $ 0.04 1,720,000 $ 0.04
----------------- -----------------
1,997,093 1,997,093
================= =================
8. WARRANTS
-------------
The Company has outstanding warrants that were issued in 2001 in relation
to a private placement offering. No value has been ascribed to the warrants
as (1) the warrants were issued at exercise prices equal to or greater than
the fair value of the Company's common stock on the date of issuance and
(2) there is no market for the warrants. At December 31, 2003, the only
warrants outstanding were the 2,500,000 warrants issued in August 2001 that
expire in August 2004.
F-15
PRISM SOFTWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
9. BASIC AND DILUTED NET LOSS PER SHARE
-----------------------------------------
The following table illustrates the reconciliation of the numerators and
denominators of the basic and diluted loss per share computations.
2003 2002
-------------- --------------
Numerator
Net loss $ (5,254,036) $ (2,307,371)
Preferred dividends (39,400) (39,400)
-------------- --------------
Net loss $ (5,293,436) $ (2,346,771)
============== ==============
Denominator
Basic and diluted weighted average number of
common shares outstanding during the period 140,446,000 140,089,000
-------------- --------------
Basic and diluted net loss per share $ (0.04) $ (0.02)
============== ==============
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 DECEMBER 31,
2003 2002
------------- -------------
Options 1,997,093 3,365,693
Warrants 2,500,000 5,940,000
Convertible debt 755,598,167 84,170,451
10. INCOME TAXES
-----------------
The Company recognizes deferred tax assets and liabilities for temporary
differences between the financial reporting and tax bases of its assets and
liabilities. Deferred tax assets are reduced by a valuation allowance when
deemed appropriate.
The Company has deferred tax assets of approximately $7,888,000 at December
31, 2003 relating to its net operating losses. The Company provided a 100%
valuation allowance for these deferred tax assets. Accordingly, the Company
recorded no benefit for income taxes during the periods presented. During,
2003 and 2002 the Company's valuation allowance increased approximately
$2,021,000 and $916,000, respectively.
F-16
PRISM SOFTWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
10. INCOME TAXES (CONTINUED)
-----------------------------
At December 31, 2003, the Company has net operating loss carryforwards for
federal tax purposes of approximately $17,529,000, which will expire
beginning in 2004 through 2023.
11. COMMITMENTS AND CONTINGENCIES
----------------------------------
Legal proceedings
-----------------
In February 2004, the Company's previous President and Chief Executive
Officer filed for arbitration in a dispute with the Company, claiming that
the Company owes him unpaid back wages and interest thereon through his
last day of employment (January 23, 2004), future wages through September
14, 2004, and stock options (Note 7). The Company disputes all claims. The
arbitration proceedings have not been scheduled.
Leases
------
The Company's office lease expires March 31, 2004. A new lease is to be
negotiated, and its terms are not expected to vary significantly from the
current lease terms. The current lease provides for a basic rent of $8,287
per month. Rent expense was $98,433 and $95,400 in 2003 and 2002,
respectively.
12. 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.
F-17