U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
X__Quarterly report under section 13 or 15(d) of the Securities Ex-
change Act of 1934 for the quarterly period ended September 30,
1999.
__Transition report under section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _________ to
_____________.
Commission File No: 0-23561
SUNBURST ACQUISITIONS IV, INC.
(Name of small business in its charter)
Colorado 84-1431797
__________________________________________________________
(State or other (IRS Employer Identification
jurisdiction of Incorporation) No.)
2082 Cherry Street
__________________________________________________________
Address of Principal Executive Office (street and number)
Denver, Colorado 80207
__________________________________________________________
City, State and Zip Code
(Issuer's telephone number: (303) 321-0461
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12
months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No ____
Applicable only to issuers involved in bankruptcy proceedings during
the past five years:
Check whether the issuer has filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court. Yes ____
No ____
Applicable only to corporate issuers:
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date. 8,800,831 as of
December 20, 1999.
Transitional Small Business Disclosure
Format (Check one):
Yes ____ No X
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS AND EXHIBITS
(a) The unaudited financial statements of registrant as of and
for the period ending September 30, 1999, follow.
SUNBURST IV ACQUISITIONS, INC. and SUBSIDIARY
FINANCIAL STATEMENTS
Period ended September 30, 1999
SUNBURST IV ACQUISITIONS, INC. and SUBSIDIARY
Index to Financial Statements
[C]
Condensed Consolidated Balance Sheet 5
Condensed Consolidated Statements of Operations 7
Condensed Consolidated Statements of Cash Flows 9
Notes to Condensed Consolidated Financial Statements 11
SUNBURST ACQUISITIONS IV, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
September 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Cash $ 189,598
Restricted Cash 300,000
Accounts receivable, less allowance
for doubtful accounts
of $245,688 6,597,725
Inventories 193,057
Prepaid Expenses 148,562
Current Assets 7,428,943
Property and Equipment, net 492,941
Goodwill - Net 905,912
Other Assets 105,959
8,933,755
Liabilities and Equity
Short-term Debt and Notes Payable 1,596,423
Notes Payable, Related Parties 100,400
Accounts Payable 3,330,638
Accrued Expenses 740,509
Deferred Revenue 200,564
Current Liabilities 5,968,533
Long term debt and notes
payable, excluding current portion 155,639
Line of credit 3,965,291
Minority interest in
consolidated subsidiary -
Shareholders' Deficit
Series A cumulative
convertible preferred stock,
no par value, 16,667 shares
authorized 16,667
shares outstanding 100,000
Series B cumulative
convertible preferred stock,
no par value, 100,000 shares
authorized, 72,000
shares outstanding 519,884
Common stock, no par value
100,000,000 shares
authorized 8,800,831
shares outstanding 9,499,845
Warrants 694,230
Accumulated deficit (11,969,667)
Total shareholders' deficit (1,155,708)
Total Liabilities and Equity $ 8,933,755
</TABLE>
See accompanying notes to condensed consolidated financial statements.
SUNBURST ACQUISITIONS IV, INC. and SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
1999 1998 1999 1998
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues
Hardware $ 6,556,521 2,231,817 12,870,222 5,564,736
Licenses 1,889,867 894,664 3,097,670 1,348,093
Services 1,642,933 582,745 2,315,936 2,166,820
Total Net Revenue 10,089,321 3,709,206 18,283,828 9,079,649
Cost of Sales 8,188,243 2,752,387 14,834,323 6,710,774
Gross Margin 1,901,078 956,819 3,449,505 2,368,875
Operating Expenses
Selling and Marketing 712,123 365,362 1,084,859 703,979
General and
Administrative 1,319,139 1,267,358 2,538,889 2,468,326
Research and Development - - - 51,750
Total Operating Expenses 2,031,262 1,632,720 3,623,748 3,224,055
Operating Income (loss) (130,184) (675,901) (174,243) (855,180)
Interest expense (198,486) (153,316) (268,333) (234,161)
Other income (expense) (16,805) 29,008 (16,555) 14,526
Minority interests in loss of
consolidated subsidiaries - - - -
Income (loss)
before taxes (345,475) (800,209) (459,131) (1,074,815)
Income Taxes 0 0 0 0
Net loss (345,475) (800,209) (459,131) (1,074,815)
Shares used in computing
net loss per share 8,382,544 8,300,000 8,341,277 8,300,000
Cumulative preferred
stock dividend 20,667 20,000 40,889 67,934
Net loss applicable
to common stock (366,142) (820,209) (500,020) (1,142,749)
Net loss per common share
Basic (0.04) (0.10) (0.06) (0.14)
Diluted $ (0.04) (0.10) (0.06) (0.14)
</TABLE>
See accompanying notes to condensed consolidated financial statements.
SUNBURST ACQUISITIONS IV, INC. and SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months Six months
ended ended
9/30/99 9/30/98
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (459,131) $ (1,074,814)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 211,382 216,726
Issuance of warrants - 81,742
Common stock dividend 41,333 67,934
Changes in:
Trade accounts receivable (3,969,549) (410,267)
Accounts payable and
accrued expenses 234,974 1,819,758
Other assets and liabilities 775,043 (732,119)
Total adjustments (2,706,817) 1,043,774
Net cash from (used in)
operating activities (3,165,949) 31,040
Cash flows from investing activities
Purchase of equipment (90,072) (83,099)
Net cash used in
investing activities (90,072) (83,099)
Cash flows from financing activities:
Issuance of common stock 747,354 39,669
Issuance of debt - line of credit 2,731,035 76,035
Issuance of Series B Preferred Stock - 720,000
Repayment of debt (160,932) (786,330)
Net cash provided by (used in)
financing activities 3,317,457 (49,374)
Net cash increase (decrease) in cash
and cash equivalents 61,436 (64,765)
Cash and cash equivalents,
beginning of period 128,162 175,110
Cash and cash equivalents,
end of period $ 189,598 $ 110,345
</TABLE>
See accompanying notes to condensed consolidated financial statements.
SUNBURST ACQUISITIONS IV, INC. and SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
1. Basis of Presentation
The accompanying condensed consolidated financial statements
include the accounts of Sunburst Acquisitions IV, Inc. ("the
Company") and its subsidiary, Prologic Management Systems, Inc.
("Prologic"). All significant inter-company balances and transactions
have been eliminated in consolidation.
The accompanying unaudited, condensed, consolidated
financial statements have been prepared by the Company in
accordance with generally accepted accounting principles, pursuant to
the rules and regulations of the Securities and Exchange Commission.
In the opinion of management, the accompanying condensed
consolidated financial statements include all adjustments (of a normal
recurring nature) which are necessary for a fair presentation of the
results for the interim periods presented. Certain information and
footnote disclosures normally included in financial statements have
been condensed or omitted pursuant to such rules and regulations.
Although the Company believes that the disclosures are adequate to
make the information presented not misleading, these financial
statements should be read in conjunction with the financial statements
and the notes thereto included in the Company's Report on Form 10-
KSB for the transition period ended March 31, 1999, the consolidated
financial statements and notes thereto included in the Prologic
Management Systems, Inc. Form 10-KSB for the fiscal year ended
March 31, 1999, and the unaudited, condensed, consolidated financial
statements of Prologic included in Prologic's report on Form 10-QSB
for the six month period ended September 30, 1999. The results of
operations for the three and six month periods ended September 30,
1999 are not necessarily indicative of the results to be expected for
the full year.
2. Acquisition of controlling interest in Prologic Management
Systems, Inc.
On July 8, 1999, the Company entered into a Stock Purchase
and Merger Agreement ("SPMA") with Prologic Management
Systems, Inc. The terms of the SPMA require that the Company
purchase up to 5,280,763 shares of common stock of Prologic for
$3,000,000. In conjunction with execution of the SPMA, Sunburst
and certain of its shareholders entered into an agreement with a group
of investors to permit the investors to acquire control of Sunburst in
return for providing the funds required by the SPMA. The agreement
with these investors involves a four step reorganization of Sunburst
including (i) the sale by five current shareholders of Sunburst of a
total of 385,000 shares of common stock; (ii) the voluntary surrender
for cancellation of a total of 436,000 shares of common stock,
reducing the number of issued and outstanding shares from 2,435,000
to 1,999,000; (iii) completion of a 20:1 forward split increasing the
number of issued and outstanding shares to 39,980,000; and (iv) the
voluntary surrender for cancellation of a total of 31,680,000 shares,
reducing the number of issued and outstanding shares (following
completion of the forward split described above) to 8,300,000.
On August 4, 1999, the Company completed Tranche 1 of the
SPMA by purchasing 3,459,972 shares of common stock of Prologic
for a cash investment of $1,000,000. The Company also executed a
Voting Trust Agreement with shareholders of Prologic which granted
the Company voting rights to a total of 1,071,060 shares of Prologic
Common Stock. These transactions resulted in Sunburst owning or
having voting control of approximately 55% of the outstanding
common shares of Prologic. Sunburst funded the acquisition of
Prologic through the issuance of 500,831 (post split) shares of
Sunburst common stock at $2.00 per share. The acquisition of an
ownership interest and voting control of Prologic has been accounted
for as a reverse acquisition resulting in the recapitalization of Prologic
Management Systems, Inc. No goodwill was recorded in the
transaction. Prologic is the accounting acquirer and consequently, all
operations included in the accompanying financial statements are those
of Prologic for all periods presented.As of September 30, 1999, the
Company had acquired control of approximately 55% of the
outstanding common shares of Prologic. The remaining 45%
ownership constitutes a minority interest in Prologic which is not
owned or controlled by the Company. Due to the deficit in equity of
Prologic (totaling $1,155,708 at September 30, 1999) and losses
sustained during the period August 4, 1999 to September 30, 1999
(totaling approximately $200,000), no minority interest is reflected in
the accompanying financial statements, since there is no obligation for
minority shareholders of Prologic to contribute additional equity
amounts equal to their share of the deficits and losses sustained by
Prologic as of and for the period ended September 30, 1999.
3. Commitment to acquire additional shares of Prologic Management
Systems, Inc.
Sunburst's second stage investment under the SPMA ("Tranche
2") involves the purchase of up to 1,820,791 additional shares for a
purchase price of $2,000,000, or approximately $1.0984 per share.
The proceeds from Tranche 2 are intended to be used by Prologic to
facilitate the acquisition of another (unaffiliated) company (the
"Tranche 2 Acquisition"), and Tranche 2 is to be funded essentially
simultaneously with the closing of the Tranche 2 Acquisition.
It is intended that Prologic merge into Sunburst. As a condition to
closing the merger, Sunburst is obligated to have a binding
commitment from investors to provide it, in two stages, with up to
$4,000,000 in equity capital. The first stage will be represented by
the Tranche 2 funding described above. The second $2,000,000 stage
("Tranche 3"), which is intended to be funded after completion of the
merger, will require that Sunburst have a binding commitment from
investors to purchase a total of 890,287 shares of Sunburst common
stock for a total purchase price of $2,000,000, or $2.246 per share.
To effect the merger, Sunburst will issue common and preferred
shares for all of the outstanding common and preferred shares of
Prologic in the ratio of one Sunburst share for each Prologic share
surrendered. Prologic shares held in treasury, by way of any Prologic
subsidiary, and by Sunburst directly as a result of the transactions
noted above will be cancelled. An adjustment to the number of shares
of Sunburst common stock will be made in order that the shares of
common stock issued to former Prologic shareholders as described
above will result in those shareholders holding 47.15% of the
outstanding common stock of Sunburst after the merger but prior to
Tranche 3, as detailed in Section 8.6(a)(v) of the SPMA. All
outstanding warrants and options to acquire Prologic stock that are not
exercised prior to the merger will be automatically converted into an
option or right to purchase a like number of shares from Sunburst or
the surviving entity. If, by December 15, 1999, either the Tranche 2
Acquisition has not been closed or the planned merger of Prologic
into Sunburst has not occurred, the Company is obligated under the
SPMA to purchase 455,208 shares of Prologic common stock for
$500,000, which amount will be credited to the Company's Tranche 2
funding obligation.
4. Loss per share
Loss per share has been calculated using the weighted average
number of shares outstanding. Unless otherwise indicated, all
amounts have been adjusted for the 20:1 stock split described above.
8,300,000 shares outstanding after the four-step recapitalization of
Sunburst Acquisitions IV, Inc. have been treated as outstanding as of
the beginning of each period presented.
5. Proforma
The following condensed financial information portrays the
effects of the acquisition of a 55% controlling interest in Prologic as
of the beginning of each period presented.
<TABLE>
<CAPTION>
<S> <C> <C>
12 months Six months
March 1999 September 1999
Current Assets 3,577,540 7,428,943
Total Assets 5,181,123 8,933,755
Current Liabilities 4,876,547 5,968,533
Stockholders Equity (1,462,897) (1,155,708)
Revenues 17,078,678 18,283,828
Net Loss (2,228,187) (459,131)
Net Loss Per Share $ (0.28) (0.06)
</TABLE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with
the audited Consolidated Financial Statements as filed in the
Company's annual report on Form 10-KSB for the transition period
ended March 31, 1999, the annual report of Prologic on Form 10-
KSB for the year ended March 31, 1999, and the quarterly report of
Prologic on Form 10-QSB for the six months ended September 30,
1999. Except for the historical information contained herein, the
matters discussed in this 10-QSB are forward-looking statements that
involve a number of risks and uncertainties. There are certain
important factors and risks, including the rapid change in hardware
and software technology, market conditions, the anticipation of growth
of certain market segments and the positioning of the Company's
products and services in those segments, seasonality in the buying
cycles of certain of the Company's customers, the timing of product
announcements, the release of new or enhanced products, the
introduction of competitive products and services by existing or new
competitors and the significant risks associated with the acquisition of
new products, product rights, technologies, businesses, the
management of growth, the Company's ability to attract and retain
highly skilled technical, managerial and sales and marketing
personnel, and the other risks detailed from time to time in the
Company's SEC reports, including reports on Form 10-KSB and
Form 10-QSB, that could cause results to differ materially from those
anticipated by the statements made herein. Therefore, historical results
and percentage relationships will not necessarily be indicative of the
operating results of any future period.
Introduction
The Company, through its subsidiary Prologic Management
Systems, Inc., provides systems integration services, software
development, proprietary software products and related services. The
majority of the Company's revenues are generated from systems
integration and related product sales. The Company's services include
systems integration, and national and regional support in Internet and
intranet application and framework design, enterprise and workgroup
client/server design and optimization, relational database development,
LAN/WAN and workgroup solutions, Internet/intranet design and
connectivity, and graphic design services for the World Wide Web.
The Company's software development expertise provides an internal
resource for development needs in integration and custom projects.
The Company's proprietary products include manufacturing,
distribution, and resource tracking software for commercial clients, as
well as its intranet-based sales tracking and reporting system and
intranet-based document management, warehousing and retrieval
system. The Company's products are not directed to the retail
consumer market. For additional information on the combined
operating results of the Company and its subsidiary, see the
Consolidated Financial Statements of Prologic Management Systems,
Inc. and the Notes thereto as filed in Prologic's From 10-KSB for the
fiscal year March 31, 1999, and the accompanying financial
statements for the six month period ended September 30, 1999. The
discussion should be read in conjunction with and is qualified in its
entirety by the Financial Statements as filed in the Company's annual
report on Form 10-KSB for the transition period ended March 31,
1999, the Consolidated Financial Statements included in the annual
report of Prologic on Form 10-KSB for the year ended March 31,
1999, and the quarterly report of Prologic on Form 10-QSB for the
six months ended September 30, 1999.
Results of Operations
Three Months Ended September 30, 1999 and 1998
Net Sales. Net sales for the second quarter of fiscal 2000
were $10,089,321 compared to $3,709,206 for the second quarter of
fiscal 1999, an increase of $6,380,115 or approximately 172%. The
sales increase was primarily the result of a significant increase in the
sales of third party products and the additional sales staff at Basis.
Sales of third party hardware for the period were $6,556,521 an
increase of approximately 193% over sales for the same period one
year ago of $2,231,817. Sales of software licenses, which included
third party licenses as well as proprietary software, were $1,889,867
for the period, reflecting an increase of $995,223, or approximately
111% over sales of $894,644 for the second quarter of the previous
fiscal year. Service sales for the period, which were comprised
predominately of integration services, were $1,642,933 compared to
$582,745 for corresponding period of the previous fiscal year, an
increase of $1,060,188, or approximately 181%. The new sales staff
has concentrated initially on sales of hardware and third party
software, which historically leads to additional service sales over
time.
Cost of Sales. Cost of sales was approximately $8,188,243, or
81.1% of total net sales, for the period ended June 30, 1999, versus
approximately $2,752,387, or 74.2% of net sales, for the same period
of the previous year. The increased cost was due primarily to the
increased sales. The increase, as a percentage of net sales, reflects the
increasingly higher cost of third party products. For the September
quarter, cost of sales as a percentage of net sales was consistent with
the results of the previous quarter. The Company expects to see the
margins on sales of third party products continue to decrease, the
result of continued competition and pricing pressure in the computer
market. The Company plans to offset the increasing cost of third party
products by improving sales of related higher margin services.
Selling and Marketing. Selling and marketing expenses were
$712,123, or 7.1% of net sales, for the three month period ended
September 30, 1999, compared to $365,362, or 9.9% of net sales for
the same period of the previous fiscal year. The increase in selling
and marketing expenses (a decrease as a percentage of net sales) for
the period is due, in part, to the continued reorganization of the sales
staff at the Basis subsidiary. The Company expects selling and
marketing expenses to increase as sales increase.
General and Administrative. General and administrative
expenses for the second quarter of fiscal 2000 were $1,319,139, or
13.1% of net sales, compared to $1,267,358, or 34.2% of net sales,
for the second quarter of the previous fiscal year. The increase (a
decrease as a percentage of net sales) was the result of increases in
staff to support increased sales, and in corporate staff related to
current efforts to consolidate the accounting and administrative
functions. The Company expects to reduce administrative expenses as
the consolidations continue.
Research and Development. The Company did not incur any
research and development expense during the quarter. Research and
development is primarily related to updates of proprietary software.
The Company does not expect to incur any additional research and
development expense during the remainder of the fiscal year.
Operating Loss. The operating loss for the period was
$130,184, or 1.3% of net sales, versus $675,901 or 18.2% of sales,
for the same period last year. The operating loss improvement was the
result of increased sales, offset primarily by increased selling and
marketing expenses related to increased sales staff and the continuing
consolidation of accounting and administration functions.
Interest and Other Income. Interest expense and other expense
for the period was $215,291 compared to $124,308 for the
corresponding period of the previous fiscal year, which was mainly
interest paid on the current lines of credit, short term and long term
borrowings. The increase is the result of additional borrowings
required to support sales growth and to supplement funds being
generated by operations.
Income Taxes. The Company had no income tax expense for
the second quarter of fiscal 2000 and 1999. As of September 30,
1999, the Company had Federal net operating loss carryforwards of
approximately $11,700,000. The utilization of net operating loss
carryforwards will be limited pursuant to the applicable provisions of
the Internal Revenue Code and Treasury regulations.
Net Loss. The net loss for the quarter ended September 30,
1999 was $345,475, or approximately $.06 per share, versus a loss of
$800,209, or approximately $.18 per share, for the same period of the
prior fiscal year. The decrease in net loss was the result of increased
sales, offset by increased operating expenses and interest expense.
Six Months Ended September 30, 1999 and 1998
Net Sales. Net sales for the six months ended September 30,
1999 were $18,283,828 versus the net sales for the same period one
year ago of $9,079,649, an increase of $9,204,179, or approximately
101%. The sales increase was primarily the result of a significant
increase in the sales of third party products and the additional sales
staff at Basis. Sales of third party hardware for the period were
$12,870,222 an increase of approximately 131% over sales for the
same period one year ago of $5,564,736. Sales of software licenses,
which included third party licenses as well as proprietary software,
were $3,097,670 for the six month period, reflecting an increase of
$1,749,577, or approximately 129% over sales of $1,348,093 for the
first six months of the previous fiscal year. Service sales for the
period, which were comprised predominately of integration services,
were $2,315,936 compared to $2,166,820 for the corresponding
period of the previous fiscal year, an increase of $149,116, or
approximately 6.9%. The new sales staff has concentrated initially on
sales of hardware and third party software, which historically leads to
additional service sales over time.
Cost of Sales. Cost of sales was approximately $14,834,323,
or 81.1% of net sales, for the six months ended September 30, 1999,
versus approximately $6,710,774, or 73.9% of net sales, for the same
period of the previous fiscal year. The increased cost was due
primarily to the increased sales. The increase, as a percentage of net
sales, reflects the increasingly higher cost of third party products. The
Company expects to see the margins on sales of third party products
continue to decrease, the result of continued competition and pricing
pressure in the computer market. The Company plans to offset the
increasing cost of third party products by improving sales of related
higher margin services.
Selling and Marketing. Selling and marketing expenses were
$1,084,859, or 5.9% of net sales, for the six months ended September
30, 1999, compared to $703,979, or 7.8% of net sales, for the same
period of the previous fiscal year. The increase in selling and
marketing expenses (a decrease as a percentage of net sales) for the
period is due, in part, to the continued reorganization of the sales staff
at the Basis subsidiary. The Company expects selling and marketing
expenses to increase as sales increase.
General and Administrative. General and administrative
expenses for the six month period ended September 30, 1999 were
$2,538,889, or 13.9% of net sales, compared to $2,468,326, or
27.2% of net sales, for the same period of the previous fiscal year.
The increase (a decrease as a percentage of net sales) was the result of
increases in staff to support increased sales, and in corporate staff
related to current efforts to consolidate the accounting and
administrative functions. The Company expects to reduce
administrative expenses as the consolidations continue.
Research and Development. The Company did not incur any
research development expense during the six months ended September
30, 1999. Research and development expense for the six months
ended September 30, 1998 was approximately $51,750, or 0.6% of
net sales. Research and development is primarily related to updates of
proprietary software. The Company does not expect to incur any
research and development expense during fiscal 2000.
Operating Loss. Operating loss for the six month period ended
September 30, 1999 decreased to $174,243, or 1% of net sales,
versus the operating loss of $855,180, or 9.4% of net sales, for the
same period last year. The operating loss improvement was the result
of increased sales, offset primarily by increased selling and marketing
expenses related to increased sales staff and the continuing
consolidation of accounting and administration functions.
Interest and Other Income. Interest expense and other expense for the
first six months of fiscal 2000 was $284,888 compared to $219,635
for the same period of the previous fiscal year. The increase is the
result of additional borrowings required to support sales growth and to
supplement funds being generated by operations.
Income Taxes. The Company had no income tax expense for
the first six months of fiscal 2000 and 1999. As of September 30,
1999, the Company had Federal net operating loss carryforwards of
approximately $11,700,000. The utilization of net operating loss
carryforwards will be limited pursuant to the applicable provisions of
the Internal Revenue Code and Treasury regulations.
Net Loss. The net loss for the six months ended September
30, 1999 was $459,131, or approximately $.09 per share, versus a
loss of $1,142,749, or approximately $.25 per share, for the same
period of the previous fiscal year. The decrease in net loss was the
result of increased sales, offset by increased operating expenses and
interest expense.
Liquidity and Capital Resources
Liquidity and Capital Resources. At September 30, 1999 the
Company had working capital of approximately $1,460,410 versus a
deficit of approximately $1,299,000 at March 31, 1999. The cash
balance at September 30, 1999 was approximately $489,598, of which
$300,000 was restricted as security for the Company's line of credit.
Cash used by operations during the six month period ended
September 30, 1999 was approximately $3,165,949. Cash generated
by operations during the same six month period of the previous fiscal
year totaled approximately $31,040. Cash used in investing activities
was approximately $90,072 at September 30, 1999 and approximately
$83,099 at September 30, 1998. Cash provided by financing activities
for the six months ended September 30, 1999 totaled approximately
$3,317,457 as the result of additional advances from the Company's
line of credit and the issuance of common stock. Cash used by
financing activities totaled approximately $49,372 for the six months
ended September 30, 1998.
The Company has not integrated the sale of its proprietary
software into its subsidiaries and has not generated the increase in
professional service revenue it had anticipated and has therefore not
generated the higher margins that it had expected. The result is that
historically the Company has been unable to generate sufficient
internal cash flows to support operations, and has been dependent
upon capital reserves and outside capital sources to supplement cash
flow. New equity investments, lines of credit and other borrowings,
and credit granted by its suppliers have enabled the Company to
sustain operations over the past several years. In August 1998, the
Company's subsidiary, Prologic, had failed to meet the "continued
listing criteria" established by NASDAQ and Prologic's securities
were delisted from the NASDAQ Small Cap Market. The subsequent
lack of liquidity in Prologic's securities had materially affected its
ability to attract equity capital. Additionally, the lack of capital
resources has precluded Prologic from effectively executing its
strategic business plan. The ability to raise capital and maintain credit
sources is critical to the continued viability of the Company.
On July 8, 1999, the Company entered into a Stock Purchase
and Merger Agreement ("SPMA") with Prologic Management
Systems, Inc. The terms of the SPMA require that the Company
purchase up to 5,280,763 shares of common stock of Prologic for
$3,000,000 and provides for additional funding of $2,000,000 after
the completion of the planned merger of Prologic into Sunburst.
The three investment stages in the SPMA could potentially
provide the combined company with the equivalent of a $5,000,000
capital infusion. Of this amount, $1,000,000 is reflected in the
accompanying financial statements as the amount invested by Sunburst
to purchase an approximate 55% interest in Prologic under Tranche 1
of the agreement. This amount was raised through the issuance of
500,831 shares of Sunburst common stock. The potential acquisitions
of additional subsidiaries are conditions to closing the future financing
contemplated in the Company's business plan. The SPMA calls for
the issuance of additional Sunburst shares for cash of $4,000,000,
either prior to or immediately following the merger with Prologic.
With the capital resources available to properly manage them, the
acquisition of two or more profitable companies should significantly
expand the Company's revenues and enhance earnings. The resulting
increase in internally generated cash flows should greatly reduce the
Company's dependence upon outside capital sources. Additionally,
the Company would expect to be the beneficiary of, through the
acquisitions, qualified executive management, technical, and sales
personnel, as well as new product and service offerings. The
Company believes that the SPMA can be the catalyst that will provide
its shareholders and investors the opportunity to participate in liquid
securities, trading in an orderly market.
In the future, the Company may require additional equity, working
capital and/or debt financing to maintain current operations as well as
achieve plans for future expansion. No assurance can be given of the
Company's ability to obtain such financing on favorable terms, if at
all. If the Company is unable to obtain additional financing, its ability
to achieve plans for current and future expansion could be materially
adversely affected.
During fiscal 1998, Prologic signed a financing agreement with
Coast Business Credit for a line of credit in an amount of the lower of
$5,000,000 or the sum of 85% of eligible accounts receivable,
restricted cash (see Note 5 of the Consolidated Financial Statements)
and equipment loans (maximum of $250,000). This credit facility is
designed to provide working capital to support Prologic's sales growth
for its two subsidiaries. Among other things the agreement required
that the Company maintain a combined net worth at its BASIS and
GRSI subsidiaries of at least $750,000. The Company was in
compliance of this requirement at September 30, 1999. The total
amount of the line of credit outstanding at September 30, 1999 was
approximately $3,919,915.
During fiscal 1997, Prologic borrowed approximately
$100,000 at a rate of 8%, which was scheduled to become due on
June 30, 1997. During July 1997, the note holder agreed to extend
maturity on a month-to-month basis. As a result of the extension,
Prologic has issued 10,000 restricted common shares per month to the
note holder in consideration for the term of the extension. As of
September 30, 1999 the note was still outstanding.
In addition, during fiscal 1997 Prologic borrowed $820,000 in
a private offering of 10% Subordinated Convertible Notes due
December 31, 1999. Prior to September 30, 1997, with the exception
of one $100,000 note holder, Prologic renegotiated the conversion
terms with the note holders of the remaining $720,000. The revised
terms assign a fixed conversion price of $3.75 per share. In addition,
the note holders have been granted warrants to purchase a total of
252,000 shares of Prologic's common stock at a price of $2.00 per
share. The warrants will expire on December 31, 2001. During
December 1997, one $100,000 note holder exchanged the debt for
unregistered common stock of Prologic. The common stock was
exchanged at a price of $.625 per share for a total of 160,000 shares.
In fiscal 1999, the remainder of the note holders representing
$720,000 converted to 72,000 shares of unregistered Series B
Cumulative Convertible Preferred Stock of Prologic with a fixed
conversion rate of $3.75 per share of common stock and received
warrants to purchase an additional 72,000 shares of unregistered
common stock at a price of $1.00 per share. These warrants expire on
March 31, 2001. If by December 31, 1999 the Series B Cumulative
Convertible Preferred Stock has not been redeemed and the
redemption price paid in full, or Prologic has not raised at least $1.5
million from the sale of its equity securities excluding the Series B
Preferred Stock, the conversion rate shall become fifty percent (50%)
of the average of the closing bid and asked price of the Common
Stock on the NASDAQ Stock Market during the month of December
1999 (or, if the Common Stock is not then quoted on the NASDAQ
Stock Market, the closing prices on such other market on which the
Common Stock is then quoted).
During fiscal 1997 and 1998, Prologic borrowed $365,000 in
short term notes collateralized by its computer equipment and office
furnishings. Subsequently, $170,000 of these notes was exchanged for
288,000 shares of common stock and $45,000 in principle was repaid.
Interest on these notes is paid monthly at a rate of 2%. As of
September 30, 1999, the principle remaining on these notes is
$150,000, which is currently due and payable.
During the first six months of fiscal 2000, Prologic purchased
approximately $90,072 in capital equipment and software.
Year 2000 Issue. The Company's proprietary manufacturing
software product line was Year 2000 compliant in July 1998 and was
released during the quarter ending September 30, 1998. The
Company's internal development tools are Year 2000 compliant. The
proprietary wholesale distribution software product line was Year
2000 compliant as of April 1999 and was released in May 1999.
Internally, the Company uses its distribution software accounting
package. The Company is not currently aware of any significant Year
2000 compliance problems relating to the Company's proprietary
software systems that would have a material and adverse effect on
business, results of operations and financial condition. Furthermore,
the Company does not believe that clients utilizing its Year 2000
compliant software products will have any problems with their
vendors or customers because of the Year 2000 issue due to the use of
the Company's software products. However, there can be no
assurance that the Company will not discover Year 2000 compliance
problems in its proprietary software or other third-party software or
hardware that will require a substantial investment to correct. The
Company's inability to fix such software on a timely basis could result
in lost revenues, increased operating costs and other business
interruptions, any of which could have a material and adverse effect
on the Company's business, results of operations and financial
condition. Additionally, there can be no assurance that utility
companies, Internet network companies, Internet access companies,
third-party service providers and others outside the Company's control
will be Year 2000 compliant. Costs relating to the development of the
Year 2000 issue were included in the research and development
expenses during the fiscal year ended March 31, 1999.
Safe Harbor Statement under the Private Securities Litigation Reform
Act of 1995
This form 10-QSB may contain forward-looking statements that
involve risks and uncertainties, including, but not limited to, the
impact of competitive products and pricing, product demand and
market acceptance risks, the presence of competitors with greater
financial resources, product development and commercialization risks,
costs associated with the integration and administration of acquired
operations, capacity and supply constraints or difficulties, the results
of financing efforts and other risks detailed from time to time in the
Company's Securities and Exchange Commission filings, including
Prologic's 1999 Form 10-KSB.
PART II. Other Information
Item 1. Legal Proceedings
As of the date of this filing, neither the Company nor its
subsidiary are a party to any legal proceedings, the outcome of which,
in management's opinion, would have a material adverse effect on the
Company's operations or financial position.
Item 2. Changes in Securities
In August 1999, the Company underwent a 20:1 forward split
of its outstanding common shares.
Also in August 1999, the Company issued a total of 500,831
of its previously authorized but unissued common shares (on a post
split basis) for total consideration of $1,000,000. The shares were
issued pursuant to an exemption from registration under Regulation D
of the Securities and Exchange Act of 1933, as amended.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote by Security Holders
None.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 10QSB
A. Exhibits:
Exhibit Number Document
11.1 Schedule of Computation of Net Loss Per Share
27 Financial Data Schedule
B. Reports:
During the second quarter of fiscal 2000, the Company filed
the following reports on Form 8-K:
Current Report on Form 8K filed August 19, 1999, reporting
under Item 2, the Company's Stock Purchase and Merger Agreement
with Prologic Management Systems, Inc. as an acquisition or
disposition of assets.
Amended Current Report on Form 8K/A filed August 20,
1999, reporting under Item 2, the Company's Stock Purchase and
Merger Agreement with Prologic Management Systems, Inc. and
filing certain exhibits pertaining thereto.
<PAGE>
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.
SUNBURST ACQUISITIONS IV, INC.
By:/s/_______________________
Michael R. Quinn, (Principal Executive Officer and Director)
Date: December 21, 1999
Exhibit 11.1
SCHEDULE OF COMPUTATION OF NET LOSS PER SHARE
Page 1 of 2
<TABLE>
<CAPTION>
Three months ended
September 30,
1999 1998
<S> <C> <C>
Net loss applicable to
common stock $ (366,152) $ (820,209)
Weighted average number
of common shares equivalent:
Common shares outstanding 8,382,544 8,300,000
Incremental common equivalent
shares (calculated using the
higher of end of period or
average fair market value) 0 0
Total weighted average
shares - as adjusted 8,382,544 8,300,000
Basic (0.04) (0.10)
Diluted (0.04) (0.10)
Exhibit 11.1
SCHEDULE OF COMPUTATION OF NET LOSS PER SHARE
Page 2 of 2
</TABLE>
<TABLE>
<CAPTION>
Six months ended
September 30,
1999 1998
<S> <C> <C>
Net loss applicable to
common stock $ (500,020) $ (1,142,749)
Weighted average number
of common shares equivalent:
Common shares outstanding 8,341,277 8,300,000
Incremental common equivalent
shares (calculated using the
higher of end of period or
average fair market value) 0 0
Total weighted average
shares - as adjusted 8,341,277 8,300,000
Basic (0.06) (0.14)
Diluted $ (0.06) (0.14)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-END> SEP-30-1999
<CASH> 189,598
<SECURITIES> 0
<RECEIVABLES> 6,843,413
<ALLOWANCES> 245,688
<INVENTORY> 193,057
<CURRENT-ASSETS> 7,428,943
<PP&E> 1,538,601
<DEPRECIATION> 1,045,660
<TOTAL-ASSETS> 8,933,755
<CURRENT-LIABILITIES> 5,968,533
<BONDS> 155,639
0
619,884
<COMMON> 9,499,845
<OTHER-SE> 694,230
<TOTAL-LIABILITY-AND-EQUITY> 8,933,755
<SALES> 12,870,222
<TOTAL-REVENUES> 18,283,828
<CGS> 14,834,323
<TOTAL-COSTS> 18,458,071
<OTHER-EXPENSES> 16,555
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 268,333
<INCOME-PRETAX> (459,131)
<INCOME-TAX> 0
<INCOME-CONTINUING> (459,131)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (459,131)
<EPS-BASIC> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
