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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended March 31, 1997.
Commission file number: 33-89384-LA
PROLOGIC MANAGEMENT SYSTEMS, INC.
(Name of small business issuer in its charter)
<TABLE>
<S> <C>
Arizona 86-0498857
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
2030 East Speedway Boulevard, Tucson, Arizona 85719
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (520) 320-1000.
Securities registered under Section 12(g) of the Exchange Act:
Common Stock and Warrants to Purchase Common Stock
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 .
Check if disclosure of delinquent filers pursuant to Item 405 of
Regulations S-B is not contained in this form, and no disclosure will be
contained, to the best of the 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. [ ]
Issuer's revenue for its most recent fiscal year: $13,864,000.
As of March 31, 1997, the aggregate market value of voting stock held by
non-affiliates of the issuer: $2,719,277 based on Common Stock of 2,417,135.
This calculation does not reflect a determination that certain persons are
affiliates of the registrant for any other purposes.
Number of shares of common stock outstanding on March 31, 1997 was 3,675,395.
Transitional Small Business Disclosure Format:
Yes ; No X .
DOCUMENTS INCORPORATED BY REFERENCE:
None.
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PART I
ITEM 1. BUSINESS
GENERAL
Prologic Management Systems, Inc. ("Prologic") is an Arizona corporation
founded in April, 1984. Prologic, together with its subsidiaries (the "Company")
is a commercial systems integration and software development firm. Prologic's
subsidiaries, BASIS, Inc., based in Emeryville, California ("BASIS"), and Great
River Systems, Inc. based in St. Paul, Minnesota ("GRSI"), offer national and
regional systems integration expertise. The Company's system integration
services include 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. Prologic's Tucson office has development expertise in
manufacturing, distribution, resource planning and resource tracking for
manufacturing and commercial clients. Prologic provides a full range of hardware
and commercial software solutions, with a focus on UNIX-based products, as well
as Microsoft NT and legacy interoperability. The Company's principal executive
offices are located at 2030 East Speedway Boulevard, Tucson, Arizona 85719 and
its telephone number is (520) 320-1000. The Company's worldwide web site can be
accessed at www.prologic.com.
Acquisition of Great River Systems, Inc.
In September 1995, the Company completed the acquisition of GRSI, a
regional systems integration firm based in St. Paul, Minnesota. The acquisition
was financed with a combination of cash and stock. Founded in 1984, GRSI is a
computer systems integrator specializing in enterprise networking, internet
servers and services, systems administration, consulting and training. Internet
and intranet products and services include server installation and
configuration, website design and administration, database integration, internet
publishing, training, and planning and consulting. A key consideration in the
acquisition of GRSI was the synergy that exists between the systems integration
capabilities of GRSI and the software and integration services of Prologic.
Effective systems integration is a requirement for the successful implementation
of software products and services. GRSI's worldwide web site can be accessed at
www.grs.com.
Acquisition of BASIS, Inc.
In August 1996, Prologic completed its acquisition of BASIS, a commercial
systems integration company located in the San Francisco Bay Area with
additional offices in Portland, Oregon. The acquisition was financed with a
combination of cash and stock. BASIS specializes in providing open systems
integration and a broad range of product support services to commercial,
governmental, and research clients. BASIS support services range from basic
installation, orientation, and troubleshooting to comprehensive long-term
maintenance programs. Further, as a vendor-independent reseller of a broad range
of computer hardware and software, with a focus on Unix-based products, BASIS is
strategically aligned with Prologic. BASIS' worldwide web site can be accessed
at www.BASISinc.com.
PRODUCTS AND SERVICES
The Company provides systems integration expertise, software development,
proprietary software products and related services. The Company's services
include systems integration expertise, 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 products include manufacturing, distribution, and
resource planning and tracking software for manufacturing and commercial
clients.
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The Company's revenues arise principally from the sale of systems
integration-related products and services, the sale and re-engineering of
third-party software, and the sale of its proprietary software. The Company
believes that, over the long term, the sale of Prologic's proprietary software
offers the greatest opportunity to increase the Company's overall margins, and
the Company focuses its research and development expenditures principally on
software development activities, utilizing Java and browser technologies. During
the Company's fiscal year ended March 31, 1997 ("fiscal 1997"), approximately
68.6% of the Company's revenues were generated by hardware sales and related
services, which have materially lower margins than sales of proprietary
software. During the same fiscal year, approximately 14.2% and .6% of the
Company's total revenues were generated by systems integration services (net of
related hardware and third-party software sales) and by sales of Prologic
proprietary software, respectively.
The Company provides national and regional product support, as well as
internet and intranet application and framework and design, workgroup solutions
and relational database development. The Company provides full-service planning,
design, management, custom programming, systems integration, technical and
consulting services. This includes consulting, maintenance and support, training
and the installation and sale of third party computer hardware on which to
implement the Company's software products.
The Company provides consulting services to its clients, particularly in
the areas of hardware and software selection, logical and physical system
design, programming implementation, education and training. As a systems
integrator, the Company assumes overall project management responsibility. The
Company generally bills for project work on a time and materials basis. The
Company's ability to undertake and successfully implement major systems
integration and other projects requires a wide range of technical skills, such
as logical and physical design, implementation and training support and
technical expertise in computer hardware and peripheral equipment, databases,
programming, productivity tools, communications, and system design and
maintenance. The Company's experience has been that a highly trained and skilled
workforce possessing the necessary technical expertise is available in each of
the markets in which the Company currently has offices.
In an effort to increase its software sales, the Company has developed a
series of application software products, which use an open architecture with the
capability of accessing data from multiple industry-standard database
architectures. The Company's principal software products are described below.
Sales Tracking and Reporting System ("STARS"). STARS, the Company's Sales
Tracking and Reporting System, is an intranet-based application that consists of
an integrated set of modules for sales tracking, order processing and management
analysis. STARS was designed to transform complex, incompatible application
environments into a simple, user-friendly application. The STARS interface
system is based on Netscape Navigator. STARS is built around industry-standard
Internet and World Wide Web technologies, including HTML/HTTP protocols and
relevant language tools, such as Java applets, CGI scripts and embedded SQL/C
programs. The STARS application has drill-down menus, graphical displays and
presentations.
Document Retrieval and Distribution System ("DRD"). The Company's Document
Retrieval and Distribution System is an intranet application providing
centralized information warehouse capabilities is based on the Netscape
Publishing System. DRD consolidates multiple types of data, from text documents
to Microsoft PowerPoint presentations to video clips with sound, providing a
single source of information to organizations. SunSoft, the software arm of Sun
Microsystems, uses DRD to manage volumes of documents and publications relating
to their products, programs and services. From within the SunSoft system,
information from over 80 independent internal systems is accessible. The power
and ease-of-use of the DRD system provides authorized users with data on product
information, White Papers, promotions, channel program information and
resources. DRD is equipped with keyword and attribute search capabilities,
uniform content presentation, along with native distribution of information. It
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includes database management (using Oracle products), client server network
applications and collaborative project management.
Prologic Manufacturing. Prologic Manufacturing is a comprehensive
20-module software application suite that includes management tools which help
manage the day-to-day operations of a manufacturing environment. The
Manufacturing modules range from general accounting to the tracking and movement
of products through the plant, to increased visibility of labor efficiencies.
Prologic Manufacturing integrates all aspects of the manufacturing process.
Prologic Manufacturing can be used in conjunction with Prologic Electronic Data
Interchange software as well as Prologic Data Collection software.
Prologic Electronic Data Interchange. The Prologic Electronic Data
Interchange is a management tool that automatically creates and electronically
sends outgoing invoices and incoming orders for inter-company communications.
Prologic Distribution. The Prologic Distribution application software
suite includes software tools to help management of product distribution,
businesses forecast and plan for product fulfillment and distribution. Prologic
Distribution was designed to help customers reduce inventory carrying costs and
improve customer service. Inventory forecasts provide management with complete
reporting tools including seasonality and multi-warehouse considerations for
reducing warehousing and distribution costs. In addition, a full history by
location is maintained on-line to enable management to track product demand by
location and to further facilitate customer service. Prologic Distribution can
be used in conjunction with Prologic Electronic Data Interchange software and
Prologic Data Collection software.
Prologic Data Collection. The Prologic Data Collection software provides a
comprehensive and sophisticated data collection applications suite designed to
meet extensive information management needs. Prologic Data Collection is a
chart-server, open file system which offers full compatibility with other
applications as well as operating systems and hardware platforms. The Data
Collection applications include Bar Code Warehouse Management, Time and
Attendance, Shop Flow and Material Reporting and Custom Applications.
Resource Planning (SYMRP). In January of 1996, the Company completed the
purchase of SYMRP Scheduler software from Symmetrix, Inc., a Massachusetts based
consulting firm. The patented Resource Planning technology provides for the
scheduling of resources, including materials, labor and production equipment for
multiple plant locations on a simultaneous basis. The resource planning
technology was designed for use in environments that require the ability to
continuously monitor and modify production schedules, thus providing management
with the ability to utilize finite resources at, or near, optimum capacity at
all times, at multiple manufacturing facilities around the world. This
technology was developed for a division of a Fortune 100 chemicals company and
was awarded US Patent No. 5,233,533 granted August 3, 1993. An important factor
in the Company's acquisition of the Resource Planning and Scheduling System is
the system's design for integration with customer's existing manufacturing
application software. This allows the product to co-exist with systems that are
already in use, without displacing all of the training, procedures, time and
effort that typically go into implementing a manufacturing system. The Company
believes this is complimentary to its strategy of providing its customers
immediate benefits without replacing the existing system. To date, the Company
has not released the product. However, the Company expects to begin actively
marketing and selling the product during fiscal 1998.
MARKETING & DISTRIBUTION
The Company's overall marketing and distribution effort is directed by its
corporate office in Tucson ("Prologic Corporate"). However, each subsidiary
provides local sales and marketing management with additional support, when
required, from the Tucson office. The Company's primary goal is to lead
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with its commercial systems integration expertise, leveraging its reputation and
client base, and in the long term promote the sale of Prologic's proprietary
software products to increase the Company's overall margins and competitive
advantage. To achieve this goal, the Company will address its existing customer
base, develop new corporate accounts in targeted geographical areas and expand
and develop strategic relationships with various companies that sell products
within this market.
The Company intends to develop new corporate accounts in targeted
geographical markets by expanding its multi-channel sales organization, which
currently consists of direct corporate sales, resellers, agents and other
systems integration firms. The Company has joint marketing relationships with
leading hardware vendors and will continue to offer its systems integration
expertise. The Company currently has marketing agreements with Adobe, Banyan,
Cisco, Informix, IBM, Netscape Communications Corporation, Oracle, Progressive
Networks, Sun Microsystems, SunSoft, Sybase and Symbol Technologies to resell
their products.
The Company will also target expanding and developing strategic
relationships with various companies that sell products within this market. For
example, the Company intends to expand its current relationship with Sun
Microsystems, the largest provider of internet servers, Oracle and Netscape
Communications Corporation. As part of its marketing program, the Company also
exhibits its products at various U.S. trade shows. Existing strategic partners
of the Company include Adobe, Banyan, Cisco, Informix, IBM, Netscape
Communications Corporation, Oracle, Progressive Networks, Sun Microsystems,
SunSoft, Sybase and Symbol Technologies. Over the past thirteen years, Prologic
has established relationships with resellers through which to distribute its
software and services. Prologic will continue to maintain, seek out and work
with third party integrators who wish to OEM or private label our products both
in the United States and in foreign markets.
The Company has established a sales office in Portland, Maine, as well as
regional sales and integration centers in St. Paul, Minnesota (GRSI),
Emeryville, California (BASIS), and Portland, Oregon (BASIS), to offer
proximity to its customer and vendor base. The Company believes that there
are sufficient numbers of qualified potential employees in the Tucson area,
as well as in the Company's targeted expansion areas, to support the
geographic expansion of the Company which supports the Company's long-range
business plan.
Prologic has identified and qualified a number of potential acquisition
candidates in key geographical locations. These candidates include companies
that have considerable resources in terms of technical personnel and/or software
products that would be complementary to our business plan. Once acquired,
Prologic Corporate will act as the administrative arm for new subsidiary
companies, providing management, accounting, finance and marketing support. Once
fully integrated, senior management, accounting functions, finance and marketing
activity for the acquisitions will be consolidated and centralized.
As acquisitions are integrated into the overall operations, the focus will
turn to securing higher gross margins. This will be accomplished primarily
through the sale of systems integration services, and in the long term, the sale
of Prologic's proprietary software products and related services. The higher
margins will enable the Company to internally fund the growth of the operations
to take advantage of the significant opportunities that exist in the market.
The Company believes that its acquisition strategy is the most cost-
effective avenue of growth for the Company. However, the recent market price of
the Company's stock and the need to raise additional capital has caused the
Company to temporarily suspend its acquisition activity until these conditions
and operating results have improved.
COMPETITION
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The systems integration and computer software industries are both highly
competitive and include participants from a variety of market segments. The
competition in systems integration services includes mid-level and regional
systems integrators, "Big Six" accounting firms, the service groups of computer
equipment companies, contract programming companies, facilities management
companies and general management consulting firms. Among the more recognizable
participants in the market are Andersen Consulting, an affiliate of Arthur
Andersen LLP; Cambridge Technology Partners; Computer Sciences Corporation;
Coopers & Lybrand LLP; Electronic Data Systems Corporation; IBM-Innovative
Information Systems; and Technology Solutions Corporation. The Company believes
it competes favorably with these systems integrators in the areas and level of
responsiveness, regional and national vendor contacts and dedication to
achieving certification standards to provide its clients with a higher quality
of customer service.
The Company's software products are intended for sale to clients with
annual revenues in excess of $10,000,000. The Company competes generally on the
basis of product features and functions, product architecture, the ability to
run on a variety of industry standard platforms, technical support and other
related services. Ease of product integration with third party applications
software and price/performance are also factors. Products in this market are
principally sold through value-added resellers and systems integrators. In the
mid-sized commercial market for manufacturing systems, the Company's principal
competitors are Effective Management Systems, Fourth Shift Corporation and
Symix. With the emerging browser technology, the impact of which changed
industry standards and expectations, several competitors have announced that
they are in the process of developing versions of their existing products which
will operate in a browser-based environment, but the Company believes that most
of their production is currently host or windows-based. The Company is currently
working towards incorporating browsers into its proprietary software and plans
to complete this development prior to introducing sales of its proprietary
software into its subsidiaries' sales mix. Further, the Company believes that
none of these competitors have patented resource planning technology designed to
interface to their products as well as third party systems.
The Company believes that its ability to compete depends in part on a
number of factors outside of its control, including the ability of its
competitors to hire, retain and motivate a large number of project managers, and
the development by others of software that is competitive with Prologic's
applications and services, and the price at which others offer comparable
applications software. Management of the Company believes that the Company's
principal challenge, in the long-term, is to identify and hire effective sales
and marketing managers to focus efforts on the marketing and sales of Prologic's
proprietary software products, both through the Company's systems integration
subsidiaries and through direct sales.
Many participants in the software development and systems integration
businesses have significantly greater financial, technical, and marketing
resources than does the Company.
SOURCES OF RAW MATERIAL AND UNDERLYING TECHNOLOGY
The principal materials and components used in the Company's commercial
applications software products include computer media and user manuals. For each
product, the Company prepares master software disks, user manuals and packaging.
Substantially all of the Company's documentation production is performed by
third-party vendors. Outside sources provide all packaging and related materials
to the Company's specifications. The completed packages are assembled
internally. As of June 1997, the Company has not experienced any material
difficulties or delays in the manufacture and assembly of its products, or
material returns due to product defects. Alternate independent sources for such
components are readily available in sufficient supply. In addition, all of the
Company's sales offices sell hardware, generally through third party reseller
programs.
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The Company has numerous underlying license agreements with third party
companies concerning the use of software and programming languages which the
Company has incorporated into its products. For certain programming languages,
there are a limited number of third party companies which supply such products.
Thus, there may not be suitable alternate sources from which the Company can
procure such programming languages, should one of the third-party companies
licensing such programming language cease to conduct business.
Furthermore, these license agreements typically require the payment of
royalties. The nonpayment of royalties under these licenses could result in a
loss of the licenses, which could interrupt the sales of the Company's products,
particularly for those items for which there are only a limited number of
suppliers. Loss of any such license through either cessation of business or
non-payment of royalties would have a seriously adverse impact on the Company.
DEPENDENCE UPON LIMITED NUMBER OF CUSTOMERS
The Company's five largest clients in fiscal year ended March 31, 1997
accounted for 32.2% of total sales at 8.12%, 7.60%, 7.03%, 4.83% and 4.63% of
total revenues, respectively; and in fiscal 1996, the five largest clients
accounted for 60.8% at 26.6%, 11.7%, 8.2%, 7.6% and 6.7% of total revenues,
respectively.
From time to time, the Company, in the ordinary course of business, enters
into agreements to provide professional services to customers in connection with
the development of certain product features and enhancements. Such agreements
provide for payment of specified fees as services are provided, and milestone
payments as development milestones are attained. Other than with respect to such
agreements, none of the Company's customers are contractually obligated to
license or purchase additional products or services from the Company. Based upon
the significant capital expenditure usually associated with the initial purchase
of the Company's products and services, it is unlikely that the revenue from any
individual customer that has accounted for significant revenues in past periods
will continue to represent a significant portion of future period revenues. As a
result of this customer concentration, the Company's business, operating results
and financial condition could be materially adversely affected by the failure of
anticipated orders to materialize and by deferrals or cancellations of orders.
Furthermore, such customers are concentrated in the discrete manufacturing and
wholesale distribution industries. Accordingly, the Company's future success
depends upon the capital spending patterns of such customers and the continued
demand by such customers for the Company's products and services. The Company's
operating results may in the future be subject to substantial period-to-period
fluctuations as a consequence of such customer concentration and factors
affecting capital spending in the manufacturing and distribution industries.
PRODUCT DEVELOPMENT
The market for application, management and development software, as well
as computer software in general, is characterized by rapid technological
developments and changes in customer requirements. As a result, the Company's
success is dependent upon its ability to continue to enhance products and to
develop and introduce in a timely manner new products that keep pace with
technological advances and respond to rapidly changing customer requirements.
The life cycle of a product is dependent in part on timely updates to keep pace
with technological advances and the needs of its customers. The Company seeks to
enhance its products, typically on an annual basis, but there can be no
assurance that the Company will be successful in developing and marketing
enhancements of the Company's existing products or new products on a timely
basis, or at all. In addition, there can be no assurance that any enhancements
or new products will adequately address the changing needs or gain the
acceptance of the marketplace. The Company employed 12 full-time programmers in
research and development at March 31, 1997. Research and development employees'
time is normally expensed to research and development, but could be capitalized
if the time is directly related to the development of
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products. Due to current restraints in working capital, the Company has
significantly reduced corporate-funded development.
EMPLOYEES
As of March 31, 1997, the Company had approximately 65 full-time and 2
part-time employees, including 30 in technical services, 19 in sales and
marketing and 16 in finance and administration. The Tucson office employed 17
full-time and 2 part-time employees, GRSI had 11 full-time employees, and BASIS
had 37 full-time employees. 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
satisfactory.
The Company expects to experience a period of growth in the number of its
employees. These hiring goals are substantially more aggressive than those for
previous periods. There can be no assurance that the Company will be able to
obtain the services of additional or qualified personnel necessary to facilitate
this growth. This growth may place a substantial strain on the Company's
management, operational, financial and accounting resources. The Company's need
to manage its changing business effectively will also require it to continue to
implement and improve its operational, financial and management information
systems and to train, motivate and manage its employees. The Company's inability
to manage change effectively would have a materially adverse effect on the
Company and its ability to execute on its business strategy.
ITEM 2. PROPERTIES
Prologic's headquarters are located in Tucson, Arizona in a leased office
consisting of approximately 10,000 square feet. The facility is owned by a
partnership which is controlled by the family of Mr. James M. Heim, the
Company's President, Chief Executive Officer and Chairman of the Board. The
lease term which expires in June 2001, with rentals based on a rate not to
exceed 95% of the market rate as determined by an independent market analysis of
other office space located in the general area. The rent shall be increased
annually in a percentage amount equal to one-half of the percentage increase in
the Consumer Price Index for the previous year.
GRSI leases 3,400 square feet of office space in St. Paul, Minnesota.
The GRSI lease expires in November 1998.
BASIS leases 10,700 square feet of office space in Emeryville, California.
The lease expires under a five-year non-cancelable operating lease that expires
in March 1998. BASIS' Portland, Oregon site leases 2672 square feet of office
space under a lease that expires in December 1999.
The Company may require additional space within the next twelve months;
however, the Company believes that the additional space sufficient to meet its
requirements will be available on commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
As of the date of this filing, neither the Company nor its subsidiaries
are a party to any legal proceedings, the adverse outcome of which, in
management's opinion, would have a material adverse effect on the Company's
operations or financial position.
On June 11,1997 the Company was served with a complaint by an alleged
stockholder, Lampedusa LLC, against the Company, alleging damages of $50 million
in connection with the Company's previously
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announced joint venture with Compagnie des Signaux (CDS). The Company believes
that the claim is without merit. On July 17, 1997 a United States Magistrate
Judge recommended that the lawsuit be dismissed without prejudice against the
Company. The parties have ten days to object to the recommendation. No
objections were raised by either party during the period and the Company
believes the lawsuit will be dismissed.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SHAREHOLDERS
No matters were submitted to a vote of security holders during the quarter
ended March 31, 1997.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company completed its initial public offering on March 15, 1996 at a
price of $5.00 per share of Common Stock and $0.125 per Warrant (each warrant
entitles the holder to purchase one share of common stock at an exercise price
of $6.00). The common stock and common stock warrants of the Company are traded
on the Nasdaq Stock Market under the symbols PRLO and PRLOW, respectively, as
well as on the Boston Stock Exchange under the symbols PRC and PRCW,
respectively.
The table below represents the high and low for the Company's common stock and
warrants, as reported on the Nasdaq Stock Market from the initial trading on
March 31, 1996 through March 31, 1997.
<TABLE>
<CAPTION>
Common Stock Warrants
------------ --------
Quarter Ended High Low High Low
- ---------------------------------------------------------------------
<S> <C> <C>
March 31, 1996 $6.00 $3.63 $1.63 $0.570
June 30, 1996 $4.63 $3.25 $1.25 $0.625
September 30, 1996 $4.25 $3.00 $0.9375 $0.625
December 31, 1996 $4.13 $1.88 $0.9375 $0.500
March 31, 1997 $3.25 $1.00 $0.75 $0.250
</TABLE>
As of July 22, 1997 there were 407 shareholders of record of the Company's
common stock. The Company has neither declared or paid cash dividends on its
common stock in the past, and currently intends to retain any earnings for use
in the business and does not anticipate paying any cash dividends in the
foreseeable future.
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PART III
ITEM 6. MANAGEMENT'S DISCUSSION & ANALYSIS
The following discussion should be read in conjunction with the audited
Consolidated Financial Statements included elsewhere herein. Except for the
historical information contained herein, the matters discussed in this Annual
Report 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 provides systems integration services, networking services and
applications software for the commercial market. The systems integration
services include consulting, maintenance, training and the installation of
hardware on which to implement the Company's as well as third party software
products The Prologic proprietary applications software is licensed for use to
manufacturers and for use in the wholesale distribution industry. The Company's
products are not directed to the retail consumer market. The financial
information for the fiscal year ended March 31, 1996 includes six months of
operating activity from GRSI, a wholly owned subsidiary which was acquired on
September 30, 1995. The financial information for the fiscal year ended
March 31, 1997 includes eight months of operating activity from BASIS, a
wholly owned subsidiary which was acquired during August 1996. For additional
information on the combined operating results of the Company and its
subsidiaries, see the Consolidated Financial Statements of the Company
and Notes thereto. The discussion should be read in conjunction with and
is qualified in its entirety by the Consolidated Financial Statements of the
Company and Notes thereto.
The Acquisition of Great River Systems, Inc.
In September 1995, the Company completed the acquisition of GRSI, a
regional systems integration firm based in St. Paul, Minnesota. Founded in
1984, GRSI is a computer systems integrator specializing in enterprise
networking, internet servers and services, systems administration, consulting
and training. All of the outstanding common stock of GRSI was acquired
for 100,000 shares of common stock of the Company, $100,000 in cash and
issuance of a promissory note in the amount of $150,000. The acquisition was
accounted for as a purchase. Accordingly, the purchase price was allocated to
the assets acquired and liabilities assumed based on their estimated fair values
at the date of acquisition determined by management estimates. Goodwill in the
amount of $259,746 was recorded in connection with the acquisition.
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The Acquisition of BASIS, Inc.
In August 1996, Prologic completed its acquisition of BASIS, a
commercial systems integration company located in the San Francisco
Bay Area with additional offices in Portland, Oregon. The acquisition was
financed with a combination of $500,000 in cash and 337,349 shares of the
Company's common stock. BASIS specializes in providing open systems integration
and a broad range of product support services to commercial, governmental, and
research clients. BASIS support services range from basic installation,
orientation, and troubleshooting to comprehensive long-term maintenance
programs. Further, as a vendor-independent reseller of a broad range of computer
hardware and software, with a focus on Unix-based products, BASIS is
strategically aligned with Prologic.
RESULTS OF OPERATIONS
COMPARISON OF FISCAL 1997 TO FISCAL 1996
Revenues. Revenues were approximately $13,864,000 and $2,624,000 in fiscal
years 1997 and 1996, respectively. The increase was due to the implementation of
the Company's strategy of acquiring systems integration businesses which
included the addition of GRSI during fiscal 1996 and BASIS in fiscal 1997. In
fiscal 1996 GRSI generated $1,816,000 for a six month period from the
acquisition date and in fiscal 1997 provided $4,851,000 for the entire twelve
month period. BASIS provided revenue of approximately $8,610,000 for the eight
month period following the acquisition date in August 1996. Revenue attributable
to sales of computer hardware for fiscal years 1997 and 1996 were approximately
$9,513,000 and $1,350,000, respectively, or approximately 68.6% and 51.5%,
respectively, of total revenues for the periods. Sales of approximately
$2,269,000 in services in fiscal 1997 increased from $547,000 in fiscal 1996.
Third party software license and upgrade revenue increased 187% to approximately
$2,083,000 in fiscal 1997 from approximately $727,000 in fiscal 1996. Overall,
the increase in sales was attributable to the acquisition of the subsidiaries
GRSI and BASIS. The acquisitions have also significantly changed the Company's
product mix from principally proprietary software and related support sales to
that of third party hardware and software as traditionally sold by GRSI and
BASIS. The Company's progress to integrate the sale of its manufacturing and
distribution software into the GRSI and BASIS sales mix during fiscal 1997 has
not been as successful as the Company had planned. No product or service other
than computer hardware accounted for more than 10% of total revenues during
fiscal year 1997 or 1996.
Historically, the Company's revenues in any particular period have been
concentrated among a relatively small number of customers, particularly due to
the revenues associated with the Company's development of product features and
enhancements during the initial stages of a customer contract as contrasted to
the relatively lower revenues associated with services and products which may be
furnished by the Company to the customer after completion of the initial
customer contract. Accordingly, the Company's revenues may vary significantly
from period to period for a variety of reasons, including but not limited to the
timing of customer orders for products and services, deferrals and cancellations
of orders, and capital spending patterns of customers and prospective customers
in the manufacturing and wholesale distribution industries, in which the
Company's customers have historically been concentrated.
Cost of Sales. Cost of sales was approximately $11,418,000 and $1,744,000
in fiscal years 1997 and 1996, respectively, and as a percentage of total
revenues was approximately 82.4% and 66.5% in the comparable periods. The
increase in cost of sales as a percentage of total revenues was directly related
to the change in product mix resulting from the acquisitions of GRSI and BASIS,
whose sales were predominately hardware and third party software which carries a
much higher ratio of cost to revenue than the sales mix in fiscal 1996. The
Company's strategic plan is to increase higher margin systems integration
services and to utilize the distribution channels provided by GRSI and BASIS,
and other acquisitions, to increase sales of its software and related services
which, when integrated into the subsidiaries product mix, is expected to
generate a more favorable ratio of cost of sales to revenue.
12
<PAGE> 13
Gross Profits. Gross profit increased to approximately $2,447,000, or
17.6% of net sales, in fiscal year 1997 from approximately $879,000, or 33.5%
of net sales, in fiscal 1996. The decrease in the rate is the result of the
change in product mix from higher margin sales of Prologic's proprietary
software to sales of third party software and hardware, due to the acquisition
of both GRSI and BASIS. The fiscal 1997 gross profit on software sales, which
was predominantly third party software, was 10.1%. In 1996 the gross profit on
software sales, which included a larger percentage of proprietary software, was
approximately 37.6%. The Company's gross margin on Prologic proprietary software
will generally be higher than the gross margin on third-party software,
principally because the capitalized cost of the development of the Prologic
software is low and amortized over a 48 month period while all other direct
costs such as media and packaging are low in relation to the market price of the
software. Third party software normally carries a high cost in relation to the
market price. The margin on services decreased to approximately 33.3% in fiscal
1997 from 69.5% in fiscal 1996, and sales of third party hardware generated a
margin of 15.6% in fiscal 1997 and a margin of 16.7% in fiscal 1996.
Selling and Marketing. Sales and marketing expenses were approximately
$1,516,000, or 10.9% of net sales, in fiscal 1997 and $650,000, or 24.8% of net
sales, in fiscal 1996 an increase of approximately $866,000. This included sales
and marketing expenditures of $725,000 by BASIS, $351,000 by GRSI and $440,000
by Prologic, and included a planned increase in the number of sales and
marketing personnel, the production of new marketing tools including product
brochures, a national advertising campaign aimed at the manufacturing market,
and the participation in several trade shows and seminars geared at the
manufacturing, data collection and commercial internet markets. The Company
plans to continue to expand its marketing effort during the next fiscal year.
General and Administrative. General and administrative expenses were
approximately $2,597,000 and $695,000 in fiscal years 1997 and 1996,
respectively, or as a percentage of net sales, approximately 18.7% and 26.5%,
respectively. The increase of approximately $1,902,000 in fiscal 1997 was
attributable in part to the addition of BASIS, which accounted for $857,000 of
the increase and GRSI which included expenses for the entire twelve month period
in fiscal 1997 of $409,000. Administrative expenses included increases
attributable to an increase in management personnel, additional reserves for bad
debt, the amortization of goodwill on the acquisition of GRSI and BASIS, as well
as, legal and accounting expenses incurred indirectly in connection with the
acquisition strategy and the cost of consulting and promotion involving investor
relations. The Company believes that during the next several years the
administrative expenses of the Company will be reduced as a percentage of sales,
as administrative functions are consolidated at the Tucson headquarters.
Research and Development. Research and development expenses were
approximately $327,000 and $170,000 in fiscal years 1997 and 1996, respectively,
or as a percentage of net sales, approximately 2.4% and 6.5%, respectively.
Research and development is primarily involved in upgrading current proprietary
software modules and developing additional applications for the current
software. The increase in expenditures reflected the cost of additional
personnel in Research and Development.
Write-off of Capitalized Software. The Company wrote off approximately
$426,000 in software costs in fiscal 1997 and approximately $326,000 in fiscal
1996. The write-off during both years was associated with software which,
although not being actively marketed, is continuing to be used internally on
customer projects and generates service revenue and is being sold to the
existing customer base. However, software sales are currently not projected to
generate sufficient revenue to recover the carrying value of the software. As a
result of the fiscal 1997 write-off; no capitalized software costs remain on the
consolidated balance sheet. The write-off will eliminate, in future periods, the
amortization of software development expenses, which are included in cost of
sales and amounted to approximately $140,000 during fiscal 1997.
Loss from Operations. The Company had an operating loss of approximately
$2,601,000, or 18.8% of net sales, in fiscal 1997 and a loss of approximately
$961,000, or 36.6% of net sales, in fiscal 1996. The
13
<PAGE> 14
1997 loss was the result of the operating expenses incurred as the Company
continued to implement its business plan, through acquisition and expansion in
operating areas, as well as the write-off of the capitalized software costs. The
reduction of the loss as a percent of net sales, from 36.6% to 18.8%, is the
result of efficiencies gained as the Company implements its expansion strategy.
The Company expects that operating results will fluctuate as a result of a
number of factors, including: the availability of adequate capital; the timing
of new product and service introductions by the Company, as well as by its
competitors; changes in the Company's level of operating expenses, including the
Company's expenditures for its Product Development Group and promotional
programs; the size and timing of customer orders for its licensees' products or
services, development, production or quality problems on the part of the Company
or its licensees; the payment of support and maintenance fees; competition in
the computer software market; and the general state of the global and national
economies. The market demand for commercial software products and services can
be significantly affected by uncertain economic cycles. Many of the factors that
may affect the Company's operating results and demand for products and services
based on its technologies cannot be predicted, may not exhibit a consistent
trend, or are substantially beyond the Company's control. Fluctuations in
operating results can also be expected to result in volatility in the price of
the Company's Common Stock.
Interest and Other Expenses. The Company incurred approximately $526,000
in interest and other expenses during fiscal 1997 and $802,000 in fiscal 1996.
Fiscal 1996 included interest on the bridge financing and the write-off of the
discounts associated with the common stock and warrants issued as part of the
bridge financing agreements. During the fourth quarter of fiscal 1996 the
Company incurred interest expense associated with the bridge financing which was
approximately $458,000. This included discounts associated with bridge financing
acquired during the fourth quarter of fiscal 1996. The unamortized portion of
the discount related to other bridge financing, which was due in quarterly
installments through April 1997, was approximately $330,000 at March 31, 1996.
In April and May of fiscal 1997 the Company repaid the remainder of the bridge
financing using its line of credit with its bank and wrote - off the $330,000
balance of the unamortized discount on the bridge notes. The interest rate
payable to the bank was much more favorable to the Company than the rates of the
bridge notes.
Income Taxes. The Company had no income tax expense. As of March 31, 1997,
the Company had Federal net operating loss carryforwards of approximately
$6,400,000 (see Note 9, page F-15 of the Consolidated Financial Statements for a
further discussion of the loss carryforwards). The utilization of net operating
loss carryforwards will be limited as determined pursuant to applicable
provisions of the Internal Revenue Code and U.S. Treasury regulations
thereunder.
Net Loss. The Company had a net loss of approximately $3,128,000 or $0.88
per share in fiscal 1997 and a net loss of approximately $1,763,000 or $0.76 per
share in fiscal 1996. The net loss in fiscal 1997 was attributable to the
decrease in margins resulting from the change in sales mix to lower margin third
party hardware and software revenues, the increased operating expenses which
included the continued expansion of sales and marketing staff and the increase
in administrative expense which included the amortization of goodwill of
approximately $181,000, the increase in staff at the corporate level and the
additional expenses from the subsidiaries. Non-recurring operating expenses
include the write off of approximately $426,000 in capitalized software costs.
Liquidity and Capital Resources. At March 31, 1997, working capital was
approximately $230,000 compared to working capital of approximately $2,297,000
at March 31, 1996. The cash balance at March 31, 1997 was approximately
$1,815,000, of which $1,000,000 was restricted as security on its line of credit
with its bank.
Cash used by operations during the year totaled approximately $2,240,000
in 1997 and $784,000 in 1996. Cash used in investing activities in 1997 was
approximately $1,731,500 and included the purchase of BASIS. Cash provided by
financing activities in 1997 totaled $1,360,000 and included the issuance of new
debt.
14
<PAGE> 15
Prior to March 31, 1996 the Company had raised approximately $2,124,000 in
bridge debt and as of March 31, 1996 had repaid approximately $1,199,000. The
remaining portion was paid off in April 1996, using cash borrowed from the
Company's bank line of credit which reduced the effective interest rate on the
debt from 14% to the bank's prime borrowing rate.
As of March 31, 1996, the Company had raised the net amount of
approximately $4,011,000 in its initial public offering. The proceeds were net
of approximately $736,000 in underwriters fees and $633,000 in other cost of
obtaining the financing such as printing, legal and accounting fees.
The Company has a $1,000,000 line of credit with its bank which is subject
to renewal in August 1997. Management has discussed the renewal with its bank
and believes that the line of credit will be renewed under substantially the
same terms. The interest rate under the line of credit is the bank's prime rate.
The line of credit is secured by the Company's $1,000,000 money market account.
As of March 1997 borrowings under this agreement were $994,562.
The Company also maintains a $2,200,000 facility for the financing of
accounts receivable and inventory with Deutsche Financial Services ("DFS") for
its BASIS subsidiary. This financing facility is subject to a twelve month
renewal in August 1997. Management has discussed the renewal with DFS and
believes that the line of credit will be renewed under substantially the same
terms. The interest rate is at the prime rate plus 1%. The credit facility is
collateralized by a $300,000 irrevocable letter of credit from the Company's
bank. As of March 31, 1997 borrowings under this agreement were $107,886.
In August 1996, Prologic completed its acquisition of BASIS. All of the
outstanding stock of BASIS was acquired for 337,349 shares of common stock of
the Company plus $500,000 in cash. The acquisition was accounted for as a
purchase and accordingly the purchase price and all expenses directly associated
with the acquisition were allocated to the assets acquired and the liabilities
assumed based on their fair market values at the date of the acquisition
determined by management estimates. Goodwill in the amount of $1,459,661 was
recorded in connection with the acquisition.
During the year, the Company borrowed approximately $100,000 of current
debt due on June 30, 1997 at a rate of 8%. During July 1997 the note holder
agreed to extend the date of the payment to October 31, 1997. In addition, the
Company borrowed $820,000 in a private offering of 10% Subordinated Convertible
Notes. The Notes are due on December 31, 1999. The Notes and all accrued
interest payable are convertible at any time on or after September 30, 1997 into
Common Stock of the Company. The Notes are convertible to common stock at the
option of each note holder at a discounted rate based on the average closing
price quoted on the NASDAQ Stock Market for the ten consecutive days preceding
the date of the note holders notice of conversion.
During the year the Company also borrowed $240,000 in short term notes
collateralized by its computer equipment and office furnishings. These notes are
due on July 31, 1997. Interest on these notes is paid monthly at a rate of 2%.
In July 1997 the note holders agreed to extend the payment of the notes until
October 31, 1997.
Year to date, the Company has purchased approximately $466,000 in capital
equipment and purchased software.
Through this fiscal year the Company has not generated sufficient cash
flows from operations to fund its current operations and, at the same time, the
additional overhead required to continue the Company's growth strategy and has
therefore had to supplement its cash sources with borrowings from its lines of
credit, the Subordinated Convertible Note Offering, and other short term
borrowings. The Company has not been able to implement its plan of integrating
the sale of its software into the newly acquired subsidiaries and has not
generated the software sales it had anticipated and has therefore not
15
<PAGE> 16
generated the higher margin sales that it had expected. Management believes that
it must rely on outside sources of funds until revenues from both hardware and
software generate margins which will offset cash outflows.
During the fourth quarter ended March 31, 1997 and continuing on into the
first quarter of the current fiscal year the Company has taken steps to reduce
its corporate overhead associated with acquisitions. The Company believes that
these cutbacks will not significantly impact the overall strategy of the Company
and will create efficiencies that will begin generating positive cash flows from
operations during the Company's second quarter of its current fiscal year.
During April 1997 the Company initiated an offering of $3,000,000 of 8%
Cumulative Convertible Preferred Stock. These shares have rights to convert to
common stock and warrants to purchase additional shares of common stock of the
Company. The offering was made to non-U. S. persons as defined in Regulation S
of the Securities Act of 1933. Shares were offered in minimum quantities of
16,667 shares ($100,000) and a maximum quantity of 500,000 shares ($3,000,000)
at a price of $6.00 per share. The offering period ends at the earlier of the
sale of all of the shares offered or on December 31, 1997. Convertible shares
may be converted by the buyer on the earlier of June 30, 1998 or on the first
day that the common stock of the Company is traded publicly on the Second
Market of the Paris Stock Exchange after a secondary offering on such exchange
has been effected. The conversion rate per share of preferred stock is $6.00
divided by the conversion price. The conversion price is the average trading
price of the Company's common stock during the month of June 1998 with a minimum
price of $2.00 per share. For each share of common stock received through
conversion the holder will receive one warrant (which will expire three years
after the date of the execution of the holders subscription) to purchase one
share of common stock of the Company at an exercise price equivalent to the
effective conversion price. The net proceeds from this offering will be used for
general working capital and possible future acquisitions and product
development. Through the end of July 1997 the Company had received subscriptions
for $100,000 of the Preferred Stock.
In the future, the Company will require additional equity and/or debt
financing to achieve its current as well as future plans for 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 meet current and future plans for expansion could be
materially adversely affected. The Company, as part of its expansion strategy,
regularly reviews possible opportunities to acquire systems integration
companies and businesses which would expand the Company's geographic market
presence.
Accounting Matters. Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" (SFAS No. 121), which the Company will adopt for its fiscal year
ended March 31, 1997, required "that long-lived assets and certain identifiable
intangible assets to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable." In the opinion of management, the adoption of
SFAS No. 121 did not have any effect on the Company's financial position.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This Form 10KSB may contain forward-looking statements which are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements 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, and the results of financing efforts. Further information
regarding these and other risks is described from time to time in the Company's
filings with the Securities and Exchange Commission.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share". This Statement establishes standards for computing
and presenting earnings per share ("EPS"), and supersedes APB Opinion No. 15.
This statement replaces primary EPS with basic EPS and requires dual
presentation of basic and diluted EPS. This statement is effective for periods
ending after December 15, 1997. Basic and diluted loss per share, as calculated
under SFAS No. 128, would have been $.88 and $.88 for the year ended March 31,
1997, respectively.
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<PAGE> 17
PART IV.
ITEM 7. FINANCIAL STATEMENTS
The financial statements attached to this Report on Form 10-KSB as pages
F-1 to F-17 are incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable.
PART V.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS, COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
Information concerning the names, ages, terms and positions with the Company's
Board of Directors, and business experience of the directors is set forth below.
Each director has served continuously with the Company since his election as
indicated below.
<TABLE>
<CAPTION>
Director
Name Age Position Since
- ---- --- -------- -----
<S> <C> <C> <C>
James M. Heim (2) (3) 46 President, Chief Executive Officer 1984
and Director
Richard E. Metz 51 Executive Vice President and 1984
Director
William E. Wallin 52 Vice President of Finance, and 1997
Director
Herbert F. Day (1) (2) (3) 53 Director 1995
Craig W. Rauchle (1) (2) (3) 43 Director 1996
</TABLE>
(1) Member of Audit Committee
(2) Member of Compensation Committee
(3) Member of Nominating Committee
JAMES M. HEIM, President, Chief Executive Officer and Director. Mr. Heim is
a co-founder of the Company and has served as President and as a Director of
the Company since its inception in 1984. In addition, Mr. Heim served as
the Chief Financial Officer of the Company from 1984 through 1994. Mr. Heim
holds both a Juris Doctorate from the College of Law and a Bachelor of
Science in Business Administration from the University of Arizona.
RICHARD E. METZ, Executive Vice President, Chief Administrative Officer and
Director. Mr. Metz, the Company's Chief Administrative Officer, is a
co-founder of the Company and has served as a director since its inception
in 1984. Mr. Metz has over twenty-five years of business management and
investment experience, including ten years as a computer hardware and
software VAR prior to his affiliation with the Company. Since 1982, Mr.
Metz has owned and managed The Metz Group, a business management
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<PAGE> 18
consulting and investment firm specializing in contract negotiations and dispute
avoidance and resolution. Mr. Metz is a member of the American Arbitration
Association and serves on its regional Advisory Council, and is an Associate of
the American Bar Association, Dispute Resolution and Intellectual Property
Sections.
WILLIAM E. WALLIN, Vice President, Finance, Chief Financial Officer,
Secretary and Treasurer. Mr. Wallin, who became Chief Financial Officer,
Secretary and Treasurer of the Company in February of 1995, has over
twenty-four years of experience in accounting and financial management,
serving in positions ranging from auditor to Chief Financial Officer. From
1989 to 1991, and from 1991 to 1994, Mr. Wallin was the Corporate Controller
and Chief Financial Officer, respectively, of AlphaGraphics, Incorporated, a
large international franchising company. Mr. Wallin holds a Bachelors Degree
in accounting from Southern Illinois University.
HERBERT F. DAY, Director. Mr. Day, who became a Director in 1995, has over
twenty-five years of experience in the computer industry with IBM
Corporation. He has held professional and management positions in sales,
marketing, product management and product and business planning. Mr. Day
received his Bachelors of Science degree in Electrical Engineering from the
University of Maryland. He is currently employed as a Program Director by
the IBM Corporation.
CRAIG W. RAUCHLE, Director. Mr. Rauchle, who became Director in 1996, serves
as the Executive Vice President Corporate Development of Inter-Tel
Incorporated of Chandler, Arizona, and also holds the position of President
of Inter-Tel DataCom, Inc., a wholly-owned subsidiary. Founded in 1969,
Inter-Tel designs, produces and markets business telephone systems. Prior to
joining Inter-Tel, Mr. Rauchle was Director of Sales and Marketing for
American Business Communications in Denver, Colorado. He holds a B.A. in
Communications from the University of Denver and is a graduate of the Philip
Crosby Quality College. Mr. Rauchle is an active member of the Young
Presidents Organization and has previously served in various capacities of
that organization. He has also served as a Board Member of the North
American Telecommunications Association.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
paid or awarded by the Company to Mr. Heim, the Company's Chief Executive
Officer, during the Fiscal year ended March 31, 1997. No officer of the Company
received compensation in excess of $100,000 during the fiscal year.
Summary Compensation Table
<TABLE>
<CAPTION>
Long - Term
Annual Compensation Compensation
------------------- ------------
Name and Stock All
Other
Principal Position Year Salary Bonus Options/SARs(#)
- ------------------ ---- ------ ----- --------------
Compensation
------------
<S> <C> <C> <C> <C>
James M. Heim 1997 $70,500 0 0 0
President and Chief
Executive Officer
</TABLE>
During the fiscal year ended March 31,1997, no stock options were granted or
exercised by Mr. Heim.
18
<PAGE> 19
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL SHAREHOLDERS AND SHAREHOLDINGS OF MANAGEMENT
The following table sets forth information, as of July 15, 1997, concerning the
Common Stock benefically owned by (I) each director and nominee of the Company
(ii) the Company's Chief Executive Officer, (iii) each person known to the
Company to own beneficially more than 5% of the outstanding Common Stock, and
(iv) all of the Company's directors, nominees and executive officers as a group.
Except as otherwise noted, the named individual beneficial owner has sole
investment and voting power.
<TABLE>
<CAPTION>
Shares
Beneficially Percent
Name(1) Owned of Class
- ------- ----- --------
<S> <C> <C>
James M. Heim & Marlene Heim (2) 1,089,060 29.6%
Richard Metz 169,200 4.6%
William E. Wallin 0 0%
Herbert F. Day 0 0%
Craig W. Rauchle 0 0%
Joseph A. Sisneros(3) 216,320 5.9%
All directors, nominees and
executive officers as a group (5 persons) 1,258,260 34.2%
</TABLE>
(1) Except as otherwise noted below, the persons named in the table have sole
voting and investment power with respect to all shares of the Common Stock
shown as beneficially owned by the person named, subject to applicable
community property law. The shareholdings include, pursuant to rules of the
Securities and Exchange Commission, shares of Common Stock which a person
has a right to acquire as of July 15, 1996 or written 60 days thereafter.
Except as otherwise noted, the addresses for the persons named in the table
is 2030 East Speedway Boulevard, Tucson, Arizona 85719.
(2) Includes 697,320 shares owned by HFG Ltd. Properties, an Arizona limited
partnership of which Mr. Heim is the sole general partner. James M. Heim
and Marlene Heim directly own an aggregate of 391,740 shares of Common
Stock.
(3) Mr. Sisneros is a former Officer and Director of the Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In February 1996, the Company executed an agreement with HFG Properties, LTD, a
Limited Partnership partly owned by the Company's President Mr. Heim. The terms
of the lease are from July 1996 through June 2001, with monthly rent based on an
independent appraised market rate reduced by 5%. The rent is to be increased
annually in a percentage amount equal to one-half of the percentage increase in
the Consumer Price Index for the previous year.
19
<PAGE> 20
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
A. Documents filed as part of this report:
1. Financial Statements. The following financial statements
filed as part of this report are listed on pages F-1 to F-18
and incorporated herein by reference:
<TABLE>
<CAPTION>
Financial Statement Page
------------------- ----
<S> <C>
Independent Auditors' Report F-2, 18
Consolidated Balance Sheet F-3, 19
Consolidated Statements of Operations F-4, 20
Consolidated Statements of Changes in Shareholders' Equity F-5, 21
Consolidated Statements of Cash Flows F-6, 22
Notes to Consolidated Financial Statements F-8, 24
</TABLE>
2. Exhibit:
<TABLE>
<CAPTION>
Exhibit Number Document Page
-------------- -------- ----
<S> <C> <C>
3.1 Articles of Incorporation by the Company*
3.2 Bylaws of the Company*
3.3 Articles of Incorporation of Great River Systems, Inc.*
3.4 Bylaws of GRSI*
4.1 Form of Warrant Agency Agreement by and between
Prologic Management Systems, Inc. and American Stock
Transfer & Trust Company, with form of redeemable
warrant*
4.2 Specimen of Common Stock Certificate*
4.3 Specimen Redeemable Common Stock Purchase Warrant
Certificate*
4.4 [Form of] Representative's Warrant*
10.15 1994 Stock Option Plan, Form of Incentive Option
Agreement, Form of Non-Qualified Stock Option
Agreement*
10.17 Employment Agreement of James M. Heim*
10.19 Form of Lock-Up Agreement of Shareholders*
10.20 Form of Stock Purchase Agreement, Promissory Note and
Escrow Agreement for July 31, 1994 issuance of Common
Stock*
10.21 Employment Agreement with Patricia Shanks
10.22 Employment Agreement with Donald Legnitto
10.23 Employment Agreement with Sharon O'Reilly*
10.24 Employment Agreement with Michael Lowther*
10.25 Stock Option Agreement with Sharon O'Reilly*
10.26 Stock Option Agreement with Michael Lowther*
10.27 Line of Credit Agreement with Norwest Bank***
10.28 Office Lease with HFG Properties***
10.30 SYMRP Purchase Agreement*
10.31 Agreement and Plan of Reorganization dated as of
June 1, 1996 among Prologic Management Systems,
</TABLE>
20
<PAGE> 21
<TABLE>
<S> <C>
Inc., BASIS, Inc., BASIS Acquisition Corp. and certain
Principal Shareholders of BASIS, Inc.**
11.1 Earnings Per Share Calculation
23.1 Independent Auditors' Consent
27 Financial Data Schedule
</TABLE>
* Incorporated by reference to the corresponding exhibit number
in the Company's Registration Statement on Form SB-2 (Commission
file no. 33-89384-LA).
** Incorporated by reference to the corresponding exhibit number
in the Company's Form 8-K filed on August 23, 1996.
*** Incorporated by reference to the corresponding exhibit
number in the Company's Form 10-KSB filed on July 1, 1996.
B. Report on Form 8-K.
No report on Form 8-K. was filed by the Company during the quarter
ended March 31, 1997.
21
<PAGE> 22
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints James M. Heim and William E. Wallin, or either of
them, as his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this annual report on
Form 10-KSB and any documents related to this report and filed pursuant to the
Securities and Exchange Act of 1934, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or their substitute or substitutes may
lawfully do or cause to be done by virtue hereof.
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.
PROLOGIC MANAGEMENT SYSTEMS, INC.
DATED: August 11, 1997 By: /s/ James M. Heim
--------------------
James M. Heim
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
James M. Heim,
President and Chief Executive Officer
/s/ James M. Heim (Principal Executive Officer), and Director August 11, 1997
-------------------------
Richard E. Metz,
Executive Vice President, Chief
Administrative Officer, Secretary and
/s/ Richard E. Metz Director August 11, 1997
-------------------------
William E. Wallin,
Vice President, Chief Financial Officer,
Treasurer (Principal Financial and
/s/ William E. Wallin Accounting Officer), and Director August 11, 1997
-------------------------
Craig Rauchle,
/s/ Craig Rauchle Director August 11, 1997
-------------------------
Herbert F. Day,
/s/ Herbert F. Day Director August 11, 1997
-------------------------
</TABLE>
22
<PAGE> 23
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Prologic Management Systems, Inc.:
We have audited the accompanying consolidated balance sheet of Prologic
Management Systems, Inc. and subsidiaries (the Company) as of March 31, 1997,
and the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for each of the years in the two-year period ended March
31, 1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Prologic Management
Systems, Inc. and subsidiaries as of March 31, 1997, and the results of their
operations and their cash flows for each of the years in the two-year period
ended March 31, 1997 in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in note 2 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has continued uses of cash from operating activities that
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in note 2. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Phoenix, Arizona
June 27, 1997, except for the first
paragraph of note 15 which is
as of July 17, 1997
F-2
<PAGE> 24
PROLOGIC MANAGEMENT SYSTEMS, INC.
Consolidated Balance Sheet
March 31, 1997
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents $ 815,120
Restricted cash 1,000,000
Trade accounts receivable, less allowance for doubtful accounts and sales returns
of $228,594 at March 31, 1997 2,696,444
Notes receivable 58,333
Inventory 293,478
Prepaid expenses 91,030
-----------
Total current assets 4,954,405
-----------
Property and equipment, net 545,113
Goodwill, net 1,514,162
Other assets 112,444
-----------
Total assets $ 7,126,124
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Lines of credit $ 1,102,448
Current installments of long-term debt 63,074
Notes payable 394,570
Accounts payable 2,697,341
Accrued expenses 352,659
Deferred maintenance revenue 114,633
-----------
Total current liabilities 4,724,725
-----------
Long-term debt, excluding current installments 980,309
Commitments, contingency, and subsequent events (notes 2, 4, 6, 10, 14 and 15)
Stockholders' equity:
Preferred stock, no par value. Authorized 1,000,000 shares; no shares issued or
outstanding --
Common stock, no par value. Authorized 10,000,000 shares; 3,675,395 shares
issued and outstanding at March 31, 1997 8,038,955
Accumulated deficit (6,617,865)
-----------
Total stockholders' equity 1,421,090
-----------
Total liabilities and stockholders' equity $ 7,126,124
===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 25
PROLOGIC MANAGEMENT SYSTEMS, INC.
Consolidated Statements of Operations
Years ended March 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Net sales:
Hardware $ 9,512,835 1,350,172
Licenses 2,082,894 726,501
Services and other 2,268,645 547,187
------------ ------------
13,864,374 2,623,860
------------ ------------
Cost of sales:
Hardware 8,032,195 1,124,479
Licenses 1,871,689 453,226
Services and other 1,513,911 166,686
------------ ------------
11,417,795 1,744,391
------------ ------------
Gross profit 2,446,579 879,469
------------ ------------
Operating expenses:
Selling and marketing 1,515,998 650,207
General and administrative 2,597,103 694,822
Research and development 327,381 169,677
Write-off of software costs 425,807 325,818
Goodwill amortization 181,304 --
------------ ------------
Total operating expenses 5,047,593 1,840,524
------------ ------------
Operating loss (2,601,014) (961,055)
Other expense:
Interest expense (562,763) (803,230)
Other 35,798 990
------------ ------------
Total other expense (526,965) (802,240)
------------ ------------
Net loss $ (3,127,979) (1,763,295)
============ ============
Net loss per common share $ (0.88) (0.76)
============ ============
Shares used in per share calculations 3,541,385 2,330,209
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 26
PROLOGIC MANAGEMENT SYSTEMS, INC.
Consolidated Statements of Changes in Stockholders' Equity
Years ended March 31, 1997 and 1996
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
--------------------------- ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT DEFICIT EQUITY
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balances at March 31, 1995 2,031,280 $1,759,898 (1,726,591) 33,307
Issuance of common stock in
connection with acquisition 100,000 40,000 -- 40,000
Issuance of common stock in
connection with issuance of
bridge notes 146,790 587,160 -- 587,160
Issuance of stock warrants in
connection with issuance of
bridge notes -- 196,250 -- 196,250
Issuance of common stock in
connection with an initial
public offering 1,050,000 4,011,855 -- 4,011,855
Net loss -- -- (1,763,295) (1,763,295)
---------- ---------- ---------- ----------
Balances at March 31, 1996 3,328,070 6,595,163 (3,489,886) 3,105,277
Issuance of common stock in
connection with an acquisition 337,325 1,400,000 -- 1,400,000
Issuance of common stock in
connection with issuance of a
note 10,000 26,560 -- 26,560
Issuance of stock warrants in
connection with an initial
public offering -- 17,232 -- 17,232
Net loss -- -- (3,127,979) (3,127,979)
---------- ---------- ---------- ----------
Balances at March 31, 1997 3,675,395 $8,038,955 (6,617,865) 1,421,090
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 27
PROLOGIC MANAGEMENT SYSTEMS, INC.
Consolidated Statements of Cash Flows
Years ended March 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(3,127,979) (1,763,295)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 514,344 198,788
Change in accounts receivable allowances 75,852 56,687
Non-cash interest expense 26,560 458,210
Write-off of software costs 425,807 325,818
Increase (decrease) in cash resulting from changes in:
Trade accounts receivable (2,291,382) (278,966)
Accounts payable and accrued expenses 2,477,045 402,401
Other assets and liabilities (340,459) (183,770)
----------- -----------
Total adjustments 887,767 979,168
----------- -----------
Net cash used in operating activities (2,240,212) (784,127)
----------- -----------
Cash flows from investing activities:
Increase in restricted cash (1,000,000) --
Purchase of Great Rivers, Inc., net of cash acquired -- (247,956)
Purchase of BASIS, Inc., net of cash acquired (207,566) --
Purchase of software -- (75,000)
Purchase of equipment (465,600) (83,546)
Capitalized software development costs -- (120,842)
Increase in notes receivable (58,333) --
----------- -----------
Net cash used in investing activities (1,731,499) (527,344)
----------- -----------
Cash flows from financing activities:
Issuance of notes payable and debt 2,509,764 1,967,367
Repayment of debt (1,167,146) (1,254,233)
Net decrease in related party debt -- (53,281)
Issuance of common stock -- 4,011,855
Issuance of warrants 17,232 --
----------- -----------
Net cash provided by financing activities 1,359,850 4,671,708
----------- -----------
Net increase (decrease) in cash and cash equivalents (2,611,861) 3,360,237
Cash and cash equivalents, beginning of year 3,426,981 66,744
----------- -----------
Cash and cash equivalents, end of year $ 815,120 3,426,981
=========== ===========
</TABLE>
(Continued)
F-6
<PAGE> 28
PROLOGIC MANAGEMENT SYSTEMS, INC.
Consolidated Statements of Cash Flows, Continued
Years ended March 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
----------------- -------
<S> <C> <C>
SUPPLEMENTAL STATEMENT OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 238,254 179,804
================= =======
Noncash financing and investing activities:
Software purchased in exchange for debt $ -- 187,386
================= =======
Issuance of warrants in connection with issuance of bridge notes
$ -- 196,250
================= =======
Issuance of common stock in connection with an acquisition $ 1,400,000 --
================= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 29
PROLOGIC MANAGEMENT SYSTEMS, INC.
Notes to Consolidated Financial Statements
March 31, 1997 and 1996
(1) ORGANIZATION
Prologic Management Systems, Inc. (the Company) provides systems
integration services, networking services and applications software for
the commercial market. The Company's system integration services
include 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. Prologic provides a full range of hardware and
commercial software solutions, with a focus on UNIX-based products, as
well as NT and legacy interoperability. The Prologic proprietary
applications software is licensed for use to manufacturers and for use
in the wholesale distribution industry. The Company's products are not
directed to the retail consumer market. The Company's customers are
primarily located in the continental United States.
(2) LIQUIDITY
The Company's consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company
reported consolidated net losses of $3,127,979 and $1,763,295 in the
fiscal years ended March 31, 1997 and 1996, respectively. Cash used in
operating activities totaled $2,240,212 in 1997 and $784,127 in 1996.
The Company's net working capital and cash and cash equivalent balances
have decreased by $2,067,374 and $2,611,861, respectively, during the
current year. Management intends to convert certain long-term debt to
equity, increase sales of software, reduce certain operating expenses
and obtain additional debt and equity financing. The consolidated
financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its subsidiaries. Significant intercompany accounts and
transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
All short-term investments with a maturity of three months or less at
the date of acquisition are considered to be cash equivalents. Cash and
cash equivalents primarily include cash on hand and amounts on deposit
with financial institutions.
RESTRICTED CASH
Restricted cash consists of a certificate of deposit that secures the
Company's revolving line of credit. This certificate of deposit earns
interest at a rate of 5.5%.
F-8
<PAGE> 30
PROLOGIC MANAGEMENT SYSTEMS, INC.
Notes to Consolidated Financial Statements, Continued
INVENTORY
Inventory consists principally of purchased computer hardware and parts
and are stated at the lower of cost (first-in, first-out) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Property and equipment are
depreciated using the straight-line method over the estimated useful
lives of the respective assets which is generally five years.
SOFTWARE COSTS
The Company expenses software development costs as research and
development until the underlying product has achieved technological
feasibility, after which these costs are capitalized in accordance with
Statement of Financial Accounting Standards No. 86. Capitalized
software costs are amortized over a four-year period using the greater
of (1) the straight-line method or (2) the units-of-anticipated-revenue
method. The Company will charge identified capitalized software costs
to operations when the carrying value is deemed not to be recoverable
over its remaining useful life.
The Company amortizes purchased software costs straight-line over four
years.
During 1997 and 1996, the Company determined that certain prior
capitalized software costs had limited future value; and, therefore,
charged operations for these costs $425,807 and $325,818 in 1997 and
1996, respectively.
GOODWILL
Goodwill arose from the acquisition of GRSI and BASIS and represents
the excess of the purchase price over the estimated fair value of the
net assets of GRSI and BASIS. Goodwill is being amortized on a
straight-line basis over the period of expected benefit of 7 years. The
Company assesses the recoverability of this intangible asset by
determining whether the amortization of the goodwill balance over its
remaining life can be recovered through undiscounted future operating
cash flows of the acquired operation. The amount of goodwill
impairment, if any, is measured based on projected discounted future
operating cash flows using a discount rate reflecting the Company's
average cost of funds. The assessment of the recoverability of goodwill
will be impacted if estimated future operating cash flows are not
achieved. Accumulated amortization totaled $181,227 at March 31, 1997.
F-9
<PAGE> 31
PROLOGIC MANAGEMENT SYSTEMS, INC.
Notes to Consolidated Financial Statements, Continued
INCOME TAXES
The Company uses the asset and liability method of accounting for
income taxes. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that
includes the enactment date. A valuation allowance is recorded against
deferred tax assets when it is more likely than not that the deferred
tax assets will not be realized.
REVENUE RECOGNITION
The Company recognizes revenue from hardware sales at the time of
shipment and from software sales at the time of delivery, net of an
allowance for future returns and uncollectible accounts. Royalties
related to agreements with original equipment manufacturers (OEM) are
recorded when the OEM's ship their product incorporating the Company's
software to their end customers. Revenue associated with agreements to
provide product maintenance and support are recognized ratably over the
contractual term. Revenues from consulting arrangements are recorded
when the services are provided. The Company's revenue recognition
policies are in accordance with the American Institute of Certified
Public Accountants' Statement of Position No. 91-1, Software Revenue
Recognition.
CONCENTRATIONS OF CREDIT RISK
The Company places its cash and cash equivalents in checking and money
market accounts at three financial institutions. At March 31, 1997, the
Company had approximately $1,200,000 in deposits at a bank in excess of
the FDIC insurance limit of $100,000.
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral. The Company maintains reserves
for estimated credit losses.
COMPUTATIONS OF NET LOSS PER SHARE
The net loss per share is based upon the weighted average number of
common shares outstanding. The 1996 loss per share includes Staff
Accounting Bulletin No. 83 issuances and grants.
STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion
No. 25 - Accounting for Stock Issued to Employees ("APB 25") in
accounting for the incentive stock option and nonqualified stock option
plan. Under APB 25, since the exercise price of the Company's stock
options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
F-10
<PAGE> 32
PROLOGIC MANAGEMENT SYSTEMS, INC.
Notes to Consolidated Financial Statements, Continued
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 - Disclosures about
Fair Value of Financial Instruments, requires that the Company disclose
estimated fair values for its financial instruments. The following
summary presents a description of the methodologies and assumptions
used to determine such amounts.
The carrying amount of cash and cash equivalents approximates fair
value because their maturity is three months or less at the date
acquired. The carrying amount of accounts receivables, accounts payable
and accrued expenses approximates fair value due to the short maturity
of these instruments. The terms of notes payable and other long-term
obligations approximate the terms in the marketplace at which they
could be replaced. Therefore, the fair value approximates the carrying
value of these financial instruments.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
LONG-LIVED ASSETS
In March 1995, Statement of Financial Accounting Standards (SFAS) No.
121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, was issued. SFAS No. 121 requires
that long-lived assets and certain identifiable intangibles to be held
and used or disposed of by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of any asset may not be recoverable. The Company adopted this
statement effective April 1, 1996. In connection with its ongoing
evaluation of capital software costs, the Company wrote off $425,807 of
capitalized software costs in fiscal 1997.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, Earnings Per Share. This Statement establishes standards for
computing and presenting earnings per share ("EPS"), and supersedes APB
Opinion No. 15. This statement replaces primary EPS with basic EPS and
requires dual presentation of basic and diluted EPS. This statement is
effective for periods ending after December 15, 1997. Basic and diluted
loss per share, as calculated under SFAS No. 128, would have been $.88
and $.88 for the year ended March 31, 1997, respectively.
F-11
<PAGE> 33
PROLOGIC MANAGEMENT SYSTEMS, INC.
Notes to Consolidated Financial Statements, Continued
(4) ACQUISITIONS
In September 1995, the Company completed the acquisition of Great River
Systems, Inc. (GRSI), a regional systems integration firm based in St.
Paul, Minnesota. All of the outstanding common stock of GRSI was
acquired for 100,000 shares of common stock of the Company, valued at
$40,000, $100,000 in cash and issuance of a promissory note in the
amount of $150,000. The acquisition was accounted for as a purchase.
Accordingly, the purchase price was allocated to the assets acquired
and liabilities assumed based on their estimated fair values at the
date of acquisition determined by management estimates. Goodwill in the
amount of $259,746 was recorded in connection with the acquisition. The
accompanying consolidated statement of operations for the year ended
March 31, 1996 include the operations of GRSI from October 1, 1995.
In August 1996, Prologic completed its acquisition of BASIS, Inc.
("BASIS"), a commercial systems integration company located in the San
Francisco Bay Area with additional offices in Portland, Oregon. All of
the outstanding stock of BASIS was acquired for 337,325 shares of
common stock of the Company plus $500,000 in cash. The acquisition was
accounted for as a purchase and accordingly the purchase price and all
expenses directly associated with the acquisition totalling $2,231,533
were allocated to the assets acquired and the liabilities assumed based
on their fair market values (current assets, $2,417,506; property,
plant and equipment, $170,482; and liabilities, $1,816,116) at the date
of the acquisition determined by management estimates. The remainder of
the excess purchase price representing goodwill in the amount of
$1,459,661 was recorded in connection with the acquisition. The
accompanying consolidated statement of operations for the year ended
March 31, 1997 include the operations of BASIS from August 1, 1996.
The following financial information presents the unaudited pro forma
combined results of the Company as if the GRSI and BASIS acquisitions
had occurred at April 1, 1995.
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-------------------------------------
1997 1996
------------ ----------
(UNAUDITED)
<S> <C> <C>
Net sales $ 16,434,020 18,342,971
Net loss (3,197,769) (1,454,658)
Loss per share (0.90) (0.62)
</TABLE>
The above pro forma results give effect to (1) estimated adjustments to
net sales, cost of sales, selling and general and administrative
expenses, including amortization of intangibles resulting from the
acquisition, and (2) estimated income tax effects thereon. The pro
forma information presented is for informational purposes only and is
not necessarily indicative of future earnings (loss) or of what the
earnings (loss) actually would have been had the combinations been
consummated at the beginning of the respective periods.
F-12
<PAGE> 34
PROLOGIC MANAGEMENT SYSTEMS, INC.
Notes to Consolidated Financial Statements, Continued
In January of 1996, the Company completed the purchase of SYMRP
scheduler software from Symmetrix, Inc., a Massachusetts based
consulting firm. The purchase included the software, the underlying
patent, copyright and trade secrets regarding the scheduling
technology. The consideration included $50,000 in cash, a short-term
promissory note for $150,000, bearing interest at 10% with equal
quarterly payments through January 1, 1997, and a long-term 8%
promissory note in the amount of $187,386 (note 8). In order to secure
the promissory note and minimum royalty payment thereon, the Company
has provided a security interest to Symmetrix in the technology as well
as reversion rights in the technology. In addition, the Company is to
pay a 10% royalty for sales in excess of $2,500,000 through June 30,
2000. The purchased software was included in the write-off of software
costs in 1997 (note 3).
(5) PROPERTY AND EQUIPMENT
A summary of property and equipment as of March 31, 1997 follows:
<TABLE>
<S> <C>
Furniture $ 215,344
Equipment and software 999,774
----------
1,215,118
Less accumulated depreciation 670,005
----------
Net property and equipment $ 545,113
==========
</TABLE>
(6) LINES OF CREDIT
The Company has a $1,000,000 revolving line of credit with a bank
subject to renewal in August 1997. The interest rate on borrowings
under the agreement is the "prime" rate of interest as established by
the bank. Interest is due monthly. The line of credit is secured by the
Company's $1,000,000 money market account. As of March 31, 1997, the
Company had borrowings under this line of credit in the amount of
$994,562.
The Company also maintains a $2,200,000 letter of credit facility for
the financing of accounts receivable and inventory with a financial
institution for its BASIS subsidiary. This financing facility is
subject to a twelve-month renewal in August 1997. The interest rate is
at the prime rate plus 1%. Interest is due monthly. The credit facility
is collateralized by a $300,000 irrevocable letter of credit from the
Company's bank. As of March 31, 1997, borrowings under this agreement
were $107,886.
F-13
<PAGE> 35
PROLOGIC MANAGEMENT SYSTEMS, INC.
Notes to Consolidated Financial Statements, Continued
(7) LONG-TERM DEBT
A summary of long-term debt as of March 31, 1997 follows:
<TABLE>
<S> <C>
10% unsecured convertible promissory notes; principal due in December 1999;
these notes are subject to optional redemption, in whole or in part and are
also convertible into shares of the Company's common stock upon certain terms
and conditions $ 820,000
8% imputed interest licensing agreement with a face value of
$250,000; principal payments due in annual installments of $25,000
through June 2000 at which time the remaining principal and
interest are due; secured by purchased software
176,996
Other 46,387
----------
Total long-term debt 1,043,383
Less current installments of long-term debt 63,074
----------
Long-term debt, excluding current installments $ 980,309
==========
</TABLE>
A summary of long-term debt maturities after March 31, 1997 follows:
1998 -- $63,074; 1999 -- $33,313; 2000 -- $845,000; and 2001 --
$101,996.
(8) NOTES PAYABLE
A summary of notes payable as of March 31, 1997 follows:
<TABLE>
<S> <C>
Equipment notes payable $240,000
Notes payable to Symmetrix 50,000
Other current notes payable 104,570
--------
$394,570
========
</TABLE>
The Company issued six promissory notes totaling $240,000, secured by
various equipment, bearing interest at a rate of 2% per month.
Principal and interest on these notes is due July 31, 1997.
In connection with the Company's purchase of scheduling software (note
4), the Company issued a promissory note, secured by the purchased
software, in the amount of $150,000, bearing interest at 10% per annum,
principal and interest due in four quarterly installments of $25,000
commencing on March 31, 1996.
F-14
<PAGE> 36
PROLOGIC MANAGEMENT SYSTEMS, INC.
Notes to Consolidated Financial Statements, Continued
(9) INCOME TAXES
The actual tax expense (benefit) differs from the "expected" tax
expense (benefit) for the years (computed by applying the U.S. Federal
corporate income tax rate of 34% in 1997 and 1996 to loss before income
taxes) as follows:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Computed "expected" tax benefit $(1,063,513) (599,520)
State income taxes (net of federal benefit) (187,679) (105,797)
Increase in valuation allowance related to net operating
loss carryforward 1,251,192 705,317
----------- -----------
Income taxes $ -- --
=========== ===========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities
follow:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
---------------------------
1997 1996
---------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $2,497,835 1,246,643
Allowances for doubtful accounts and sales returns 91,438 61,097
Deferred maintenance revenue 45,853 42,944
Employee compensation and other accruals 5,266 5,257
---------- ----------
Total gross deferred tax assets 2,640,392 1,355,941
Less valuation allowance 2,640,392 1,355,941
---------- ----------
Net deferred tax assets $ -- --
========== ==========
</TABLE>
Utilization of the net operating loss carryforward will be
significantly limited or eliminated as a result of the change in
ownership resulting from the initial public offering in fiscal 1996.
The valuation allowance for deferred tax assets as of March 31, 1997
and 1996 was $2,640,392 and $1,355,941, respectively. The Company has a
net operating loss carryforward approximating $6,400,000 for federal
income tax purposes which expires in varying amounts from 2000 through
2011.
F-15
<PAGE> 37
PROLOGIC MANAGEMENT SYSTEMS, INC.
Notes to Consolidated Financial Statements, Continued
(10) OPERATING LEASES
In February 1996, the Company executed a lease agreement with HFG
Properties, Ltd., a Limited Partnership (HFG) partly owned by the
Company's President and Chief Executive Officer. The terms of the lease
are from July 1996 through June 2001, with monthly rent based on an
independent appraised market rate reduced by 5%. The rent is increased
annually in a percentage amount equal to one-half of the percentage
increase in the Consumer Price Index for the previous year. Rent
expense for this operating lease was $68,879 in fiscal 1997. Accounts
payable at March 31, 1997 include $52,836 due HFG. At March 31, 1997,
the Company had approximately $70,000 in deposits with HFG Properties,
Ltd.
The Company leases office, manufacturing and storage space, and
equipment under noncancelable operating lease agreements expiring
through March 2002. These leases contain renewal options, and the
Company is responsible for certain executory costs, including insurance
and utilities. The Company's President has also personally guaranteed
amounts pertaining to certain operating leases. Total rent expense for
these operating leases was $223,365 and $50,547 for the years ended
March 31, 1997 and 1996, respectively. Future minimum lease payments
under operating leases that have remaining noncancelable lease terms in
excess of one year at March 31, 1997 follows: 1998 - $279,268, 1999 -
$185,235, 2000 - $160,107, 2001 - $138,282, and 2002 - $34,571 for a
total of $797,463.
(11) COMMON STOCK
In September 1995, the Company issued 100,000 shares of common stock,
valued at $40,000, in connection with the acquisition of GRSI (note 4).
During fiscal 1996, the Company issued 146,790 shares of common stock,
valued at $4 per share, in connection with the sale of additional
bridge notes.
During fiscal 1996, the Company issued 196,250 warrants to purchase
common stock, valued at $1 per share, in connection with the sale of
additional bridge notes.
In March 1996, the Company issued 1,050,000 shares of common stock,
valued at $5 per share and 1,050,000 warrants at $.125, in connection
with the initial public offering. Expenses associated with the offering
totaled $1,369,395.
During fiscal 1997, the Company issued 337,325 shares of common stock,
valued at $4.15 per share, in connection with the acquisition of BASIS
(note 4).
During fiscal 1997, the Company issued 10,000 shares of common stock
valued at $2.66 per share, in connection with the issuance of a
promissory note. The Company recognized $26,560 of administrative
expense related to this issuance during the year ended March 31, 1997.
During fiscal 1997, the Company issued 157,500 warrants, valued at
$0.109, to purchase common stock in connection with the initial public
offering.
F-16
<PAGE> 38
PROLOGIC MANAGEMENT SYSTEMS, INC.
Notes to Consolidated Financial Statements, Continued
(12) STOCK OPTIONS
During 1995, the Company's Board of Directors approved both an
incentive stock option and a nonqualified stock option plan. The
maximum number of options that may be issued pursuant to the plan is
500,000. The options granted under the plan may be exercisable over a
10-year period at an option price equal to the fair market value of the
common stock at the date of grant.
As of March 31, 1997, 122,750 options had been granted and were
outstanding under this plan as follows: 1997 - 72,750 at an exercise
price of $3.88; 1996 - 50,000 at an exercise price of $5. At March 31,
1997, the weighted average remaining contractual life of outstanding
options was 9.1 years. The number of options exercisable at March 31,
1997 was 31,818 and the weighted-average exercise price of those
options was $5.00.
Pro forma information regarding net income and earnings per share is
required by Statement of Financial Accounting Standards No. 123 -
Accounting for Stock-Based Compensation (SFAS 123), and has been
determined as if the Company had accounted for its employee stock
options under the fair value method of SFAS 123. The fair value for
these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions
for fiscal years ended March 31, 1997 and 1996, respectively: risk-free
interest rates of 6.5% and 6.5%, dividend yields of 0%; volatility
factors of the expected market price of the Company's common stock of
64%; and a weighted-average expected life of the options of 4 years.
The per share weighted-average fair value of the stock options granted
in fiscal years ended March 31, 1997 and 1996 was $1.37 and $2.10,
respectively.
Had the Company determined compensation cost based on the fair value at
the grant date for its stock options under SFAS 123, the Company's net
loss would have been increased to the following pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1997 1996
------------- --------------
<S> <C> <C>
Net loss:
As reported $ (3,127,979) (1,763,295)
Pro forma (3,212,649) (1,798,230)
Net loss per common share:
As reported (0.88) (0.76)
Pro forma (0.91) (0.77)
</TABLE>
(13) ECONOMIC DEPENDENCE
The Company sells its products to customers located throughout the
United States. Sales to two customers accounted for 16% of net sales
for the year ended March 31, 1997. Sales to two customers accounted for
38% of net sales for the year ended March 31, 1996.
F-17
<PAGE> 39
PROLOGIC MANAGEMENT SYSTEMS, INC.
Notes to Consolidated Financial Statements, Continued
(14) PENSION PLAN
The Company has a 401(k) plan for the benefit of its employees. Under
the plan, eligible employees can contribute up to 15% of their
compensation or a maximum of $9,500. The Company may also make
discretionary contributions to the Plan in amounts determined by
management. Participants will be immediately vested in their personal
contributions and in management's contributions. Pension expense
totaled $140 and $1,000 for the years ended March 31, 1997 and 1996,
respectively.
(15) LITIGATION
In June 1997 the Company was served with a complaint by a purported
stockholder, seeking damages in excess of $50,000,000 in connection
with the Company's previously announced joint venture with Compagnie
des Signaux. The Company believes that the stockholder claim is without
merit and if that stockholder continues to prosecute the action, the
Company will mount a vigorous defense. On July 17, 1997, a United
States Magistrate Judge recommended that the lawsuit be dismissed
without prejudice against the Company. The parties have ten days to
file written objections to the recommendation.
The Company is involved in various claims and actions arising in the
ordinary course of business. In the opinion of management, based on
consultation with legal counsel, the ultimate disposition of these
matters will not have a materially adverse effect on the Company.
F-18
<PAGE> 1
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made as of the 15th day of August, 1996,
by and between BASIS ACQUISITION CORP., an Arizona corporation (the "Company"),
PATRICIA F. SHANKS, an individual residing at ________________________________
("Executive"), and PROLOGIC MANAGEMENT SYSTEMS, INC., an Arizona corporation,
as guarantor of the obligations of the Company herein ("Prologic").
R E C I T A L S :
WHEREAS, the Company has entered into an Agreement and Plan of
Reorganization, dated as of June 1, 1996 (the "Merger Agreement"), pursuant to
which BASIS, Inc., a California corporation, shall merge (the "Merger") with and
into a wholly owned subsidiary of Prologic;
WHEREAS, Executive was a principal shareholder of BASIS and has
transferred all of her shares in connection with the Merger;
WHEREAS, the Company desires that the Executive be employed by the
Company in order to ensure that the services of Executive shall be available to
the Company following the Merger;
WHEREAS, the understanding that the Executive will be employed by the
Company for the Employment Period (as defined below) and that the Executive will
comply with the covenants contained in Section 6 hereof has served as a
fundamental basis for the Company entering into the Merger;
WHEREAS, the execution and delivery of this Agreement is a condition to
the obligation of the Company to consummate the Merger and the Company is
consummating such Merger in reliance upon this Agreement;
WHEREAS, this Agreement is made in consideration of and in reliance
upon the Confidentiality and Non-Disclosure Agreement, dated as of the date
hereof (the "Confidentiality Agreement"), between the Company and Executive,
which is incorporated herein by reference;
WHEREAS, Executive desires to be employed by the Company on the
following terms and conditions;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties agree as follows:
<PAGE> 2
A G R E E M E N T :
1. The Employment Period.
(a) Initial Period. The "Employment Period," shall be August
1, 1996 to July 31, 1998 ("Original Employment Period"), unless terminated or
renewed pursuant to the terms of this Agreement.
(b) Renewal. Subject to Section 4, upon written notice to the
Company of Executive's interest in continuing her employment with the Company no
less than ninety (90) days prior to the expiration of the Employment Period, the
Company may elect to renew the Employment Period for additional one (1) year
periods on substantially the same terms as the original Employment Period,
provided, however, that in place of the salary and options granted under Section
3 and the severance benefits provided in Section 5, any renewal agreement will
contain salary provisions, option grants and severance benefits which are
comparable to those offered in renewal agreements generally to the principal
executive officers of Prologic, its subsidiaries and affiliates.
(c) In the event that the Company does not exercise its option
to renew the contract upon notice provided to Company in accordance with Section
1(b), Executive will receive a termination payment equal to six (6) months
salary, to be paid on a monthly basis in accordance with the Company's policies
as described in Section 3(a)(i).
2. Employment and Duties.
(a) Employment. The Company hereby employs Executive for the
Employment Period to perform such duties for the Company, its subsidiaries and
affiliates as may be reasonably specified from time to time by the Company's
Board of Directors or the representative designated by the Board of Directors
(the "Board"). Executive hereby accepts employment with the Company as President
and Chief Executive Officer (or a comparable position if there is a
restructuring of the Company, Prologic or their subsidiaries or affiliates),
reporting directly to the Board of the Company. Executive also shall be made an
Executive Vice President of Prologic, with compensation payable in connection
with such position included in Executive's compensation hereunder. In addition,
Executive will have a reporting relationship with the President or Chief
Executive Officer of Prologic. It is understood that Executive will use best
efforts to perform her duties in the manner directed by the Board and in
compliance with all federal, state and local laws, ordinances and regulations.
(b) Time Devoted to Duties. Executive shall devote all of her
normal business time and efforts to the business of the Company, its
subsidiaries and affiliates, the amount of such time to be sufficient to permit
her diligently and faithfully to serve and endeavor to further the Company's
interests to the best of her ability. Executive will not, during the Employment
Period, (i) accept any other employment, or (ii) engage, directly or indirectly,
in any other business activity (whether or not pursued for pecuniary gain) that
is or may be competitive with, or that might place her in a competing position
to that of the Company or its subsidiaries or affiliates, provided,
2
<PAGE> 3
however, that an investment of less than one percent (1%) in a public company
which competes with Prologic or the Company but with which Executive has no
other involvement will not violate the terms hereof. The Executive hereby
represents that her employment hereunder and compliance by her of the terms and
conditions of this Agreement will not conflict with or result in the breach of
any agreement by which she may be bound.
3. Compensation.
(a) Monetary Remuneration and Benefits. During the Employment
Period, the Company shall pay to Executive for all services rendered by her in
any capacity:
(i) Salary. An annual salary of One Hundred Thirty
Thousand Dollars ($130,000), payable pursuant to the procedures
regularly established, and as they may be amended, by the Company
during the course of this Agreement. This rate shall be subject to
increases from time to time in the sole and exclusive discretion of the
Board.
(ii) Contribution Bonus. A bonus based on the "Net
Contribution" of the Company, which shall mean BASIS Earnings (as
defined in the Merger Agreement) ("Net Contribution Bonus"). For the
twelve (12) month periods ending June 30, 1997 and June 30, 1998, the
Net Contribution Bonus shall equal 4% of the Net Contribution for each
period.
(iii) Consolidated Earnings Bonus. A bonus based on
"Consolidated Net Profits," which shall be an amount equal to .05% of
the net pre-tax profits of Prologic in excess of One Million Dollars
($1,000,000) for each fiscal year ending March 31, 1997 and March 31,
1998 ("Consolidated Net Profit Bonus"), provided, however, that the
Consolidated Net Profits Bonus shall, under no circumstances, exceed
the amount of Ten Thousand Dollars ($10,000).
(iv) Prologic Bonus Plan. In the event that the Board
of Directors of Prologic shall adopt a company-wide bonus plan for
which all executive-level employees shall be eligible (the "Prologic
Plan"), then Executive shall be entitled to make an election to
participate in the Prologic Plan. Such plan will become effective only
at the commencement of Prologic's fiscal year, and Executive shall have
the opportunity to make her election to participate at that point in
time. If Executive elects to participate in the Prologic Plan,
Executive shall irrevocably forfeit all of her future rights under the
Consolidated Net Profits Bonus, and shall be entitled to participate
only in the Prologic Plan from that point forward.
All bonuses set forth in Section 3(a) shall be paid annually, within
ninety (90) days after the completion of each annual period. However,
Executive shall be entitled to receive a quarterly draw against her Net
Contribution Bonus in an amount equal to fifty percent (50%) of such
bonus earned during the fiscal quarter. Such quarterly draws shall be
paid within thirty (30) days after the close of the quarter. The
remainder of the Net Contribution Bonus shall be paid annually pursuant
to the terms contained herein. In the event that the
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<PAGE> 4
quarterly draws paid to Executive should exceed the total of the Net
Contribution Bonus earned for the annual period, then any such excess
payment shall be applied and deducted from the Executive's subsequent
annual period Net Contribution Bonus.
(b) Upon execution of this Agreement and the effectiveness of
the Merger, Executive shall be granted options for an aggregate total of thirty
thousand (30,000) shares of Prologic Common Stock (the "Options") in the form of
standard option grants made to executive officers of Prologic in accordance with
and under the Prologic 1994 Stock Option Plan or its successor (the "Plan") as
follows:
(i) The Options shall become exercisable at the fair
market value of Prologic Common Stock as of July 1, 1996, in quarterly
increments of three thousand seven hundred and fifty (3,750) shares, at
the end of each fiscal quarter over the two year Original Employment
Period.
(ii) Prologic will diligently endeavor to comply with
all applicable securities laws in connection with any Options to be
granted in connection with the Plan and before any shares are issued
pursuant to Options. Without limiting the generality of the foregoing,
Prologic may require from the optionee such investment representation
or such agreement, if any, as counsel for Prologic may consider
necessary or advisable in order to comply with the Securities Act of
1933 as then in effect ("Securities Act"), and may require that the
optionee agree that any sale of the shares will be made only in such
manner as is permitted by the Board. The committee supervising the Plan
may, in its sole discretion, cause the Shares underlying the Options to
be registered under the Securities Act, and the committee will give
positive consideration to effecting such registration. Optionee shall
take any action reasonably requested by Prologic in connection with
registration or qualification of the Shares under federal or state
securities laws.
(c) Vacation. During the Employment Period, Executive will be
given four (4) weeks vacation with full pay and benefits each year, exclusive of
the Company holidays, pursuant to the policies regularly established and as they
may be amended by the Company; provided, however, that Executive will use her
best efforts to ensure that such vacation does not unduly interfere with the
operation and performance of the business of the Company, its subsidiaries and
affiliates. The Company acknowledges that Executive also has accumulated
vacation time as an employee of the Company which she will not lose during the
Employment Period and without prejudice to accruing new vacation time.
(d) Expenses. During the Employment Period, the Company agrees
to reimburse Executive for reasonable travel and other business expenses
incurred by Executive in the performance of her duties hereunder, in accordance
with the Company's reimbursement policies as they may be amended from time to
time during the Employment Period, including, without limitation, expenses of
approximately $775 per month for association dues to be paid to TEC Association.
4
<PAGE> 5
(e) Office and Staff. The Company will provide Executive with
appropriate facilities and support services as may reasonably be required by the
Executive for the proper discharge of her duties hereunder.
(f) Participation in Plans. As she becomes eligible and
continues to be eligible therefor, the Company and Prologic shall provide the
Executive with the right to participate in such plans or programs generally made
available by the Company or Prologic to, or for the benefit of, its executives.
(g) Other Executive Benefits. As she becomes eligible and
continues to be eligible therefor, the Company will provide such employee
benefits as are provided by the Company to its other principal executives
hereunder, including insurance coverage, if any, on any policy for the Company's
principal executive officers and directors, and when applicable, coverage as
reasonably available to Executive as an Executive Vice President of Prologic.
4. Termination of Employment.
(a) By Death. The Company shall pay to Executive's
beneficiaries or estate, as appropriate, the compensation to which she is
entitled pursuant to Section 3(a) through the end of the month in which death of
the Executive occurs and the severance payments to which she is entitled
pursuant to Section 5(a). Thereafter, the Company's obligations hereunder shall
terminate. Nothing in this Section shall affect any entitlement of Executive's
heirs to the benefits of any life insurance plan purchased by the Company.
(b) By Disability. If, in the sole opinion of the Board,
Executive shall be prevented from properly performing her duties hereunder by
reason of any physical or mental incapacity for a period of more than one
hundred and twenty (120) days in the aggregate or sixty (60) consecutive days in
any twelve-month period (the "Disability Period"), then, to the extent permitted
by law, the Employment Period shall terminate on, and the compensation to which
Executive is entitled pursuant to Section 3(a) shall be paid up through, the
last day of the month of the Disability Period (of one hundred twenty (120) days
or sixty (60) days, as applicable) and the severance payments to which she is
entitled pursuant to Section 5(a), and thereafter the Company's obligations
hereunder shall terminate. Nothing in this Section shall affect Executive's
rights under any disability insurance plan in which she is a participant.
(c) By the Company For Cause. The Company may terminate,
without liability and without prejudice to any other remedy to which Employer
may be entitled either at law, in equity or under this Agreement, the Employment
Period for Cause (as defined below) at any time and without advance notice. The
Company shall pay Executive the compensation to which she is entitled pursuant
to Section 3(a) through the end of the day upon which notice is received and
thereafter the Company's obligations hereunder this Agreement shall terminate.
Termination shall be for "Cause" if:
5
<PAGE> 6
(i) Executive acts or fails to act and such act or
failure to act is, in the reasonable opinion of the Board, in bad faith
or to the material detriment of the Company or its subsidiaries or
affiliates;
(ii) Executive refuses or fails to act in accordance
with any direction or order of the Board if such failures or refusals,
individually or in the aggregate, are, in the reasonable opinion of the
Board, material to Executive's performance and such performance does
not, in the good faith and reasonable judgment of the Executive, result
in or violate any applicable federal, state or local law, ordinances or
regulations;
(iii) Executive commits any act of dishonesty or a
felony affecting the Company, its subsidiaries or affiliates and such
act of dishonesty or felony adversely affects the Company, its
subsidiaries or affiliates or their or its reputation, business or
business relationships;
(iv) Executive has a chemical dependency which
interferes with the performance of the Executive's duties and
responsibilities under this Agreement;
(v) Executive commits gross misconduct or neglect,
or, in the reasonable opinion of the Board, demonstrates gross
incompetence in the management of the affairs of the Company or its
subsidiaries or affiliates;
(vi) Executive is convicted of a felony or any crime
involving moral turpitude, fraud or misrepresentation; or
(vii) Executive materially breaches any term of this
Agreement, if such breach is not cured within thirty (30) days after
written notice thereof is provided by the Company to the Executive.
(d) By the Company Without Cause. The Employment Period may be
terminated without Cause by the Company only upon the written consent of the
Executive. In the event the Company terminates the Employment Period without
Cause and without the written consent of the Executive, the Company shall
provide thirty (30) days advance written notice to Executive and shall pay to
Executive the severance payment to which she is entitled to pursuant to Section
5(a), and thereafter the Company's obligations hereunder shall terminate.
(e) By Executive For Good Reason. The Executive may terminate
her employment hereunder for "Good Reason" upon thirty (30) days written notice
if:
(i) the duties and responsibilities and status
assigned to Executive are not reasonably consistent with the position
and responsibilities originally assumed by Executive under this
Agreement or there is a material adverse change (which is under the
reasonable control of the Company) in the work environment as it
applies to Executive, in each case having a material negative effect on
Executive's employment position;
6
<PAGE> 7
(ii) the Company, without the Executive's consent,
requires the relocation of the offices at which Executive is
principally employed on the date hereof to a location more than 25
miles from such location or requires Executive to be based other than
the Company's offices at such location, except for business travel by
Executive as shall be required only as reasonably necessary to permit
Executive to properly perform her duties hereunder; and
(iii) the Company fails to cure within thirty (30)
days of the Company's receipt of notice from Executive of Company's
failure to perform its material obligations to Executive under this
Agreement.
(f) By Executive Without Good Reason. The Employment Period
may be terminated without Good Reason by the Executive only upon the written
consent of the Company. In the event the Executive terminates the Employment
Period without Good Reason and without the written consent of the Company, the
Executive shall provide thirty (30) days advance written notice to the Company
and the Company shall have the rights set forth in Section 5(b). Thereafter,
Executive's obligations hereunder, except for those set forth in Section 6,
shall terminate.
(g) By Company and Executive Upon Mutual Agreement. The
Employment Period may be terminated upon the written consent of both the Company
and the Executive on terms to be mutually agreed upon. Thereafter, the Company's
and Executive's obligations hereunder shall terminate.
5. Benefits Upon Termination of Employment Period.
(a) Termination of Employment by Death, Disability, or By
Executive For Good Reason. In the event of termination prior to the completion
of the Original Employment Period by the Company as a result of Executive's
death or disability or, by the Executive for Good Reason (as defined in Section
4(e)), Executive shall be entitled to all compensation and accrued benefits
earned by her, including bonuses, prior to the date of termination as provided
for in this Agreement, pro rata up to and including that date, together with an
amount equal to the greater of six (6) months salary or the balance of salary
remaining in the Original Employment Period, as full and complete severance
compensation. Thereafter, the Company's obligations to the Executive shall
terminate. Furthermore, to the extent permitted by applicable laws and the Plan,
all stock options granted to Executive in connection with this Agreement shall
become immediately and fully exercisable.
(b) Termination of Employment by Company for Cause or by
Executive for Other Than Good Reason. In the event of termination prior to the
completion of the Original Employment Period by the Company for Cause or by
Executive other than for Good Reason, the Company shall pay to the Executive the
compensation set forth in Section 3(a)(i) earned by her prior to the date of
termination. Upon such payment, the Company's obligations to the Executive shall
terminate. The Executive shall not be entitled to any other compensation or
other severance payment, including those set forth in Section 1(b). Thereafter,
the Executive's obligations to the Company, except those set forth in Section 6,
shall terminate. Furthermore, to the extent permitted
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<PAGE> 8
by applicable laws and the Plan, all stock options granted to Executive in
connection with this Agreement, but not yet exercised at the date of
termination, shall become immediately null and void.
(c) Excess Payments. Notwithstanding anything contained in
this Section or any other section of this Agreement to the contrary, if any
compensation or benefit payment shall be considered in the aggregate to be an
"excess parachute payment" as that term is defined in Section 280G of the
Internal Revenue Code of 1986, as amended, all such compensation and benefits
shall be reduced, upon the written request of the Executive, to the extent
required to prevent such compensation and benefits, in the aggregate, from being
considered an "excess parachute payment".
6. Preservation of Business.
(a) General. During the Employment Period and subject to the
provisions of Section 2(b), Executive will use her best efforts to advance the
business and organization of the Company, its subsidiaries and affiliates, the
services of present and future employees and to advance its business relations
with its joint venture partners, suppliers, distributors, customers and others.
(b) Uniqueness of Services; Interference with Business;
Competitive Activities. The parties agree that the services that Executive will
perform hereunder are special, unique and extraordinary in nature and that, if
the Executive breaches the terms of this Agreement, it may reduce the value of
the Company and the Company may be entitled in appropriate instances (and in
addition to any remedy that it may have at law) to any equitable relief,
including injunctive relief, that may rightfully be awarded under applicable
law. Executive agrees that during the Employment Period and for one year after
termination thereof (but no earlier than June 30, 1999) (the "Restricted
Period"), she shall not, for herself or any third party, directly or indirectly
(i) divert or attempt to divert from the Company or its subsidiaries or
affiliates any business of any kind in which it, the Company, its subsidiaries
or affiliates are engaged, or have the reasonable expectation of engaging in,
including, without limitation, the solicitation of or interference with any of
its suppliers, clients or customers, (ii) employ, solicit for employment, or
recommend for employment during the Restricted Period any person employed by the
Company, or by any of its subsidiaries or affiliates, during the period of such
person's employment and for a period of six (6) months after such employee's
termination, or (iii) engage in or be employed by any business activity or
provide any merchandise or services that is or may be competitive with the
Company or any of its subsidiaries or affiliates within the San Francisco Bay
Area or Portland Area (the "Restricted Area"). Executive expressly acknowledges
that the subject matter, territorial and time restrictions contained in this
paragraph are reasonable and are properly required for the adequate protection
of the Company's property interests. Notwithstanding the foregoing, Executive
may, upon the termination of the Employment Period and with the prior written
consent of the Company (which shall not be unreasonably withheld), be engaged or
employed by a computer hardware manufacturer in the Restricted Area.
(c) Consequences of Termination Without Cause or Termination
with Good Reason. The covenants contained in Section 6(b) will terminate
immediately if the Company
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<PAGE> 9
terminates this Agreement without cause or Executive terminates this Agreement
with good reason, provided that, during the period that the Executive continues
to receive payment of severance benefits as provided in Section 5 hereof,
Executive will not compete with the Company or Prologic or their affiliates, or
contact or attempt to contact the Company's or Prologic's, or their affiliates',
employees or customers (except with respect to matters unrelated to her services
hereunder); shall not utilize the property of the Company, Prologic or their
affiliates, including intellectual property, and shall under no circumstances
act for, with or on behalf of, as an employee or otherwise, a competitor where
she would be involved in direct competition with the Company, Prologic or their
affiliates.
7. Dispute Resolution; Remedies.
(a) Mediation. In the event of any controversy or claim
arising out of or related to this Agreement, or the breach thereof, which has
not been settled through informal discussion and negotiation, the parties agree
first to try in good faith to settle the dispute by mediation held in the
Company's offices and administered by the American Arbitration Association under
its Employment Mediation Rules, subject to the laws of the State of California,
before resorting to arbitration, provided, however, that any controversy or
claims arising out of or related to Section 6 shall not be governed by this
Section.
(b) Arbitration. In the event of any controversy or claim
arising out of or related to this Agreement, or the breach thereof, which has
not been settled through negotiation or the mediation procedures provided for in
the previous paragraph, such controversy or claim shall be settled by binding
arbitration held in the Company's offices and administered by the American
Arbitration Association under its National Rules for the Resolution of
Employment Disputes, subject to the laws of the state of California, and
judgment on the award rendered by the arbitrator(s) may be entered in any court
having jurisdiction thereof, provided, however, that any controversy or claims
arising out of or related to Section 6 shall not be governed by this Section.
This Section shall also not apply to any breach or threatened breach of the
Confidentiality Agreement.
8. Miscellaneous.
(a) Entire Agreement; Amendment. This Agreement, together with
the Confidentiality Agreement, constitutes the entire agreement between the
parties with respect to the matters covered herein, and may not be modified,
amended or terminated except by a written instrument executed by the parties
hereto. All other agreements between the parties pertaining to the employment or
remuneration of Executive not specifically contemplated hereby or incorporated
herein are terminated and shall be of no further force or effect.
(b) Assignment. Executive agrees that she will not assign,
sell, transfer, delegate or otherwise dispose of, whether voluntarily or
involuntarily, or by operation of law, any rights or obligations under this
Agreement, nor shall Executive's rights be subject to encumbrance or the claims
of creditors. Any purported assignment, transfer, or delegation by the Executive
shall be null and void. Executive hereby consents to the assignment of this
Agreement to Prologic or any
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of the Company's or Prologic's direct or indirect subsidiaries or any of their
affiliates or any of their successors in interest, provided that such assignment
shall not materially and adversely effect the employment and duties of Executive
hereunder. Nothing in this Agreement shall prevent the consolidation of the
Company with, or its merger into, any other corporation, or the sale by the
Company of all or substantially all of its properties or assets, or the
assignment by the Company of this Agreement and the performance of its
obligations hereunder to Prologic or any of their direct or indirect
subsidiaries or any of their affiliates or any of their successors in interest.
Subject to the foregoing, this Agreement shall be binding upon and shall inure
to the benefit of the parties and their respective heirs, legal representatives,
successors, and permitted assigns, and shall not benefit any person or entity
other than those enumerated above.
(c) No Waiver. No waiver of any breach or default hereunder
shall be considered valid unless in writing, and no such waiver shall be deemed
a waiver of any subsequent breach or default of the same or similar nature. The
failure of any party to insist upon strict adherence to any term of this
Agreement on any occasion shall not operate or be construed as a waiver of the
right to insist upon strict adherence to that term or any other term of this
Agreement on that or any other occasion.
(d) Enforcement; Severability. In the event that any term or
provision of this Agreement shall be deemed by a court of competent jurisdiction
to be overly broad in scope, duration or area of applicability, the court
considering the same shall have the power and is hereby authorized and directed
to modify such term or provision to limit such scope, duration or area, or all
of them, so that such term or provision is no longer overly broad and to enforce
the same as so limited. Subject to the foregoing sentence, in the event that any
provision of this Agreement shall be held to be invalid or unenforceable for any
reason, such invalidity or unenforceability shall attach only to such provision
and shall not affect or render invalid or unenforceable any other provision of
this Agreement. The Executive agrees that the provisions of Section 6 hereof
constitute independent and separable covenants which shall survive the
termination of the Employment Period.
(e) Notices. Any notice permitted or required hereunder shall
be in writing and shall be deemed to have been given on the date of delivery or,
if mailed by registered or certified mail, postage prepaid, on the date of
mailing:
If to Executive to:
Patricia F. Shanks
_____________________
_____________________
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<PAGE> 11
If to the Company to:
BASIS Acquisition Corp.
c/o Prologic Management Systems, Inc.
2030 East Speedway Boulevard
Tucson, Arizona 85719
Either party may, by notice to the other, change her or its address for notice
hereunder.
(f) Executive Acknowledgment. Executive acknowledges that (i)
she has consulted with or has had the opportunity to consult with independent
counsel of her own choice concerning this Agreement and has been advised to do
so by the Company, and (ii) she has read and understands the Agreement, is fully
aware of its legal effect, and has entered into it freely based on her own
judgment.
(g) Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original and all of which shall
constitute one and the same instrument.
(h) Headings. All headings appear in this Agreement for
convenience only and shall not be used in construing the terms hereof.
IN WITNESS WHEREOF, the parties have executed this Employment Agreement
as of the day and year first above written.
BASIS ACQUISITION CORP. EXECUTIVE
By:_________________________ ___________________________
Patricia F. Shanks
Its:________________________
Performance by the Company of its obligations hereunder are hereby guaranteed by
Prologic.
PROLOGIC MANAGEMENT SYSTEMS, INC.
By:___________________________________________
Its:___________________________________________
11
<PAGE> 1
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made as of the 15th day of August, 1996,
by and between BASIS ACQUISITION CORP., an Arizona corporation (the "Company"),
and DONALD E. LEGNITTO, an individual residing at 30 Bothin Road, Fairfax,
California 94930 (the "Executive"), and PROLOGIC MANAGEMENT SYSTEMS, INC., an
Arizona corporation, as guarantor of the obligations of the Company herein
("Prologic").
R E C I T A L S :
WHEREAS, the Company has entered into an Agreement and Plan of
Reorganization, dated as of June 1, 1996 (the "Merger Agreement"), pursuant to
which BASIS, Inc., a California corporation, shall merge (the "Merger") with and
into a wholly owned subsidiary of Prologic;
WHEREAS, the Company desires that the Executive be employed by the
Company in order to ensure that the services of the Executive shall be available
to the Company following the Merger;
WHEREAS, the understanding that the Executive will be employed by the
Company for the Employment Period (as defined below) and that the Executive will
comply with the covenants contained in Section 6 hereof has served as a
fundamental basis for the Company entering into the Merger;
WHEREAS, the execution and delivery of this Agreement is a condition to
the obligation of the Company to consummate the Merger and the Company is
consummating such Merger in reliance upon this Agreement;
WHEREAS, the Executive desires to be employed by the Company on the
following terms and conditions;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties agree as follows:
A G R E E M E N T :
1. The Employment Period.
(a) Initial Period. The "Employment Period," shall be August
1, 1996 to July 31, 1998 ("Original Employment Period"), unless terminated or
renewed pursuant to the terms of this Agreement.
(b) Renewal. Subject to Section 4, upon written notice to the
Company no less than ninety (90) days prior to the expiration of the Employment
Period of the Executive's interest in continuing his employment with the
Company, the Company may elect to renew the Employment
<PAGE> 2
Period for additional one (1) year periods on substantially the same terms as
the Original Employment Period, provided, however, that in place of the salary
and options granted under Section 3 and the severance benefits provided in
Section 5, any renewal agreement will contain salary provisions, option grants
and severance benefits which are comparable to those offered in renewal
agreements generally to the principal executive officers of Prologic, its
subsidiaries and affiliates and which are acceptable to the Executive.
(c) In the event that the Company does not exercise its option
to renew the contract upon notice provided to Company in accordance with Section
1(b), Executive will receive a termination payment equal to three (3) months
salary, to be paid on a monthly basis in accordance with the Company's policies
as described in Section 3(a)(i).
2. Employment and Duties.
(a) Employment. The Company hereby employs the Executive for
the Employment Period to perform such duties for the Company, its subsidiaries
and affiliates as may be reasonably specified from time to time by the Company's
Board of Directors or the representative designated by the Board of Directors
(the "Board") and similar in nature and scope to those duties performed by
Executive while employed by BASIS, Inc. The Executive hereby accepts employment
with the Company as Senior Vice President of the Company, or in such other
positions as the Board may designate. Executive also shall be made a Vice
President of Prologic, with compensation payable in connection with such
position included in Executive's compensation hereunder. It is understood that
the Executive will use best efforts to perform his duties in the manner directed
by the Board and in compliance with all federal, state and local laws,
ordinances and regulations.
(b) Time Devoted to Duties. The Executive shall devote all of
his normal business time and efforts to the business of the Company, its
subsidiaries and affiliates, the amount of such time to be sufficient to permit
him diligently and faithfully to serve and endeavor to further the Company's
interests to the best of his ability. The Executive will not, during the
Employment Period, (i) accept any other employment, or (ii) engage, directly or
indirectly, in any other business activity (whether or not pursued for pecuniary
gain) that is or may be competitive with, or that might place him in a competing
position to that of the Company or its subsidiaries or affiliates, provided,
however, that an investment of less than one percent (1%) in a public company
which competes with Prologic or the Company but with which the Executive has no
other involvement will not violate the terms hereof. The Executive hereby
represents that his employment hereunder and compliance by him of the terms and
conditions of this Agreement will not conflict with or result in the breach of
any agreement by which he may be bound.
3. Compensation.
(a) Monetary Remuneration and Benefits. During the Employment
Period, the Company shall pay to the Executive for all services rendered by him
in any capacity:
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<PAGE> 3
(i) Salary. An annual salary of One Hundred Twenty
Thousand Dollars ($120,000), payable pursuant to the procedures
regularly established, and as they may be amended, by the Company
during the course of this Agreement. This rate shall be subject to
increases from time to time in the sole and exclusive discretion of the
Board.
(ii) Bonus. Quarterly, upon satisfaction by the
Executive of his obligations and duties under this Agreement, as such
obligations and duties become due on a quarterly basis, the Executive
shall be paid a "Bonus" in an amount equal to one-eighth (1/8) of the
face amount of the obligation owed by the Executive to the Company
("Option Obligation") as a result of his exercise of certain stock
options pursuant to that certain Stock Option Agreement, dated as of
December 15, 1995, between the Executive and BASIS, Inc. In lieu of a
cash payment to the Executive, this Bonus shall take the form of
forgiveness by the Company of the Option Obligation in eight (8) equal
quarterly installments, each equal to one-eighth (1/8) of Executive's
Option Obligation.
(iii) Quarterly Bonus Incentive. The Executive shall
also be entitled to receive a "Quarterly Bonus" based on the
Executive's achievement of certain performance objectives to be
determined and established by the Board of Prologic. These performance
objectives shall be set so they are reasonably obtainable by Executive.
The amount of the Quarterly Bonus shall be set by the Prologic Board
based on the degree to which the Executive, in the reasonable judgment
of the Prologic Board, has achieved such objectives; provided, however,
that the minimum amount shall be Five Thousand Dollars ($5,000) per
fiscal quarter and the maximum amount shall be Twelve Thousand Five
Hundred Dollars ($12,500) per fiscal quarter. The Quarterly Bonus shall
be paid within thirty (30) days after the close of the quarter.
(iv) Automobile Allowance. The Executive shall be
paid a vehicular allowance in the amount of Five Hundred Dollars ($500)
per month during the Employment Period, to be used by the Executive for
the operation and maintenance of motor vehicles used by him for
business purposes.
(b) Upon execution of this Agreement and the effectiveness of
the Merger, the Executive shall be granted options for an aggregate total of
fifteen thousand (15,000) shares of Prologic Common Stock (the "Options") in the
form of standard option grants made to executive officers of Prologic in
accordance with and under the Prologic 1994 Stock Option Plan or its successor
(the "Plan") as follows:
(i) The Options shall become exercisable at the fair
market value of Prologic Common Stock as of July 1, 1996, in quarterly
increments of one thousand eight hundred and seventy-five (1,875)
shares, at the end of each fiscal quarter over the two year Original
Employment Period.
(ii) Prologic will diligently endeavor to comply with
all applicable securities laws in connection with any Options to be
granted in connection with the Plan and before any shares are issued
pursuant to Options. Without limiting the generality of the
3
<PAGE> 4
foregoing, Prologic may require from the Executive such investment
representation or such agreement, if any, as counsel for Prologic may
consider necessary or advisable in order to comply with the Securities
Act of 1933 as then in effect ("Securities Act"), and may require that
the Executive agree that any sale of the shares will be made only in
such manner as is permitted by the Board. The committee supervising the
Plan may, in its sole discretion, cause the shares underlying the
Options to be registered under the Securities Act, and the committee
will give positive consideration to effecting such registration. The
Executive shall take any action reasonably requested by Prologic in
connection with registration or qualification of the shares under
federal or state securities laws.
(c) Vacation. During the Employment Period, the Executive will
be given four (4) weeks vacation with full pay and benefits each year, exclusive
of the Company holidays, pursuant to the policies regularly established and as
they may be amended by the Company; provided, however, that the Executive will
use his best efforts to ensure that such vacation does not unduly interfere with
the operation and performance of the business of the Company, its subsidiaries
and affiliates. The Company acknowledges that Executive also has accumulated
vacation time as an employee of the Company which he will not lose during the
Employment Period and without prejudice to accruing new vacation time.
(d) Expenses. During the Employment Period, the Company agrees
to reimburse the Executive for reasonable travel and other business expenses
incurred by the Executive in the performance of his duties hereunder, in
accordance with the Company's reimbursement policies as they may be amended from
time to time during the Employment Period.
(e) Office and Staff. The Company will provide the Executive
with appropriate facilities and support services as may reasonably be required
by the Executive for the proper discharge of his duties hereunder. The Executive
initially will be at the same location as presently used by Executive.
(f) Participation in Plans. As he becomes eligible and
continues to be eligible therefor, the Company and Prologic shall provide the
Executive with the right to participate in such plans or programs generally made
available by the Company or Prologic to, or for the benefit of, its executives.
Such participation shall give full credit to service by Executive with BASIS,
Inc., and generally equal or exceed BASIS, Inc. plans or programs.
(g) Other Executive Benefits. As he becomes eligible and
continues to be eligible therefor, the Company will provide such employee
benefits as are provided by the Company to its other principal executives
hereunder, including insurance coverage, if any, on any policy for the Company's
principal executive officers and directors, and when applicable, coverage as
reasonably available to Executive as a Vice President of Prologic. Such benefits
shall give full credit to service by Executive with BASIS, Inc., and generally
equal or exceed BASIS, Inc. benefits.
4. Termination of Employment.
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<PAGE> 5
(a) By Death. The Company shall pay to the Executive's
beneficiaries or estate, as appropriate, the compensation to which he is
entitled pursuant to Section 3(a) through the end of the month in which death of
the Executive occurs and the severance payments to which he is entitled pursuant
to Section 5(a). Thereafter, the Company's obligations hereunder shall
terminate. Nothing in this Section shall affect any entitlement of the
Executive's heirs to the benefits of any life insurance plan purchased by the
Company.
(b) By Disability. If, in the sole opinion of the Board, the
Executive shall be prevented from properly performing his duties hereunder by
reason of any physical or mental incapacity for a period of more than one
hundred and twenty (120) days in the aggregate or sixty (60) consecutive days in
any twelve-month period (the "Disability Period"), then, to the extent permitted
by law, the Employment Period shall terminate on, and the compensation to which
the Executive is entitled pursuant to Section 3(a) shall be paid up through, the
last day of the month of the Disability Period (of one hundred twenty (120) days
or sixty (60) days, as applicable) and the severance payments to which he is
entitled pursuant to Section 5(a), and thereafter the Company's obligations
hereunder shall terminate. Nothing in this Section shall affect the Executive's
rights under any disability insurance plan in which he is a participant.
(c) By the Company For Cause. The Company may terminate,
without liability and without prejudice to any other remedy to which the Company
may be entitled either at law, in equity or under this Agreement, the Employment
Period for Cause (as defined below) if Executive fails to cure a "Cause," as
hereinafter defined, within thirty (30) days of Executive's receipt of notice
from the Company specifying such Cause. The Company shall pay the Executive the
compensation to which he is entitled pursuant to Section 3(a) through the end of
that day which is thirty (30) days following the day upon which notice is
received and thereafter the Company's obligations hereunder this Agreement shall
terminate. Termination shall be for "Cause" if:
(i) The Executive acts or fails to act and such act
or failure to act is, in the reasonable opinion of the Board, in bad
faith or to the material detriment of the Company or its subsidiaries
or affiliates;
(ii) The Executive refuses or fails to act in
accordance with any direction or order of the Board if such failures or
refusals, individually or in the aggregate, are, in the reasonable
opinion of the Board, material to the Executive's performance and such
performance does not, in the good faith and reasonable judgment of the
Executive, result in or violate any applicable federal, state or local
law, ordinances or regulations;
(iii) The Executive commits any act of dishonesty or
a felony affecting the Company, its subsidiaries or affiliates and such
act of dishonesty or felony adversely affects the Company, its
subsidiaries or affiliates or their or its reputation, business or
business relationships;
(iv) The Executive has a chemical dependency which
interferes with the performance of the Executive's duties and
responsibilities under this Agreement;
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<PAGE> 6
(v) The Executive commits gross misconduct or
neglect, or, in the reasonable opinion of the Board, demonstrates gross
incompetence in the management of the affairs of the Company or its
subsidiaries or affiliates;
(vi) The Executive is convicted of a felony or any
crime involving moral turpitude, fraud or misrepresentation; or
(vii) The Executive materially breaches any term of
this Agreement, if such breach is not cured within thirty (30) days
after written notice thereof is provided by the Company to the
Executive.
(d) By the Company Without Cause. The Employment Period may be
terminated without Cause by the Company. In the event the Company terminates the
Employment Period without Cause and without the written consent of the
Executive, the Company shall provide thirty (30) days advance written notice to
the Executive and shall pay to the Executive within thirty (30) days following
such termination the base compensation due Executive pursuant to Section 3
hereof for the remaining period of the Employment Period up to a maximum of
twelve (12) months and the balance due on the Option Obligation shall be
cancelled in full, and thereafter the Company's obligations hereunder shall
terminate.
(e) By Executive For Good Reason. The Executive may terminate
his employment hereunder for "Good Reason" upon thirty (30) days written notice
if:
(i) the duties and responsibilities and status
assigned to Executive are not reasonably consistent with the position
and responsibilities originally assumed by Executive under this
Agreement or there is a material adverse change (which is under the
reasonable control of the Company) in the work environment as it
applies to Executive, in each case having a material negative effect on
Executive's employment position; or
(ii) the Company, without the Executive's consent,
requires the relocation of the offices at which the Executive is
principally employed on the date hereof to a location more than 25
miles from such location or requires the Executive to be based other
than the Company's offices at such location, except for business travel
by the Executive as shall be required only as reasonably necessary to
permit the Executive to properly perform his duties hereunder; or
(iii) the Company fails to cure within thirty (30)
days of the Company's receipt of notice from the Executive of Company's
failure to perform its material obligations to the Executive under this
Agreement.
(f) By Executive Without Good Reason. The Employment Period
may be terminated by the Executive without Good Reason. In the event the
Executive terminates the Employment Period without Good Reason and without the
written consent of the Company, the Executive shall provide thirty (30) days
advance written notice to the Company and the Company
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<PAGE> 7
shall have the rights set forth in Section 5(b). Thereafter, the Executive's
obligations hereunder, except for those set forth in Section 6, shall terminate.
(g) By Company and Executive Upon Mutual Agreement. The
Employment Period may be terminated upon the written consent of both the Company
and the Executive on terms to be mutually agreed upon. Thereafter, the Company's
and the Executive's obligations hereunder shall terminate.
5. Benefits Upon Termination of Employment Period.
(a) Termination of Employment by Death or Disability. In the
event of termination prior to the completion of the Original Employment Period
by the Company as a result of the Executive's death or disability, the Executive
shall be entitled to all compensation and accrued benefits earned by him,
including bonuses, prior to the date of termination as provided for in this
Agreement, pro rata up to and including that date, together with an amount equal
to the lesser of six (6) months salary or the balance of salary remaining in the
Original Employment Period, as full and complete severance compensation.
Thereafter, the Company's obligations to the Executive shall terminate.
Furthermore, to the extent permitted by applicable laws and the Plan, all stock
options granted to the Executive in connection with this Agreement shall become
immediately and fully exercisable.
(b) Termination of Employment by Company for Cause or by
Executive for Other Than Good Reason. In the event of termination prior to the
completion of the Original Employment Period by the Company for Cause or by the
Executive other than for Good Reason, the Company shall pay to the Executive the
compensation set forth in Section 3(a)(i) earned by him prior to the date of
termination. Upon such payment, the Company's obligations to the Executive shall
terminate. The Executive shall not be entitled to any other compensation or
other severance payment, including those set forth in Section 1(b). Thereafter,
the Executive's obligations to the Company, except those set forth in Section 6,
shall terminate. Furthermore, to the extent permitted by applicable laws and the
Plan, all stock options granted to the Executive in connection with this
Agreement, but not yet exercised at the date of termination, shall become
immediately null and void.
(c) Termination of Employment by Executive for Good Reason. In
the event of termination prior to completion of the Original Employment Period
by the Executive for Good Reason, the Company shall pay to the Executive within
thirty (30) days following such termination the base compensation due Executive
pursuant to Section 3 hereof for the remaining period of the Employment Period
up to a maximum of twelve (12) months and the balance due on the Option
Obligation shall be cancelled in full, and thereafter the Company's obligations
hereunder shall terminate.
(d) Excess Payments. Notwithstanding anything contained in
this Section or any other section of this Agreement to the contrary, if any
compensation or benefit payment shall be considered in the aggregate to be an
"excess parachute payment" as that term is defined in Section 280G of the
Internal Revenue Code of 1986, as amended, all such compensation and benefits
shall
7
<PAGE> 8
be reduced, upon the written request of the Executive, to the extent required to
prevent such compensation and benefits, in the aggregate, from being considered
an "excess parachute payment."
6. Preservation of Business.
(a) General. During the Employment Period and subject to the
provisions of Section 2(b), the Executive will use his best efforts to advance
the business and organization of the Company, its subsidiaries and affiliates,
the services of present and future employees and to advance its business
relations with its joint venture partners, suppliers, distributors, customers
and others.
(b) Uniqueness of Services; Interference with Business;
Competitive Activities. The parties agree that the services that Executive will
perform hereunder are special, unique and extraordinary in nature and that, if
the Executive breaches the terms of this Agreement, it may reduce the value of
the Company and the Company may be entitled in appropriate instances (and in
addition to any remedy that it may have at law) to any equitable relief,
including injunctive relief, that may rightfully be awarded under applicable
law. Executive agrees that during the Employment Period (the "Restricted
Period"), he shall not, for himself or any third party, directly or indirectly
(i) divert or attempt to divert from the Company or its subsidiaries or
affiliates any business of any kind in which it, the Company, its subsidiaries
or affiliates are engaged, or have the reasonable expectation of engaging in,
including, without limitation, the solicitation of or interference with any of
its suppliers, clients or customers, (ii) employ, solicit for employment, or
recommend for employment during the Restricted Period any person employed by the
Company, or by any of its subsidiaries or affiliates, during the period of such
person's employment and for a period of six (6) months after such employee's
termination (such six (6) month period not applicable, however, after the
Restricted Period), or (iii) engage in or be employed by any business activity
or provide any merchandise or services that is or may be competitive with the
Company or any of its subsidiaries or affiliates within the San Francisco Bay
Area or Portland Area (the "Restricted Area"). The Executive expressly
acknowledges that the subject matter, territorial and time restrictions
contained in this paragraph are reasonable and are properly required for the
adequate protection of the Company's property interests.
(c) Consequences of Termination Without Cause or Termination
with Good Reason. The covenants contained in Section 6(b) will terminate
immediately if the Company terminates this Agreement without cause or Executive
terminates this Agreement with good reason.
(d) Consequences of Termination With Cause or Termination
Without Good Reason. In the event that Company terminates the Agreement with
Cause or the Executive terminates the Agreement without Good Reason, the
provisions of paragraphs 6(b)(i) and 6(b)(ii) shall continue to apply, but the
provisions of paragraph 6(b)(iii) above shall not apply nor survive such
termination of employment unless the Company elects to pay Executive the monthly
installments of Executive's base salary in which event the provisions of
paragraph 6(b)(iii) shall apply for the period of time the payments are made up
to the term of the Restricted Period.
7. Dispute Resolution; Remedies.
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<PAGE> 9
(a) Mediation. Notwithstanding anything contained in this
Agreement to the contrary, in the event of any controversy or claim arising out
of or related to this Agreement, or the breach thereof, which has not been
settled through informal discussion and negotiation, the parties agree first to
try in good faith to settle the dispute by mediation held in the Executive's
offices and administered by the American Arbitration Association under its
Employment Mediation Rules, subject to the laws of the State of California,
before resorting to arbitration, provided, however, that any controversy or
claim arising out of or related to Section 6 shall not be governed by this
Section.
(b) Arbitration. In the event of any controversy or claim
arising out of or related to this Agreement, or the breach thereof, which has
not been settled through negotiation or the mediation procedures provided for in
the previous paragraph, such controversy or claim shall be settled by
non-binding arbitration held in the Company's offices and administered by the
American Arbitration Association under its National Rules for the Resolution of
Employment Disputes, subject to the laws of the state of California.
8. Miscellaneous.
(a) Entire Agreement; Amendment. This Agreement, together with
the Confidentiality Agreement, constitutes the entire agreement between the
parties with respect to the matters covered herein, and may not be modified,
amended or terminated except by a written instrument executed by the parties
hereto. All other agreements between the parties pertaining to the employment or
remuneration of the Executive not specifically contemplated hereby or
incorporated herein are terminated and shall be of no further force or effect.
(b) Assignment. The Executive agrees that he will not assign,
sell, transfer, delegate or otherwise dispose of, whether voluntarily or
involuntarily, or by operation of law, any rights or obligations under this
Agreement, nor shall the Executive's rights be subject to encumbrance or the
claims of creditors. Any purported assignment, transfer, or delegation by the
Executive shall be null and void. The Executive hereby consents to the
assignment of this Agreement to Prologic or any of the Company's or Prologic's
direct or indirect subsidiaries or any of their affiliates or any of their
successors in interest, provided that such assignment shall not materially and
adversely effect the employment and duties of the Executive hereunder. Nothing
in this Agreement shall prevent the consolidation of the Company with, or its
merger into, any other corporation, or the sale by the Company of all or
substantially all of its properties or assets, or the assignment by the Company
of this Agreement and the performance of its obligations hereunder to Prologic
or any of their direct or indirect subsidiaries or any of their affiliates or
any of their successors in interest. Subject to the foregoing, this Agreement
shall be binding upon and shall inure to the benefit of the parties and their
respective heirs, legal representatives, successors, and permitted assigns, and
shall not benefit any person or entity other than those enumerated above.
(c) No Waiver. No waiver of any breach or default hereunder
shall be considered valid unless in writing, and no such waiver shall be deemed
a waiver of any subsequent breach or default of the same or similar nature. The
failure of any party to insist upon strict adherence to any term of this
Agreement on any occasion shall not operate or be construed as a
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<PAGE> 10
waiver of the right to insist upon strict adherence to that term or any other
term of this Agreement on that or any other occasion.
(d) Enforcement; Severability. In the event that any term or
provision of this Agreement shall be deemed by a court of competent jurisdiction
to be overly broad in scope, duration or area of applicability, the court
considering the same shall have the power and is hereby authorized and directed
to modify such term or provision to limit such scope, duration or area, or all
of them, so that such term or provision is no longer overly broad and to enforce
the same as so limited. Subject to the foregoing sentence, in the event that any
provision of this Agreement shall be held to be invalid or unenforceable for any
reason, such invalidity or unenforceability shall attach only to such provision
and shall not affect or render invalid or unenforceable any other provision of
this Agreement. The Executive agrees that the provisions of Section 6 hereof
constitute independent and separable covenants which shall survive the
termination of the Employment Period.
(e) Notices. Any notice permitted or required hereunder shall
be in writing and shall be deemed to have been given on the date of delivery or,
if mailed by registered or certified mail, postage prepaid, on the date of
mailing:
If to the Executive to:
Donald E. Legnitto
30 Bothin Road
Fairfax, California 94930
If to the Company to:
BASIS Acquisition Corp.
c/o Prologic Management Systems, Inc.
2030 East Speedway Boulevard
Tucson, Arizona 85719
Either party may, by notice to the other, change his or its address for notice
hereunder.
(f) Executive Acknowledgment. The Executive acknowledges that
(i) he has consulted with or has had the opportunity to consult with independent
counsel of his own choice concerning this Agreement and has been advised to do
so by the Company, and (ii) he has read and understands the Agreement, is fully
aware of its legal effect, and has entered into it freely based on his own
judgment.
(g) Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original and all of which shall
constitute one and the same instrument.
(h) Headings. All headings appear in this Agreement for
convenience only and shall not be used in construing the terms hereof.
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IN WITNESS WHEREOF, the parties have executed this Employment Agreement
as of the day and year first above written.
BASIS ACQUISITION CORP. EXECUTIVE
By:______________________________ ___________________________
Donald E. Legnitto
Its:______________________________
Performance by the Company of its obligations hereunder are hereby guaranteed by
Prologic.
PROLOGIC MANAGEMENT SYSTEMS, INC.
By:
Its:
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EXHIBIT 11.1
SCHEDULE OF COMPUTATION OF NET LOSS PER SHARE
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net Loss (3,127,979) (1,763,295)
Weighted average number of common shares equivalent:
Common shares outstanding 3,541,385 2,161,728
Staff Accounting Bulletin No. 83 issuances
and grants -- 168,481(1)
---------- ----------
Shares used in per share computations 3,541,385 2,330,209
========== ==========
Net loss per common share $ (0.88) $ (0.76)
</TABLE>
(1) These shares of common stock equivalents were included in the calculation
even though they produced an antidilutive effect in accordance with SAB 83.
<PAGE> 1
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Prologic Management Systems, Inc.:
We consent to incorporation by reference in the registration statement (No.
33-89384-LA) on Form S-8 of Prologic Management Systems, Inc. of our report
dated June 27, 1997, except for the first paragraph of Note 15 to the
consolidated financial statements, which is as of July 17, 1997, relating to
the consolidated balance sheet of Prologic Management Systems, Inc. and
subsidiaries as of March 31, 1997, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for each of the
years in the two-year period ended March 31, 1997, which report appears in the
March 31, 1997 annual report on Form 10-KSB of Prologic Management Systems,
Inc.
Our report dated June 27, 1997, except for the first paragraph of Note 15 to
the consolidated financial statements, which is as of July 17, 1997, contains
an explanatory paragraph that states that the Company has suffered recurring
losses from operations and has continued uses of cash from operating activities
that raise substantial doubt about its ability to continue as a going concern.
The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
KPMG Peat Marwick LLP
Phoenix, Arizona
August 11, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 1,815,120
<SECURITIES> 0
<RECEIVABLES> 2,983,371
<ALLOWANCES> 228,594
<INVENTORY> 293,478
<CURRENT-ASSETS> 4,954,405
<PP&E> 1,215,118
<DEPRECIATION> 670,005
<TOTAL-ASSETS> 7,126,124
<CURRENT-LIABILITIES> 4,724,725
<BONDS> 0
0
0
<COMMON> 8,038,955
<OTHER-SE> (6,617,865)
<TOTAL-LIABILITY-AND-EQUITY> 7,126,124
<SALES> 9,512,385
<TOTAL-REVENUES> 13,864,374
<CGS> 8,032,195
<TOTAL-COSTS> 16,465,388
<OTHER-EXPENSES> 526,965
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,601,014)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,127,979)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,127,979)
<EPS-PRIMARY> (0.88)
<EPS-DILUTED> (0.88)
</TABLE>
