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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 For the quarterly period ended September 30, 1999.
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 (I.R.S. Employer
incorporation or organization) Identification No.)
3708 E. Columbia Street, #110, Tucson, Arizona 85714
(Address of principal executive offices) (Zip Code)
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Issuer's telephone number (520) 747-4100.
(Former address: 2030 East Speedway Blvd., Tucson Arizona 85719
Former 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 .
--- ---
Number of shares of common stock outstanding on September 30, 1999 was
8,231,321.
Transitional Small Business Disclosure Format:
Yes ; No X .
--- ---
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Prologic Management Systems, Inc.
Index
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Page
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Part I. FINANCIAL INFORMATION 3
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at September 30, 1999
and March 31, 1999 3
Condensed Consolidated Statements of Operations
for the Three and Six Months Ended September 30, 1999 and
September 30, 1998 4
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended September 30, 1999 and
September 30, 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 7
Part II. OTHER INFORMATION 13
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults upon Senior Securities 13
Item 4. Submission of Matters to a Vote by Security Holders 13
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Exhibit 11.1 16
Exhibit 27
SIGNATURES 15
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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<CAPTION>
SEPTEMBER 30, 1999 MARCH 31, 1999
------------------ --------------
(unaudited) (unaudited)
<S> <C> <C>
Assets
Cash $ 189,598 $ 128,162
Restricted Cash 300,000 300,000
Accounts receivable, less allowance for doubtful accounts 6,597,725 2,628,176
of $245,688 at September 30, 1999 and at March 31, 1999
Inventories 193,057 516,937
Prepaid Expenses 148,562 4,265
------------ ------------
Current Assets 7,428,943 3,577,540
Property and Equipment, net 492,941 492,001
Goodwill - Net 905,912 1,028,162
Other Assets 105,959 83,420
------------ ------------
8,933,755 5,181,123
============ ============
Liabilities and Equity
Short-term Debt and Notes Payable 1,596,423 349,136
Notes Payable, Related Parties 100,400 100,400
Accounts Payable 3,330,638 3,572,170
Accrued Expenses 740,509 733,950
Deferred Revenue 200,564 120,891
------------ ------------
Current Liabilities 5,968,533 4,876,547
Long term debt and notes payable, excluding current portion 155,639 533,217
Line of credit 3,965,291 1,234,256
Shareholders Equity
Series A cumulative convertible preferred stock,
no par value, 16,667 shares authorized 16,667
shares outstanding 100,000 100,000
Series B cumulative convertible preferred stock,
no par value, 100,000 shares authorized, 72,000
shares outstanding 519,884 519,883
Common stock, no par value 10,000,000 shares
authorized 8,231,321 shares outstanding 9,499,845 8,692,637
Warrants 694,230 694,230
Accumulated deficit (11,969,667) (11,469,647)
------------ ------------
Total Stockholders' deficit (1,155,708) (1,462,897)
------------ ------------
TOTAL LIABILITIES AND EQUITY $ 8,933,755 $ 5,181,123
============ ============
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See accompanying notes to condensed consolidated financial statements.
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PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
------------ ----------- ------------ -----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues
Hardware $ 6,556,521 $ 2,231,817 $ 12,870,222 $ 5,564,736
Licenses 1,889,867 894,644 3,097,670 1,348,093
Services 1,642,933 582,745 2,315,936 2,166,820
------------ ----------- ------------ -----------
Total Net Revenue $ 10,089,321 $ 3,709,206 $ 18,283,828 $ 9,079,649
Cost of Sales 8,188,243 2,752,387 14,834,323 6,710,774
Gross Margin 1,901,078 956,819 3,449,505 2,368,875
Operating Expenses
Selling and Marketing 712,123 365,362 1,084,859 703,979
General and Administrative 1,319,139 1,267,358 2,538,889 2,468,326
Research and Development -- -- -- 51,750
------------ ----------- ------------ -----------
Total Operating Expenses 2,031,262 1,632,720 3,623,748 3,224,055
Operating Income (loss) (130,184) (675,901) (174,243) (855,180)
Interest expense (198,486) (153,316) (268,333) (234,161)
Other income (expense) (16,805) 29,008 (16,555) 14,526
------------ ----------- ------------ -----------
Income (loss) before taxes (345,475) (800,209) (459,131) (1,074,815)
Income Taxes 0 0 0 0
------------ ----------- ------------ -----------
Net loss (345,475) (800,209) (459,131) (1,074,815)
============ =========== ============ ===========
Shares used in computing net loss
per share 5,879,601 4,541,266 5,303,694 4,563,207
Cumulative Preferred Stock Dividend $ 20,667 $ 20,000 $ 40,889 $ 67,934
Net loss applicable to common stock $ (366,142) $ (820,209) $ (500,020) $(1,142,749)
Net loss per common share
Basic $ (0.06) $ (0.18) $ (0.09) $ (0.25)
Diluted $ (0.06) $ (0.18) $ (0.09) $ (0.25)
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See accompanying notes to condensed consolidated financial statements.
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PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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SIX MONTHS ENDED SEPTEMBER 30,
1999 1998
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(unaudited) (unaudited)
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Cash flows from operating activities:
Net loss $ (459,131) $(1,074,814)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 211,382 216,726
Issuance of warrants -- 81,742
Common Stock Dividend 41,333 67,934
Changes in:
Trade accounts receivable (3,969,549) (410,267)
Accounts payable and accrued expenses 234,974 1,819,758
Other assets and liabilities 775,043 (732,119)
----------- -----------
Total adjustments (2,706,817) 1,043,774
----------- -----------
Net cash from (used in) operating (3,165,949) 31,040
----------- -----------
Activities
Cash flows from investing activities
Purchase of equipment (90,072) (83,099)
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Net cash used in investing activities (90,072) (83,099)
Cash flows from financing activities:
Issuance of common stock 747,354 39,669
Issuance of debt - line of credit 2,731,035 76,035
Issuance of Series B Preferred Stock 720,000
Repayment of debt (160,932) (786,330)
----------- -----------
Net cash provided by (used in) financing
Activities 3,317,457 (49,374)
Net cash increase (decrease) in cash and cash equivalents 61,436 (64,765)
Cash and cash equivalents, beginning of period 128,162 175,110
----------- -----------
Cash and cash equivalents, end of period $ 189,598 $ 110,345
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Interim Periods
The accompanying condensed consolidated financial statements include the
accounts of Prologic Management Systems, Inc. (the "Company") and its
wholly-owned subsidiaries, Great River Systems, Inc. ("GRSI"), and BASIS,
Inc ("BASIS"). All significant inter-company balances and transactions have
been eliminated in consolidation.
The accompanying unaudited, condensed, consolidated financial statements
have been prepared by the Company in accordance with generally accepted
accounting principles, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, the
accompanying condensed consolidated financial statements include all
adjustments (of a normal recurring nature) which are necessary for a fair
presentation of the results for the interim periods presented. Certain
information and footnote disclosures normally included in financial
statements have been condensed or omitted pursuant to such rules and
regulations. Although the Company believes that the disclosures are adequate
to make the information presented not misleading, these financial statements
should be read in conjunction with the consolidated financial statements and
the notes thereto included in the Company's Report on Form 10-KSB for the
fiscal year ended March 31, 1999. The results of operations for the three
months ended September 30, 1999 are not necessarily indicative of the
results to be expected for the full year.
2. Lines of Credit
In March 1998, BASIS and GRSI obtained a line of credit in an amount that is
the lower of $5,000,000 or the sum of 85% of eligible accounts receivable,
restricted cash (see Note 2) and equipment loans in the first year (maximum
equipment loan is $250,000). This line of credit is secured by substantially
all of BASIS and GRSI's assets. As of September 30, 1999, borrowings under
this line of credit were $3,919,915.
The line of credit bears monthly interest at the highest prime rate in
effect during each month (8.25% during September 1999) plus 1.75% per annum
for the portion of the loan related to accounts receivable and prime plus
2.25% per annum for the portion related to equipment purchases subject to a
minimum charge in any month of not less than 9% per annum. Interest is based
on a minimum daily loan balance of $1,000,000. The line matures on March 31,
2001.
The Company is required to pay a monthly minimum fee of $1,500. Also, the
Company paid an initial loan fee of $50,000 in March 1998 with an additional
loan fee based on .25% of the maximum dollar amount ($5,000,000) due
annually thereafter. In years four and beyond, the Company must pay a
renewal fee of .5% of the maximum dollar amount.
If the Company terminates this agreement prior to the maturity date, it must
pay a penalty equal to the greater of all interest due during the prior six
months or the minimum monthly interest multiplied by the number of partial
or full months from the effective termination to the maturity date.
The line of credit agreement requires that BASIS and GRSI maintain a
combined minimum net worth of $750,000. At September 30, 1999, BASIS and &
GRSI were in compliance with this covenant.
3. Goodwill
Cost in excess of net assets acquired (goodwill) is being amortized on a
straight-line basis over seven years. Amortization expense for the quarter
ended September 30, 1999 totaled $61,125. Accumulated amortization totaled
$812,720 at September 30, 1999.
In September 1995, the Company completed the acquisition of GRSI, a systems
integration company 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, the issuance of a promissory note in the amount
of $150,000 and $100,000 of cash. The acquisition was accounted for as a
purchase and accordingly, the aggregate purchase of $290,000 was allocated
to the assets acquired and liabilities assumed based on their
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estimated fair values at the date of acquisition. Cost in excess of net
assets acquired of $259,746 was recorded as goodwill in connection with the
acquisition.
In August 1996, the Company completed the acquisition of BASIS, a systems
integration company located in the San Francisco Bay Area. All of the
outstanding stock of BASIS was acquired for 337,325 shares of common stock
of the Company valued at $1,400,000 and $500,000 in cash. The acquisition
was accounted for as a purchase and accordingly the aggregate purchase price
of $2,231,533 was allocated to the assets acquired and the liabilities
assumed based on their estimated fair values at the date of the acquisition.
Cost in excess of net assets acquired of $1,459,661 was recorded as goodwill
in connection with the acquisition.
4. Property and Equipment
Property and equipment as of September 30, 1999, consists of the following:
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September 30, 1999 March 31, 1999
<S> <C> <C>
Furniture and leasehold improvements $ 305,812 $ 350,027
Equipment and software 1,321,522 1,187,634
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1,627,333 1,537,661
Less accumulated depreciation (1,134,392) (1,045,660)
----------- -----------
Net property and equipment $ 492,941 $ 492,001
=========== ===========
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the audited
Consolidated Financial Statements as filed in the Company's annual report Form
10-KSB. Except for the historical information contained herein, the matters
discussed in this 10-QSB are forward-looking statements that involve a number of
risks and uncertainties. There are certain important factors and risks,
including the rapid change in hardware and software technology, market
conditions, the anticipation of growth of certain market segments and the
positioning of the Company's products and services in those segments,
seasonality in the buying cycles of certain of the Company's customers, the
timing of product announcements, the release of new or enhanced products, the
introduction of competitive products and services by existing or new competitors
and the significant risks associated with the acquisition of new products,
product rights, technologies, businesses, the management of growth, the
Company's ability to attract and retain highly skilled technical, managerial and
sales and marketing personnel, and the other risks detailed from time to time in
the Company's SEC reports, including reports on Form 10-KSB and Form 10-QSB,
that could cause results to differ materially from those anticipated by the
statements made herein. Therefore, historical results and percentage
relationships will not necessarily be indicative of the operating results of any
future period.
INTRODUCTION
The Company provides systems integration services, software development,
proprietary software products and related services. The majority of the
Company's revenues are generated from systems integration and related product
sales. The Company's services include systems integration, and national and
regional support in Internet and intranet application and framework design,
enterprise and workgroup client/server design and optimization, relational
database development, LAN/WAN and workgroup solutions, Internet/intranet design
and connectivity, and graphic design services for the World Wide Web. The
Company's software development expertise provides an internal resource for
development needs in integration and custom projects. The Company's proprietary
products include manufacturing, distribution, and resource tracking software for
commercial clients, as well as its intranet-based sales tracking and reporting
system and intranet-based document management, warehousing and retrieval system.
The Company's products are not directed to the retail consumer market. For
additional information on the combined operating results of the Company and its
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.
As previously reported in the Company's Report on Form 10-KSB for the fiscal
year ended March 31, 1998, the Company's securities were delisted from both the
Nasdaq Stock Market and the Boston Stock Exchange in August 1998. Delisting
resulted from the Company's failure to maintain the minimum net tangible asset
requirement of the Nasdaq Stock Market. Trading of the Company's securities may
continue to be conducted on the OTC Electronic Bulletin Board or in the
non-Nasdaq over-the-counter market. As a result, a holder of the Company's
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securities may find it more difficult to dispose of, or to obtain accurate
quotations as to the market value of, the Company's securities. In addition,
purchases and sales of the Company's securities may be subject to Rule 15g-9
(the "Rule") promulgated by the Securities and Exchange Commission (the "SEC").
The Rule imposes various sales practice requirements on broker-dealers who sell
securities governed by the Rule to persons other than established customers and
accredited investors (generally institutions with assets in excess of $5 million
or individuals with a net worth in excess of $1 million or annual income
exceeding $200,000 or $300,000 jointly with their spouse). For transactions
covered by the Rule, the broker-dealer must make a special suitability
determination for the purchaser and have received the purchaser's written
consent to the transaction prior to sale. Consequently, the Rule may have an
adverse effect on the ability of broker-dealers to sell the Company's securities
and may affect the salability of the Company's securities in the secondary
market.
The SEC has also adopted rules that regulate broker-dealer practices in
connection with transactions in "penny stocks." Penny stocks generally are
equity securities with a price less than $5.00 per share, other than securities
registered on certain national securities exchanges or quoted on the Nasdaq
system. With the Company's securities delisted from the Nasdaq SmallCap Market,
they may come within the definition of penny stocks because the trading price of
the Company's common stock in currently below the $5.00 per share threshold. The
penny stock rules require a broker-dealer, prior to a transaction in a penny
stock not exempt from the rules, to deliver a standardized document prepared by
the SEC that provides information about penny stocks and the nature and level of
risks in the penny stock market. The broker-dealer must also provide the
customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction, and
monthly account statements showing the market value of each penny stock held in
the customer's account. The bid and offer quotations, and the broker-dealer and
salesperson compensation information must be given to the customer prior to
effecting the transaction. These disclosure requirements may have the effect of
reducing the level of trading activity in the secondary market for a stock that
becomes subject to the penny stock rules.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Net Sales. Net sales for the second quarter of fiscal 2000 were $10,089,321
compared to $3,709,206 for the second quarter of fiscal 1999, an increase of
$6,380,115 or approximately 172%. The sales increase was primarily the result of
a significant increase in the sales of third party products and the additional
sales staff at Basis. Sales of third party hardware for the period were
$6,556,521 an increase of approximately 193% over sales for the same period one
year ago of $2,231,817. Sales of software licenses, which included third party
licenses as well as proprietary software, were $1,889,867 for the period,
reflecting an increase of $995,223, or approximately 111% over sales of $894,644
for the second quarter of the previous fiscal year. Service sales for the
period, which were comprised predominately of integration services, were
$1,642,933 compared to $582,745 for corresponding period of the previous fiscal
year, an increase of $1,060,188, or approximately 181%. The new sales staff has
concentrated initially on sales of hardware and third party software, which
historically leads to additional service sales over time.
Cost of Sales. Cost of sales was approximately $8,188,243, or 81.1% of total
net sales, for the period ended June 30, 1999, versus approximately $2,752,387,
or 74.2% of net sales, for the same period of the previous year. The increased
cost was due primarily to the increased sales. The increase, as a percentage of
net sales, reflects the increasingly higher cost of third party products. For
the September quarter, cost of sales as a percentage of net sales was consistent
with the results of the previous quarter. The Company expects to see the margins
on sales of third party products continue to decrease as a result of continued
competition and pricing pressure in the computer market. The Company plans to
offset the increasing cost of third party products by improving sales of related
higher margin services.
Selling and Marketing. Selling and marketing expenses were $712,123, or 7.1%
of net sales, for the three month period ended September 30, 1999, compared to
$365,362, or 9.9% of net sales for the same period of the previous fiscal year.
The increase in selling and marketing expenses (a decrease as a percentage of
net sales) for the period is due, in part, to the continued reorganization of
the sales staff at the Basis subsidiary. The Company expects selling and
marketing expenses to increase as sales increase.
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General and Administrative. General and administrative expenses for the
second quarter of fiscal 2000 were $1,319,139, or 13.1% of net sales, compared
to $1,267,358, or 34.2% of net sales, for the second quarter of the previous
fiscal year. The increase (a decrease as a percentage of net sales) was the
result of increases in staff to support increased sales, and in corporate staff
related to current efforts to consolidate the accounting and administrative
functions. The Company expects to reduce administrative expenses as the
consolidations continue.
Research and Development. The Company did not incur any research and
development expense during the quarter. Research and development is primarily
related to updates of proprietary software. The Company does not expect to incur
any additional research and development expense during the remainder of the
fiscal year.
Operating Loss. The operating loss for the period was $130,184, or 1.3% of
net sales, versus $675,901 or 18.2% of sales, for the same period last year. The
operating loss improvement was the result of increased sales, offset primarily
by increased selling and marketing expenses related to increased sales staff and
the continuing consolidation of accounting and administration functions.
Interest and Other Income. Interest expense and other expense for the period
was $215,291 compared to $124,308 for the corresponding period of the previous
fiscal year, which was mainly interest paid on the current lines of credit,
short term and long term borrowings. The increase is the result of additional
borrowings required to support sales growth and to supplement funds being
generated by operations.
Income Taxes. The Company had no income tax expense for the second quarter
of fiscal 2000 and 1999. As of September 30, 1999, the Company had Federal net
operating loss carryforwards of approximately $11,700,000. The utilization of
net operating loss carryforwards will be limited pursuant to the applicable
provisions of the Internal Revenue Code and Treasury regulations.
Net Loss. The net loss for the quarter ended September 30, 1999 was
$345,475, or approximately $.06 per share, versus a loss of $800,209, or
approximately $.18 per share, for the same period of the prior fiscal year. The
decrease in net loss was the result of increased sales, offset by increased
operating expenses and interest expense.
SIX MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Net Sales. Net sales for the six months ended September 30, 1999 were
$18,283,828 versus the net sales for the same period one year ago of $9,079,649,
an increase of $9,204,179, or approximately 101%. The sales increase was
primarily the result of a significant increase in the sales of third party
products and the additional sales staff at Basis. Sales of third party hardware
for the period were $12,870,222 an increase of approximately 131% over sales for
the same period one year ago of $5,564,736. Sales of software licenses, which
included third party licenses as well as proprietary software, were $3,097,670
for the six month period, reflecting an increase of $1,749,577, or approximately
129% over sales of $1,348,093 for the first six months of the previous fiscal
year. Service sales for the period, which were comprised predominately of
integration services, were $2,315,936 compared to $2,166,820 for the
corresponding period of the previous fiscal year, an increase of $149,116, or
approximately 6.9%. The new sales staff has concentrated initially on sales of
hardware and third party software, which historically leads to additional
service sales over time.
Cost of Sales. Cost of sales was approximately $14,834,323, or 81.1% of net
sales, for the six months ended September 30, 1999, versus approximately
$6,710,774, or 73.9% of net sales, for the same period of the previous fiscal
year. The increased cost was due primarily to the increased sales. The increase,
as a percentage of net sales, reflects the increasingly higher cost of third
party products. The Company expects to see the margins on sales of third party
products continue to decrease, the result of continued competition and pricing
pressure in the computer market. The Company plans to offset the increasing cost
of third party products by improving sales of related higher margin services.
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Selling and Marketing. Selling and marketing expenses were $1,084,859, or
5.9% of net sales, for the six months ended September 30, 1999, compared to
$703,979, or 7.8% of net sales, for the same period of the previous fiscal year.
The increase in selling and marketing expenses (a decrease as a percentage of
net sales) for the period is due, in part, to the continued reorganization of
the sales staff at the Basis subsidiary. The Company expects selling and
marketing expenses to increase as sales increase.
General and Administrative. General and administrative expenses for the six
month period ended September 30, 1999 were $2,538,889, or 13.9% of net sales,
compared to $2,468,326, or 27.2% of net sales, for the same period of the
previous fiscal year. The increase (a decrease as a percentage of net sales) was
the result of increases in staff to support increased sales, and in corporate
staff related to current efforts to consolidate the accounting and
administrative functions. The Company expects to reduce administrative expenses
as the consolidations continue.
Research and Development. The Company did not incur any research development
expense during the six months ended September 30, 1999. Research and development
expense for the six months ended September 30, 1998 was approximately $51,750,
or 0.6% of net sales. Research and development is primarily related to updates
of proprietary software. The Company does not expect to incur any research and
development expense during fiscal 2000.
Operating Loss. Operating loss for the six month period ended September 30,
1999 decreased to $174,243, or 1% of net sales, versus the operating loss of
$855,180, or 9.4% of net sales, for the same period last year. The operating
loss improvement was the result of increased sales, offset primarily by
increased selling and marketing expenses related to increased sales staff and
the continuing consolidation of accounting and administration functions.
Interest and Other Income. Interest expense and other expense for the first
six months of fiscal 2000 was $284,888 compared to $219,635 for the same period
of the previous fiscal year. The increase is the result of additional borrowings
required to support sales growth and to supplement funds being generated by
operations.
Income Taxes. The Company had no income tax expense for the first six months
of fiscal 2000 and 1999. As of September 30, 1999, the Company had Federal net
operating loss carryforwards of approximately $11,700,000. The utilization of
net operating loss carryforwards will be limited pursuant to the applicable
provisions of the Internal Revenue Code and Treasury regulations.
Net Loss. The net loss for the six months ended September 30, 1999 was
$459,131, or approximately $.09 per share, versus a loss of $1,142,749, or
approximately $.25 per share, for the same period of the previous fiscal year.
The decrease in net loss was the result of increased sales, offset by increased
operating expenses and interest expense.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Capital Resources. At September 30, 1999 the Company had
working capital of approximately $1,460,410 versus a deficit of approximately
$1,299,000 at March 31, 1999. The cash balance at September 30, 1999 was
approximately $489,598, of which $300,000 was restricted as security for the
Company's line of credit.
Cash used by operations during the six month period ended September 30, 1999
was approximately $3,165,949. Cash generated by operations during the same six
month period of the previous fiscal year totaled approximately $31,040. Cash
used in investing activities was approximately $90,072 at September 30, 1999 and
approximately $83,099 at September 30, 1998. Cash provided by financing
activities for the six months ended September 30, 1999 totaled approximately
$3,317,457 as the result of additional advances from the Companies line of
credit and the issuance of common stock. Cash used by financing activities
totaled approximately $49,372 for the six months ended September 30, 1998.
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The Company has not integrated the sale of its proprietary software into its
subsidiaries and has not generated the increase in professional service revenue
it had anticipated and has therefore not generated the higher margins that it
had expected. The result is that historically the Company has been unable to
generate sufficient internal cash flows to support operations, and has been
dependent upon capital reserves and outside capital sources to supplement cash
flow. New equity investments, lines of credit and other borrowings, and credit
granted by its suppliers have enabled the Company to sustain operations over the
past several years. In August 1998, the Company had failed to meet the
"continued listing criteria" established by NASDAQ and the Company's Securities
were delisted from the NASDAQ Small Cap Market. The subsequent lack of liquidity
in the Company's securities has materially affected the Company's ability to
attract equity capital. Additionally, the lack of capital resources has
precluded the Company from effectively executing its strategic business plan.
The ability to raise capital and maintain credit sources is critical to the
continued viability of the Company.
During July 1999, the Company entered into a Stock Purchase and Merger
Agreement ("SPMA") with Sunburst Acquisitions IV, Inc., a Colorado corporation
("Sunburst"). The terms of the SPMA require that Sunburst purchase up to
5,280,763 shares of common stock of the Company for $3,000,000 pursuant to a
Regulation D Exemption under the United States Securities Act of 1933, as
amended. The investment by Sunburst is to be staged in two parts. The first
stage ("Tranche 1") purchases 3,459,972 shares at $0.2890 per share, for a total
of $1,000,000. The Company received the initial $1 million during August 1999.
The second stage ("Tranche 2") purchases up to 1,820,791 shares at $1.0984 per
share, for a total of $2,000,000. The Company shall use the proceeds from
Tranche 1 primarily as working capital. The proceeds from Tranche 2 are intended
to be used by the Company to facilitate the acquisition of another
(unaffiliated) company (the "Tranche 2 Acquisition"), and funded essentially
simultaneously with the closing of the Tranche 2 Acquisition.
Subject to shareholder approval, upon closing of the Tranche 2 Acquisition
it is intended that the Company initiate the process to be merged with and into
Sunburst or a subsidiary of Sunburst organized for that purpose. As a condition
to closing of the merger, Sunburst is obligated to have a binding commitment
from other investors, satisfactory to the Company in form and substance, to
purchase from Sunburst or the surviving entity 890,287 shares of common stock at
$2.246 per share, for a total of $2,000,000 ("Tranche 3"). The proceeds from
this financing are also intended to facilitate an additional acquisition(s). If,
by December 15, 1999, either the Tranche 2 Acquisition has not been closed or
the Company has not been merged with Sunburst, then Sunburst will purchase
455,208 shares of the Company's Common Stock (at a price of $1.098 per share)
for a total purchase price of $500,000. Such purchase shall be credited against
Sunburst's contractual obligation to complete the Tranche 2 purchase. After the
merger, the shareholders of the Company as of March 31, 1999, without dilution
for existing warrants, options or other such derivatives, would hold no less
than 47.15% of the common stock of Sunburst or the surviving entity. All
outstanding warrants and options to acquire Company stock that are not exercised
prior to the merger will be automatically converted into an option or right to
purchase a like number of shares from Sunburst or the surviving entity. Upon
completion of the merger, the carrying value of the Company's assets may be
revised to reflect purchase accounting.
The three investment stages in the SPMA could potentially provide the
Company with the equivalent of a $5,000,000 capital infusion. Upon the merger,
Prologic shareholders, including those holding exercisable derivatives, would
retain approximately 50% of the merged entities. The potential acquisitions,
which are conditions to closing the future financing, will be consistent with
the Company's strategic business plan. With the capital resources available to
properly manage them, the acquisition of two or more profitable companies should
significantly expand the Company's revenues and enhance earnings. The resulting
increase in internally generated cash flows should greatly reduce the Company's
dependence upon outside capital sources. Additionally, the Company would expect
to be the beneficiary of, through the acquisitions, qualified executive
management, technical, and sales personnel, as well as new product and service
offerings. The Company believes that the SPMA can be the catalyst that will
provide its shareholders and investors the opportunity to participate in liquid
securities, trading in an orderly market.
In the future, the Company may require additional equity, working capital
and/or debt financing to maintain current operations as well as achieve plans
for future expansion. No assurance can be given of the Company's ability to
obtain such financing on favorable terms, if at all. If the Company is unable to
obtain additional financing, its ability to achieve plans for current and future
expansion could be materially adversely affected.
11
<PAGE> 12
During fiscal 1998, the Company signed a financing agreement with Coast
Business Credit for a line of credit in an amount of the lower of $5,000,000 or
the sum of 85% of eligible accounts receivable, restricted cash (see Note 5 of
the Consolidated Financial Statements) and equipment loans (maximum of
$250,000). This credit facility is designed to provide working capital to
support the Company's sales growth for both subsidiaries. Among other things the
agreement required that the Company maintain a combined net worth at its BASIS
and GRSI subsidiaries of at least $750,000. The Company was in compliance of
this requirement at September 30, 1999. The total amount of the line of credit
outstanding at September 30, 1999 was approximately $3,919,915.
During fiscal 1997, the Company borrowed approximately $100,000 at a rate of
8%, which was scheduled to become due on June 30, 1997. During July 1997, the
note holder agreed to extend maturity on a month-to-month basis. As a result of
the extension, the Company issues 10,000 restricted common shares per month to
the note holder in consideration for the term of the extension. As of September
30, 1999 the note was still outstanding.
In addition, during fiscal 1997 the Company borrowed $820,000 in a private
offering of 10% Subordinated Convertible Notes due December 31, 1999. Prior to
September 30, 1997, with the exception of one $100,000 note holder, the Company
renegotiated the conversion terms with the note holders of the remaining
$720,000. The revised terms assign a fixed conversion price of $3.75 per share.
In addition, the note holders have been granted warrants to purchase a total of
252,000 shares of the Company's common stock at a price of $2.00 per share. The
warrants will expire on December 31, 2001. During December 1997, one $100,000
note holder exchanged the debt for unregistered common stock of the Company. The
common stock was exchanged at a price of $.625 per share for a total of 160,000
shares. In fiscal 1999, the remainder of the note holders representing $720,000
converted to 72,000 shares of unregistered Series B Cumulative Convertible
Preferred Stock with a fixed conversion rate of $3.75 per share of common stock
and received warrants to purchase an additional 72,000 shares of unregistered
common stock at a price of $1.00 per share. These warrants expire on March 31,
2001. If by December 31, 1999, the Series B Cumulative Convertible Preferred
Stock has not been redeemed and the redemption price paid in full, or the
Company has not raised at least $1.5 million from the sale of its equity
securities excluding the Series B Preferred Stock, the conversion rate shall
become fifty percent (50%) of the average of the closing "bid" and "asked" price
of the Common Stock on the NASDAQ Stock Market during the month of December 1999
(or, if the Common Stock is not then quoted on the NASDAQ Stock Market, the
closing prices on such other market on which the Common Stock is then quoted).
During fiscal 1997 and 1998, the Company borrowed $365,000 in short term
notes collateralized by its computer equipment and office furnishings.
Subsequently, $170,000 of these notes was exchanged for 288,000 shares of common
stock and $45,000 in principle was repaid. Interest on these notes is paid
monthly at a rate of 2%. As of September 30, 1999, the principle remaining on
these notes is $150,000, which is currently due and payable.
During the first six months of fiscal 2000, the Company purchased
approximately $90,072 in capital equipment and software.
Year 2000 Issue. The Company's proprietary manufacturing software product
line was Year 2000 compliant in July 1998 and was released during the quarter
ending September 30, 1998. The Company's internal development tools are Year
2000 compliant. The proprietary wholesale distribution software product line was
Year 2000 compliant as of April 1999 and was released in May 1999. Internally,
the Company uses its distribution software accounting package. The Company is
not currently aware of any significant Year 2000 compliance problems relating to
the Company's proprietary software systems that would have a material and
adverse effect on business, results of operations and financial condition.
Furthermore, the Company does not believe that clients utilizing its Year 2000
compliant software products will have any problems with their vendors or
customers because of the Year 2000 issue due to the use of the Company's
software products. However, there can be no assurance that the Company will not
discover Year 2000 compliance problems in its proprietary software or other
third-party software or hardware that will require a substantial investment to
correct. The Company's inability to fix such software on a timely basis could
result in lost revenues, increased operating costs and other business
interruptions, any of which could have a material and adverse effect on the
Company's business, results of operations and financial condition. Additionally,
there can be no assurance that utility companies, Internet network companies,
Internet access companies, third-party service providers and others outside the
Company's control will be Year 2000 compliant. Costs relating to the development
of the Year 2000 issue were included in the research and development expenses
during the fiscal year ended March 31, 1999.
12
<PAGE> 13
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This form 10-QSB may contain forward-looking statements that involve risks and
uncertainties, including, but not limited to, the impact of competitive products
and pricing, product demand and market acceptance risks, the presence of
competitors with greater financial resources, product development and
commercialization risks, costs associated with the integration and
administration of acquired operations, capacity and supply constraints or
difficulties, the results of financing efforts and other risks detailed from
time to time in the Company's Securities and Exchange Commission filings,
including the Company's 1999 Form 10-KSB.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of the date of this filing, neither the Company nor its subsidiaries are
a party to any legal proceedings, the outcome of which, in management's opinion,
would have a material adverse effect on the Company's operations or financial
position.
ITEM 2. CHANGES IN SECURITIES
In August 1999, the Company reduced the number of authorized shares of its
Series A 8% Cumulative Convertible Preferred Stock from 750,000 shares to the
currently issued and outstanding 16,667 shares. The remaining shares of
preferred stock may have preferences, limitations, and relative rights may be
determined by the Board of Directors from time to time.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE BY SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
On September 22, 1999, the Company reported on Form 8-K that it had entered
into a definitive agreement to acquire Solid Systems, Inc. subject to the
completion of certain conditions of the Agreement and Plan of Merger and
Reorganization. The Company anticipated that the Merger would become effective
by November 15, 1999. Subsequent to that report, with the exception of the "No
Solicitation" provision of the Agreement which expired on November 15, 1999, the
Company and Solid Systems agreed to extend the closing date to December 15,
1999.
Subsequent to September 30, 1999, the Company terminated its Tucson office
lease with HFG Properties in order to secure office space that would accommodate
future expansion. The Company's new lease has a monthly rate comparable to that
of its previous lease.
On October 26, 1999, The Company's Chief Financial Officer, William E.
Wallin, resigned to take a similar position with another company. Subsequently,
the Company elevated its Assistant Controller, Margaret O'Connor, to the
position of Controller, and the Company's Chief Executive Officer, James M.
Heim, is serving as interim Chief Financial Officer.
13
<PAGE> 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 10QSB
A. Exhibits:
<TABLE>
<CAPTION>
Exhibit Number Document Page
-------------- -------- ----
<S> <C> <C>
11.1 Schedule of Computation of Net Loss Per Share 15
27 Financial Data Schedule
</TABLE>
B. Reports:
During the second quarter of fiscal 2000, the Company filed the following
reports on Form 8-K:
Current Report on Form 8K filed August 19, 1999, reporting under Item 5,
the Company's Stock Purchase and Merger Agreement with Sunburst
Acquisitions IV, Inc.
Current Report on Form 8K filed September 22, 1999, reporting under Item
5, the Company's definitive agreement to acquire Solid Systems, Inc.
14
<PAGE> 15
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.
<TABLE>
PROLOGIC MANAGEMENT SYSTEMS, INC.
<S> <C>
DATED: November 19, 1999 By: /s/ James M. Heim
-------------------------------------
James M. Heim
President and Chief Executive Officer
By: /s/ James M. Heim
-------------------------------------
James M. Heim
President, (Principal Financial and
Accounting Officer)
</TABLE>
15
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Document
-------------- --------
<S> <C>
11.1 Schedule of Computation of Net Loss Per Share
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 11.1
SCHEDULE OF COMPUTATION OF NET LOSS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss applicable to common stock $ (366,142) $ (820,209) $ (500,020) $(1,142,749)
Weighted average number of common shares equivalent:
Common shares outstanding 5,879,601 4,541,266 5,303,694 4,563,207
Common equivalent shares representing shares
issuable upon exercise of stock options and warrants
Incremental common equivalent shares (calculated 0 0 0 0
using the higher of end of period or average fair
market value)
Total weighted average shares - as adjusted 5,879,601 4,541,266 5,303,694 4,563,207
Basic (0.06) (0.18) (0.09) (0.25)
Diluted (0.06) (0.18) (0.09) (0.25)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 489,598
<SECURITIES> 0
<RECEIVABLES> 6,843,413
<ALLOWANCES> 245,688
<INVENTORY> 193,057
<CURRENT-ASSETS> 7,428,943
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,933,755
<CURRENT-LIABILITIES> 5,968,533
<BONDS> 0
0
619,884
<COMMON> 9,499,845
<OTHER-SE> (11,968,782)
<TOTAL-LIABILITY-AND-EQUITY> 8,933,755
<SALES> 12,870,222
<TOTAL-REVENUES> 18,283,828
<CGS> 0
<TOTAL-COSTS> 14,834,323
<OTHER-EXPENSES> 3,623,748
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 268,333
<INCOME-PRETAX> (459,131)
<INCOME-TAX> 0
<INCOME-CONTINUING> (459,131)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (459,131)
<EPS-BASIC> (.09)
<EPS-DILUTED> (.09)
</TABLE>
