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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, 1999.
Commission file number: 33-89384-LA
PROLOGIC MANAGEMENT SYSTEMS, INC.
(Name of small business issuer in its charter)
Arizona 86-0498857
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
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: $17,078,678.
As of March 31, 1999, the aggregate market value of voting stock held by
non-affiliates of the issuer: $141,340.47 based on Common Stock of 4,711,349.
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, 1999 was 4,711,349.
Transitional Small Business Disclosure Format: Yes [ ]; No [X].
DOCUMENTS INCORPORATED BY REFERENCE:
Financial Statements
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PART I
RECENT DEVELOPMENTS
Stock Purchase and Merger Agreement
On July 8, 1999, Prologic Management Systems, Inc. (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 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, on the earlier of the closing of the
Tranche 2 Acquisition or September 30, 1999, 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). 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
purchasing accounting. On the effective date of the merger, the name of the
surviving entity will be changed.
Prior to the SPMA with the Company, Sunburst Acquisitions IV, Inc.
(OTC: SBAQ) was a reporting, development stage corporation with no material
assets, no operations and no trading of its common stock. A group of investors
with whom the Company has been negotiating, led by Century Financial Partners,
Inc. and Bristol Capital, LLC, both principally located in Los Angeles,
California, acquired controlling interest of Sunburst and are providing the
funds required by the SPMA. Mr. James M. Heim, President and CEO of the Company
will remain in a similar capacity with Sunburst or the surviving entity pursuant
to the terms of his previously existing Employment Agreement. Additionally, Mr.
Heim has entered into a Voting Trust Agreement with Sunburst, in accordance with
the terms of the SPMA, giving Sunburst the voting rights to 100% of the voting
shares he beneficially owns or controls. The Company anticipates releasing
further details of the agreement in a subsequent filing.
The Company's Analysis
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
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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. Prior to the SPMA, numerous capital opportunities had presented
themselves to the Company, however, none of these "opportunities" were deemed to
be in the best interest of the Company or its shareholders.
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,
the shareholders of record as of March 31, 1999, 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.
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ITEM 1. BUSINESS
GENERAL
Prologic Management Systems, Inc. is an Arizona corporation founded in
1984. The Company is a commercial systems integration and software development
firm. The Company's subsidiaries, BASIS, based in Emeryville, California, and
GRSI, based in St. Paul, Minnesota, 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. The
Company's Prologic Tucson office has software development expertise in
manufacturing, distribution and resource tracking for 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 World Wide Web Site can be accessed at
www.prologic.com.
In September 1995, Prologic acquired GRSI, a commercial systems
integration firm based in St. Paul, Minnesota. In August 1996, Prologic acquired
BASIS, a regional systems integration company based in the San Francisco Bay
Area with a regional office in Portland, Oregon. The Company has consolidated
the operations of the GRSI subsidiary with its BASIS subsidiary to achieve
operating efficiencies and to centralize management. The Company has been
working toward centralizing its financial reporting and some administrative and
marketing functions at its corporate office in Tucson, Arizona. The financial
reporting and accounting system at its GRSI subsidiary have been successfully
centralized at the Company's corporate office. The financial reporting and
accounting system conversion at its BASIS subsidiary is currently in progress
and expected to be completed by the end of the second quarter of fiscal 2000.
PRODUCTS AND SERVICES
The Company provides systems integration services, software
development, proprietary software products and related services; however, 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 and distribution 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 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. Since 1996, the
Company has continued to increase sales of its systems integration services,
which have a higher margin than sales of computer hardware and related services.
Over the long term, the Company believes that the sale of professional services
and proprietary software offers the greatest opportunity to increase the
Company's overall margins, and the Company focuses its development expenditures
principally on software and service development activities. To date, sales of
the Company's professional services and proprietary software have represented an
increasingly important percentage of gross
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margins. During the Company's fiscal year ended March 31, 1999 approximately 48%
of the Company's total gross margin was generated by professional services and
proprietary software. During the same fiscal year, approximately 52% of the
Company's gross margin was generated by hardware sales and related third-party
software, which have materially lower margins than sales of professional
services, systems integration services or proprietary software.
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 and 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 focused a
limited amount of development resources to address Year 2000 compliance and
enhance and improve its 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.
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 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 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.
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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 that 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.
MARKETING AND DISTRIBUTION
The Company's overall marketing and distribution effort is directed by
its corporate office in Tucson. 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 with its commercial systems
integration expertise, leveraging its reputation and client base, and in the
long term promote the sale of professional services and 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 has joint marketing relationships with leading hardware
vendors and will continue to offer its systems integration expertise. The
Company currently resells products from or has marketing agreements with Access
Graphics, Cisco, Informix, Netscape Communications Corporation, Oracle,
Progressive Networks, Remedy, Sun Microsystems, SunSoft, Sybase, Symbol
Technologies and Veritas.
The Company has established sales and/or integration offices in
Portland, Maine (Prologic), Emeryville, California (BASIS), Portland, Oregon
(BASIS), and St. Paul, Minnesota (GRSI), 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 in
accordance with the Company's long-range business plan.
GROWTH STRATEGY
The Company's strategy is to grow its revenue both by increasing its
systems integration services within its customer base at existing Company
locations, and by acquiring existing systems integration companies and
businesses. In addition to the Company's strategic business plan, such
acquisitions are also a condition to closing the financing stages in accordance
with the SPMA. (See PART I, RECENT DEVELOPMENTS, "Stock Purchase and Merger
Agreement") The Company has identified and qualified a number of potential
acquisition candidates in targeted geographical locations. These candidates have
technical personnel and sales resources that would be complementary to the
Company's business plan. Once acquired, the Company's corporate office 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 at the Company's corporate
office.
As acquisitions are integrated into the overall operations, the
Company's 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 proprietary software products and related services.
Management believes that higher margins, if achieved, will enable the Company to
internally fund the growth of the operations to take advantage of the
significant acquisition and other growth opportunities that exist in the market.
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The Company believes that its acquisition strategy is the most
cost-effective avenue of growth for the Company. However, delisting of the
Company's securities and the lack of capital resources had caused the Company to
temporarily suspend its acquisition activity.
COMPETITION
The systems integration and computer software industries are highly
competitive, include participants from a variety of market segments, are subject
to rapid change and have low barriers to entry. The competition in systems
integration services includes mid-level and regional systems integrators,
international, national and regional 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, Cambridge
Technology Partners, Computer Sciences Corporation, PricewaterhouseCoopers,
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 its dedication to maintaining
up-to-date certification standards to provide its clients with a higher standard
of customer service.
The Company's software products are intended for sale to clients with
annual revenues of approximately $10,000,000 to $100,000,000. Although the
Company is not a significant competitor in the manufacturing and distribution
markets, it 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. The Company distributes its software products
through a national network of dealers and a field salesperson on the East Coast.
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.
Many participants in the software development and systems integration
businesses have significantly greater financial, technical, and marketing
resources than does the Company. The Company expects that competition in the
services industry could increase in the future, partly due to low barriers of
entry. Increased competition could result in price reductions, reduced margins,
or loss of market share for the Company and greater competition for qualified
technical personnel. There can be no assurance that the Company will be able to
compete successfully against current and future competitors. If the Company is
unable to compete effectively, or if competition among information technology
services companies results in a deterioration of market conditions for
information technology services companies, there could be a material adverse
effect on the Company.
DEPENDENCE UPON LIMITED SUPPLY OF SALES, MANAGEMENT AND TECHNICAL PERSONNEL
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 sales personnel,
technicians, managers, and the development by others of competitive services and
software. The Company's Management believes that its principal long-term
challenge is to identify and hire effective sales and project managers and
skilled technical personnel to focus efforts on the marketing and
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sales of professional services and proprietary software products, both through
the Company's systems integration subsidiaries and through direct sales. Many
participants in the professional services, systems integration and software
development businesses have significantly greater financial, technical, and
marketing resources than does the Company.
SOURCES OF PRODUCTS AND UNDERLYING TECHNOLOGY
The principal products used in the Company's systems integration
projects include third-party computer hardware and software. As of July 1999,
the Company has not experienced any material difficulties or delays in meeting
customer shipments. While alternate independent suppliers for such products are
available, the Company is reliant upon licensing and marketing agreements with
the product manufacturers.
The Company's primary supplier, Access Graphics, Inc., whose products
accounted for approximately 60% of the Company's fiscal 1999 revenues, currently
allows the Company to purchase goods on open credit and under a program that
allows customers to assign proceeds from sales of products directly to the
supplier. At March 31, 1999, the Company had balances of $236,007 under the
assignment of proceeds program and $2,560,639 on open credit with this supplier.
The current stated credit limit with this supplier is $600,000. Historically,
the supplier has allowed the Company to exceed its credit limits. However, there
is no assurance that this supplier will continue to do so. Although this
supplier is not the sole source of these products, the Company has a long
relationship with this supplier and would like to continue the relationship.
Management is currently pursuing options available to the Company for increasing
the credit limit and financing purchases with other sources. Although this
relationship and the stated credit limit have not caused delays in meeting
customer shipments, management believes that because of the trends in the
Company's operating results and the current low credit limit that the Company's
ability to meet customer demands could be affected.
The Company has numerous underlying agreements with third-party
hardware and software companies concerning the distribution and support of their
products. There are a limited number of companies that have comparable products.
Furthermore, the loss of any license agreement with a significant supplier or
manufacturer could interrupt the sales of the Company's products and services
and have a material adverse impact on the Company.
DEPENDENCE UPON LIMITED NUMBER OF CUSTOMERS
The Company's five largest clients in fiscal year ended March 31, 1999
accounted in the aggregate for 30.62% of total revenues at 13.45%, 6.80%, 4.07%,
3.22% and 3.08% of total revenues, respectively; and in fiscal 1998, the five
largest clients accounted in the aggregate for 38.25% at 14.94%, 8.60%, 5.47%,
4.84% and 4.40% 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 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.
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Furthermore, such customers are concentrated in specific geographic
areas. 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 these areas.
PRODUCT DEVELOPMENT
The market for application 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 will depend in part on 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 6 full-time programmers in
product support and development at March 31, 1999.
Product development employees' time is expensed to research and
development. Due to current restraints in working capital, the Company has
significantly reduced corporate-funded development. In the future the Company
may be required to expend substantial funds for continuing product development,
including expenses associated with research and development activities and
additional engineering and other technical personnel. There can be no assurance
that such funds will be available to the Company given its current financial
condition and results of operations. Any failure by the Company to anticipate or
respond adequately to technological developments, customer requirements, or new
design and production techniques, or any significant delays in product
development or introduction, could have a material adverse effect on the
operating results of the Company.
EMPLOYEES
As of March 31, 1999, the Company had approximately 45 full-time
employees, including 22 in technical services, 6 in sales and marketing and 15
in finance and administration. The Tucson office employed 19 full-time
employees, and the Company's integration subsidiaries had 26 full-time
employees. The Company's employees are not represented by any collective
bargaining organization, and the Company has never experienced a work stoppage.
The Company believes that its relations with its employees are satisfactory.
<PAGE> 10
ITEM 2. PROPERTIES
The Company'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 that 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 5,382 square feet of office space in Eagan, Minnesota. The
GRSI lease expires in December 2003. BASIS leases 10,700 square feet of office
space in Emeryville, California, under a month-to-month lease, pending renewal.
BASIS' Portland, Oregon site leases 2,672 square feet of office space under a
lease that expires in December 1999.
If the Company were to require additional or alternate space within the
next twelve months, the Company believes that the 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.
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, 1999.
<PAGE> 11
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). As of March 31, 1999, the Company's common stock warrants had
expired. In addition, with the delisting of the Company's securities from the
NASDAQ Small Cap and the Boston Stock Exchange in August 1998, trading of the
Company's common stock has continued to be conducted on the non-NASDAQ
over-the-counter market, under the symbol PRLO.
The table below represents the high and low bid prices for the Company's common
stock and warrants, as reported by the National Quotation Bureau, from trading
on June 30, 1997 through March 31, 1999. The quotations shown represent
inter-dealer prices without adjustment for retail mark-ups, mark downs or
commissions, and may not necessarily reflect actual transactions.
<TABLE>
<CAPTION>
Common Stock Warrants
Quarter Ended High Low High Low
- ------------- ---- --- ---- ---
<S> <C> <C> <C> <C>
June 30, 1997 $ 1.50 $ 0.62 $ 0.391 $ 0.031
September 30, 1997 $ 1.62 $ 0.50 $ 0.125 $ 0.063
December 31, 1997 $ 1.62 $ 0.62 $ 0.125 $ 0.063
March 31, 1998 $ 1.50 $ 0.68 $ 0.094 $ 0.031
June 30, 1998 $ 1.50 $ 0.625 N/A N/A
September 30, 1998 $ 0.625 $0.0625 N/A N/A
December 31, 1998 $ 0.375 $0.0200 N/A N/A
March 31, 1999 $ 0.250 $0.0312 N/A N/A
</TABLE>
As of April 22, 1999 there were 379 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 on its
common stock in the foreseeable future. During fiscal 1998, the Company had sold
subscriptions for $250,000 of the private placement offering of the Company's 8%
Cumulative Convertible Preferred Stock. In accordance with this offering, the
Company's Board of Directors elected to pay the preferred stockholders cash
dividends totaling $12,657 in lieu of stock dividends. Subsequent to March 31,
1998, $150,000 of the 8% Cumulative Convertible Preferred Stock holders
converted to common stock at $2.00 per share. Pursuant to the terms of the
offering's conversion feature, the holder received 75,000 shares of common stock
and warrants to purchase an additional 75,000 shares of common stock at $2.00
per share. These warrants expire December 31, 2000.
<PAGE> 12
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 by the Company and by companies whose products are sold by the
Company under reseller agreements, 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,
software development and applications software for the commercial market. The
Company's professional services include consulting, systems integration,
software development, maintenance, training and the installation of hardware on
which to implement the Company's as well as third-party software products. The
Company's proprietary applications software is primarily licensed for use to
manufacturers and for use in the wholesale distribution industry. For additional
information on the 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.
RESULTS OF OPERATIONS
COMPARISON OF FISCAL 1999 TO FISCAL 1998
Revenues. Revenues decreased by 21.0% for the year ended March 31, 1999
dropping from $21,623,092 for the previous fiscal year to $17,078,678 for the
year just ended. Sales of third party hardware dropped by 26.8% and sales of
third party and proprietary software licenses decreased by 27.6%, sales of
professional services increased by 13.0%. The decrease in the sale of third
party hardware and third party software is attributable to the sales staff
turnover at both the BASIS and Great River Systems offices during the second and
third quarters. During the fourth quarter the Company began to restaff and
reorganize the BASIS sales department by adding sales personnel and support
staff. During the first quarter of fiscal 2000 the company has added additional
sales staff and technical support.
Sales of proprietary software and professional services generated from
software sales increased by 161% during the year due in part to software updates
for the year 2000 issue and the services revolving around those new releases.
Historically, the Company's revenues in any particular period have been
concentrated among a relatively small number of customers. This is due to the
revenues associated with the initial stages of a
<PAGE> 13
typical system implementation in contrast 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 installation. 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 specific industries and
areas in which the Company's customers have historically been concentrated.
Cost of Sales. Cost of sales decreased during the year dropping from
80.1% of net sales in fiscal 1998 to 76.2% in 1999. Although the cost of third
party hardware sales as a percentage of sales increased from $13,327,312 or
85.5% to $9,909,775 or 86.8% the cost of professional services and software
licenses and third party licenses decreased. Professional services cost 52.5% of
service revenues in fiscal 1998 and decreased to 45.6% in fiscal 1999 while the
cost rate for licenses decreased from 81.6% in fiscal 1998 to 70.7% in 1999.
The increase in the cost of third party hardware was the result of the
continued competition and pricing pressure in the computer hardware market. The
company expects this trend to continue.
The decrease in the rate of professional service cost to service sales
is the result of the increased services provided around the Year 2000 upgrades
and consulting along with increased effectiveness of the delivery of integration
services at the BASIS subsidiary.
The cost of software licenses decreased as a percentage of sales
because of the increased sale of high margin proprietary software in relation to
total software license sales. The cost of the proprietary software is low due to
the Company's complete write-off over the last several fiscal years of all of
its unamortized software development cost. Sale of third party hardware remained
similar to the previous fiscal year.
Gross Profits. Gross profit improved as a percentage of sales to 23.8%
in fiscal 1999 from 20.0% in fiscal 1998 due to the increased sales of higher
margin professional services as well as the decreased cost of providing services
and the reduced cost of software license sales. The result of the total sales
decrease of 21.0% offset by the decreased cost as a percentage of sales reduced
the total gross profit by $234,539 or 1.4% of total sales.
Selling and Marketing. As a result of the sales staff turnover during
the second and third quarters of fiscal 1999 selling and administrative expenses
decreased by $714,969 from $1,938,907 or 9.0% of sales to $1,223,938 or 7.2% of
sales. The decrease included salaries, commissions and other payroll related
expenses as well general expenses associated with the San Jose office and the
Sacramento office. The Company expects selling and marketing expenses to
increase as a percentage of sales during fiscal 2000 as additional sales staff
is hired.
General and Administrative. General and administrative expenses
increased during the fiscal year by $995,316. Fiscal 1998 expenses were
$3,404,225 or 15.7% of sales versus $4,399,541 or 25.8% of sales for fiscal
1999. The increase was due in part to expanding the company's technical services
staff to support the increase in integration service sales, increases in
corporate staff related to the consolidation of accounting, management and
administrative functions, and the severance cost of approximately $75,000
related to the elimination during fiscal 1999 of certain senior management
positions. The Company was required to retain certain senior management
personnel for prescribed periods pursuant to agreements related to the
acquisitions of the Company's two subsidiaries. The more significant payments
under the terms of the employment agreements were completed during the fourth
quarter of fiscal 1999. The Company expects to reduce general administrative
expenses as the planned consolidations continue.
<PAGE> 14
Research and Development. During the year the Company incurred
approximately $51,750 in research and development expense. During the previous
year the Company's research and development expenses were $523,306 or 2.4% of
sales. Research and development is primarily involved in upgrading current
proprietary software modules, including efforts to meet Year 2000 compliance
Expenses Associated with Raising Capital. During fiscal 1998 the
Company incurred $244,985 in expenses that were associated with the Company's
attempts to raise additional capital. These expenses included fees paid to
consultants in both Europe and the United States for efforts taken on the
Company's behalf to sell preferred stock in Europe. The Company ceased to offer
the securities upon the effectiveness of amendments to Regulation S adopted by
the Securities and Exchange Commission. Other charges included the value of
warrants given as compensation to consultants and financial advisors. The
Company did not incur any expenses associated with raising capital in fiscal
1999.
Loss from Operations. The Company's loss from operations decreased by
$201,655 to $1,847,859 or 10.8% of sales in fiscal 1999 from a loss of
$2,049,514 or 9.5% in fiscal 1998. The reduction in the loss from operations
from the prior fiscal year was the result of the decreased operating expenses,
offset by the reduced gross profit, which was the result of the decreased
revenues. During the year, the Company witnessed significant turnover in sales
staff and an operational restructuring that resulted in the operating loss.
The Company believes that it will continue to see gross profit erode in
the resellers market for both hardware and software sales. Accordingly the
Company's strategy is to continue to increase the sales of integration services
through its subsidiaries and to continue to increase sales of its proprietary
software products and associated services through its subsidiaries' distribution
channels. As sales of services and software increase in relation to the sale of
hardware, the Company expects to see more favorable changes in its results of
operations.
The Company expects that operating results will fluctuate as a result
of a number of factors, including but not limited to: the availability of
adequate capital; the ability to attract and retain highly skilled technical,
managerial and sales and marketing personnel; the timing of new product and
service introductions by the Company, by vendors whose products the Company
resells to its customers, 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 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 the Company's
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 Expense. The Company incurred $413,540 in interest expense
during fiscal 1999 and $477,157 in fiscal 1998. Interest expense is on both long
term and short term debt.
Income Taxes. The Company had no income tax expense for the years ended
March 31, 1999 and 1998. As of March 31, 1999, the Company had federal net
operating loss carryforwards of approximately $11,200,000 (see Note 8 of the
Consolidated Financial Statements for a further discussion of the loss
carryforwards). The utilization of net operating loss carryforwards will be
significantly limited as
<PAGE> 15
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 $2,228,187 or
$0.50 per share in fiscal 1999 and a net loss of approximately $2,610,938 or
$0.67 per share in fiscal 1998. The net loss in fiscal 1999 was attributable to
the lower than expected total revenues offset somewhat by the increased rate of
cost to revenues.
Liquidity and Capital Resources. At March 31, 1999, the Company had a
working capital deficit of approximately $1,299,000 compared to working capital
of approximately $268,000 at March 31, 1998. The cash balance at March 31, 1999
was approximately $428,000, $300,000 of which was restricted as security for the
Company's line of credit.
Cash used in operations during the year totaled approximately $138,015
in 1999 and $2,068,080 in 1998. Cash used in investing activities in 1999 was
approximately $146,454 and approximately $114,560 in 1998. Cash provided by
financing activities in 1999 totaled $237,521 and included the net change in the
line of credit, compared to approximately $1,542,630 in 1998 which is net of the
payoff of the $1,000,000 line of credit with the Company's bank and the issuance
of warrants and preferred stock.
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.
Subsequent to March 31, 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 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.
During July 1999, the Company received a subscription for 3,459,972
shares of common stock for gross proceeds of $1 million as part of the Stock
Purchase and Merger Agreement.
Subject to shareholder approval, on the earlier of the closing of the
Tranche 2 Acquisition or September 30, 1999, 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
<PAGE> 16
$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).
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 purchasing accounting. The Company anticipates releasing
further details of the agreement in a subsequent filing.
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,
the shareholders of record as of March 31, 1999, 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
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.
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 new 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 $1,000,000. The Company received a waiver for
non-compliance with this requirement at March 31, 1998 and modified the
agreement in July 1998 to a combined net worth requirement of $750,000 for both
subsidiaries. The Company was in compliance at March 31, 1999. The total amount
of the line of credit outstanding at March 31, 1999 was approximately $1,234,000
with additional availability of approximately $925,000. At July 15, 1999 the
Company had $2,681,000 outstanding on the line with additional availability of
$155,000. The line matures on March 31, 2001.
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
March 31, 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
<PAGE> 17
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 convertible
preferred stock at a conversion rate of $3.75 per share 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 March 31, 2001.
The Company borrowed $240,000 in short term notes collateralized by its
computer equipment and office furnishings during fiscal 1997. Interest on these
notes is paid monthly at a rate of 2%. During fiscal 1998, an additional
$125,000 was borrowed against this equipment. Of the $365,000, holders of notes
totaling $205,000 agreed to extend through December 31, 1997; the remaining
$160,000 exchanged their debt for unregistered common stock of the Company at a
price of $0.625 per share, for a total of 256,000 shares.
During fiscal 1999, holders of $45,000 of the above notes were paid
off; holders of notes totaling $130,000 extended through July 31, 1998; a
$20,000 note holder agreed to extend on a month-to-month basis with 30 days
notice of payment on demand; and a $10,000 note holder exchanged the debt for
common stock at a rate of $0.625 per share. As of March 31, 1999, $150,000 of
principal remained outstanding on these notes extended on a month to month
basis.
During fiscal 1998, the Company issued 241,330 shares of common stock
at $1.00 per share to three affiliates of the Company for cash and the
assumption of debt. The $1.00 per share price was in excess of the market price
of the Company's common stock on the respective dates of purchase.
During the year, the Company purchased approximately $146,454 in
capital equipment and software.
Also in fiscal 1998, the Company sold $250,000 of its 8% Cumulative
Convertible Preferred Stock pursuant to Regulation S of the Securities Act of
1933. The shares were sold at a price of $6.00 per share, and may be converted
to common stock after June 30, 1998 at $2.00 per share of common stock. The
Company has the right to pay the dividends in cash or in shares of common stock,
and in fiscal 1998, the Company elected to pay cash dividends totaling $12,657
in lieu of stock dividends. During fiscal 1999, $150,000 of the 8% Cumulative
Convertible Preferred Stock holders converted to common stock at $2.00 per
share. Pursuant to the terms of the offering's conversion feature, the holder
received 75,000 shares of common stock and warrants to purchase an additional
75,000 shares of common stock at $2.00 per share. These warrants expire December
31, 2000.
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 and
does not foresee any problems in converting to the Year 2000 compliant version
of its software. The Company does not foresee any problems in working with
third-party companies or clients because of the Year 2000 issue. Furthermore,
the Company does not believe that clients utilizing its updated software
products will have any problems with their vendors because of the Year 2000
issue due to the use of the Company's software products. Costs relating to the
development of the Year 2000 issue have been included in the research and
development expenses over the fiscal year ended March 31, 1999.
<PAGE> 18
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This Form 10-KSB contains 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.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB")
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 and has been adopted by the company for
the year ended March 31, 1998.
In October 1995, FASB issued SFAS No. 123, "Accounting for Stock-based
Compensation". This Statement establishes financial accounting and reporting
standards for stock-based employee compensation plans. Those plans include all
arrangements by which employees receive shares of stock or other equity
instruments of the employer or the employer incurs liabilities to employees in
amounts based on the price of the employer's stock. Examples are stock purchase
plans, stock options, restricted stock, and stock appreciation rights. This
Statement also applies to transactions in which an entity issues its equity
instruments to acquire goods or services from nonemployees. Those transactions
must be accounted for based on the fair value of the consideration received or
the fair value of the equity instruments issued whichever is more reliably
measurable.
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 130, "Reporting Comprehensive Income", during the fiscal year ended March
31, 1999. This Statement establishes standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income refers to revenues, expenses,
gains and losses that under generally accepted accounting principles are
included in comprehensive income but are excluded from net income. Adoption of
this Statement did not have an impact on the Company's current disclosures and
presentation.
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", during the fiscal year ended March 31,
1999. This Statement requires that public companies report certain information
about their major customers, operating segments, products and services, and the
geographic areas in which they operate. Because the Company operates within a
single operating segment, adoption of this statement did not have an impact on
the Company's current disclosures and presentation.
In February 1998, the Financial Accounting Standards Board issued
Statement No. 132, "Employers' Disclosures about Pension and Other
Postretirement Benefits" (SFAS No. 132), which is
<PAGE> 19
effective for financial statements issued for fiscal years beginning after
December 15, 1997. SFAS No. 132 revises employers' disclosures about pension and
other postretirement benefit plans. SFAS No. 132 requires comparative
information for earlier years to be restated. The Company adopted SFAS No. 132
for its fiscal year beginning April 1, 1998. Adoption of SFAS No. 132 did not
have an effect on the Company's financial statement presentation and
disclosures.
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities", which
is effective for financial statements issued for all fiscal quarters of fiscal
years beginning after June 15, 1999. This Statement requires companies to
recognize all derivative contracts as either assets or liabilities in the
balance sheet and to measure them at fair value. If certain conditions are met,
a derivative may be specifically designated as a hedge, the objective of which
is to match the timing of gain or loss recognition on the hedging derivative
with the recognition of (i) the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk or (ii) the earnings effect
of the hedged forecasted transaction. For a derivative not designated as a
hedging instrument, the gain or loss is recognized in income in the period of
change. Historically, the Company has not entered into derivative contracts to
hedge existing risks or for speculative purposes. Accordingly, the Company does
not expect adoption of the new standard on January 1, 2000 to have any effect on
its financial statements.
<PAGE> 20
PART IV.
ITEM 7. FINANCIAL STATEMENTS
The financial statements attached to this Report on Form 10-KSB as pages F-1 to
F-24 are incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
In Amendment No. 2 to the Current Report on Form 8K dated March 15,
1999 and amended in its entirety on May 10, 1999, reporting under Item 4.
Changes in Registrant's Certifying Accountant, the Company reported that its
auditors, Arthur Andersen LLP, declined to stand for re-election, as well as the
Company's Board of Directors' approval of the April 2, 1999 engagement of BDO
Seidman LLP as the principal accountant to audit the Company's financial
statements, commencing with its fiscal year ended March 31, 1999. The Company
also reported that, during the approximate one year engagement of Arthur
Andersen LLP as the Company's principal accountant to audit its financial
statements, commencing with its fiscal year ended March 31, 1998, and within the
meaning of Item 304 of Regulation S-K, Arthur Andersen LLP did not inform the
Company of any disagreements, reportable events, or any dispute relating to
accounting principles or practices, financial statement disclosure, or auditing
scope or procedures, which disagreements, if not resolved to their satisfaction,
would have caused them to make reference in connection with their opinion to the
subject matter of the disagreement, except that in the Company's Report on Form
10-KSB for the fiscal year ended March 31, 1998, the Company reported that
Arthur Andersen LLP had reported to the Company that, in the course of their
audit of the Company's consolidated financial statements for the fiscal year
ended March 31, 1998, they discovered various conditions that they believe
constitute material weaknesses in the Company's internal controls. These
conditions consisted of (i) weakness in policies and procedures to ensure
accurate timing, classification, and recording of significant transactions; (ii)
weaknesses in maintaining formal documentation regarding accounting
transactions; and (iii) weaknesses in operating and accounting personnel due to
significant turnover and absence of technical competencies. The Company has
taken various steps intended to strengthen its financial controls, including the
hiring of additional personnel experienced in both operational and financial
positions.
Prior to the engagement of BDO Seidman LLP, the Company did not consult
with such firm regarding the application of accounting principles to a specific
completed or contemplated transaction, or any matter that was either the subject
of a disagreement or a reportable event. However, prior to the engagement of BDO
Seidman LLP, the Company consulted with such firm in order to confirm the
Company's expectation that the auditor's opinion with respect to the Company's
consolidated financial statements would contain a modification paragraph
reflecting uncertainty with respect to the Company's ability to continue as a
going concern.
<PAGE> 21
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 Executive Officers and their respective
business experience is set forth below. Each director has served continuously
with the Company since his election as indicated below.
<TABLE>
<CAPTION>
Name Age Position Director Since
---- --- -------- --------------
<S> <C> <C> <C>
James M. Heim (1)(2) 48 President, Chief Executive 1984
Officer and Director
Richard E. Metz (1)(2) 52 Executive Vice President and 1984
Director
Mark S. Biestman (1)(2) 42 Director 1997
William E. Wallin 54 Chief Financial Officer
</TABLE>
(1) Member of Audit Committee
(2) Member of Compensation Committee
Directors are elected to serve until the next Annual Meeting of
Shareholders. The Board of Directors, as of March 5, 1999, formally accepted the
resignations of Herbert F. Day and Craig W. Rauchle, both having developed
conflicts with other obligations. Primarily because of the timing, the Board of
Directors concurred that their ability to appoint qualified, unaffiliated
individuals to fill the vacancies was unlikely. Accordingly, it was agreed to
carry on with three Directors until the next election. Therefore, the Board of
Directors by the authority contained in the Bylaws of the Corporation, approved
a resolution that until the next Meeting of Shareholders and Election of
Directors, the required number of Directors of the Corporation shall be three.
For the remainder of their terms, the following Directors were appointed to
serve as both the Audit Committee and the Compensation Committee: Mark S.
Biestman, Chairman, James M. Heim and Richard E. Metz.
JAMES M. HEIM, President, Chief Executive Officer, Chairman of the
Board 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, Secretary 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 thirty 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 and management consulting and investment
firm. Mr. Metz is a member of the American Arbitration Association and is an
Associate member of the American Bar Association, Dispute Resolution and
Intellectual Property Law Sections.
MARK S. BIESTMAN, Director. Mr. Biestman, who became a Director in
1997, has worked in the information technology field for over 19 years in both
sales and marketing management. Mr. Biestman is currently Vice President of
Worldwide Sales at CommerceOne, a privately held company based in Walnut Creek,
California, co-founded by former CEO of Sybase, Mark Hoffman. CommerceOne Inc.
develops, licenses and markets the Commerce Chain Solution, the industry's only
<PAGE> 22
real-time, electronic procurement and supplier management solution for inter
business transactions. Mr. Biestman has also served as Netscape Communications'
Vice President of Sales, Western Region, Vice President of Telecommunications
Sales at Oracle Corporation, and Vice President of Sales and Industry Marketing
at Metaphor. In addition, Mr. Biestman has held various sales and management
positions at Tandem Computers and IBM Corporation. Mr. Biestman holds a B.A. in
Economics from the University of California at Berkeley and has attended the
Stanford Business School Executive program.
WILLIAM E. WALLIN, Vice President, Finance, Chief Financial Officer,
and Treasurer. Mr. Wallin, who became Chief Financial Officer, 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.
ITEM 10. EXECUTIVE COMPENSATION
Information below sets forth certain information regarding business
experience and compensation paid or awarded by the Company during the Fiscal
year ended March 31, 1999 to the following Executive Officers: Mr. James M.
Heim, the Company's Chief Executive Officer.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------- ----------------------
Name and Other All Other
Principal Position Year Salary Bonus Stock Options/SARs(#) Compensation
- ------------------ ---- ------ ----- --------------------- ------------
<S> <C> <C> <C> <C> <C>
James M. Heim, 1999 $72,000(1) 0 0 0
President and Chief 1998 $62,000 0 0 0
Executive Officer 1997 $70,500 0 0 0
</TABLE>
(1) During the fiscal year ended March 31,1999, no stock options were
granted or exercised by Mr. Heim.
<PAGE> 23
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL SHAREHOLDERS AND SHAREHOLDINGS OF MANAGEMENT
The following table sets forth information, as of March 31, 1999,
concerning the Common Stock beneficially 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
Title of Class of Stock Name(1) Owned of Class
- ----------------------- ---- --------- --------
<S> <C> <C> <C>
Common James M. Heim & Marlene Heim (2) 1,089,060 23.1%
Common Richard E. Metz 169,200 3.5%
Common Mark S. Biestman 10,000 --
Common All directors, nominees and executive
officers as a group (4 persons) 1,293,260 27.5%
</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 March 31, 1999 or within 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 Properties Ltd., 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. In
accordance with the terms of the Stock Purchase and Merger Agreement dated July
8, 1999, James M. Heim & Marlene Heim entered into a Voting Trust Agreement with
Sunburst, giving Sunburst the voting rights to 100% of the voting shares they
beneficially own or control. (See PART I, RECENT DEVELOPMENTS, "Stock Purchase
and Merger Agreement")
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In February 1996, the Company executed an agreement with HFG Properties, Ltd.,
an Arizona 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. During Fiscal 1999,
the Company's obligations under this lease were in the amount of $138,282.
<PAGE> 24
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-2 to F-20 and herein by reference:
<TABLE>
<CAPTION>
Financial Statement Page
------------------- ----
<S> <C>
Report of Independent Public Accountants F-2
Consolidated Balance Sheet F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Changes in Shareholders' Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8
</TABLE>
2. Exhibit:
<TABLE>
<CAPTION>
Exhibit Number Document
-------------- --------
<S> <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
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*
10.28 Office Lease with HFG Properties***
10.29 Coast Business Credit
Loan and Security Agreement
10.30 SYMRP Purchase Agreement*
10.31 Agreement and Plan of Reorganization dated as of
June 1, 1996 among Prologic Management Systems,
Inc., BASIS, Inc., BASIS Acquisition Corp. and
certain Principal Shareholders of BASIS, Inc.**
11.1 Earnings per Share Calculation
21 Subsidiaries
23.1 Consent of Independent Certified Public Accountants,
BDO Seidman LLP
27 Financial Data Schedule
</TABLE>
<PAGE> 25
* 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.
During the fourth quarter of fiscal 1999, the Company filed Amendment
No. 2 to the Current Report on Form 8K dated March 15, 1999 and amended in its
entirety on May 10, 1999, reporting under Item 4. Changes in Registrant's
Certifying Accountant, that the Company's auditors, Arthur Andersen LLP,
declined to stand for re-election and that the Company's Board of Directors
approved the April 2, 1999 engagement of BDO Seidman LLP as the principal
accountant to audit the Company's financial statements, commencing with its
fiscal year ended March 31, 1999.
<PAGE> 26
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: July 14, 1999 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>
/s/ James M. Heim James M. Heim, July 14, 1999
- ------------------ President and Chief Executive Officer
(Principal Executive Officer), and Director
/s/ Richard E. Metz Richard E. Metz, July 14, 1999
- -------------------- Executive Vice President, Chief
Administrative Officer, Secretary and Director
/s/ William E. Wallin William E. Wallin, July 14, 1999
- ---------------------- Vice President, Chief Financial Officer,
Treasurer (Principal Financial and
Accounting Officer),
/s/ Mark S. Biestman Mark S. Biestman, July 14, 1999
- ---------------------- Director
</TABLE>
<PAGE> 27
PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1999 AND 1998
<PAGE> 28
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Prologic Management Systems, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Prologic
Management Systems, Inc. and subsidiaries (the "Company") as of March 31, 1999,
and the related consolidated statements of operations, changes in stockholders'
deficit, and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. These 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 audit provides 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, 1999, and the results
of their operations and cash flows for the year then ended 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
1 to the consolidated financial statements, the Company has suffered recurring
losses from operations and has negative cash flows from its operating
activities. These factors raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
(s) BDO SEIDMAN, LLP
Los Angeles, California
June 4, 1999, except for Notes 1 and 15, which
are as of July 12, 1999
F-2
<PAGE> 29
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Prologic Management Systems, Inc. and Subsidiaries
We have audited the accompanying consolidated statements of operations,
changes in stockholders' equity, and cash flows of Prologic Management Systems,
Inc. an Arizona corporation, and subsidiaries (the "Company") for the year ended
March 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Prologic Management Systems, Inc. and subsidiaries for the year ended
March 31,1998 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
1 to the consolidated financial statements, the Company has suffered recurring
operating losses and negative cash flow from operations, which raises
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 1. The consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
(s) Arthur Andersen, LLP
Phoenix, Arizona
August 14, 1998
F-3
<PAGE> 30
PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
March 31, 1999
- -------------------------------------------------------------------------------------------
<S> <C>
ASSETS
Current assets:
Cash $ 128,162
Restricted cash (Note 2) 300,000
Accounts receivable, less allowance for doubtful accounts of $245,688
Receivables include $236,007 of accounts under an assignment of proceeds
agreement (Note 1) 2,628,176
Inventory 516,937
Prepaid expenses 4,265
- -------------------------------------------------------------------------------------------
Total current assets 3,577,540
Property and equipment, net (Note 4) 492,001
Goodwill, net 1,028,162
Other assets 83,420
- -------------------------------------------------------------------------------------------
$ 5,181,123
===========================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Short-term debt and notes payable (Note 7) $ 349,136
Notes payable - related parties (Note 13) 100,400
Accounts payable (Note 1) 3,572,170
Accrued expenses 733,950
Deferred maintenance revenue 120,891
- -------------------------------------------------------------------------------------------
Total current liabilities 4,876,547
- -------------------------------------------------------------------------------------------
Long-term debt and notes payable, excluding current portion (Note 7) 533,217
Line of credit (Note 5) 1,234,256
- -------------------------------------------------------------------------------------------
Commitments and contingencies (Notes 1, 5, 9, 12 and 14)
Stockholders' deficit (Notes 6, 7, 9, and 10)
Series A cumulative convertible preferred stock, no par value, 750,000
shares authorized, 16,667 shares issued and outstanding, liquidation value
of $6.00 of per share plus accrued dividends 100,000
Series B cumulative convertible preferred stock, no par value, 100,000
shares authorized, 72,000 shares issued and outstanding, liquidation
value of $10 per share plus accrued dividends 519,883
Common stock, no par value, 10,000,000 shares authorized, 4,711,349 shares
issued and outstanding 8,692,637
Warrants 694,230
Accumulated deficit (11,469,647)
- -------------------------------------------------------------------------------------------
Total stockholders' deficit (1,462,897)
- -------------------------------------------------------------------------------------------
Total liabilities and stockholders' deficit $ 5,181,123
===========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 31
PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended March 31, 1999 1998
- -------------------------------------------------------------------------------------
<S> <C> <C>
Revenue:
Hardware $ 11,419,616 $ 15,594,791
Professional services 3,607,572 3,193,676
Software license 2,051,490 2,834,625
- -------------------------------------------------------------------------------------
Total revenue 17,078,678 21,623,092
- -------------------------------------------------------------------------------------
Cost of sales:
Hardware 9,909,775 13,327,312
Professional services 1,645,909 1,676,542
Software license 1,451,124 2,312,829
- -------------------------------------------------------------------------------------
Total cost of sales 13,006,808 17,316,683
- -------------------------------------------------------------------------------------
Gross profit 4,071,870 4,306,409
- -------------------------------------------------------------------------------------
Operating expenses:
General and administrative 4,399,541 3,404,225
Selling and marketing 1,223,938 1,938,907
Research and development 51,750 523,306
Expenses associated with raising capital - 244,985
Amortization of goodwill 244,500 244,500
- -------------------------------------------------------------------------------------
Total operating expenses 5,919,729 6,355,923
- -------------------------------------------------------------------------------------
Operating loss (1,847,859) (2,049,514)
- -------------------------------------------------------------------------------------
Other expense:
Interest expense 413,540 477,157
Other (income) expense (33,212) 84,267
- -------------------------------------------------------------------------------------
Total other expense 380,328 561,424
- -------------------------------------------------------------------------------------
Net loss (2,228,187) (2,610,938)
Cumulative preferred stock dividend (83,033) (12,657)
- -------------------------------------------------------------------------------------
Net loss available to common stockholders $ (2,311,220) $ (2,623,595)
=====================================================================================
Loss per common share:
Basic and diluted $ (0.50) $ (0.67)
=====================================================================================
Weighted average number of common shares:
Basic and diluted 4,615,329 3,941,811
=====================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 32
PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
Series A Series B
Cumulative Convertible Cumulative Convertible
Preferred Stock Preferred Stock Common Stock
----------------------- ----------------------- -------------------------
Shares Amount Shares Amount Shares Amount
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, March 31, 1997 -- $ -- 3,674,895 $ 7,803,785
Issuance of common stock in
connection with issuance of a note -- -- 96,000 103,262
Issuance of common stock in
connection with conversion of notes -- -- 416,000 260,000
Issuance of common stock upon
exercise of warrants -- -- 50,000 20,000
Issuance of common stock to
management and employees -- -- 243,080 242,972
Reacquisition of stock issued in error -- -- (1,251) (5,004)
Issuance of warrants in connection
with convertible subordinated notes -- -- --
Issuance of warrants for professional
services -- -- --
Issuance of Series A cumulative
convertible preferred stock 41,667 250,000 --
Issuance of stock options -- -- -- 68,255
Series A cumulative convertible
preferred stock dividends -- -- --
Net loss -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE, March 31, 1998 41,667 250,000 -- -- 4,478,724 8,493,270
Issuance of preferred stock in
connection with conversion of a note 72,000 519,883
Common stock issued in accordance
with provisions of a note payable 120,000 36,198
Issuance of warrant in connection
with services to raise capital
Conversion of preferred stock to
common stock (25,000) (150,000) 75,000 150,000
Issuance of common stock in
connection with conversion of a note 32,000 11,200
Issuance of common stock in
connection with conversion of a note 5,625 1,969
Net loss -- --
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE, March 31, 1999 16,667 $ 100,000 72,000 $ 519,883 4,711,349 $ 8,692,637
===============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Total
Stockholders'
Accumulated Equity
Warrants Deficit (Deficit)
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE, March 31, 1997 235,170 $(6,617,865) $ 1,421,090
Issuance of common stock in
connection with issuance of a note -- -- 103,262
Issuance of common stock in
connection with conversion of notes -- -- 260,000
Issuance of common stock upon
exercise of warrants (20,000) -- --
Issuance of common stock to
management and employees -- -- 242,972
Reacquisition of stock issued in error -- -- (5,004)
Issuance of warrants in connection
with convertible subordinated notes 257,292 -- 257,292
Issuance of warrants for professional
services 109,591 -- 109,591
Issuance of Series A cumulative
convertible preferred stock -- -- 250,000
Issuance of stock options -- -- 68,255
Series A cumulative convertible
preferred stock dividends -- (12,657) (12,657)
Net loss -- (2,610,938) (2,610,938)
- -----------------------------------------------------------------------------------------
BALANCE, March 31, 1998 582,053 (9,241,460) 83,863
Issuance of preferred stock in
connection with conversion of a note 519,883
Common stock issued in accordance
with provisions of a note payable 36,198
Issuance of warrant in connection
with services to raise capital 112,177 112,177
Conversion of preferred stock to
common stock --
Issuance of common stock in
connection with conversion of a note 11,200
Issuance of common stock in
connection with conversion of a note 1,969
Net loss -- (2,228,187) (2,228,187)
- -----------------------------------------------------------------------------------------
BALANCE, March 31, 1999 $ 694,230 $(11,469,647) $(1,462,897)
=========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 33
PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
Years ended March 31, 1999 1998
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,228,187) $(2,610,938)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 412,029 446,439
Issuance of common stock for interest incurred 38,167 62,968
Issuance of warrants for services and interest incurred 112,177 366,883
Issuance of stock options -- 68,255
Non-cash interest expense -- 103,262
Change in assets and liabilities, net of effect of business acquired:
Accounts receivable 777,427 (709,159)
Inventory (296,286) 72,827
Prepaid expenses 95,327 (8,562)
Other assets (49,776) (121,316)
Accounts payable 986,368 (111,549)
Accrued expenses 126,889 254,402
Deferred maintenance revenue (112,150) 118,408
- --------------------------------------------------------------------------------------------------------
Total adjustments 2,090,172 542,858
- --------------------------------------------------------------------------------------------------------
Net cash used in operating activities (138,015) (2,068,080)
- --------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of equipment (146,454) (172,893)
Decrease in notes receivable -- 58,333
- --------------------------------------------------------------------------------------------------------
Net cash used in investing activities (146,454) (114,560)
- --------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Decrease in restricted cash -- 700,000
Net change in line of credit 237,521 135,415
Issuance of long-term debt and notes payable -- 304,311
Repayment of long-term debt and notes payable -- (95,439)
Issuance of notes payable - related parties -- 341,000
Payments of notes payable - related parties -- (255,000)
Issuance of Series A cumulative convertible preferred stock -- 250,000
Issuance of common stock -- 175,000
Cash paid for dividends -- (12,657)
- --------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 237,521 1,542,630
- --------------------------------------------------------------------------------------------------------
Net (decrease) in cash (46,948) (640,010)
Cash, beginning of year 175,110 815,120
- --------------------------------------------------------------------------------------------------------
Cash, end of year $ 128,162 $ 175,110
========================================================================================================
Supplemental statement of cash flow information:
Cash paid during the year for interest $ 152,731 $ 464,506
========================================================================================================
Noncash financing and investing activities:
Conversion of convertible subordinated notes to Series A cumulative
convertible preferred stock -- 100,000
Conversion of preferred Series A stock to common stock 150,000 --
Conversion of convertible subordinated notes to Series B cumulative
convertible preferred stock 519,883 --
Conversion of notes payable to common stock -- 160,000
Reclassification of costs associated with Series B preferred stock 200,116 --
Conversion of debt and interest to common stock 11,200 --
========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 34
PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY AND ITS OPERATIONS
NATURE OF BUSINESS AND SUMMARY OPERATIONS
Prologic Management Systems, Inc. (Prologic), an Arizona corporation, with its
wholly-owned subsidiaries, Great River Systems, Inc. (GRSI) and BASIS, Inc.
(BASIS) (collectively, the Company) 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 Company also provides systems integration
services, networking services and applications software for the commercial
market together with related support services. In addition, Prologic has
developed proprietary application software which is licensed to manufacturers
and companies in the wholesale distribution industry.
The Company has historically generated the majority of its revenue from the
resale of hardware and software products produced by third parties, primarily
Sun Microsystems, Inc. (Sun). Sales of Sun products accounted for approximately
68% and 65%, of total revenue for the years ended March 31, 1999 and 1998, and
represented approximately 90% of hardware revenue for the same periods. The
BASIS and GRSI reseller agreements with Sun can be canceled by either party upon
30 days notice. The Company anticipates that the reseller agreements will
continue indefinitely. The Company is contractually required to purchase all Sun
products from a designated distributor (supplier) of Sun products. The Company's
supplier offers credit terms and financing arrangements whereby accounts
receivable from the sales of certain Sun products are assigned to the supplier,
to whom customers are directed to send payment. At March 31, 1999, the Company
owed approximately $1,848,477 to its supplier, of which $236,007 represented
accounts receivable assigned to its supplier. Additionally, at March 31, 1999,
the supplier had extended credit of $250,000 and $350,000 to GRSI and BASIS.
Subsequent to March 31, 1999, the Company exceeded its credit limit with its
supplier. Management is currently pursuing options available for increasing the
credit limit and financing purchases with other sources. Although this
relationship and the stated credit limit have not caused delays in meeting
customer shipments, management believes that because of the trends in the
Company's operating results and the current low credit limit, its ability to
meet customer demands could be effected.
As of March 31, 1998, the Company's common stock and warrants were listed on the
Nasdaq SmallCap Market. On June 8, 1998, the Company was informed by Nasdaq that
it failed to meet the minimum net tangible assets requirement and the minimum
bid price criteria for continued listing on the Nasdaq SmallCap Market and
therefore, its securities would be delisted. On August 7, 1998, the Company
notified Nasdaq that it will not pursue its right to appeal the decision by
Nasdaq to delist the Company's securities. The Company's securities were
delisted from the Nasdaq stock market effective with the close of business on
August 7, 1998. The delisting of the Company's securities could significantly
impair the Company's ability to obtain additional financing.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. The
carrying amounts of assets and liabilities presented in the financial statements
do not purport to represent realizable or settlement values. However, the
Company has suffered recurring operating losses and has negative cash flow from
operations and a stockholders' deficit. These factors raise substantial doubt
about the Company's ability to continue as a going concern. The Company's plans
with regard to these matters are described below. In addition, the Company's
ability to obtain additional financing may be impaired due to the delisting of
its securities from the Nasdaq SmallCap Market.
MANAGEMENT PLANS
The Company intends to manage its short-term liquidity through extending
payments to vendors, engaging additional investors and creditors, and
negotiating an increased credit limit with its primary supplier. The Company
believes its investment to build the infrastructure to expand the delivery of
professional services and a recently implemented sales and marketing effort
directed at selling these services to its customers
F-8
<PAGE> 35
PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY AND ITS OPERATIONS
MANAGEMENT PLANS (CONTINUED)
will significantly improve its operating results. The Company believes that a
shift in revenue mix will result in a more favorable gross profit margin, reduce
borrowing requirements, and produce a higher net margin as professional services
become a larger percentage of total revenue. There can be no assurance, however,
that the Company will be able to successfully complete a shift in revenue mix or
that the transition will result in higher gross or net margins.
Subsequent to March 31, 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 $3,000,000.00 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 second stage ("Tranche 2") purchases up to 1,820,791 shares
at $1.0984 per share, for a total of $2,000,000. The proceeds from Tranche 1
shall be used by the Company primarily as working capital and were funded upon
the execution of the SPMA. 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. The Company anticipates releasing a more
detailed description of the agreement in a subsequent filing.
Further, on the earlier of the closing of the Tranche 2 Acquisition or September
30, 1999, it is intended that the Company initiate the process, subject to
shareholder approval, 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). All outstanding shares of
common stock, preferred stock, and 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. On the effective date of the merger, the name of the surviving
entity will be changed.
The three investment stages in the SPMA would potentially provide the Company
with the equivalent of $5,000,000 in capital infusion. The acquisitions, which
are conditions to closing the future financing stages, 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 acquisitions, qualified executive management,
technical and sales personnel, as well as new product and service offerings.
In addition, the Company is continuing its efforts to secure working capital for
operations, expansion and possible acquisitions, mergers, joint ventures, and/or
other business combinations. However, there can be no assurance that the Company
will be able to secure additional capital, or that if such capital is available,
that the terms or conditions would be acceptable to the Company.
F-9
<PAGE> 36
PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY AND ITS OPERATIONS
COMPETITION
The markets for systems integration services, networking services and
applications software are highly competitive and fragmented, are subject to
rapid change and have low barriers to entry. The Company competes for potential
clients with systems consulting and implementation firms, multinational
accounting firms, software application firms, service groups of computer
equipment companies, facilities management companies, general management
consulting firms, programming companies and technical personnel and data
processing outsourcing companies. Many of these competitors have significantly
greater financial, technical and marketing resources and greater name
recognition than the Company. The Company expects that competition in the
services industry could increase in the future, partly due to low barriers of
entry. Increased competition could result in price reductions, reduced margins
or loss of market share for the Company and greater competition for qualified
technical personnel. There can be no assurance that the Company will be able to
compete successfully against current and future competitors. If the Company is
unable to compete effectively, or if competition among information technology
services companies results in a deterioration of market conditions for
information technology services companies, there could be a material adverse
effect on the Company.
INDUSTRY
The Company operates in an industry that is characterized by fast-changing
technology. As a result, the Company will be required to expend substantial
funds for continuing product development, including expenses associated with
research and development activities and additional engineering and other
technical personnel. There can be no assurance that such funds will be available
to the Company given its current financial condition and results of operations.
Any failure by the Company to anticipate or respond adequately to technological
developments, customer requirements, or new design and production techniques, or
any significant delays in product development or introduction, could have a
material adverse effect on the operating results of the Company.
RAPID TECHNOLOGICAL CHANGE
The Company's success will depend in part on its ability to enhance its existing
products and services, to develop and introduce new services and products and
train its consultants in order to keep pace with continuing changes in
information technology, evolving industry standards and changing client
preferences. There can be no assurance that the Company will be successful in
addressing these issues or that, even if these issues are addressed, the Company
will be successful in the marketplace. In addition, there can be no assurance
that products or technologies developed by others will not render the Company's
services noncompetitive or obsolete. The Company's failure to address these
issues successfully could have a material adverse effect on the Company.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Prologic and its
subsidiaries GRSI and BASIS. All significant intercompany accounts and
transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires the Company's management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain amounts in 1998 were reclassified to conform with 1999 financial
statement presentation.
F-10
<PAGE> 37
PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments has been determined by the
Company using available market information and valuation methodologies.
Considerable judgement is required in estimating fair values. Accordingly, the
estimates may not be indicative of the amounts the Company could realize in a
current market exchange.
The carrying amount of cash, accounts receivable, accounts payable and accrued
expenses approximate 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.
REVENUE RECOGNITION
The Company recognizes revenue from the sale of third-party hardware and
software products upon shipment from the vendor to the end user, or when shipped
from the Company, whichever is appropriate. Revenue is recognized on sales of
third-party maintenance agreements upon receipt of the billing invoice from the
vendor at which time the Company retains no further obligation to the customer
or vendor. Revenue from professional services is recognized upon substantial
completion of the work and notification from the customer of their acceptance.
Revenue from software licensing is recognized in accordance with Statement of
Position 97-2, Software Revenue Recognition. Revenue from software licensing is
recognized when delivery of the software has occurred, a signed non-cancelable
license agreement has been received from the customer and any remaining
obligations under the license agreement are insignificant. Revenue associated
with agreements to provide product support services is recognized as related
services are provided. Revenue from annual or other renewals of maintenance
contracts is deferred and recognized on a straight-line basis over the term of
the contracts.
RESTRICTED CASH
Restricted cash consists of a certificate of deposit that secures the Company's
revolving line of credit, which bears interest at prime minus 3.0%.
INVENTORY
Inventory consists primarily of third-party computer hardware and third-party
software products, which are typically awaiting transfer to a customer, and is
stated at the lower of cost (first-in, first-out) or market.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated using the straight-line
method over the estimated useful lives of the respective assets which is
generally five years. Depreciation expense was approximately $168,000 and
$208,000 in 1999 and 1998.
PRODUCT DEVELOPMENT
Under Statement of Financial Accounting Standards (SFAS) No. 86, Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,
capitalization of software development costs begins upon the establishment of
technological feasibility of the product. The establishment of technological
feasibility and the ongoing assessment of the recoverability of these costs
require considerable judgment by management with respect to certain external
factors, including, but not limited to, anticipated future gross product
revenues, estimated economic product lives and changes in software and hardware
technology. In addition, the Company has and plans to continue to purchase
software from third parties. Purchased software is also accounted for in
accordance with SFAS No. 86. Amounts that could have been capitalized under this
statement after consideration of the above factors were immaterial, and
therefore no internal software development costs have been capitalized by the
Company in fiscal 1999 and fiscal 1998.
F-11
<PAGE> 38
PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 -- SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of, 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 assesses the recoverability of long-lived assets by determining
whether the amortization of the balances over their remaining lives can be
recovered through undiscounted future operating cash flows. The amount of
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 long-lived assets will be impacted if
estimated future operating cash flows are not achieved.
GOODWILL
Cost in excess of net assets acquired (goodwill) is being amortized on a
straight-line basis over seven years. Amortization expense for the years ended
March 31, 1999 and 1998 totaled $244,500 and $244,500, respectively.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially expose the Company to concentrations of
credit risk, as defined by SFAS No. 105, consist primarily of accounts
receivable. The Company does not require collateral upon delivery of its
products or services. At March 31, 1999 receivables from one customer accounted
for 11.6% of total accounts receivable.
INCOME TAXES
The Company has adopted the provisions of SFAS No. 109, Accounting for Income
Taxes, which, among other things provides for the establishment of deferred
income taxes for temporary differences between the financial and income tax
basis of reporting.
COMPREHENSIVE INCOME
Comprehensive income consists of net income and other comprehensive income.
Other comprehensive income refers to revenues, expenses, gains and losses that
under generally accepted accounting principles are included in comprehensive
income but are excluded from net income. The Company did not have any items of
other comprehensive income.
EARNINGS PER SHARE
On March 3, 1997, the FASB issued Statement of Financial Accounting Standard No.
128, "Earnings Per Share" (SFAS 128). SFAS 128 provides for the calculation of
Basic and Diluted earnings per share. Basic earnings per share includes no
dilution and is computed by dividing income available to common shareholders by
the weighted average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution of securities that could
share in the earnings of the entity.
A reconciliation of the numerators and denominators of the basic and diluted
loss per share calculations for the years ended March 31, 1999 and 1998, is as
follows:
<TABLE>
<CAPTION>
Years ended March 31, 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Loss per share - Basic and diluted:
Net loss available to common shareholders $(2,311,220) $(2,623,595)
Weighted average number of common shares 4,615,329 3,941,811
- --------------------------------------------------------------------------------
Loss per common share - Basic and diluted $ (0.50) $ (0.67)
================================================================================
</TABLE>
F-12
<PAGE> 39
PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 -- ACQUISITIONS
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 price of $290,000 was allocated to the
assets acquired and liabilities assumed based on their estimated fair values at
the date of acquisition. Cost in excess of net assets acquired of $259,746 was
recorded as goodwill.
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.
NOTE 4 -- PROPERTY AND EQUIPMENT
Property and equipment as of March 31, 1999, consists of the following:
<TABLE>
<CAPTION>
Amount
--------------------------------------------------------------------------
<S> <C>
Furniture and leasehold improvements $ 350,027
Equipment and software 1,187,634
--------------------------------------------------------------------------
1,537,661
Less accumulated depreciation 1,045,660
--------------------------------------------------------------------------
Net property and equipment $ 492,001
==========================================================================
</TABLE>
NOTE 5 -- LINE 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 March 31, 1999, borrowings under this line of
credit were $1,234,256, with additional availability of approximately $925,011.
The line of credit bears monthly interest at the highest prime rate in effect
during each month (7.75% during March 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 March 31, 1999, BASIS and & GRSI were in
compliance with this covenant.
F-13
<PAGE> 40
PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 -- LINE OF CREDIT (CONTINUED)
The Company also maintained a $2,200,000 line of credit facility for the
financing of accounts receivable and inventory with a financial institution for
its BASIS subsidiary. The line of credit was paid off in March 1998 and was not
renewed.
NOTE 6 -- CONVERTIBLE SUBORDINATED NOTES
In November 1996, the Company borrowed $820,000 in a private offering of 10%
convertible subordinated notes. On September 29, 1997, the Company renegotiated
the conversion terms with the holders of $720,000 of the notes. The revised
terms assign a fixed conversion price of $3.75 per share, which was $2.63 in
excess of the market price of the Company's common stock on the date of the
revision. In addition, the noteholders were 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 were valued at approximately $257,000 ($1.02 per share) and have
been recorded in the accompanying financial statements as additional debt
issuance costs (other assets) and are amortized over the remaining term of the
notes. The warrants expire on December 31, 2001.
During December 1997, $100,000 of notes were converted into 160,000 shares of
the Company's common stock based on the fair market value of the stock on the
date of the conversion. During the year-ended March 31, 1999, the remaining
noteholders converted $720,000 of notes into 72,000 shares of Series B
convertible preferred stock and warrants to purchase a total of 72,000 shares of
the Company's common stock which are exercisable at $1.00 per share, which was
the fair market value of the stock at the date of their issuance. The fair value
of $61,920 related to these warrants was charged to interest expense during
fiscal 1999. The remaining debt issue costs have been netted against the Series
B cumulative preferred stock. The warrants expire on March 31, 2001.
NOTE 7 -- SHORT-TERM DEBT AND NOTES PAYABLE
Short-term debt and notes payable at March 31, 1999 are as follows:
<TABLE>
<CAPTION>
Amount
--------------------------------------------------------------------------------------------------
<S> <C>
Notes payable, interest at 2% per month, secured by various equipment,
originally due on March 31, 1998, since extended on a month-to-month basis
with an option to exchange for common stock. $ 150,000
Minimum royalty payable of $250,000, with imputed interest at 10%, payments
due in annual installments of $25,000 through June 30, 2000 and the
remaining principal and interest due December 31, 2000; secured by purchased
software. 194,156
Note payable, interest at 8.5%, unsecured, principal and interest due monthly
through March 31, 2004. 126,499
Bridge note payable, interest at 2% per month, originally due in October 1997,
extended on a month-to-month basis, unsecured. In return for the
extensions, the Company issues 10,000 shares of its common stock to the
lender for each month the note is extended, and the value of these shares
are charged to interest expense each month the note is extended. 100,000
Note payable, interest at prime less 3.0%, due on the earlier of the
termination of the line of credit or March 28, 2001, secured by restricted
cash (Note 2). 300,000
Other 11,698
--------------------------------------------------------------------------------------------------
Total short-term debt and long-term debt 882,353
Less current portion of long-term debt and notes payable 349,136
--------------------------------------------------------------------------------------------------
Long-term debt and notes payable, excluding current portion $ 533,217
==================================================================================================
</TABLE>
F-14
<PAGE> 41
PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 -- SHORT-TERM DEBT AND NOTES PAYABLE (CONTINUED)
During fiscal 1999, notes totaling $45,000 were paid. Notes totaling $10,000 in
principal and $1,200 in interest were exchanged for common stock. Notes in the
principal balance of $150,000 were extended on a month to month basis.
In January 1996, the Company purchased SYMRP Scheduler and SYMFLO Database from
Symmetrix, Inc. (Symmetrix), a Massachusetts-based consulting firm. The
consideration included a $50,000 cash payment, a $150,000 promissory note
bearing interest at 10%, on which the final payment was made in fiscal 1998, and
a minimum royalty payment of $250,000. Each June the Company pays an annual
installment of $25,000 toward this minimum royalty. The Company was delinquent
on a $17,500 payment due March 31, 1999 under the minimum royalty agreement
described above. Symmetrix holds a security interest in the above software as
well as reversion rights in this technology.
A summary of long-term debt and notes payable installments after March 31, 1999
is as follows:
<TABLE>
<CAPTION>
March 31, Amount
-------------------------------------------------------------------------------
<S> <C>
2000 $ 349,136
2001 43,245
2002 144,857
2003 21,613
2004 323,502
-------------------------------------------------------------------------------
$ 882,353
===============================================================================
</TABLE>
NOTE 8 -- INCOME TAXES
Net deferred tax assets of approximately $4,575,000 have been offset by a
valuation allowance since management cannot determine whether it is more likely
than not such assets will be realized.
A reconciliation of the difference between the provision for income taxes and
the amount that would be computed using statutory federal income tax rates is as
follows:
<TABLE>
<CAPTION>
Years ended March 31, 1999 1998
---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Benefit computed at federal rate of 34% $ (747,000) $ (839,000)
State income tax benefit, net of federal benefit (176,000) (148,000)
Increase in valuation allowance related to net operating loss carryforward 923,000 987,000
---------------------------------------------------------------------------------------------------------------
Benefit for income taxes $ - $ -
===============================================================================================================
</TABLE>
A detail of the net deferred tax asset is as follows:
<TABLE>
<CAPTION>
Years ended March 31, 1999 1998
---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $ 4,384,000 $ 3,485,000
Allowance for doubtful accounts 98,000 61,000
Deferred maintenance revenue 48,000 93,000
Amortization of goodwill 40,000 40,000
Other accruals 5,000 5,000
---------------------------------------------------------------------------------------------------------------
Total deferred tax assets 4,575,000 3,684,000
Less valuation allowance (4,575,000) (3,684,000)
---------------------------------------------------------------------------------------------------------------
Net deferred tax assets $ - $ -
===============================================================================================================
</TABLE>
F-15
<PAGE> 42
PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 -- INCOME TAXES (CONTINUED)
Utilization of the net operating loss carryforward may be significantly limited
or eliminated as a result of change in ownership as defined in Section 382 of
the internal revenue code. The Company has a net operating loss carryforward
approximating $11.2 million for federal income tax purposes which expires in
varying amounts from 2000 through 2019. Approximately $400,000 of the net
operating loss carryforward expires in fiscal 2000.
NOTE 9 -- CAPITAL STOCK
COMMON STOCK
In fiscal 1999, holders of notes totaling $10,000 in principal and $1,200 in
interest converted these notes to 32,000 shares of common stock at $.35 per
share, as provided for in the conversion agreement (see Note 7).
In fiscal 1999, the Company issued 120,000 shares of common stock valued at the
market price on the dates of issuance, totaling $36,198, in connection with
month-to-month extensions on a $100,000 bridge note payable (see Note 7). The
terms of the bridge note extension require the Company to issue 10,000
additional shares of common stock to the lender for each month the note is
extended. The fair value of these shares was charged to interest expense.
In fiscal 1999, holders of Series A preferred stock converted 25,000 shares of
stock, totaling $150,000, into 75,000 shares of common stock, and warrants to
purchase an additional 75,000 shares of common stock at $2.00 per share as
provided in the offering agreement.
In fiscal 1999, the Company issued 5,625 shares of common stock, totaling
$1,969, to certain individuals as compensation in accordance to terms of their
agreements.
In fiscal 1998, the Company issued 96,000 shares of common stock valued at the
market price on the dates of issuance, totaling $103,262, in connection with
month-to-month extensions on a $100,000 bridge note payable. The terms of the
bridge note extension require the Company to issue 10,000 additional shares of
common stock to the lender and the value of these shares are charged to interest
expense for each month the note is extended.
In fiscal 1998, holders of notes totaling $160,000 converted these notes to
256,000 shares of common stock at $0.625 per share, as provided for in the
conversion agreement. In addition, holders of convertible subordinated notes
totaling $100,000 converted these notes to 160,000 shares of common stock at
$0.625 per share, as provided for in the conversion agreement.
In fiscal 1998, the Company issued 241,330 shares of common stock at $1.00 per
share in exchange for $175,000 cash and the assumption of $66,330 of debt.
COMMON STOCK WARRANTS
During fiscal 1999, the Company issued warrants for the purchase of 141,000
shares of common stock to financial advisory companies at varying exercise
prices ranging from $1.00 to $3.00 per share, expiring from February 2000 to
November 2002. The agreements provide for the issuance of warrants for the
purchase of up to an additional 50,000 shares of the Company's common stock,
dependent upon the continuation of the agreements which are cancelable by either
party without penalty. The warrants were valued at $50,256, based on the fair
value on the date of issuance and have been recorded as general and
administrative expense in the accompanying financial statements.
In fiscal 1999, the Company issued 72,000 warrants in connection with the
conversion of the $720,000 note (see Note 6). The value of the warrants was
determined at the date of the conversion of the note, based on the fair market
value. The remaining debt issue costs have since been written off against the
preferred Series B stock.
In fiscal 1999 the Company issued 75,000 warrants in connection with the
conversion of the Series A preferred stock, as discussed above in Note 9.
F-16
<PAGE> 43
PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 -- CAPITAL STOCK (CONTINUED)
SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK
From June 1997 to December 1997, the Company offered shares of 8% Series A
Cumulative Convertible Preferred Stock (Series A Preferred) to non-U.S. persons
at an offering price of $6.00 per share. During this period, 46,667 shares were
sold in exchange for $250,000. Proceeds were utilized primarily for working
capital needs.
The Series A Preferred provides for the payment of dividends at the rate of 8%,
payable quarterly beginning March 31, 1998 to be paid in cash or shares of
common stock at a stated price of $2.00 per share, at the discretion of the
Company's Board of Directors. Cumulative unpaid dividends totaled approximately
$11,033 at March 31, 1999. Holders of Series A Preferred have liquidation
preference over holders of common stock and receive $6.00 per share plus accrued
dividends, in the event of liquidation.
Holders of Series A Preferred may convert each share of Series A Preferred into
shares of common stock with a minimum stated value of $2.00 per share beginning
after June 1998, at a conversion rate of $6.00 per preferred stock share (each
share of Series A Preferred is convertible into three shares of common stock),
subject to adjustment. In addition, for each share of common stock received
through conversion, holders are entitled to receive one warrant to purchase one
share of common stock at the conversion price ($2.00 per share). Warrants issued
under this agreement expire in December 2000.
Series A Preferred is subject to conversion 12 months after the issuance at the
option of the Company, contingent upon an increase in the price of common stock
equal to at least 150% of the conversion price ($3.00 per share, subject to
adjustment).
In July 1998, holders of Series A Preferred totaling 25,000 shares elected to
convert their shares into 75,000 shares of common stock and warrants to purchase
75,000 shares of common stock as provided in the agreement.
SERIES B CUMULATIVE CONVERTIBLE PREFERRED STOCK
In March 1998, the Company authorized 100,000 shares of 10% Series B Cumulative
Convertible Preferred Stock (Series B Preferred). The Series B Preferred
provides for the payment of dividends at the rate of 10% payable semi-annually
beginning October 31, 1998, to be paid in cash or shares of common stock,
subject to provisions in the agreement. Cumulative unpaid dividends totaled
approximately $72,000 at March 31, 1999.
Series B Preferred may be converted to fully-paid and nonassessable shares of
common stock at the option of the shareholder. The number of shares of common
stock to be received is obtained by multiplying the Applicable Conversion Rate
($2.67 at March 31, 1999) by the number of shares of Preferred Stock, subject to
adjustment.
The Company may redeem Series B Preferred at the stated value plus accrued
dividends with at least 20 days notice to the shareholders and may not reissue
any shares repurchased.
In the event of liquidation, Series B Preferred shareholders will receive $10
per share plus accrued dividends. Holders of Series B have liquidation
preference over holders of common stock.
In June 1998, holders of $720,000 of convertible notes converted their notes
into 72,000 shares of Series B Preferred and warrants to purchase 72,000 shares
of common stock (see Note 6). The warrants are exercisable at $1 per share and
expire March 31, 2001, which was the fair market value of the warrants at the
date of their issuance.
F-17
<PAGE> 44
PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 -- STOCK OPTION PLAN
During 1995, the Company's Board of Directors approved a stock option plan. The
maximum number of shares that may be purchased pursuant to the plan is 500,000.
Options granted under the plan include incentive and nonqualified stock options,
with vesting determined on the grant date, not to exceed ten years, and are
exercisable over a ten-year maximum period at a price to approximate the fair
market value of the common stock at the date of grant.
The following table summarizes the activity under the Company's stock option
plan:
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------------------------------------
1999 1998
-------------------------- ---------------------------
Number of Price Number of Price
Shares Per Share Shares Per Share
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Options outstanding, beginning of year 460,363 $ 1.68 122,750 $ 3.93
Granted 54,500 .50 356,363 1.05
Canceled/expired 163,613 1.00 18,750 1.88
Exercised - - - -
-----------------------------------------------------------------------------------------------------------------
Options outstanding, end of year 351,250 $ 1.81 460,363 $ 1.68
=================================================================================================================
Options exercisable, end of year 252,292 1.02 143,750 $ 2.35
=================================================================================================================
Options available for grant 148,750 39,637
=================================================================================================================
Weighted average fair value of options granted $ .08 $ .99
=================================================================================================================
</TABLE>
Options outstanding and exercisable by price range as of March 31, 1999 are as
follows:
<TABLE>
<CAPTION>
Weighted
Average Weighted Weighted
Remaining Average Average
Options Contractual Exercise Options Exercise
Range of Exercise Prices Outstanding Life Price Exercisable Price
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$.50 - $4.00 351,250 3.72 years $1.81 252,292 $1.02
================================================================================================
</TABLE>
In November 1997, management repriced 51,000 stock options with exercise prices
in excess of $2.00, previously granted to employees, to $1.00 per share.
In June 1998, the Board authorized the repricing of 100,000 stock options with
exercise prices in excess of $3.88, previously granted to management under
employment contracts, to $1.00 per share. The effect of these repricings are
reflected in the summary tables above.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123
During 1995, the Financial Accounting Standards Board issued SFAS No. 123,
Accounting for Stock-Based Compensation, which defines a fair value based method
of accounting for an employee stock option or similar equity instrument and
encourages all entities to adopt that method of accounting for all their
employee stock compensation plans. However, it also allows an entity to continue
to measure compensation cost related to stock options issued to employees under
these plans using the method of accounting prescribed by Accounting Principles
Board Opinion No. 25 (APB No. 25), Accounting for Stock Issued to Employees.
Entities electing to continue accounting for stock-based compensation under APB
No. 25 must make pro forma disclosures of net income (loss) and earnings (loss)
per share, as if the fair value based method of accounting defined in SFAS No.
123 had been applied.
F-18
<PAGE> 45
PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 -- STOCK OPTION PLAN (CONTINUED)
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123 (CONTINUED)
The Company has elected to account for its stock-based compensation plans under
APB No. 25 and has therefore recognized $68,255 in fiscal 1998 of compensation
expense in the accompanying consolidated financial statements for stock-based
employee awards granted at an option price less than the fair value of the
Company's common stock on the date of grant. Additionally, the Company has
computed for pro forma disclosure purposes the value of all options granted
during 1999 and 1998, using the Black-Scholes option pricing model with the
following weighted average assumptions:
<TABLE>
<CAPTION>
1999 1998
Options Options
-------------------------------------------------------------------------
<S> <C> <C>
Risk free interest rate 5.14 - 5.46% 5.8-6.8%
Expected dividend yield - -
Expected lives 5 years 5 years
Expected volatility 532% 127.7%
</TABLE>
The total value of options granted was computed to be the following approximate
amounts, which would be amortized on the straight-line basis over the vesting
period:
<TABLE>
<CAPTION>
Amount
-------------------------------------------------------------------------
<S> <C>
Year ended March 31, 1999 $ 3,756
Year ended March 31, 1998 $ 348,552
</TABLE>
If the Company had accounted for its stock-based compensation plans using a fair
value based method of accounting, the Company's net loss and loss per common and
common share equivalent would have been as follows:
<TABLE>
<CAPTION>
Years ended March 31, 1999 1998
-------------------------------------------------------------------------------
<S> <C> <C>
Net loss:
As reported $ (2,311,220) $ (2,623,595)
Pro forma (2,491,734) (2,782,069)
Loss per common share - basic and diluted:
As reported (0.50) (0.67)
Pro forma (0.54) (0.71)
</TABLE>
The effects of applying SFAS No. 123 for providing pro forma disclosures for
1999 and 1998 are not likely to be representative of the effects on reported net
loss and loss per common and common share equivalent for future years, because
options vest over several years and additional awards generally are made each
year.
NOTE 11 -- SIGNIFICANT CUSTOMERS
The Company derives a significant portion of its total revenue from relatively
few customers. The Company's five largest customers accounted for 31% and 38% of
total revenue for the years ended March 31, 1999 and 1998. In 1999 and 1998,
revenue from one customer was 13% and 15% of total revenue.
The Company anticipates that customers that represent more than 10% of total
revenue will vary from period to period depending on the placement of orders by
a particular customer or customers in any given period.
F-19
<PAGE> 46
PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 -- 401(k) 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 $10,000 in both 1999 and 1998. The Company may also make discretionary
contributions to the plan in amounts determined by management. Participants
immediately vest in both their personal contributions and in the Company's
contributions. The Company contributed immaterial amounts to the plan for the
years ended March 31, 1999 and 1998.
NOTE 13 -- RELATED PARTY TRANSACTIONS
The Company leases its Tucson facility from HFG Properties, Ltd., (HFG), a
limited partnership of which the Company's President and Chief Executive Officer
is a partner. Additionally, the Company had notes payable with related parties
of approximately $100,400 at March 31, 1999. Of these notes, approximately
$14,000 was due at March 31, 1998, which was extended to March 31, 1999. The
effective interest rate is approximately 6.0%.
NOTE 14 -- COMMITMENTS AND CONTINGENCIES
In February 1996, the Company executed a lease agreement with HFG Properties,
Ltd. (HFG), a limited partnership in which the Company's President and Chief
Executive Officer is a limited partner. The terms of the lease are from July
1996 through June 2001. Rent expense under this operating lease was $96,255 and
$78,000 in fiscal 1999 and 1998, respectively. Accrued rent at March 31, 1999
included $53,052 due HFG. During fiscal 1998, two employees of the Company paid
rent on behalf of the Company totaling $66,330. In return, the Company issued a
total of 66,330 shares of common stock, valued at $66,330, to the employees.
At March 31, 1999, the Company had approximately $33,000 in deposits with HFG.
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.
Future minimum lease payments under operating leases that have remaining
noncancelable lease terms in excess of one year at March 31, 1999 are as
follows:
<TABLE>
<CAPTION>
For the years ending March 31, Amount
--------------------------------------------------------------------------
<S> <C>
2000 $ 315,250
2001 205,589
2002 176,529
2003 149,308
Thereafter 34,295
--------------------------------------------------------------------------
$ 880,971
==========================================================================
</TABLE>
NOTE 15 -- SUBSEQUENT EVENTS
During July 1999, the Company received a subscription for 3,459,973 shares of
common stock for gross proceeds of $1 million as part of the Stock Purchase
and Merger Agreement, which is more fully described in Note 1. The Company
will incur costs related to this placement of approximately $140,000. Upon
completion of the merger, the carrying value of the Company's assets may
be revised to reflect purchase accounting.
F-20
<PAGE> 47
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit Number Document
-------------- --------
<S> <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
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*
10.28 Office Lease with HFG Properties***
10.29 Coast Business Credit Loan and Security Agreement
10.30 SYMRP Purchase Agreement*
10.31 Agreement and Plan of Reorganization dated as of
June 1, 1996 among Prologic Management Systems,
Inc., BASIS, Inc., BASIS Acquisition Corp. and
certain Principal Shareholders of BASIS, Inc.**
11.1 Earnings per Share Calculation
21 Subsidiaries
23.1 Consent of Independent Certified Public
Accountants, BDO Seidman LLP
27 Financial Data Schedule
</TABLE>
<PAGE> 48
* 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.
<PAGE> 1
Exhibit 11.1 Earnings per Share Calculation
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
1999 1998
------------ ------------
<S> <C> <C>
Net loss applicable to common stock $(2,311,220) $(2,623,595)
Weighted average number of common shares equivalent:
Common shares outstanding 4,615,329 3,941,811
Common equivalent shares representing shares
issuable upon exercise of stock options and warrants -- --
Incremental common equivalent shares (calculated using the higher of end of
period or average fair market value)
Total weighted average shares - as adjusted 4,615,329 3,941,811
Basic $ (0.50) $ (0.67)
Diluted $ (0.50) $ (0.67)
</TABLE>
<PAGE> 1
Exhibit 21 Subsidiaries
BASIS, Inc. is incorporated under the laws of the state of Arizona and does not
operate under a DBA.
Great River Systems, Inc. is incorporated under the laws of the state of
Wisconsin and does not operate under a DBA.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Prologic Management Systems, Inc.
We hereby consent to the inclusion of our report dated June 4, 1999, except for
Notes 1 and 15 which are as of July 12, 1999, relating to the consolidated
balance sheet of Prologic Management Systems, Inc. and subsidiaries as of March
31, 1999, and the related consolidated statements of operations, changes in
stockholders' equity (deficit) and cash flows for the year then ended, which
report appears in the March 31, 1999 Form 10-KSB of Prologic Management Systems,
Inc.
/s/ BDO SEIDMAN, LLP
Los Angeles, California
July 14, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 428,162
<SECURITIES> 0
<RECEIVABLES> 2,873,864
<ALLOWANCES> 245,688
<INVENTORY> 516,937
<CURRENT-ASSETS> 3,577,540
<PP&E> 1,537,661
<DEPRECIATION> 1,045,660
<TOTAL-ASSETS> 5,181,123
<CURRENT-LIABILITIES> 4,876,547
<BONDS> 0
0
619,883
<COMMON> 8,692,637
<OTHER-SE> (1,077,417)
<TOTAL-LIABILITY-AND-EQUITY> 5,181,123
<SALES> 11,419,616
<TOTAL-REVENUES> 17,078,678
<CGS> 9,909,775
<TOTAL-COSTS> 13,006,808
<OTHER-EXPENSES> 6,300,057
<LOSS-PROVISION> 245,688
<INTEREST-EXPENSE> 413,540
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,228,187)
<EPS-BASIC> 0.50
<EPS-DILUTED> 0.50
</TABLE>
