<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended December 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 (I.R.S. Employer
of incorporation or organization) Identification No.)
3708 E. Columbia Street, #110, Tucson, Arizona 85714
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (520) 747-4100.
(Former address: 2030 East Speedway Blvd., Tucson Arizona 85719
Former telephone number: 520-320-1000)
Securities registered under Section 12(g) of the Exchange Act:
Common Stock and Warrants to Purchase Common Stock
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ].
Number of shares of common stock outstanding on December 31, 1999 was 8,396,277.
Transitional Small Business Disclosure Format: Yes [ ]; No [X].
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Prologic Management Systems, Inc.
Index
<TABLE>
<CAPTION>
Page
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<S> <C>
Part I. FINANCIAL INFORMATION 3
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at December 31, 1999 and March 31, 1999 3
Condensed Consolidated Statements of Operations for the Three Months and Nine Months
Ended December 31, 1999 and December 31, 1998 4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
December 31, 1999 and December 31, 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 7
Part II. OTHER INFORMATION 13
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults upon Senior Securities 13
Item 4. Submission of Matters to a Vote by Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 10-QSB
Exhibit 11 15
Exhibit 27 16
SIGNATURES 14
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1999 MARCH 31, 1999
----------------- --------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 469,798 $ 128,162
Restricted Cash 300,000 300,000
Accounts receivable, less allowance for doubtful accounts
of $245,688 at March 31, 1999 and December 31, 1999 6,302,497 2,628,176
Subscription Receivable 529,218 --
Inventory 149,618 516,937
Prepaid Expenses 141,230 4,265
------------ ------------
TOTAL CURRENT ASSETS 7,892,361 3,577,540
Property and equipment - net $ 464,858 $ 492,001
Goodwill - Net 844,787 1,028,162
Other Assets 98,177 83,420
------------ ------------
TOTAL ASSETS $ 9,300,183 $ 5,181,123
============ ============
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current Liabilities
Short term debt and notes payable 1,258,677 349,136
Notes Payable 14,400 100,400
Accounts Payable 3,637,774 3,572,170
Accrued Expenses 907,018 733,950
Deferred Revenue 208,470 120,891
------------ ------------
Total Current Liabilities 6,026,339 4,876,547
Long term debt and notes payable, excluding current portion 494,700 533,217
Line of credit 3,658,145 1,234,256
Stockholders Deficit
Series A cumulative convertible preferred stock, no par value, 16,667 shares
authorized 16,667 shares issued and outstanding 100,000 100,000
Series B cumulative convertible preferred stock, no par value, 100,000 shares
authorized, 72,000 shares issued and outstanding 519,884 519,883
Series C cumulative convertible preferred stock, no par value, 100,000 shares
authorized, 75,000 shares issued and outstanding 750,000 --
Common stock, no par value 10,000,000 shares authorized, 8,396,277 shares
issued and outstanding at December 31, 1999 and 4,711,349 at March 31, 1999 9,588,492 8,692,637
Warrants 694,230 694,230
Stock Dividends -- --
Accumulated deficit (12,531,607) (11,469,647)
------------ ------------
TOTAL STOCKHOLDERS DEFICIT (879,001) (1,462,897)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS DEFICIT $ 9,300,183 $ 5,181,123
============ ============
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
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PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
------------ ------------ ------------ ------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net Sales
Hardware $ 5,486,847 $ 3,499,029 $ 18,357,069 $ 9,063,765
Licenses 1,945,297 292,156 5,042,967 1,640,250
Services 1,414,550 955,036 3,730,486 3,121,856
------------ ------------ ------------ ------------
$ 8,846,694 $ 4,746,221 $ 27,130,522 $ 13,825,871
Cost of Sales 7,071,611 3,716,960 21,905,934 10,427,734
Gross Profit 1,555,797 1,029,261 5,005,302 3,398,137
Operating Expenses
Selling and marketing 601,887 260,729 1,686,746 964,708
General and administrative 1,285,111 986,494 3,824,000 3,454,820
Research and development 0 0 0 51,750
------------ ------------ ------------ ------------
Total Operating Expenses $ 1,667,712 $ 1,247,223 $ 5,291,460 $ 4,471,278
Operating Loss (111,915) (217,962) (286,158) (1,073,141)
Interest Expense (372,325) (99,032) (640,658) (333,193)
Other income (expense) 0 4,915 (16,555) 19,442
------------ ------------ ------------ ------------
Income (loss) before taxes (484,240) (312,079) (943,371) (1,386,892)
Income Taxes 0 0 0 0
------------ ------------ ------------ ------------
Net loss (484,240) (312,079) (943,371) (1,386,892)
============ ============ ============ ============
Shares Used in Computing Net Loss Per Share 8,242,897 4,624,636 6,286,991 4,557,769
Cumulative Preferred Stock Dividend 20,666 20,667 61,555 87,934
Net loss applicable to common stock $ (504,906) $ (332,746) $ (1,004,926) $ (1,474,826)
Loss per common share
Basic $ (0.06) $ (0.07) $ (0.16) $ (0.32)
Diluted $ (0.06) $ (0.07) $ (0.16) $ (0.32)
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31,
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (943,371) $(1,386,892)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 368,027 324,039
Issuance of warrants 0 81,742
Common Stock Dividend 61,555 87,934
Changes in:
Trade accounts receivable (4,203,539) (1,504,540)
Accounts payable and accrued expenses 238,672 1,813,452
Other assets and liabilities 128,732 (217,687)
----------- -----------
Total adjustments $(3,406,553) $ 584,940
----------- -----------
Net cash from (used in)
operating activities (4,349,924) (801,952)
----------- -----------
Cash flows from investing activities:
Purchase of equipment (157,208) (90,065)
----------- -----------
Net cash used in investing activities (157,208) (90,065)
Cash flows from financing activities:
Issuance of common stock 895,855 39,669
Issuance of Series B preferred stock 0 720,000
Issuance of Series C preferred stock 750,000 --
Issuance of notes payable and debt 909,541 930,568
Issuance of Debt - Line of Credit 2,423,889 --
Repayment of debt (130,517) (483,202)
----------- -----------
Net cash provided by (used in)
financing activities 4,848,768 1,207,035
Net increase (decrease) in cash and cash equivalents 341,636 315,018
Cash and cash equivalents at beginning of period 128,162 175,110
----------- -----------
Cash and cash equivalents at end of period $ 469,798 $ 490,128
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Interim Periods
The accompanying condensed consolidated financial statements include
the accounts of Prologic Management Systems, Inc. (the "Company") and
its wholly-owned subsidiaries, Great River Systems, Inc. ("GRSI"), and
BASIS, Inc ("BASIS"). All significant inter-company balances and
transactions have been eliminated in consolidation.
The accompanying unaudited, condensed, consolidated financial statements
have been prepared by the Company in accordance with generally accepted
accounting principles, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, the
accompanying condensed consolidated financial statements include all
adjustments (of a normal recurring nature) which are necessary for a fair
presentation of the results for the interim periods presented. Certain
information and footnote disclosures normally included in financial
statements have been condensed or omitted pursuant to such rules and
regulations. Although the Company believes that the disclosures are
adequate to make the information presented not misleading, these financial
statements should be read in conjunction with the consolidated financial
statements and the notes thereto included in the Company's Report on Form
10-KSB for the fiscal year ended March 31, 1999. The results of operations
for the three month and nine month periods ended December 31, 1999 are not
necessarily indicative of the results to be expected for the full year.
2. Lines of Credit
In March 1998, BASIS and GRSI obtained a line of credit in an amount that
is the lower of $5,000,000 or the sum of 85% of eligible accounts
receivable, restricted cash of $300,000 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 December 31, 1999,
borrowings under this line of credit were $3,658,145.
The line of credit bears monthly interest at the highest prime rate in
effect during each month (8.25% during September 1999) plus 1.75% per
annum for the portion of the loan related to accounts receivable and prime
plus 2.25% per annum for the portion related to equipment purchases
subject to a minimum charge in any month of not less than 9% per annum.
Interest is based on a minimum daily loan balance of $1,000,000. The line
matures on March 31, 2001.
The Company is required to pay a monthly minimum fee of $1,500. Also, the
Company paid an initial loan fee of $50,000 in March 1998 with an
additional loan fee based on .25% of the maximum dollar amount
($5,000,000) due annually thereafter. In years four and beyond, the
Company must pay a renewal fee of .5% of the maximum dollar amount.
If the Company terminates this agreement prior to the maturity date, it
must pay a penalty equal to the greater of all interest due during the
prior six months or the minimum monthly interest multiplied by the number
of partial or full months from the effective termination to the maturity
date.
The line of credit agreement requires that BASIS and GRSI maintain a
combined minimum net worth of $750,000. At December 31, 1999, BASIS and &
GRSI were in compliance with this covenant.
3. Goodwill
Cost in excess of net assets acquired (goodwill) is being amortized on a
straight-line basis over seven years. Amortization expense for the quarter
ended December 31, 1999 totaled $61,125. Accumulated amortization totaled
$873,845 at December 31, 1999.
In September 1995, the Company completed the acquisition of GRSI, a
systems integration company based in St. Paul, Minnesota. All of the
outstanding common stock of GRSI was acquired for 100,000 shares of common
stock of the Company valued at $40,000, the issuance of a promissory note
in the amount of $150,000 and $100,000 of cash. The acquisition was
accounted for as a purchase and accordingly, the aggregate purchase of
$290,000 was allocated to the assets acquired and liabilities
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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 connection with the acquisition.
In August 1996, the Company completed the acquisition of BASIS, a systems
integration company located in the San Francisco Bay Area. All of the
outstanding stock of BASIS was acquired for 337,325 shares of common stock
of the Company valued at $1,400,000 and $500,000 in cash. The acquisition
was accounted for as a purchase and accordingly the aggregate purchase
price of $2,231,533 was allocated to the assets acquired and the
liabilities assumed based on their estimated fair values at the date of
the acquisition. Cost in excess of net assets acquired of $1,459,661 was
recorded as goodwill in connection with the acquisition.
4. Property and Equipment
Property and equipment as of December 31, 1999, consists of the following:
<TABLE>
<CAPTION>
December 31, 1999 March 31, 1999
----------------- --------------
<S> <C> <C>
Furniture and leasehold improvements $ 394,930 $ 350,027
Equipment and software 1,299,540 1,187,634
----------- -----------
1,694,470 1,537,661
Less accumulated depreciation (1,229,612) (1,045,660)
----------- -----------
Net property and equipment $ 464,858 $ 492,001
=========== ===========
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The Company provides systems integration services, software development,
proprietary software products and related services. The majority of the
Company's revenues are generated from systems integration and related product
sales. The Company's services include systems integration, and national and
regional support in Internet and intranet application and framework design,
enterprise and workgroup client/server design and optimization, relational
database development, LAN/WAN and workgroup solutions, Internet/intranet design
and connectivity, and graphic design services for the World Wide Web. The
Company's software development expertise provides an internal resource for
development needs in integration and custom projects. The Company's proprietary
products include manufacturing, distribution, and resource tracking software for
commercial clients, as well as its intranet-based sales tracking and reporting
system and intranet-based document management, warehousing and retrieval system.
The Company's products are not directed to the retail consumer market. For
additional information on the combined operating results of the Company and its
subsidiaries, see the Consolidated Financial Statements of the Company and Notes
thereto. The discussion should be read in conjunction with and is qualified in
its entirety by the Consolidated Financial Statements of the Company and Notes
thereto.
As previously reported in the Company's Report on Form 10-KSB for the
fiscal year ended March 31, 1998, the Company's securities were delisted from
both the NASDAQ Stock Market and the Boston Stock Exchange in August 1998.
Delisting resulted from the Company's failure to maintain the minimum net
tangible asset requirement of the NASDAQ Stock Market. Trading of the Company's
securities may continue to be conducted on the OTC Electronic Bulletin Board or
in the non-NASDAQ over-the-counter market. As a result, a holder of the
Company's securities may find it more difficult to dispose of, or to obtain
accurate quotations as to the market value of, the Company's securities. In
addition, purchases and sales of the Company's securities may be subject to Rule
15g-9 (the "Rule") promulgated by the Securities and Exchange Commission (the
"SEC"). The Rule imposes various sales practice requirements on broker-dealers
who sell securities governed by the Rule to persons other than established
customers and accredited investors (generally institutions with assets in excess
of $5 million or individuals with a net worth in excess of $1 million or annual
income exceeding $200,000 or $300,000 jointly with their spouse). For
transactions covered by the Rule, the broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transaction prior to sale. Consequently, the Rule may
have an adverse effect on the ability of broker-dealers to sell the Company's
securities and may affect the salability of the Company's securities in the
secondary market.
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The SEC has also adopted rules that regulate broker-dealer practices in
connection with transactions in "penny stocks." Penny stocks generally are
equity securities with a price less than $5.00 per share, other than securities
registered on certain national securities exchanges or quoted on the NASDAQ
system. With the Company's securities delisted from the NASDAQ Small Cap Market,
they may come within the definition of penny stocks because the trading price of
the Company's common stock in currently below the $5.00 per share threshold. The
penny stock rules require a broker-dealer, prior to a transaction in a penny
stock not exempt from the rules, to deliver a standardized document prepared by
the SEC that provides information about penny stocks and the nature and level of
risks in the penny stock market. The broker-dealer must also provide the
customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction, and
monthly account statements showing the market value of each penny stock held in
the customer's account. The bid and offer quotations, and the broker-dealer and
salesperson compensation information must be given to the customer prior to
effecting the transaction. These disclosure requirements may have the effect of
reducing the level of trading activity in the secondary market for a stock that
becomes subject to the penny stock rules.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998
Net Sales. Net sales for the third quarter of fiscal 2000 were $8,846,694
compared to $4,746,221 for the same period of the prior fiscal year, an increase
of $4,100,473, or approximately 86%. The sales growth was due primarily to the
increased focus on high-availability integrated systems by the new sales staff
at the Company's Basis subsidiary. Sales of third party hardware for the period
were $5,486,847, an increase of approximately 57% over sales for the same period
one year ago of $3,499,029. Sales of software licenses, which included third
party licenses as well as proprietary software, were $1,945,297 for the period,
an increase of approximately 566% over sales of $292,156 for the third quarter
of the previous fiscal year. Service sales for the period, which were comprised
predominately of integration services, were $1,414,550 compared to $955,036 for
the corresponding period of the previous fiscal year, an increase of
approximately 48%. The Company continues to concentrate on sales of hardware and
third party software which historically leads to additional service sales over
time.
Cost of Sales. Cost of sales was approximately $7,071,611, or 79.9% of total
net sales, for the quarter ended December 31, 1999, versus approximately
$3,716,960, or 78.3% of net sales, for the same period of the previous year. The
increased cost was due primarily to the increased sales. The increase, as a
percentage of net sales, reflects the increasingly higher cost of third party
products. For the December 1999 quarter, cost of sales as a percentage of net
sales was consistent with the results of the previous quarter. The Company
expects to see the margins on sales of third party products continue to decrease
as a result of continued competition and pricing pressure in the computer
market. The Company plans to offset the increasing cost of third party products
by improving sales of related higher margin services.
Selling and Marketing. Selling and marketing expenses were $601,887, or 6.8%
of net sales, for the three month period ended December 31, 1999, compared to
$260,729, or 5.5% of net sales for the same period of the previous fiscal year.
The increase, as a percentage of net sales, is due primarily to the continued
expansion of the sales staff at Basis. The Company expects selling and marketing
expenses to increase as sales increase.
General and Administrative. General and administrative expenses for the third
quarter of fiscal 2000 were $1,285,111, or 14.5% of net sales, compared to
$986,494, or 20.8% of net sales, for the third quarter of the previous fiscal
year. The increase (a decrease as a percentage of net sales) was primarily the
result of an expansion in administrative staff to support sales growth. The
Company expects general and administrative expenses to reflect increases in
total sales.
Research and Development. The Company did not incur any research and
development expense during the quarter. Research and development is primarily
related to updates of proprietary software.
Operating Loss. The operating loss for the period was $111,915, or 1.3% of
net sales, versus $217,962 or 4.6% of net sales, for the same period last year.
The operating loss improvement was the result of increased sales,
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offset primarily by increased selling and marketing and general and
administrative expenses, and to a lesser extent, by the increasing cost of third
party products.
Interest and Other Income. Interest expense and other expense for the quarter
was $372,325 compared to $94,117 for the corresponding period of the previous
fiscal year, which was mainly interest paid on the current lines of credit,
short term and long term borrowings. The increase is primarily the result of
additional borrowings required to support sales growth and to supplement funds
being generated by operations.
Income Taxes. The Company had no income tax expense for the third quarters of
fiscal 2000 and 1999. As of December 31, 1999, the Company had Federal net
operating loss carry forwards of approximately $12,100,000. The utilization of
net operating loss carry forwards will be limited pursuant to the applicable
provisions of the Internal Revenue Code and Treasury regulations.
Net Loss. The net loss for the quarter ended December 31, 1999 was $484,240,
or approximately $.06 per share, versus a loss of $312,079, or approximately
$.07 per share, for the same period of the prior fiscal year. The increased net
loss was primarily the result of increased interest expense and operating
expenses.
NINE MONTHS ENDED DECEMBER 31, 1999 AND 1998
Net Sales. Net sales for the nine months ended December 31, 1999 were
$27,130,522, an increase of $13,304,651, or approximately 96%, over net sales of
$13,825,871 for the same period of the prior fiscal year. The sales growth was
due primarily to the increased focus on high-availability integrated systems by
the new sales staff at the Company's Basis subsidiary. Sales of third party
hardware for the period were $18,357,069, an increase of approximately 102.5%
over sales for the same period one year ago of $9,063,765. Sales of software
licenses, which included third party licenses as well as proprietary software,
were $5,042,967 for the nine month period, an increase of approximately 207%
over sales of $1,640,250 for the first nine months of the previous fiscal year.
Service sales for the period, which were comprised predominately of integration
services, were $3,730,486 compared to $3,121,856 for the corresponding period of
the previous fiscal year, an increase of approximately 19.5%. The Company
continues to concentrate on sales of hardware and third party software, which
historically leads to additional service sales over time.
Cost of Sales. Cost of sales was approximately $21,905,934, or 80.7% of net
sales, for the nine months ended December 31, 1999, versus $10,427,734, or 75.4%
of net sales, for the same period of the previous fiscal year. The increased
cost was due primarily to the increased sales. The increase, as a percentage of
net sales, reflects the increasingly higher cost of third party products. The
Company expects to see the margins on sales of third party products continue to
decrease as a result of continued competition and pricing pressure in the
computer market. The Company plans to offset the increasing cost of third party
products by improving sales of related higher margin services.
Selling and Marketing. Selling and marketing expenses were $1,686,746, or
6.2% of net sales, for the nine months ended December 31, 1999, compared to
$964,708, or 7% of net sales, for the same period of the previous fiscal year.
The increase, as a percentage of net sales, is due primarily to the continued
expansion of the sales staff at Basis. The Company expects selling and marketing
expenses to increase as sales increase.
General and Administrative. General and administrative expenses for the nine
month period ended December 31, 1999 were $3,824,000, or 14.1% of net sales,
compared to $3,454,820, or 25% of net sales, for the same period of the previous
fiscal year. The increase (a decrease as a percentage of net sales) was
primarily the result of an expansion in administrative staff to support sales
growth, and in corporate staff related to the consolidation of the accounting
and administrative functions. The Company expects general and administrative
expenses to reflect increases in total sales.
Research and Development. The Company did not incur any research development
expense during the nine months ended December 31, 1999. Research and development
expense for the nine months ended December 31, 1998 was approximately $51,750,
or 0.4% of net sales. Research and development is primarily related to updates
of proprietary software.
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Operating Loss. Operating loss for the nine month period ended December 31,
1999 decreased to $286,158, or 1.1% of net sales, versus $1,073,141, or 7.8% of
net sales, for the same period last year. The operating loss improvement was the
result of increased sales, offset primarily by increased selling and marketing
and general and administrative expenses, and to a lesser extent, by the
increasing cost of third party products.
Interest and Other Income. Interest expense and other expense for the first
nine months of fiscal 2000 was $657,213 compared to $313,751 for the same period
of the previous fiscal year, which was mainly interest paid on the current lines
of credit, short term and long term borrowings The increase is primarily the
result of additional borrowings required to support sales growth and to
supplement funds being generated by operations.
Income Taxes. The Company had no income tax expense for the first nine months
of fiscal 2000 and 1999. As of December 31, 1999, the Company had Federal net
operating loss carry forwards of approximately $12,100,000. The utilization of
net operating loss carry forwards will be limited pursuant to the applicable
provisions of the Internal Revenue Code and Treasury regulations.
Net Loss. The net loss for the nine months ended December 31, 1999 was
$943,371, or approximately $.16 per share, compared to $1,386,892, or
approximately $.32 per share, for the same period of the previous fiscal year.
The decreased net loss was the result of increased sales, offset by increased
operating expenses and interest expense.
Great River Systems, Inc. For the nine months ended December 31, 1999, the
Company's GRSI subsidiary has not materially contributed to operations. Revenues
for GRSI were less than 1% of the Company's total net sales, while its
operations accounted for approximately 18% of the Company's net loss for the
nine-month period. The Company is exploring various strategic alternatives for
GRSI, including closure. If the Company elects to cease operations at GRSI, the
Company would recognize a non-recurring charge to operations, including a
non-cash expense related to the write-off of goodwill. The Company anticipates
that it will determine the disposition of GRSI before its current fiscal year
end of March 31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Capital Resources. At December 31, 1999 the Company had
working capital of approximately $1,866,022 versus a deficit of approximately
$1,299,000 at March 31, 1999. The cash balance at December 31, 1999 was
approximately $769,798, of which $300,000 was restricted as security for the
Company's line of credit.
Cash used by operations during the nine month period ended December 31,
1999 was approximately $4,349,924 compared to cash used by operations of
$801,952 for the corresponding period in fiscal 1998. The increase was due
primarily to increased accounts receivable resulting from significant sales
growth. Cash used in investing activities was approximately $157,208 at December
31, 1999 and approximately $90,065 at December 31, 1998. The increase was due to
additional capital equipment purchases. Cash provided by financing activities
for the nine months ended December 31, 1999 totaled approximately $4,848,768
compared to $1,207,035 for the corresponding period in fiscal 1998. The increase
resulted primarily from additional advances against the Company's line of credit
and the issuance of equity securities, and, to a lesser extent, a net increase
in debt.
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 adversely 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.
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On December 30, 1999, the Company authorized a class of securities
designated Series C 10% Cumulative Convertible Preferred Stock, consisting of
100,000 shares with a Stated Value of $10.00, a dividend rate of 10% and an
Applicable Conversion Value of $2.25. Further, the Company authorized the
issuance of 75,000 shares of the Series C Preferred for an aggregate of $750,000
pursuant to the subscription agreements received from two subscribers. Of the
$750,000 raised, $220,782 represented current debt of the Company which was
exchanged for 22,078 shares of Series C Preferred, and the remaining $529,218
was subscribed to in cash. At December 31, 1999, the Company had received
$220,782 of the subscriptions, and an additional $154,218 was received in
January 2000. The Company anticipates receipt of the remaining $375,000 within
approximately 45 days of the date of this report.
During July 1999, the Company entered into a Stock Purchase and Merger
Agreement ("SPMA") with Sunburst Acquisitions IV, Inc., a Colorado corporation
("Sunburst"). The terms of the SPMA require that Sunburst purchase up to
5,280,763 shares of common stock of the Company for $3,000,000 pursuant to a
Regulation D Exemption under the United States Securities Act of 1933, as
amended. The investment by Sunburst was to be staged in two parts. The first
stage ("Tranche 1") purchased 3,459,972 shares at $0.2890 per share, for a total
of $1,000,000. The Company received the initial $1 million during August 1999.
The second stage ("Tranche 2") purchased up to 1,820,791 shares at $1.0984 per
share, for a total of $2,000,000. The Company used the proceeds from Tranche 1
primarily as working capital. The proceeds from Tranche 2 were intended to be
used by the Company to facilitate the acquisition of another (unaffiliated)
company (the "Tranche 2 Acquisition"), and funded essentially simultaneously
with the closing of the Tranche 2 Acquisition.
Subject to shareholder approval, upon closing of the Tranche 2 Acquisition
it was 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 was 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"). If, by December 15,
1999, either the Tranche 2 Acquisition had not been closed or the Company had
not been merged with Sunburst, then Sunburst was to purchase 455,208 shares of
the Company's Common Stock (at a price of $1.098 per share) for a total purchase
price of $500,000. Such purchase was to be credited against Sunburst's
contractual obligation to complete the Tranche 2 purchase.
As of December 31, 1999, Sunburst had not performed its contractual
obligations beyond the initial Tranche 1 purchase, and it is evident to the
Company that Sunburst does not intend to meet its current or future obligations.
The Company is presently holding discussions with the principals of Sunburst in
an effort to reach an amicable resolution of the immediate situation. As a
result of the aborted Agreement, the Company will require additional equity or
debt financing, from other sources, to maintain current operations and assure
its ability to achieve its plans for current and future expansion. No assurance
can be given of the Company's ability to obtain such financing on favorable
terms, if at all.
In fiscal 1998, the Company signed a financing agreement with Coast
Business Credit for a line of credit in an amount of the lower of $5,000,000 or
the sum of 85% of eligible accounts receivable, restricted cash (see Note 5 of
the Consolidated Financial Statements) and equipment loans (maximum of
$250,000). This credit facility is designed to provide working capital to
support the Company's sales growth for both subsidiaries. Among other things the
agreement required that the Company maintain a combined net worth at its BASIS
and GRSI subsidiaries of at least $750,000. At December 31, 1999, the Company
was in compliance with this requirement. The total amount of the line of credit
outstanding at December 31, 1999 was approximately $3,658,145.
During fiscal 1998 and 1997, the Company borrowed $365,000 in short-term
notes collateralized by its computer equipment and office furnishings.
Subsequently, $170,000 of these notes was exchanged for 288,000 shares of common
stock and $45,000 in principle was repaid. The interest rate on the notes is 2%
per month. As of December 31, 1999, the remaining principle balance on these
notes, which is currently due, was $150,000.
In fiscal 1997, the Company borrowed $100,000 with an interest rate of 8%
and a scheduled maturity date of June 30, 1997. During July 1997, the note
holder agreed to extend the maturity date with a revised interest rate of 2% per
month. As additional consideration, the Company issues 10,000 shares per month
of restricted common stock to the note holder for the term of the extension. As
of December 31, 1999, the note was still outstanding.
11
<PAGE> 12
The terms and conditions of the Company's Series B Cumulative Convertible
Preferred Stock require that if, by December 31, 1999, the Series B Cumulative
Convertible Preferred Stock had not been redeemed and the redemption price paid
in full, or the Company had not raised at least $1.5 million from the sale of
its equity securities excluding the Series B Preferred Stock, the conversion
rate would have become fifty percent (50%) of the average of the closing "bid"
and "asked" price of the Common Stock on the NASDAQ Stock Market during the
month of December 1999 (or, if the Common Stock was not then quoted on the
NASDAQ Stock Market, the closing prices on such other market on which the Common
Stock was then quoted). At December 31, 1999, the Company had raised in excess
of $1.5 million and, therefore, the foregoing condition is no longer effective.
During the first nine months of fiscal 2000, the Company purchased
approximately $157,208 in capital equipment and software.
Year 2000 Issue. The Company's proprietary manufacturing software product
line was Year 2000 compliant in July 1998 and was released during the quarter
ending September 30, 1998. The Company's internal development tools are Year
2000 compliant. The proprietary wholesale distribution software product line was
Year 2000 compliant as of April 1999 and was released in May 1999. Internally,
the Company uses its distribution software accounting package. The Company is
not currently aware of, and to date has not experienced, any significant Year
2000 compliance problems relating to the Company's proprietary software systems
that would have a material and adverse effect on the Company's business, results
of operations or financial condition. Furthermore, the Company does not believe
that clients utilizing its Year 2000 compliant software products will have any
problems with their vendors or customers because of the Year 2000 issue due to
the use of the Company's software products. However, there can be no assurance
that the Company will not discover Year 2000 compliance problems in its
proprietary software or other third-party software or hardware that will require
a substantial investment to correct. The Company's inability to fix such
software on a timely basis could result in lost revenues, increased operating
costs and other business interruptions, any of which could have a material and
adverse effect on the Company's business, results of operations and financial
condition. Additionally, there can be no assurance that utility companies,
Internet network companies, Internet access companies, third-party service
providers and others outside the Company's control will be Year 2000 compliant.
Costs relating to the development of the Year 2000 issue were included in the
research and development expenses during the fiscal year ended March 31, 1999,
and the Company has not incurred any material costs or expenses relating to Year
2000 issues during the first nine months of the fiscal year ending March 31,
2000.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
Management's discussion and analysis in this Form 10-QSB should be read in
conjunction with the audited Consolidated Financial Statements as filed in the
Company's annual report on Form 10-KSB for the fiscal year ended March 31, 1999.
Except for the historical information contained herein, the matters discussed in
this Form 10-QSB are forward-looking statements that involve a number of risks
and uncertainties. There are numerous important factors and risks, including the
rapid change in hardware and software technology, market conditions, the
anticipation of growth of certain market segments and the positioning of the
Company's products and services in those segments, seasonality in the buying
cycles of certain of the Company's customers, the timing of product
announcements, the release of new or enhanced products, the introduction of
competitive products and services by existing or new competitors and the
significant risks associated with the acquisition of new products, product
rights, technologies, businesses, the management of growth, the Company's
ability to attract and retain highly skilled technical, managerial and sales and
marketing personnel, and the other risks detailed from time to time in the
Company's SEC reports, including reports on Form 10-KSB and Form 10-QSB, that
could cause results to differ materially from those anticipated by the
forward-looking statements made herein. Therefore, historical results and
percentage relationships will not necessarily be indicative of the operating
results of any future period.
12
<PAGE> 13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of the date of this filing, neither the Company nor its subsidiaries are a
party to any legal proceedings, the outcome of which, in management's
opinion, would have a material adverse effect on the Company's operations or
financial position.
ITEM 2. CHANGES IN SECURITIES
The terms and conditions of the Company's Series B Convertible Preferred Stock
state that in the event that, between March 31, 1998 and December 31, 1999, the
Corporation shall issue any class or series of its preferred stock having a
conversion price lower than $3.75 per share of Common Stock, then the Applicable
Conversion Value of the Series B Convertible Preferred Stock shall, upon such
issuance, be adjusted downward to an amount equal to such lower conversion price
of each such issuance. On December 30, 1999, the Company authorized a class of
securities designated Series C 10% Cumulative Convertible Preferred Stock with
an Applicable Conversion Value of $2.25. Accordingly, the Applicable Conversion
Value for the Series B Convertible Preferred Stock was simultaneously adjusted
from $3.75 to $2.25.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE BY SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
In connection with the Stock Purchase and Merger Agreement dated July 8, 1999,
between the Company and Sunburst Acquisitions IV, Inc., Prologic shareholders
James M. and Marlene Heim, (391,740 shares) and HFG Properties, Ltd. (697,320
shares) assigned the voting rights in their common stock of the Company to
Sunburst pursuant to a Voting Trust Agreement. On December 30, 1999, pursuant to
the terms and conditions contained therein, the Voting Trust terminated.
ITEM 6. EXHIBITS AND REPORTS ON FORM 10-QSB
A. Exhibits:
<TABLE>
<CAPTION>
Exhibit Number Document Page
-------------- -------- ----
<S> <C> <C>
3.1 Statement pursuant to Arizona Revised Statutes Section 10-602 15
[Designation of Terms of Series C Convertible Preferred Stock]
11.1 Schedule of Computation of Net Loss Per Share 16
27 Financial Data Schedule 17
</TABLE>
B. Reports:
No reports on Form 8-K were filed during the quarter ended December 31, 1999.
The Company filed a report on Form 8-K on January 6, 2000 relating to several
events reported under Item 5 of the Form 8-K, including (i) the failure of
Sunburst Acquisitions IV, Inc. to perform certain obligations under a Stock
Purchase and Merger Agreement dated July 8, 1999, between it and the Company,
(ii) the termination by mutual agreement of a Merger Agreement between the
Company an Solid Systems, Inc., (iii) the Company's issuance on December 30.
1999 of 750,000 shares of its Series C Convertible Preferred Stock, and (iv) the
termination of the employment contract of James M. Heim as the Company's
president. Mr. Continues to serve as the Company's Chairman of the Board and
Chief Executive Officer on an "at will" basis.
13
<PAGE> 14
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: February 21, 2000 By: /s/ James M. Heim
--------------------------------------
James M. Heim
Principal Financial and Accounting Officer
By: /s/ Richard E. Metz
--------------------------------------
Richard E. Metz
President
14
<PAGE> 1
EXHIBIT 3.1 STATEMENT PURSUANT TO ARIZONA REVISED STATUTES SECTION 10-602
[DESIGNATION OF TERMS OF SERIES C CONVERTIBLE PREFERRED STOCK]
- -----------------------------------------------------------------------------
EXHIBIT A
TO
STATEMENT PURSUANT TO A.R.S. SECTION 10-602
OF
PROLOGIC MANAGEMENT SYSTEMS, INC.
The following is the text of the resolution adopted by the Board of Directors
of Prologic Management Systems, Inc. (the "Corporation") at a meeting of the
Board of Directors on December 30, 1999:
RESOLVED, that the following is the statement of the designations, powers,
privileges, preferences and relative, participating, optional or other special
rights, and the qualifications, limitations or actions relating to the Series C
10% Cumulative Convertible Preferred Stock (the "Preferred Stock"):
1. DESIGNATION AND AMOUNT. The series of Preferred Stock of the Corporation
designated as "Series C 10% Cumulative Convertible Preferred Stock" shall be
100,000 shares.
2. DIVIDEND RATE. The holders of outstanding shares of the Preferred Stock
shall be entitled to receive out of funds legally available therefore cash
dividends accruing at the rate of 10% per annum (on the basis of a 360-day year)
on the Stated Value (defined herein) per share of the Preferred Stock
("Dividends"). The right to receive Dividends on the Preferred Stock shall be
cumulative. Dividends shall be payable, to the extent of funds legally available
therefore, on each April 30 and October 31, beginning on April 1, 2000 or when
otherwise determined by the Board of directors (each, a "Dividend Payment
Date"), to holders of record on the date that is 15 days preceding the
appropriate Dividend Payment Date. Such dividends shall be payable in preference
and priority to any payment of any dividend on Common Stock of the Corporation.
No interest or other charge shall accrue with respect to accumulated by unpaid
dividends on the Preferred Stock. No dividend shall be paid on the Common Stock
in any year, other than dividends payable solely in Common Stock, until all
Dividends for such year have been declared and paid on the Preferred Stock. In
the event that the Board of Directors shall have declared and paid, or set apart
for payment, all dividends on the Preferred Stock at the rates specified in this
section in any one fiscal year, and shall elect to declare additional dividends
in that fiscal year out of funds legally available therefor, such additional
dividends shall be declared and paid on the Common Stock, in an amount equal to
the dividends paid on such number of shares of Common Stock into which such
share of Preferred Stock, on the record date for such dividend payment, is
convertible. At the Corporation's sole discretion, the Corporation may elect to
pay any or all Dividends by issuing, in lieu of cash, shares of Common Stock.
The number of shares of Common Stock shall equal the total undeclared and
accrued Dividends multiplied by 85% of the lower of (i) the Applicable
Conversion Value (determined on the date that is 15 days before the relevant
Dividend Payment Date), as adjusted pursuant to Section 5, or (ii) the average
of the closing "bid" and "asked" price of the Common Stock on the Nasdaq Stock
market during the twenty trading days preceding the relevant Dividend Payment
Date (or, if the Common Stock is not then quoted on the Nasdaq stock Market, the
closing prices on such other market on which the Common Stock is then traded or,
if not traded, as the Board of Directors of the Corporation may reasonably
determine).
3. LIQUIDATION, DISSOLUTION OR WINDING UP.
(a) PREFERENCE - CONVERTIBLE PREFERRED STOCK. In the event of any
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary, holders of each share of Preferred Stock shall be entitled to be
paid out of the assets of the Corporation legally available for such
distribution, before any sums shall be paid or any assets distributed among the
holders of shares of Common Stock, an amount equal to $10.00 per share of
Preferred Stock (the "Stated Value") plus the accrued but unpaid Dividends
thereon, up to and including the date of full payment. If the assets of the
Corporation shall be insufficient to permit the payment in full to the holders
of the Preferred Stock of the amount thus distributable, then the entire assets
of the Corporation legally available for such distribution shall be distributed
ratably among the holders of the Preferred Stock and any other class or series
of preferred stock of the Corporation outstanding on the distribution date.
After such payment shall have been made in full to the holders of the Preferred
Stock or funds
16
<PAGE> 2
necessary for such payment shall have been set aside by the Corporation in trust
for the account of holders of the Preferred Stock so as to be available for such
payment, holders of the Preferred Stock shall be entitled to no further
participation in the distribution of the assets of the Corporation and shall
have no further rights of conversion, and the remaining assets available for
distribution shall be distributed ratably among the holders of the Common Stock.
(b) A consolidation or merger (other than a consolidation or merger in
which the holders of voting securities of the Corporation immediately before the
consolidation or merger own (immediately after the consolidation or merger)
voting securities of the surviving or acquiring corporation, or of a parent
party of such surviving or acquiring corporation, possessing more than 50% of
the voting power of such surviving or acquiring corporation or parent party) of
the Corporation or a sale of all or substantially all of the assets of the
Corporation shall be regarded as a liquidation, dissolution or winding up of the
affairs of the Corporation within the meaning of this Section 3.
(c) Whenever the distribution provided for herein shall be paid in property
other than cash, the value of such distribution shall be the fair market value
of such property as determined in good faith by the Board of Directors of the
Corporation.
4. VOTING POWER. Except as otherwise expressly provided in Section 9 hereof,
or as required by law, no holder of Preferred Stock shall be entitled to vote on
any matters submitted to a vote of the shareholders of the Corporation.
5. CONVERSION RIGHTS. The holders of Preferred Stock shall have the following
conversion rights:
(a) GENERAL. Subject to and in compliance with the provisions of this
Section 5, any shares of Preferred Stock may, at the option of the holder, be
converted into fully-paid and nonassessable shares (calculated as to each
conversion to the largest whole share) of Common Stock. The number of shares of
Common Stock to which a holder of Preferred Stock shall be entitled upon
conversion of each share of Preferred Stock shall be the product obtained by
multiplying the Applicable Conversion Rate (determined as provided in Section
5(b)) by the number of shares of Preferred Stock being converted.
(b) APPLICABLE CONVERSION RATE. The conversion rate in effect at any time
(the "Applicable Conversion Rate") shall be the quotient obtained by dividing
$10.00 by the Applicable Conversion Value, calculated as provided in Section
5(c).
(c) APPLICABLE CONVERSION VALUE. The Applicable Conversion Value in effect
from time to time, except as adjusted in accordance with Section 5(d) hereof,
shall be $2.25.
(d) ADJUSTMENTS TO APPLICABLE CONVERSION VALUE. In the event that the
Series C Preferred Stock has not been redeemed and the redemption price paid in
full and the Corporation shall issue any new class or series of its preferred
stock having a conversion price lower than $2.25 per share of Common Stock, then
the Applicable Conversion Value of the Series C Convertible Preferred Stock
shall, upon such issuance, be adjusted downward to an amount equal to such lower
conversion price of each such issuance. Further, in the event that the Series C
Preferred Stock has not been redeemed and the redemption price paid in full and
the Applicable Conversion Value of any other existing class or series of its
preferred stock is adjusted after December 30, 1999 to a conversion price lower
than $2.25 per share of Common Stock, then the Applicable Conversion Value of
the Series C Convertible Preferred Stock shall, upon such adjustment, be
adjusted downward to an amount equal to such lower conversion price of such
class or series of preferred stock.
(e) DIVIDENDS. In the event the Corporation shall make or issue, or fix a
record date for the determination of holders of Common Stock entitled to
receive, a dividend or other distribution payable in securities of the
Corporation other than of Common Stock or in assets (excluding cash dividends or
distributions), then and in each such event provision shall be made so that the
holders of the Preferred Stock shall receive upon conversion thereof in addition
to the number of shares of Common Stock receivable thereupon, the number of
securities or such other assets of the Corporation which they would have
received had their Preferred Stock been converted into Common Stock on the date
of such event and had they thereafter, during the period from the date of such
event to and including the Conversion Date (as that term is hereafter defined in
Section 5(h)), retained such securities or such other assets receivable by them
as aforesaid during such period, giving application to all adjustments called
for during such period under this Section 5 with respect to the rights of the
holders of the Preferred Stock.
17
<PAGE> 3
(f) RECAPITALIZATION OR RECLASSIFICATION. If the Common Stock issuable upon
the conversion of the Preferred Stock shall be changed into the same or
different number of shares of any class or classes of stock of the Corporation,
whether by recapitalization, reclassification or otherwise (other than a
subdivision or combination of or stock dividend provided for elsewhere in this
Section 5, or a reorganization, merger, consolidation or sale of assets provided
for elsewhere in this Section 5), then and in each such event the holder of each
share of Preferred Stock shall have the right thereafter to convert such share
into the kind and amount of shares of stock and other securities and property
receivable upon such reorganization, reclassification or other change by holders
of the number of shares of Common Stock into which such share of Preferred Stock
might have been converted (taking into account all declared but unpaid Dividends
with respect to such Preferred Stock) immediately prior to such reorganization,
reclassification or change, all subject to further adjustment as provided
herein.
(g) CERTIFICATE AS TO ADJUSTMENTS. In each case of an adjustment or
readjustment of the Applicable Conversion Rate, the Corporation will furnish
each holder of Preferred Stock with a certificate, executed by an executive
officer of the Corporation showing such adjustment or readjustment, and stating
in detail the facts upon which such adjustment or readjustment is based.
(h) EXERCISE OF CONVERSION PRIVILEGE. To exercise its conversion privilege,
a holder of Preferred Stock shall surrender the certificate or certificates
representing the shares being converted to the Corporation at its principal
office, and shall give written notice to the Corporation at that office that
such holder elects to convert such shares. Such notice shall also state the name
or names (with address or addresses) in which the certificate or certificates
for shares of Common Stock issuable upon such conversion shall be issued. The
certificate or certificates for shares of Preferred Stock surrendered for
conversion shall be accompanied by proper assignment thereof to the Corporation
or in blank. The date when such written notice is received by the Corporation,
together with the certificate or certificates representing the shares of
Preferred Stock being converted, shall be the "Conversion Date." As, promptly as
practicable, but in any event within 30 days after the Conversion Date, the
Corporation shall issue and shall deliver to the holder of the shares of
Preferred Stock being converted, or on its written order, such certificate or
certificates as it may request for the number of whole shares of Common Stock
issuable upon the conversion of such shares of Preferred Stock in accordance
with the provisions of this Section 5, and cash, as provided in Section 5(i), in
respect of any fraction of a share of Common Stock issuable upon such
conversion. Such conversion shall be deemed to have been effected immediately
prior to the close of business on the Conversion Date, and at such time the
rights of the holder as holder of the converted shares of Preferred Stock shall
cease and the person or persons in whose name or names any certificate or
certificates for shares of Common Stock shall be issuable upon such conversion
shall be deemed to have become the holder or holders of record of the shares of
Common Stock represented thereby.
(i) CASH IN LIEU OF FRACTIONAL SHARES. No fractional shares of Common Stock
or scrip representing fractional shall be issued upon the conversion of shares
of Preferred Stock. Instead of any fractional of Common Stock which would
otherwise be issuable upon conversion of Preferred Stock, the Corporation shall
pay to the holder of the shares of Preferred Stock which were converted a cash
adjustment in respect of such fractional shares in an amount equal to the same
fraction of the market price per share of the Common Stock (as determined in a
reasonable manner prescribed by the Board of Directors) at the close of business
on the Conversion Date. The determination as to whether or not any fractional
shares are issuable shall be based upon the total number of shares of Preferred
Stock being converted at any one time by any holder thereof, not upon each share
of Preferred Stock being converted.
(j) PARTIAL CONVERSION. In the event some but not all of the shares of
Preferred Stock represented by a certificate or certificates surrendered by a
holder are converted, the Corporation shall execute and deliver to or on the
order of the holder, at the expense of the Corporation, a new certificate
representing the number of shares of Preferred Stock which were not converted.
(k) RESERVATION OF COMMON STOCK. The Corporation shall at all times reserve
and keep available out of its authorized but unissued shares of Common Stock,
solely for the purpose of effecting the conversion of the shares of the
Preferred Stock, such number of its shares of Common Stock as shall time to time
be sufficient to effect the conversion of all outstanding shares of the
Preferred Stock, and if at any time the number of authorized but unissued shares
of Common Stock shall not be sufficient to effect the conversion of all then
outstanding shares of the Preferred Stock, the Corporation shall use its best
efforts to cause such corporate action to be taken as may be necessary to
increase its authorized but unissued shares of Common Stock to such number of
shares as shall be sufficient for such purpose.
18
<PAGE> 4
6. REDEMPTION. The Corporation shall have the right to redeem the Preferred
Stock or any portion thereof at a redemption price per share of Preferred Stock
equal to the Stated Value plus all undeclared and accrued Dividends thereon. The
Corporation shall give holders of the Preferred Stock at least 20 days notice of
the Corporation's election to redeem the Preferred Stock, and such notice shall
specify the redemption date ("Redemption Date"). Any shares of Preferred Stock
which shall not have been converted to shares of Common Stock as provided
elsewhere herein on the day preceding the Redemption Date shall be deemed
redeemed for all purposes, and the holder shall thereafter be entitled to
receive only the redemption price per share specified herein.
7. NO REISSUANCE OF THE SERIES C 10% CUMULATIVE CONVERTIBLE PREFERRED Stock.
No share or shares of the Series C 10% Cumulative Convertible Preferred Stock
acquired by the Corporation by reason of redemption, purchase, conversion or
otherwise shall be reissued. The Corporation may from time to time take such
appropriate corporate action as may be necessary to reduce the authorized number
of shares of the Series C 10% Cumulative Convertible Preferred Stock, and such
shares shall thereafter be authorized but unissued shares of the Corporation's
preferred stock which thereafter may be issued with such designations, powers,
privileges, preferences and rights as the Board of Directors by resolution may
determine.
8. RESTRICTIONS AND LIMITATIONS.
Except as expressly provided herein or as required by law, so long as any of
the shares of Preferred Stock authorized remain outstanding, the Corporation
shall not, without the vote or written consent by the holders of at least 60% of
the then outstanding shares of Preferred Stock, each share of Preferred Stock to
be entitled to one vote in each instance:
(i) Redeem, purchase or otherwise acquire for value (or pay into or set
aside for a sinking fund for such purpose), any share or shares of the
Corporation (except shares of the Corporation's Series A 8% Cumulative
Convertible Preferred stock, the Corporation's Series B 10% Cumulative
Convertible Preferred Stock and those shares repurchased from officers,
directors, employees, consultants or other shareholders of the Corporation under
agreements requiring such persons to offer to sell such to the Corporation in
certain events);
(ii) Authorize or issue, or obligate itself to authorize or issue, any
other equity security senior to the Preferred Stock as to liquidation
preferences; or
(iii) Amend its Articles of Incorporation to alter or change the rights,
preferences or privileges of the Preferred Stock; provided that no such
amendment shall alter or change (i) the ability of a holder to convert the
Preferred Stock into Common Stock, or (ii) the Applicable Conversion Rate
therefor subject to the provisions of Section 5 as in effect on the date of
authorization of the Preferred Stock pursuant to these Articles of
Incorporation, without the consent of each holder of the Preferred Stock
affected thereby.
9. NO DILUTION OR IMPAIRMENT. The Corporation will not, by amendment of its
Articles of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms of the Preferred Stock set forth herein, but will at all times in good
faith assist in the carrying out of all such terms and in the taking of all such
action as may be necessary or appropriate in order to protect the rights of the
holders of the Preferred Stock against dilution or other impairment.
10. NOTICES OF RECORD DATE. In the event of:
(a) any taking by the Corporation of a record of the holders of any class
of securities for the purpose of determining the holders thereof who are
entitled to receive any dividend or other distribution, or to receive any other
right, or
(b) any capital reorganization of the Corporation, any reclassification or
recapitalization of the capital stock of the Corporation, any merger or
consolidation of the Corporation, or any transfer of all or substantially all of
the assets of the Corporation to any other corporation, or any other entity or
person, or
(c) any voluntary or involuntary dissolution, liquidation or winding up
of the Corporation,
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<PAGE> 5
then and in each such event the Corporation shall mail or cause to be mailed to
each holder of Preferred Stock a notice specifying (i) the date on which any
such record is to be taken for the purpose of such dividend, distribution or
right and a description of such dividend, distribution or right, (ii) the date
on which any such reorganization, reclassification, recapitalization, transfer,
consolidation, merger, dissolution, liquidation or winding up is expected to
become effective, and (iii) the time, if any, that is to be fixed, as to when
the holders of record of Common Stock (or other securities) shall be entitled to
exchange their shares of Common Stock (or other securities) for securities or
other property deliverable upon such reorganization, reclassification,
recapitalization, transfer, consolidation, merger, dissolution, liquidation or
winding up. Such notice shall be mailed at least 20 days prior to the date
specified in such notice on which such dividend, distribution or right or such
reorganization, reclassification, recapitalization, transfer, consolidation,
merger, liquidation or winding up is to be taken.
20
<PAGE> 1
EXHIBIT 11.1
SCHEDULE OF COMPUTATION OF NET LOSS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net loss applicable to common stock $ (504,906) $ (332,746) $(1,004,926) $(1,474,826)
Weighted average number of common shares equivalent:
Common shares outstanding 8,242,897 4,624,636 6,286,991 4,557,769
Common equivalent shares representing shares
issuable upon exercise of stock options and warrants 0 0 0 0
Incremental common equivalent shares (calculated
using the higher of end of period or average fair
market value) 0 0 0 0
Total weighted average shares - as adjusted 8,242,897 4,624,636 6,286,991 4,557,769
Basic (0.06) (0.07) (0.16) (0.32)
Diluted (0.06) (0.07) (0.16) (0.32)
</TABLE>
15
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 769,798
<SECURITIES> 0
<RECEIVABLES> 7,077,403
<ALLOWANCES> 245,688
<INVENTORY> 149,618
<CURRENT-ASSETS> 7,892,361
<PP&E> 1,694,470
<DEPRECIATION> 1,229,612
<TOTAL-ASSETS> 9,300,183
<CURRENT-LIABILITIES> 6,026,339
<BONDS> 0
0
1,369,884
<COMMON> 9,588,492
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 9,300,183
<SALES> 5,486,847
<TOTAL-REVENUES> 8,846,694
<CGS> 0
<TOTAL-COSTS> 7,290,827
<OTHER-EXPENSES> 1,667,712
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 372,325
<INCOME-PRETAX> (111,915)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (484,240)
<EPS-BASIC> (.06)
<EPS-DILUTED> (.06)
</TABLE>
