<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 June 30, 2000.
Commission file number: 33-89384-LA
PROLOGIC MANAGEMENT SYSTEMS, INC.
(Name of small business issuer in its charter)
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<CAPTION>
<S> <C>
Arizona 86-0498857
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
3708 E. Columbia Street, #110, Tucson, Arizona 85714
(Address of principal executive offices) (Zip Code)
</TABLE>
Issuer's telephone number (520) 747-4100.
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 June 30, 2000 was 8,439,577.
Transitional Small Business Disclosure Format:
Yes ______ ; No ___X___ .
<PAGE> 2
Prologic Management Systems, Inc.
Index
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Page
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Part I. FINANCIAL INFORMATION 3
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at June 30, 2000
and March 31, 2000 3
Condensed Consolidated Statements of Operations
for the Three Months Ended June 30, 2000 and June 30, 1999 4
Condensed Consolidated Statements of Cash Flows
for the Three Months Ended June 30, 2000 and June 30, 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 8
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 8-K 13
Exhibit 27 15
SIGNATURES 14
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<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED AND CONSOLIDATED BALANCE SHEETS
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<CAPTION>
JUNE 30, 2000 MARCH 31, 2000
------------- --------------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash $ 574,511 $ 447,910
Restricted cash 300,000 300,000
Accounts receivable, less allowance for doubtful accounts of
$335,864 at June 30, 2000 and March 31, 2000 9,064,315 7,573,226
Inventory 356,702 203,463
Prepaid expense 75,047 23,465
------------ ------------
Total current assets 10,370,575 8,548,064
Property and equipment, net 369,879 403,435
Goodwill, net 566,782 619,245
Other assets 276,038 322,342
------------ ------------
Total assets $ 11,583,274 $ 9,893,086
============ ============
Liabilities and Stockholders' Deficit
Current liabilities:
Short term debt and notes payable $ 1,534,840 $ 1,660,460
Line of credit 3,929,023 4,647,306
Accounts payable 8,184,314 5,674,105
Accrued expenses 815,281 654,154
Deferred revenue 182,007 502,936
Net liabilities (assets) of discontinued operations (14,956) 14,061
------------ ------------
Total current liabilities 14,630,509 13,153,022
Long term debt and notes payable, excluding current portion 61,799 66,573
------------ ------------
Total Liabilities 14,692,308 13,219,595
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 519,883 519,883
Series C cumulative convertible preferred stock, no par value, 100,000
shares authorized, 75,000 shares issued and outstanding 750,000 750,000
Common stock, no par value, 10,000,000 shares authorized,
8,439,577 shares issued and outstanding 9,625,812 9,620,812
Stock subscription receivable (191,500) (191,500)
Warrants 741,367 728,770
Accumulated deficit (14,654,596) (14,854,474)
------------ ------------
Total stockholders' deficit (3,109,034) (3,326,509)
------------ ------------
Total liabilities and stockholders' deficit $ 11,583,274 $ 9,893,086
============ ============
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See accompanying notes to condensed consolidated financial statements.
<PAGE> 4
PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED AND CONSOLIDATED STATEMENTS OF OPERATIONS
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<CAPTION>
THREE MONTHS ENDED JUNE 30,
2000 1999
(unaudited) (unaudited)
<S> <C> <C>
Net Sales
Hardware $ 8,354,331 $ 6,345,963
Licenses 5,179,875 1,206,081
Services 901,217 661,675
------------ ------------
14,435,423 8,213,719
Cost of Sales 11,987,170 6,601,265
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Gross Profit 2,448,253 1,612,454
Operating Expenses
Selling and marketing 746,551 363,085
General and administrative 1,259,662 1,155,842
Research and development 53,243 0
------------ ------------
Total Operating Expenses 2,059,456 1,518,927
------------ ------------
Operating Income (loss) 388,797 93,527
Interest Expense (196,428) (69,847)
Other income (expense) 8,717 0
------------ ------------
Net Income (loss) from continuing operations 201,086 23,680
Net Income (loss) from discontinued operations (1,208) (137,335)
------------ ------------
Net Income (loss) $ 199,878 $ (113,655)
============ ============
Cumulative Preferred Stock Dividend (38,750) (20,222)
------------ ------------
Net Income (loss) available to common stockholders $ 161,128 $ (133,877)
============ ============
Weighted average shares of common stock
Basic 8,439,577 4,721,349
Diluted 9,057,800 4,721,349
Earnings (loss) per common share
Basic and diluted for continuing operations $ 0.02 $ 0.00
Basic and diluted for discontinued operations $ 0.00 $ (0.03)
Basic and diluted per common share $ 0.02 $ (0.03)
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 5
PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
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<CAPTION>
THREE MONTHS ENDED JUNE 30,
2000 1999
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 199,878 $ (113,655)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 89,169 105,670
Issuance of warrants 12,596 0
Changes in:
Accounts receivable (1,491,089) (3,266,905)
Inventory (153,239) 418,602
Prepaid expenses (51,582) (114,860)
Other assets 46,307 50,396
Accounts payable 2,510,209 2,251,202
Accrued expenses 161,127 157,326
Deferred maintenance revenue (320,929) 7,675
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Total adjustments 802,569 (390,894)
----------- -----------
Net cash from (used in) continuing operating activities 1,002,447 (504,549)
Net cash (used in) discontinued operating activities (29,017) (183,989)
Net cash provided by (used in) operating activities 973,430 (688,538)
Cash flows from investing activities
Purchase of equipment (3,150) (48,081)
----------- -----------
Net cash used in investing activities (3,150) (48,081)
Cash flows from financing activities:
Net change in line of credit (718,283) 937,789
Issuance of common stock 5,000 7,500
Repayment of debt (130,396) (32,720)
----------- -----------
Net cash provided by (used in) financing activities (843,679) 912,569
Net increase in cash and cash equivalents 126,601 175,950
Cash and cash equivalents at beginning of period 447,910 128,162
----------- -----------
Cash and cash equivalents at end of period $ 574,511 $ 304,112
=========== ===========
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See accompanying notes to condensed consolidated financial statements.
<PAGE> 6
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 subsidiary, 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, 2000. The results of operations for the three
month period ended June 30, 2000 are not necessarily indicative of the
results to be expected for the full fiscal year.
2. Discontinued Operations
As reported in the Company's Report on Form 10-KSB for the fiscal year
ended March 31, 2000, the Board of Directors authorized the closure of
the Company's Great River Systems, Inc. ("GRSI") subsidiary at March
31, 2000, and its subsequent dissolution. As a result, the Company
recognized a one-time restructuring charge, and a nonrecurring asset
impairment charge to goodwill, at fiscal year end March 31, 2000. The
nonrecurring charges, together with GRSI results of operations, were
presented in the Form 10-KSB as "Net Income (Loss) from Discontinued
Operation," and income for fiscal 1999, contained therein for
comparative purposes, was restated without GRSI results. In this
interim report on Form 10-QSB, income for the quarter ended June 30,
1999, contained herein for comparative purposes, also has been restated
to conform to this revised presentation.
3. Line of Credit
In March 1998, the Company 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 borrowed
(maximum equipment loan is $250,000). The line of credit is secured by
substantially all of BASIS' assets. As of June 30, 2000, borrowings
under this line of credit were $3,929,023.
The line of credit bears monthly interest at the highest prime rate in
effect during each month 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
interest rate in any month of not less than 9% per annum. Interest is
based on a minimum daily loan balance of $1,000,000. 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. The line matures on
March 31, 2001.
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 maintain a minimum net
worth of $750,000. At June 30, 2000, the Company was in compliance with
this covenant.
4. 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 June 30, 2000 totaled $52,463. Accumulated amortization
totaled $817,267 at June 30, 2000.
<PAGE> 7
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.
5. Property and Equipment
Property and equipment as of June 30, 2000, consists of the following:
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June 30, 2000 March 31, 2000
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Furniture and leasehold improvements $ 252,185 $ 365,084
Equipment and software 821,278 818,129
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Total property and equipment 1,073,463 1,183,213
Less accumulated depreciation (703,584) (779,778)
----------- -----------
Net property and equipment $ 369,879 $ 403,435
=========== ===========
</TABLE>
At June 30, 2000, the Company retired $112,800 of leasehold
improvements, and associated depreciation, that had been written down
in prior periods.
6. 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.
7. Earnings Per Share
Earnings per share (EPS) is computed by dividing net income by the
weighted average number of common shares outstanding in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share". The following table reconciles the number of common shares used
in the basic and diluted EPS calculations:
FOR THE THREE MONTHS ENDED JUNE 30, 2000
----------------------------------------
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NET WEIGHTED
INCOME AVERAGE PER-SHARE
(LOSS) SHARES AMOUNT
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BASIC EPS
Income available to common stockholders $ 161,128 8,439,577 $ 0.02
EFFECT OF DILUTIVE SECURITES
Common stock options -- -- --
Convertible Preferred Stock 38,750 618,223 --
DILUTED EPS
Income available to common
stockholders - assumed conversions $ 199,878 9,057,800 $ 0.02
</TABLE>
FOR THE THREE MONTHS ENDED JUNE 30, 1999
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<CAPTION>
NET WEIGHTED
INCOME AVERAGE PER-SHARE
(LOSS) SHARES AMOUNT
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<S> <C> <C> <C>
BASIC EPS
Loss available to common stockholders $(133,877) 4,721,349 $ (0.03)
EFFECT OF DILUTIVE SECURITIES
Common stock options -- -- --
DILUTED EPS
Loss available to common
stockholders - assumed conversions $(133,877) 4,721,349 $ (0.03)
</TABLE>
<PAGE> 8
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.
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.
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.
As previously reported, on July 8, 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 Tranche 2
was to be 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
<PAGE> 9
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 combined 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. In summary, under the
terms of the SPMA, Sunburst was obligated to purchase 6,171,235 shares of common
stock for $5,000,000.
At December 31, 1999, Sunburst had not performed any contractual
obligation beyond the initial Tranche 1 purchase, and, as a result of Sunburst's
defaults, the further transactions contemplated by the SPMA were, thereafter,
effectively abandoned. Prior to breaching the SPMA, Sunburst had received
3,459,972 shares of the Company's common stock, a number disproportionate to its
performance under the SPMA. The Company contends that Sunburst, having never
fully paid for the shares, is unjustly holding Prologic common stock to which it
is not entitled. The Company is continuing to hold discussions with the
principals of Sunburst in an effort to reach a resolution of the immediate
situation. As of the date of this report, no definitive settlement has been
reached. As a result of Sunburst's defaults under the SPMA, the Company will
require additional equity or debt financing, from other sources, to maintain
current operations, service current debt, 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
June 2000, the Company engaged the investment banking firm of Carmichael and
Company to assist and advise the Company in connection with the review of the
Company's strategic alternatives. In addition to raising capital, possible
alternatives include the sale of certain assets, including BASIS, Inc., the
Company's remaining operating subsidiary.
RESULTS OF OPERATIONS
Net Sales. Net sales for the first quarter of fiscal 2001 were $14,435,423
compared to $8,213,719 for the same period of the prior fiscal year, an increase
of $6,221,704, or approximately 76%. The sales growth was due primarily to
continued demand for high-availability integrated systems at the Company's BASIS
subsidiary. Sales of third party hardware for the period were $8,354,331, an
increase of approximately 32% over sales for the same period one year ago of
$6,345,963. Sales of software licenses, which included third party licenses as
well as proprietary software, were $5,179,875 for the period, an increase of
approximately 329% over sales of $1,206,081 for the first quarter of the
previous fiscal year. Service sales for the period, which were comprised
predominately of integration services, were $901,217 compared to $661,675 for
the corresponding period of the previous fiscal year, an increase of
approximately 36%. 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 $11,987,170, or 83.0% of
total net sales, for the quarter ended June 30, 2000, versus approximately
$6,601,265, or 80.4% 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. 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 is attempting to offset the
increasing cost of third party products by increasing sales of higher margin,
related services.
Selling and Marketing. Selling and marketing expenses were $746,551, or 5.2%
of net sales, for the three month period ended June 30, 2000, compared to
$363,085, or 4.4% 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
first quarter of fiscal 2001 were $1,259,662, or 8.7% of net sales, compared to
$1,155,842, or 14.1% of net sales, for the first quarter of the previous fiscal
year. The decrease, as a percentage of net sales, was primarily the result of
the expansion in administrative staff having stabilized, while sales continued
to grow. The Company normally expects general and administrative expenses to
generally reflect material changes in total sales.
<PAGE> 10
Research and Development. Research and development expenses were $53,243, or
0.4% of net sales, for the first quarter of fiscal 2001. The Company did not
incur any research and development expense during the first quarter of the
previous fiscal year. Research and development is generally related to updates
of proprietary software.
Operating Income. Operating income for the period was $388,797, or 2.7% of
net sales, versus $93,527, or 1.1% of net sales, for the same period last year.
The improvement in operating income was the result of increased sales, offset
somewhat by increased selling and marketing expenses and the increasing cost of
third party products.
Interest Expense and Other Income. Interest expense and other income for the
quarter was $187,711, compared to $69,847 for the corresponding period of the
prior year, which was mainly interest paid on the current lines of credit and
short term borrowings. The increase was 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 quarters
of fiscal 2001 and 2000. As of June 30, 2000, the Company had Federal net
operating loss carry forwards of approximately $14,000,000. 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 Income (loss) from Continuing Operations. Net income for the quarter
ended June 30, 2000 was $201,086, or approximately $0.02 per share, versus
income of $23,680, or approximately $0.01 per share, for the same period of the
prior fiscal year. The improvement in net income was the result of increased
sales and operating income, offset partially by increased interest expense.
Net Income (loss) from Discontinued Operations. During the fiscal year ended
March 31, 2000, the Company discontinued operations of Great River Systems. The
loss related to the discontinuance of the subsidiary was $1,208 for the first
quarter of fiscal 2001 as compared to a loss of $137,335 for the same period of
the prior fiscal year.
Net Income (loss) including Discontinued Operations. Including charges
related to the discontinuance of the Great River Systems subsidiary, the Company
had net income of $161,128, or $0.02 per share, for the first quarter of fiscal
2001, as compared to a net loss of $133,877, or ($0.03) per share, for the same
period of the prior fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Capital Resources. At June 30, 2000 the Company had a
working capital deficit of approximately $4,260,000 versus a deficit of
approximately $4,605,000 at March 31, 2000. The deficit is primarily the result
of the Company's revolving line of credit, which matures on March 31, 2001,
being categorized as a current liability. The cash balance at June 30, 2000 was
$874,511, of which $300,000 was restricted as security for the Company's line of
credit.
Cash provided from operations during the quarter ended June 30, 2000
was $1,002,447, compared to cash used in operations of $504,549 for the
corresponding period in fiscal 2000. The reversal was due primarily to increased
income and decreased accounts receivable resulting from improved collections and
cash flow management. Cash used in investing activities was $3,150 at June 30,
2000 and $48,081 at June 30, 1999. The decrease was due to reduced capital
equipment purchases. Cash used in financing activities for the quarter ended
June 30, 2000 was $843,679, compared to cash provided by financing activities of
$912,569 for the corresponding period in fiscal 2000. The reversal resulted
primarily from reduced borrowings against the Company's line of credit, and, to
a lesser extent, the repayment of debt.
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
<PAGE> 11
from effectively executing its strategic business plan. The ability to
raise capital and maintain credit sources is critical to the continued viability
of the Company.
During fiscal year 2000, 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 per share, a dividend rate of 10%
and an Applicable Conversion Value of $2.25. On December 30, 1999, the Company
authorized the sale of 75,000 shares of the Series C Preferred, including 37,500
shares to a related party and 37,500 shares to an entity in which officers of
the Company have a minority interest, for an aggregate of $750,000, pursuant to
two subscription agreements. Of the $750,000 raised, $220,780 represented
conversion of current debt from a related party, and $529,220 was subscribed to
in cash. Including the conversion of debt, and $337,720 in cash payments, the
Company has received $558,500, representing 55,850 shares of the Series C
Preferred stock, and has extended the due date for the remaining $191,500, until
December 31, 2000.
In fiscal 1997, the Company borrowed $100,000 with an interest rate of
8% and a scheduled maturity date of June 30, 1997. Subsequently, the maturity
date was extended with a revised interest rate of 2% per month plus 10,000
shares per month of restricted common stock. During fiscal 2000, the Company
issued 120,000 shares of common stock as interest towards the note. In March
2000, the Company renegotiated the terms of the note and eliminated the common
stock interest component. The replacement note is unsecured, in the amount of
$164,500 which includes interest and expenses previously accrued, and bears
interest at 2% per month. After an initial payment of $15,693, the note is
payable in twelve equal monthly installments of $15,555, including principal and
interest, through March 2001.
During fiscal 2000, the Company and one of its primary vendors agreed
to convert a $1,212,000 trade payable into a promissory note. At June 30, 2000,
the principal balance was approximately $753,000, payable with interest at 12%
in monthly installments of $37,500 through September 2000, and $50,000 through
November 2000. The remaining principal balance of approximately $575,000 is due
in full on December 31, 2000.
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 systems integration operations. Among other things the
agreement requires that the Company maintain a combined net worth at BASIS of at
least $750,000. At June 30, 2000, the Company was in compliance with this
requirement. The Company has neither a commitment from the lender to renew this
facility, nor any commitment from any other source to replace this facility.
There can be no assurance that this facility will be renewed or that it can be
replaced, either on terms acceptable to the Company or at all. The credit
facility matures at March 31, 2001, and, to support operations, the Company will
need to renew or replace this credit facility. The total amount of the line of
credit outstanding at June 30, 2000 was approximately $3,929,023.
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 June 30, 2000, the remaining principle balance
on these notes, which are currently due, was $150,000. In July 2000, an
additional $20,000 in principle was repaid, leaving a balance due of $130,000.
At June 30, 2000, the Company had current debt obligations, or debt
that will become due within twelve months, of approximately $1,490,000,
excluding $3,929,023 of borrowings under its line of credit, the term of which
expires on March 31, 2001. It is unlikely that the Company will be able to
service this debt from funds generated by operations alone. As a result, the
Company will require additional equity or debt financing to maintain current
operations, service current debt, and assure its ability to achieve its plans
for current and future expansion and the Company will need to either renew the
line of credit, replace it with another line of credit with similar borrowing
limits, or repay outstanding borrowings by March 31, 2001. No assurance can be
given of the Company's ability to obtain any or all financing on favorable
terms, if at all. In June 2000, the Company engaged the investment banking firm
of Carmichael and Company to assist and advise the Company in connection with
the review of the Company's strategic alternatives. In addition to raising
capital, possible alternatives include the sale of certain assets, including
BASIS, Inc., the Company's remaining operating subsidiary.
<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. If the Company had not raised the proceeds specified in the Series B
Cumulative Convertible Preferred Stock agreement, then the Company would record
a deemed dividend of approximately $400,000. On August 1, 2000, certain holders
of the Series B Cumulative Preferred Stock filed an action seeking a court
determination of whether the Company had met this condition at December 31,
1999. (See Part II, Item 1 of this Report.)
During the first quarter of fiscal 2001, the Company purchased
approximately $3,150 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. The Company did not incur any material costs or expenses
relating to Year 2000 issues during the fiscal year ended March 31, 2000, or in
the first quarter of fiscal 2001, ended June 30, 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,
2000. 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.
<PAGE> 13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 1, 2000, certain holders of the Series B Convertible
Preferred Stock filed an action in the Arizona Superior Court, Pima County (Pace
Investment Co., Inc., et al. v. Prologic Management Systems, Inc., CV 20003999).
In the complaint, Plaintiffs allege that certain conditions affecting the Series
B Preferred Stock conversion rate were not timely met, or not met at all,
resulting in rights to convert Series B Preferred shares into a substantially
greater number of shares of the Company's common stock than originally
specified. Although the exact number of shares of common stock is unspecified,
the Company believes that judgment in favor of the Plaintiffs might result in
conversion rights involving up to 5,837,049 shares of common stock. The
Plaintiffs also request a judgment declaring whether the Company's Series C
Convertible Preferred Stock (which has conversion rights and conversion rates
identical to those of the Series B Preferred Stock) was validly issued. The
Company maintains, as previously reported, that the conditions were met by
December 31, 1999, and intends to vigorously defend against the Plaintiffs
claims and allegations.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE BY SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 10QSB
A. Exhibits:
Exhibit Number Document Page
-------------- -------- ----
27 Financial Data Schedule 15
B. Reports:
No reports on Form 8-K were filed during the quarter ended
June 30, 2000.
<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: August 18, 2000 By:/s/ James M. Heim
----------------------------------------
James M. Heim
Principal Financial and
Accounting Officer
By: /s/ Richard E. Metz
----------------------------------------
Richard E. Metz
President
<PAGE> 15
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
27 FINANCIAL DATA SCHEDULE
