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, 2000.
Commission file number: 1-13704
PROLOGIC MANAGEMENT SYSTEMS, INC.
(Name of small business issuer in its charter)
Arizona 86-0498857
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
3708 E. Columbia Street, #110, Tucson, Arizona 85714
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (520) 747-4100.
Securities registered under Section 12(g) of the Exchange Act:
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, 2000 was 8,439,577.
Transitional Small Business Disclosure Format:
Yes [ ] ; No [X].
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Prologic Management Systems, Inc.
Index
Page
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Part I. FINANCIAL INFORMATION 3
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at December 31, 2000 (unaudited)
and March 31, 2000 3
Condensed Consolidated Statements of Operations for the Three and
Nine Months Ended December 31, 2000 (unaudited) and December
31, 1999 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended December 31, 2000 (unaudited) and December 31,
1999 (unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results of Operations and 8
Financial Condition
Part II. OTHER INFORMATION 15
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote by Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED AND CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 MARCH 31, 2000
----------------- --------------
Assets (unaudited)
Current assets:
Cash $ 385,849 $ 447,910
Restricted cash 300,000 300,000
Accounts receivable, less allowance for doubtful accounts of
$329,864 at December 31, 2000 and $335,864 at March 31, 2000 3,423,812 7,573,226
Inventory 476,416 203,463
Prepaid expense 101,188 23,465
------------ ------------
Total current assets 4,687,265 8,548,064
Property and equipment, net 312,073 403,435
Goodwill, net 461,518 619,245
Other assets 66,667 322,342
------------ ------------
Total assets $ 5,527,523 $ 9,893,086
============ ============
Liabilities and Stockholders' Deficit
Current liabilities:
Short term debt $ 1,892,534 $ 1,660,460
Line of credit 894,509 4,647,306
Accounts payable 1,753,333 5,674,105
Accrued expenses 361,324 654,154
Deferred revenue 133,597 502,936
Net liabilities (assets) of discontinued operations (13,861) 14,061
------------ ------------
Total current liabilities 5,021,436 13,153,022
Long term debt, excluding current portion 4,511,942 66,573
------------ ------------
Total Liabilities 9,533,378 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 at December 31, 2000
and 8,429,577 shares issued and outstanding at March 31, 2000 9,625,812 9,620,812
Stock subscription receivable (191,500) (191,500)
Warrants 741,367 728,770
Accumulated deficit (15,551,417) (14,854,474)
------------ ------------
Total stockholders' deficit (4,005,855) (3,326,509)
------------ ------------
Total liabilities and stockholders' deficit $ 5,527,523 $ 9,893,086
============ ============
See accompanying notes to condensed consolidated financial statements.
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PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED AND CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2000 1999 2000 1999
-------------- ------------- -------------- --------------
(unaudited) (unaudited) (unaudited) (unaudited)
Net Sales
Hardware $ 4,182,445 $ 5,486,847 $ 19,582,063 $ 18,362,450
Licenses 1,008,975 1,945,297 7,214,532 5,041,245
Services 1,062,486 1,414,912 3,500,546 3,717,436
-------------- ------------- -------------- --------------
6,253,906 8,847,056 30,297,141 27,121,131
Cost of Sales 5,095,884 7,071,611 24,505,653 21,844,711
-------------- ------------- -------------- --------------
Gross Profit 1,158,022 1,775,445 5,791,488 5,276,420
Operating Expenses
Selling and marketing 732,930 601,887 2,118,433 1,677,096
General and administrative 1,282,648 1,247,655 3,807,130 3,712,247
Research and development 45,200 0 149,329 0
-------------- ------------- -------------- --------------
Total Operating Expenses 2,060,778 1,849,542 6,074,892 5,389,342
-------------- ------------- -------------- --------------
Operating Income (loss) (902,756) (74,097) (283,404) (112,923)
Interest Expense (91,777) (365,047) (431,118) (633,213)
Other income (expense) 4,929 0 18,785 (16,438)
-------------- ------------- -------------- --------------
Net Income (loss) from continuing operations (989,604) (439,144) (695,737) (762,573)
Net Income (loss) from discontinued operations 0 (45,096) (1,208) (180,798)
-------------- ------------- -------------- --------------
Net Income (loss) $ (989,604) $ (484,240) $ (696,945) $ (943,371)
============== ============= ============== ==============
Cumulative Preferred Stock Dividend (38,750) (20,666) (116,250) (61,555)
-------------- ------------- -------------- --------------
Net Income (loss) available to common
stockholders $ (1,028,354) $ (504,906) $ (813,195) $(1,004,926)
============== ============= ============== ==============
Weighted average shares of common stock
Basic 8,439,577 8,242,897 8,438,756 6,286,991
Diluted 8,439,577 8,242,897 8,438,755 6,286,991
Earnings (loss) per common share
Basic and diluted for continuing operations ($ 0.12) ($ 0.05) ($0.08) ( $0.12)
Basic and diluted for discontinued operations $ 0.00 ($ 0.01) $0.00 ( $0.03)
Basic and diluted per common share ($ 0.12) ($ 0.06) ($0.10) ( $0.16)
See accompanying notes to condensed consolidated financial statements.
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PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED DECEMBER 31,
2000 1999
------------- -------------
(unaudited) (unaudited)
Cash flows from operating activities:
Net income (loss) $ (696,943) $ (762,573)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 251,017 368,027
Issuance of warrants for services 12,596 0
Common Stock Dividend 0 61,555
Changes in:
Accounts receivable 4,149,414 (4,251,328)
Inventory (272,953) 367,319
Prepaid expenses (77,723) (136,965)
Other assets 255,675 69,626
Accounts payable 1,079,228 913,510
Accrued expenses (292,830) 11,047
Deferred maintenance revenue (369,339) 87,579
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Total adjustments 4,735,085 (2,509,630)
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Net cash provided by (used in) continuing operating 4,038,142 (3,272,203)
activities
Net cash used in discontinued operating activities (27,922) (171,477)
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Net cash provided by (used in) operating activities 4,010,220 (3,443,680)
------------- -------------
Cash flows from investing activities
Purchase of equipment (1,928) (157,208)
------------- -------------
Net cash used in investing activities (1,928) (157,208)
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Cash flows from financing activities:
Net change in line of credit (3,752,797) 2,423,889
Issuance of common stock 5,000 895,855
Issuance of Series C Preferred Stock 0 750,000
Repayment of debt (322,556) (130,517)
------------- -------------
Net cash provided by (used in) financing activities (4,070,353) 3,939,227
------------- -------------
Net increase in cash and cash equivalents (62,061) 338,339
Cash and cash equivalents at beginning of period 447,910 128,162
------------- -------------
Cash and cash equivalents at end of period $ 385,849 $ 466,501
============= =============
Supplemental statement of cash flow information:
Cash paid during the period for interest $ 423,137 $ 513,952
Cash paid during the period for taxes $ 0 $ 0
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 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 September 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 period ended December 31,
1999, contained herein for comparative purposes, also has been restated
to conform to this revised presentation.
3. Change in Methods of Procurement and Sales
The Company has elected to transition its method of obtaining third
party products and services, which will impact the presentation of the
financial statements for the remainder of the fiscal year. Under this
procurement method, the Company records only its markup on third party
products and services, the costs of the products and the equivalent
gross sale prices are not recognized. The resulting effect will be a
reduction in net sales and cost of sales. Gross profit and operating
income will remain unaffected. The Company initiated the first phase of
the transition in the quarter ended September 30, 2000, and anticipates
it will finalize the transition by the current fiscal year-end.
Beginning with the quarter ended September 30, 2000, the Company
changed certain aspects of its business practices in regards to
procurement, which pursuant to SEC's Staff Accounting Bulletin No. 101,
will require the Company to report revenue on certain transactions net.
In December 1999, the SEC staff releases Staff Accounting Bulletin No.
101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101
provides interpretive guidance on the recognition, presentation and
disclosure of revenue in the financial statements. SAB 101 must be
applied in the financial statements no later than the fourth quarter of
fiscal years beginning after December 15, 1999. Additionally, during
2000 the EITF reached a consensus on issue number 99-19, "Reporting
Revenue Gross as a Principal Versus Net as an Agent," in which further
guidance is provided to assist companies in determining how revenue
should be presented in financial statements. The Company does not
believe that the initial application of either of these pronouncements
will have an impact on its previously reported financial statements.
4. 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 December 31, 2000, borrowings
under this line of credit were $894,509.
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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 December 31, 2000, the Company was in compliance
with this covenant.
5. 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, 2000 totaled $52,575. Accumulated
amortization totaled $922,531 at December 31 2000.
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.
6. Property and Equipment
Property and equipment as of December 31, 2000, consists of the following:
December 31, 2000 March 31, 2000
----------------- ----------------
Furniture and leasehold improvements $ 252,185 $ 365,084
Equipment and software 835,975 818,129
----------------- ----------------
Total property and equipment 1,088,160 1,183,213
Less accumulated depreciation (776,087) (779,778)
----------------- ----------------
Net property and equipment $ 312,073 $ 403,435
================= ================
7. 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.
8. Long Term Debt
In December 2000, the Company signed a $5 million note, converting
approximately $5 million in accounts payable. The note assigns
bi-weekly payments of $20,000 commencing on January 1, 2001, and
provides that the Company direct 50% of any future sums received by,
committed to, or invested in the Company as an additional equity
capital infusion, towards any unpaid balance due on the note. The
interest rate on the note is 10%, with a due date of April 2, 2002. The
note bears an 18% per annum default clause.
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9. 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 December 31, 2000 and 1999
Weighted Per-Share
Net Income (loss) Average Shares Amount
2000 1999 2000 1999 2000 1999
------------ ------------ ----------- ------------ ------ ------
Basic EPS
Income (loss) available to
common stockholders $(1,028,354) $(504,906) 8,439,577 8,242,897 $(0.12) $(0.06)
Effect of Dilutive Securities
Common stock options - - - - - -
Convertible Preferred Stock - - - - - -
Diluted EPS
Income available to common
stockholders - assumed conversions $(1,028,354) $(504,906) 8,439,577 8,242,897 $(0.12) $(0.06)
For the Nine Months Ended December 31, 2000 and 1999
Weighted Per-Share
Net Income (loss) Average Shares Amount
2000 1999 2000 1999 2000 1999
------------- -------------- ------------- -------- ---- ----
Basic EPS
Income (loss) available to
common stockholders $(813,195) $(1,004,926) 8,438,755 6,286,991 $(0.10) $(0.16)
Effect of Dilutive Securities
Common stock options - - - - - -
Convertible Preferred Stock - - - - - -
Diluted EPS
Income available to common
stockholders - assumed conversions $(813,195) $(1,004,926) 8,438,755 6,286,991 $(0.10) $(0.16)
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
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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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2000 AND 1999
Net Sales. Net sales for the third quarter of fiscal 2001 were
$6,253,906 compared to $8,847,056 for the same period of the prior fiscal year,
a decrease of $2,593,150, or approximately 29.3%. The sales decrease was due
primarily to an economic downturn that caused clients to delay a significant
number of orders during the quarter. Sales of third party hardware for the
period were $4,182,445, a decrease of approximately 23.8% over third party
hardware sales for the same period one year ago of $5,486,847. Sales of software
licenses, which included third party licenses as well as proprietary software,
were $1,008,975 for the period, a decrease of approximately 48.0% over sales of
$1,945,297 for the third quarter of the previous fiscal year. Service sales for
the period, which were comprised predominately of integration services, were
$1,062,486 compared to $1,414,912 for the corresponding period of the previous
fiscal year, a decrease of approximately 25.0%. The Company continues to
concentrate on sales of hardware and third party software that normally lead to
additional service sales.
Cost of Sales. Cost of sales was $5,095,884, or 81.5% of total net
sales, for the quarter ended December 31, 2000, versus approximately $7,071,611,
or 79.9% of net sales, for the same period of the previous year. The decreased
cost of sales was primarily the result of the decline in sales. The Company
expects to see the margins on sales of third party products continue to decline
in the long term 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 $732,930, or
11.7% of net sales, for the three month period ended December 31, 2000, compared
to $601,887, or 6.8% of net sales for the same period of the previous fiscal
year. The increase was primarily the result of an expanded sales staff at the
Company's BASIS
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subsidiary. The Company normally expects sales and marketing
expenses to generally reflect long range sales trends, rather than short-term
sales cycles.
General and Administrative. General and administrative expenses for the
third quarter of fiscal 2001 were $1,282,648, or 20.5% of net sales, compared to
$1,247,655, or 14.1% of net sales, for the third quarter of the previous fiscal
year. The increase, as a percentage of net sales, was primarily the result of
the decrease in sales. The Company normally expects general and administrative
expenses to generally reflect long range sales trends, rather than short-term
sales cycles.
Research and Development. Research and development expenses were
$45,200, or 0.7% of net sales, for the third quarter of fiscal 2001. The Company
did not incur any research and development expense during the third quarter of
the previous fiscal year. Research and development is generally related to
improvements of proprietary software.
Operating Income (loss). Operating loss for the period was $902,756, or
14.4% of net sales, versus a loss of $74,097, or 0.8% of net sales, for the same
period last year. The operating loss was the combined result of increased
staffing to accommodate sales growth, and the decrease in sales resulting from
an economic downturn that caused clients to delay a significant number of orders
during the quarter.
Interest Expense and Other Income. Interest expense and other income
for the quarter was $86,848, compared to $365,047 for the corresponding period
of the prior year, which was mainly interest paid on the current lines of credit
and short term borrowings. The decrease was primarily the result of reduced
short-term borrowings during the period.
Income Taxes. The Company had no income tax expense for the third
quarters of fiscal 2001 and 2000. As of December 31, 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 loss for the quarter
ended December 31, 2000 was $989,604, or a loss of approximately $0.12 per
share, versus a loss of $439,144, or a loss of approximately $0.06 per share,
for the same period of the prior fiscal year. The loss was the result of the
decrease in sales resulting from an economic downturn that caused clients to
delay a significant number of orders during the quarter, offset somewhat by
reduced 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 $0 for the
third quarter of fiscal 2001 as compared to a loss of $45,096 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 loss of $989,604, or a loss of $0.12 per share, for the third quarter of
fiscal 2001, as compared to a net loss of $484,240, or a loss of approximately
$0.06 per share, for the same period of the prior fiscal year.
NINE MONTHS ENDED DECEMBER 31, 2000 AND 1999
Net Sales. Net sales for the fist nine months of fiscal 2001 were
$30,297,141 compared to $27,121,131 for the same period of the prior fiscal
year, an increase of $3,176,010, or approximately 11.7%. The sales growth was
due primarily to continued demand for high-availability integrated systems at
the Company's BASIS subsidiary, impacted by an economic downturn in the December
quarter that caused clients to delay a significant number of orders during that
quarter. Sales of third party hardware for the period were $19,582,063, an
increase of approximately 6.6% over sales for the same period one year ago of
$18,362,450. Sales of software licenses, which included third party licenses as
well as proprietary software, were $7,214,532 for the period, an increase of
approximately 43.1% over sales of $5,041,245 for the first nine months of the
previous fiscal year. Service sales for the period, which were comprised
predominately of integration services, were $3,500,546 compared to $3,717,436
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for the corresponding period of the previous fiscal year, a decrease of
approximately 5.8%. The Company continues to concentrate on sales of hardware
and third party software that normally lead to additional service sales.
Cost of Sales. Cost of sales was $24,505,653, or 80.9% of total net
sales, for the nine months ended December 31, 2000, versus approximately
$21,844,711, or 80.5% of net sales, for the same period of the previous year.
The increased cost was a result of the increase in sales. 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 $2,118,433,
or 7.0% of net sales, for the nine months ended December 31, 2000, compared to
$1,677,096, or 6.2% of net sales for the same period of the previous fiscal
year. The increase was primarily the result of an expanded sales staff at Basis
to accommodate sales growth. The Company normally expects sales and marketing
expenses to generally reflect long range sales trends, rather than short-term
sales cycles.
General and Administrative. General and administrative expenses for the
first nine months of fiscal 2001 were $3,807,130, or 12.6% of net sales,
compared to $3,712,247, or 13.7% of net sales, for the same period of the
previous fiscal year. The decrease, as a percentage of net sales, is primarily a
reflection of increased sales. The Company normally expects general and
administrative expenses to generally reflect long range sales trends, rather
than short-term sales cycles.
Research and Development. Research and development expenses were
$149,329, or 0.5% of net sales, for the nine months ended December 31, 2000. The
Company did not incur any research and development expense during the same
period of the previous fiscal year. Research and development is generally
related to improvements of proprietary software.
Operating Income (loss). Operating loss for the nine months ended
December 31, 2000 was $283,404, or 0.9% of net sales, versus a loss of $112,923,
or 0.4% of net sales, for the same period last year. The operating loss was the
combined result of increased staffing to accommodate sales growth, and the
decrease in sales in the December quarter resulting from an economic downturn
that caused clients to delay a significant number of orders during the quarter.
Interest Expense and Other Income. Interest expense and other income
for the nine months ended December 31, 2000 was $412,333, compared to $649,651
for the corresponding period of the prior year, which was mainly interest paid
on the current lines of credit and short term borrowings. The decrease was
primarily the result of reduced short-term borrowings during the period.
Income Taxes. The Company had no income tax expense for the first nine
months of fiscal 2001 and 2000. As of December 31, 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 loss for the nine
months ended December 31, 2000 was $695,737, or a loss of approximately $0.08
per share, versus a loss of $762,573, or a loss of approximately $0.12 per
share, for the same period of the prior fiscal year. The loss was the result of
decreased sales in the December quarter resulting from an economic downturn that
caused clients to delay a significant number of orders during the quarter,
offset somewhat by reduced 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 nine months of fiscal 2001 as compared to a loss of $180,798 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 loss of $696,945, or a loss of approximately $0.08 per share,
for the first nine months of fiscal 2001, as compared to a net loss of $943,371,
or a loss of approximately $0.15 per share, for the same period of the prior
fiscal year.
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LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000 the Company had a working capital deficit of
approximately $334,000 versus a deficit of approximately $4,605,000 at March 31,
2000. The reduction in working capital deficit was primarily the result of
approximately $5,000,000 of current accounts payable being reclassified as
long-term debt during the December quarter. As a result of the working capital
deficit, the Company's independent certified public accountants have expressed
substantial doubt about the Company's ability to continue as a going concern.
The total cash balance at December 31, 2000 was $685,849, of which $300,000 was
restricted as security for the Company's line of credit.
Cash provided by operations during the quarter ended December 31, 2000
was $4,010,220, compared to cash used in operations of $3,443,680 for the
corresponding period in fiscal 2000. This was due primarily to decreased
accounts receivable resulting from improved collections and cash flow management
and the reclassification of a portion of accounts payable to debt. Cash used in
investing activities was $1,928 at December 31, 2000 and $157,208 at December
31, 1999. The decrease was due to reduced capital equipment purchases. Cash used
in financing activities for the quarter ended December 31, 2000 was $4,070,353,
compared to cash provided by financing activities of $3,939,227 for the
corresponding period in fiscal 2000. The decrease resulted primarily from
reductions in long-term debt, reduced borrowings against the Company's line of
credit, and the lack of any significant issuances of equity in the current
fiscal year.
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.
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.
As part of the Sunburst settlement described above, the Company paid
$100,000 to Sunburst, of which, $25,000 was paid in cash and the Company
executed a short-term promissory note for the remaining $75,000. The note is
payable in three quarterly principal payments of $25,000, plus interest at 10%,
commencing in April 2001 and concluding in October 2001.
In December 2000, the Company signed a $5 million note, converting
approximately $5 million in accounts payable. The note assigns bi-weekly
payments of $20,000 commencing on January 1, 2001, and provides that the Company
direct 50% of any future sums received by, committed to, or invested in the
Company as an additional equity capital infusion, towards any unpaid balance due
on the note. The interest rate on the note is 10%, with a due date of April 2,
2002. The note bears an 18% per annum default clause.
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.
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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%.
At December 31, 2000, the remaining principal balance was approximately
$723,000.
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 December 31, 2000, the Company was in compliance with this
requirement. The Company has no commitment from the lender to renew this
facility. The Company has received proposals from a number of competing lenders,
but has no 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 December 31, 2000 was approximately $894,509.
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 $65,000 in principle was repaid. The interest rate on
the notes is 2% per month. As of December 31, 2000, the remaining principle
balance on these notes, which are currently due, was $130,000.
At December 31, 2000, the Company had current debt obligations, or debt
that will become due within twelve months, of approximately $1,892,534,
excluding $894,509 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. As of the date of
this report, the Company is not a party to any agreements for the sale or other
disposition of assets not in the ordinary course of business.
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 third quarter of fiscal 2001, the Company purchased
approximately $1,928 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,
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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 nine months of fiscal 2001, ended December 31, 2000.
Subsequent Events. On February 16, 2001, the Company consummated a
definitive agreement with Sunburst Acquisitions IV, Inc. in full settlement of
all claims under a Stock Purchase and Merger Agreement ("SPMA") between the two
companies. Pursuant to the SPMA, Sunburst had previously invested $1,000,000 in
the Company and was issued 3,459,972 shares of Prologic common stock. In
December 1999, the SPMA failed to proceed and the two companies have since been
attempting to resolve their differences. Under the settlement agreement, the
Company paid Sunburst $100,000 in settlement expenses. Of the 3,459,972 shares
of Prologic common stock issued to Sunburst, 900,000 shares were purchased by
third parties, Sunburst retained ownership of 600,000 shares, and Sunburst
surrendered the remaining 1,959,972 shares. Those surrendered shares were
cancelled, reducing the Company's total outstanding common stock from 8,503,942
shares to 6,544,871 shares.
"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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously reported, 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 has filed a counterclaim against the Plaintiffs,
petitioning the court to, amongst other things, affirm the Company's position
and deny the Plaintiffs' claims.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE BY SECURITY HOLDERS
On February 2, 2001, the Company filed its Preliminary Proxy Statement for the
2000 Annual Meeting with the SEC. The Company's 2000 Annual Meeting will take
place at 2:00 p.m., local time, Thursday, March 29, 2001, at the Holiday Inn
Palo Verde, 4550 South Palo Verde Boulevard, Tucson, Arizona. The purposes of
the Annual Meeting are: (1) To elect seven (7) directors to serve until the next
annual meeting of shareholders of the Company and until their successors are
elected and qualified; (2) To amend and restate Prologic's 1994 Stock Option
Plan (the "Plan") to increase the number of shares of the Company's common stock
allocated to and reserved for issuance under the Plan from 500,000 to 3,500,000,
and to extend the term of the Plan to March 29, 2011; (3) To approve and adopt
an amendment to the Company's Articles of Incorporation to increase the number
of authorized shares of the common stock of the Company from 10,000,000 to
50,000,000 and the number of authorized shares of the preferred stock of the
Company from 1,000,000 to 5,000,000; (4) To approve and adopt an amendment to
the Company's Articles of Incorporation to limit the liability of directors to
the fullest extent allowed by Arizona law; (5) To ratify the appointment of BDO
Seidman LLP as the Company's independent auditors for the fiscal year ending
March 31, 2001; and (6) To consider any other matters which properly may come
before the meeting or any adjournments or postponements of the meeting. The
Board of Directors has fixed the close of business on February 21, 2001 as the
record date (the "Record Date") for the determination of the shareholders
entitled to notice of, and to vote at, the Annual Meeting or any adjournment
thereof. Only shareholders of record at the close of business on the Record Date
are entitled to notice of, and to vote at, the Annual Meeting. The stock
transfer books will not be closed. Shares of common stock can be voted at the
Annual Meeting only if the holder is present at the Annual Meeting in person or
represented by valid proxy.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 10QSB
A. Exhibits:
None.
B. Reports:
No reports on Form 8-K were filed during the quarter ended
December 31, 2000.
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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 16, 2001 By: /s/ James M. Heim
-------------------------------
James M. Heim
Principal Financial and
Accounting Officer
By: /s/ Richard E. Metz
-------------------------------
Richard E. Metz
President
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