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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 1996.
Commission file number: 33-89384-LA
Prologic Management Systems, Inc.
(Name of small business issuer in its charter)
Arizona 86-0498857
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2030 East Speedway Blvd., Tucson, Arizona 85719
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (520) 320-1000.
(Former address: 2731 East Elvira Road, #151, Tucson, Arizona, 85706)
(Former telephone number: 520-741-1001)
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 July 31, 1996 was 3,328,070.
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 June 30, 1996
and March 31, 1996 3
Condensed Consolidated Statements of Operations
for the Three Months Ended June 30, 1996 and June 30, 1995 4
Condensed Consolidated Statements of Cash Flows
for the Three Months Ended June 30, 1996 and June 30, 1995 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 11
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults upon Senior Securities 11
Item 4. Submission of Matters to a Vote by Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
Exhibit 11 13
Exhibit 27 14
SIGNATURES 12
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PROLOGIC MANAGEMENT SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 MARCH 31, 1996
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(unaudited)
Assets
Current assets
Cash and cash equivalents $ 2,370,582 3,426,981
Trade accounts receivable less allowance for doubtful
accounts of $152,696 at June 30, 1996 and March 31,1996 417,176 480,914
Inventory 52,991 41,931
Prepaid expenses 91,082 37,639
----------- ----------
Total current assets 2,931,831 3,987,465
Property and equipment, net (6) 204,950 124,642
Software costs, net (7) 530,810 565,812
Goodwill, net (3) 225,306 235,806
Other assets 147,899 69,651
----------- ----------
Total assets $ 4,040,796 4,983,376
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Liabilities and Shareholders' Equity
Current liabilities
Line of credit $ 895,007 47,367
Current installments of long term debt 109,669 30,018
Notes payable -- 892,710
Notes payable to related parties -- 40,000
Accounts payable 213,274 322,469
Accrued expenses 315,781 250,486
Deferred maintenance revenue 126,587 107,361
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Total current liabilities 1,660,318 1,690,411
Long term debt, excluding current installments 21,550 187,688
Shareholders' equity
Common stock, no par value
Authorized 10,000,000 shares;
3,328,070 issued and outstanding
at March 31, 1996 and June 30, 1996 6,612,395 6,595,163
Accumulated deficit (4,253,467) (3,489,886)
----------- ----------
Net shareholders' equity 2,358,928 3,105,277
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Total liabilities and shareholders' equity $ 4,040,796 4,983,376
=========== ==========
See accompanying notes to condensed consolidated financial statements
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PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30,
1996 1995
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(unaudited) (unaudited)
Net Sales
Hardware $ 397,323 $ 13,814
Licenses 92,879 67,248
Services and Other 256,068 72,455
----------- -----------
746,269 153,517
Cost of Sales 572,143 75,971
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Gross Profit 174,126 77,547
Operating Expenses
Selling and marketing 149,648 88,496
General and administrative 373,505 68,478
Research and development 82,411 34,171
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Total Operating Expenses 605,564 191,145
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Operating Loss (431,437) (113,598)
Interest Expense (356,641) (19,064)
Other income (expense) 24,497 --
----------- -----------
Net loss before taxes (763,582) (132,662)
Income Taxes -- --
----------- -----------
Net loss $ (763,582) $ (132,662)
=========== ===========
Net (loss) per common share (.22) (.06)
Shares used in computing net (loss) per share 3,328,070 2,031,280
See accompanying notes to condensed consolidated financial statements
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PROLOGIC MANAGEMENT SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED JUNE 30,
1996 1995
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(unaudited) (unaudited)
Cash flows from operating activities:
Net Loss $ (763,582) $(132,662)
Adjustments in reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 54,305 56,566
Changes in: -- --
Trade accounts receivable 63,738 (76,034)
Prepaid Expenses (53,443) 617
Deposits (78,248) --
Other Assets 8,166 9,157
Accounts payable and accrued expenses (43,900) 26,771
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Total adjustments (49,381) 17,079
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Net cash used in operating activities (812,962) (115,700)
Cash flows from investing activities:
Purchase of equipment (56,415) (13,878)
Capitalized software development costs -- (73,388)
Purchase of Software - in-house (1,220) (657)
Purchase of Furniture/Fixtures (31,475) (3,402)
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Net cash used in investing activities (89,111) (91,327)
Cash flows from financing activities: --
Issuance of notes payable and debt 927,291 874,823
Repayment of debt (1,058,848) (521,484)
Net decrease in related party debt (40,000) --
Issuance of common stock and warrants 17,232 --
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Net cash provided by financing activities (154,325) 353,339
Net increase (decrease) in cash and cash equivalents (1,056,399) 146,310
Cash and cash equivalents, beginning of period 3,426,981 66,744
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Cash and cash equivalents, end of period $ 2,370,582 $ 213,054
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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, Great River Systems, Inc. All significant
intercompany 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 principals, 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, it is suggested
that these financial statements be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's 1996 Report on Form 10-KSB. The results of operations for the
three months ended June 30, 1996 are not necessarily indicative of the
results to be expected for the full year.
2. Line of Credit
The Company maintains a $1,000,000 line of credit with its bank, which is
subject to renewal in August 1996. The interest rate on borrowings under
the agreement is the "prime" rate of interest as established by the bank.
The line of credit is secured by the Company's money market accounts. The
credit agreement contains, among other things, restrictive financial
covenants. As of June 30, 1996, the Company had borrowings totaling
$895,007 under this agreement and was compliant with the covenants.
3. Goodwill
Goodwill arose from the acquisition of GRSI and represents the excess of
the purchase price over the estimated fair value of the net assets of
GRSI. Goodwill is being amortized on a straight-line basis over the period
of expected benefit of 7 years. The Company assesses the recoverability of
this intangible asset by determining whether the amortization of the
goodwill balance over its remaining life can be recovered through
undiscounted future operating cash flows of the acquired operation. The
amount of goodwill impairment, if any, is measured based on projected
discounted future operating cash flows using a discount rate reflecting
the Company's average cost of funds. The assessment of the recoverability
of goodwill will be impacted if estimated future operating cash flows are
not achieved. Accumulated amortization totaled approximately $31,000 at
June 30, 1996.
4. Subsequent Events
On August 15, 1996, the Company completed the purchase of 100% of the
outstanding common stock of BASIS, Inc. The purchase price of $1,900,000
will be paid in $500,000 cash and issuance of 350,000 shares of common
stock of the Company valued at $4.00 per share. The Company is also
required to pay a contingent purchase price up to $1,600,000 in cash and
common stock based, based on the pretax earnings of BASIS, Inc. for the
twelve-month period ending June 30, 1997. BASIS, Inc. had net sales of
approximately $15 million for the year ended December 31, 1995 and net
earnings of approximately $210,000. Its total assets and stockholders'
equity approximated $2.4 million and $1.2 million, respectively, at
December 31, 1995.
5. Acquisitions
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In September 1995, the Company completed the acquisition of Great River
Systems, Inc. (GRSI), a regional systems integration firm based in St.
Paul, Minnesota. The following financial information presents the
unaudited pro forma combined results of the Company as if the GRSI
acquisition had occurred at April 1, 1994:
THREE MONTHS
ENDED
JUNE 30, 1995
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Sales $1,135,207
Net loss $ (100,419)
Net loss per common share $ (0.05)
The above pro forma results give effect to (1) estimated adjustments to
net sales, cost of sales, selling and general and administrative expenses,
including amortization of intangibles resulting from the acquisition, and
(2) estimated income tax effects thereon. The pro forma information
presented is for informational purposes only and is not necessarily
indicative of future earnings (loss) or of what the earnings (loss)
actually would have been had the combination been consummated at the
beginning of the respective periods.
6. Property and Equipment
Property and equipment are comprised of the following:
JUNE 30, MARCH 31,
1996 1996
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Furniture and Fixtures $ 42,294 $ 39,968
Computer equipment and software $318,980 $232,190
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$361,274 $272,158
Less accumulated depreciation $156,324 $147,516
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Net property and equipment $204,950 $124,642
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7. Software Costs
A summary of capitalized software follows:
JUNE 30, MARCH 31,
1996 1996
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Existing products and enhancements $487,376 $487,376
Purchased software $387,386 $387,386
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$874,762 $874,762
Less accumulated amortization $343,952 $308,950
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Net software costs $530,810 $565,812
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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The following discussion should be read in conjunction with the audited
Consolidated Financial Statements included elsewhere herein. Except for the
historical information contained herein, the matters discussed in this 10QSB are
forward-looking statements that involve a number of risks and uncertainties.
There are certain important factors and risks, including the rapid change in
hardware and software technology, market conditions, the anticipation of growth
of certain market segments and the positioning of the Company's products and
services in those segments, seasonality in the buying cycles of certain of the
Company's customers, the timing of product announcements, the release of new or
enhanced products, the introduction of competitive products and services by
existing or new competitors and the significant risks associated with the
acquisition of new products, product rights, technologies, businesses, the
management of growth, the Company's ability to attract and retain highly skilled
technical, managerial and sales and marketing personnel, and the other risks
detailed from time to time in the Company's SEC reports, including reports on
Form 10-KSB and Form 10QSB, that could cause results to differ materially from
those anticipated by the statements made herein. Therefore, historical results
and percentage relationships will not necessarily be indicative of the operating
results of any future period.
INTRODUCTION
The Company provides applications software for the commercial market which it
licenses for use to manufacturers and for use in the wholesale distribution
industry. The Company's products are not directed to the retail consumer market.
Additionally, the Company provides systems integration and networking services.
These systems integration services include consulting, maintenance, training and
the installation and sale of third party computer hardware on which to implement
the Company's software products. The Company anticipates that its revenues
generated from the sale of third party hardware will continue to increase as a
percentage of total revenues in future periods, primarily as a result of the
acquisitions described below. The Company expects that increased sales of third
party hardware will help produce additional software license and software
service-related revenues.
The Acquisition of Great River Systems, Inc.
On October 2, 1995, Prologic Management Systems, Inc. completed its acquisition
of Great River Systems, a regional computer systems integrator. Great River
Systems is a wholly owned subsidiary of Prologic Management Systems and expands
Prologic's market position as a comprehensive systems integration specialist to
further extend Prologic's presence in the midwest marketplace.
The Acquisition of BASIS, Inc.
On August 15, 1996, Prologic Management Systems, Inc. completed its acquisition
of BASIS, Inc. Pursuant to the acquisition agreement, BASIS was merged into and
became a wholly-owned subsidiary of Prologic. BASIS, Inc. was a privately held
company whose revenues in 1995 were approximately $15 million. BASIS is a
systems integration company located in the San Francisco area, with additional
offices in Portland, Oregon.
RESULTS OF OPERATIONS
Net Revenues. Net revenues for the first quarter of fiscal 1997 increased by
$592,000, from $154,000 in the first quarter of the previous fiscal year to
$746,000 in the first quarter of the current fiscal year. The increase was due
to increases in hardware sales and sales of services, including maintenance and
system integration services. With the increase in total revenues came a change
in the revenue mix, as revenues from hardware and services far out-paced
software revenues, which had been the predominate area of revenues in prior
periods. The major increase was due to the continued impact of the company's
acquisition strategy with sales of hardware generated from the company's
subsidiary Great River Systems, Inc. (GRSI) reflecting the most significant
change in the revenue mix. The Company had expected an additional one million
dollars in hardware revenues, but one large order had to be canceled due to
product constraints imposed by the manufacturer. The Company is working with the
manufacturer to avoid these problems in the future.
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Cost of Sales. Cost of sales increased with the increase in net revenues and the
change in the mix to more sales of hardware. Total cost of sales for the first
quarter of the current fiscal year was $572,000 versus $76,000 in the first
quarter of the previous fiscal year. As a percentage of net revenues, total cost
of sales for the first quarter were 76.7% versus the first quarter of the
previous fiscal year when cost of revenues as a percentage of revenues was
49.5%. This change reflects the lower margin that is earned on the sale of third
party hardware compared to the margin on proprietary software sales. The
Company's strategy is to increase the sale of software products by creating
distribution channels through the acquisition of system integration firms. The
Company expects to see increases in software sales from its operating
subsidiaries beginning in the third quarter of the current fiscal year.
Sales and Marketing. Sales and marketing expenses increased by $61,000 from the
first quarter of the previous fiscal year. Sales and marketing expenses were
$150,000, or 20.1% of net revenues, for the quarter just ended and were $88,000,
or 57.7% of net revenues for the first quarter of last year. The increase
includes the additional cost of increasing the staff as well as increases in
advertising and lead generation. The Company expects to continue to increase
sales and marketing expenses as it implements its growth strategy.
General and Administrative. General and administrative expenses increased from
$68,000, or 44.6% of net revenue, for the first quarter of the previous fiscal
year to $374,000, or 50.1% of net revenues, for the first quarter of the current
fiscal year. The increase was the result of increased staff, and increases in
expenses indirectly associated with the March 1996 initial public offering of
the Company's common stock., as well as expenses associated with the
implementation of its acquisition strategy. Expense areas that reflected
significant increases included legal and audit expenses, insurance, consulting
and investor relations. The Company expects total general and administrative
expenses to decrease as a percentage of sales beginning in the second quarter of
the current fiscal year.
Research and Development. Total research and development expense was $82,000 in
the quarter ended June 30, 1996, an increase of $48,000 from the same period in
the previous fiscal year when research and development expense was $34,000. The
increase was the result of expensing all development work for the current
quarter.
Interest and Other Income. The Company incurred approximately $357,000 in
interest expenses during the first quarter of the current fiscal year and
$19,000 in the first quarter of the previous fiscal year. The increase was the
result of the interest and discounts on the bridge financing which was paid off
during the first quarter of the current fiscal year. This financing was paid off
early using the Company's line of credit with its bank which significantly
reduced the interest rate payable on these notes.
Income Taxes. The Company had no income tax expense for the first quarter of
fiscal 1997 and 1996. As of March 31, 1996, the Company had Federal net
operating loss carryforwards of approximately $3,260,000. The utilization of net
operating loss carryforwards will be limited as determined pursuant to
applicable provisions of the Internal Revenue Code and Treasury regulations
thereunder.
Net Loss. The net loss for the quarter ended June 30, 1996 was approximately
$764,000 versus a loss for the same period of the prior fiscal year of
approximately $133,000. The net loss for the quarter is attributable to the
decreased margin, the increased operating expenses incurred as the Company began
its operating plan and the interest and discounts which are associated with the
bridge financing.
LIQUIDITY AND CAPITAL RESOURCES
Cash, and cash equivalents totaled $2,376,000 at June 30, 1996 compared to
$3,427,000 at March 31, 1996. The decrease in cash was primarily due to the
funds used by operations to begin the growth and acquisition strategy. In June
the Company deposited $75,000 into an escrow account as part of its agreement
for the acquisition of BASIS, Inc. During the month of April 1996 the Company
paid off all remaining bridge notes, which carried an interest rate of 14%, with
funds from the Company's line of credit with its bank which was borrowed at the
bank's prime rate. In addition, during the quarter, the Company repaid loans to
related parties of $40,000 and issued warrants for the purchase of 157,500
shares of common stock to its underwriter per the underwriting agreement for its
initial public offering. During this period, the Company purchased $89,000 in
capital equipment, including computer equipment and office furniture.
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Based on the Company's operating plan, management believes that the anticipated
cash flow from operations and the use of its line of credit will be sufficient
to meet the Company's anticipated cash needs. In the future, the Company may
require additional financing to achieve its current as well as future plans for
expansion. No assurance can be given of the Company's ability to obtain such
financing on favorable terms, if at all. If the Company is unable to obtain
additional financing, its ability to meet its current and future plans for
expansion could be materially adversely affected.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This form 10QSB may contain forward-looking statements that involve risks and
uncertainties, including, but not limited to, the impact of competitive products
and pricing, product demand and market acceptance risks, the presence of
competitors with greater financial resources, product development and
commercialization risks, costs associated with the integration and
administration of acquired operations, capacity and supply constraints or
difficulties, the results of financing efforts and other risks detailed from
time to time in the Company's Securities and Exchange Commission filings.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of the date of this filing, neither the Company nor its subsidiary is a party
to any legal proceedings, the adverse outcome of which, in management's opinion,
would have a material effect on Prologic operations or financial position.
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. Exhibit:
Exhibit Number Document Page
-------------- -------- ----
11 Schedule of Computation of Net Loss Per Share 13
27 Financial Data Schedule 14
B. Reports:
No reports on Form 8-K were filed during the quarter ended June 30, 1996.
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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: August 19, 1996 By: /s/ James M. Heim
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James M. Heim
President and Chief Executive Officer
By: /s/ William E. Wallin
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William E. Wallin,
Vice President, Chief Financial Officer,
Secretary and Treasurer (Principal
Financial and Accounting Officer)
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