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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
(AMENDMENT NO. 1)
[X] AMENDMENT TO THE QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the period ended December 31, 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 incorporation or organization) (I.R.S. Employer 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
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No .
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Number of shares of common stock outstanding on January 31, 1996 was 3,675,395.
Transitional Small Business Disclosure Format:
Yes ; No X .
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The Registrant hereby amends Part I, Item 2, in its entirety, of its Quarterly
report for the period ended December 31, 1996 to read as follows:
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements included elsewhere herein. Except for the historical
information contained herein, the matters discussed in this Report are
forward-looking statements that involve a number of risks and uncertainties.
There are certain important factors and risks, including the rapid change in
computer 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, seasonally 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 risk associated
with the acquisition of new products, product rights, technologies, businesses,
the management of the Company's 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 its 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.
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 network services.
These services include consulting, maintenance, training and the installation
and sale of third party computer hardware on which to implement the Company's
and other vendors' software products. Although no assurances can be given, 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
hopes that increased sales of third party hardware will help produce additional
software license and software service-related revenues associated with the
Company's applications software products.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1996 AND 1995
Net Sales. Net sales for the third quarter were approximately $5,963,000 versus
net sales for the same period one year ago of $1,233,000, an increase of
approximately $ 4,730,000. The increase was due to increases in hardware sales
and sales of services, including maintenance, system integration services and
third party software sales, however sales of proprietary software have not yet
met expectations. With the increase in total revenues came a change in the sales
mix as sales of hardware increased as a percent of total sales while sales of
software decreased as a percentage of total sales. The increase in net sales was
due to the continued impact of the Company's acquisition strategy, with hardware
and integration service sales from Great River Systems, Inc. ("GRSI") (acquired
in September 1995) and BASIS, Inc. ("BASIS") (acquired in August 1996)
reflecting the most significant impact when third quarter 1996 revenues are
compared to third quarter 1995 revenues.
Cost of Sales. Cost of sales increased from approximately $728,000, or 59% of
sales, to approximately $4,668,000, or 78% of sales, due to the increased total
sales as well as the change in sales mix (referred to above). The change, as a
percent of total sales, reflects the lower margin that is earned on the sale of
third party hardware compared to the margin earned on the sale of proprietary
software. The Company's strategy is to increase the sales of higher margin
proprietary software products by creating distribution channels through the
acquisition of system integration firms. And, the cost of sales has decreased as
a
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percentage of sales by 4% (margin has increased) from the second quarter,
ended September 30, 1996. The Company does not expect that increases in the sale
of proprietary software will have a material effect on the operating results of
the Company in the short term. The Company expects that sales of third-party
hardware will predominate the Company's sales mix in the short term.
Selling and Marketing. Selling and marketing expenses in the 1996 quarter
increased by approximately $597,000 from the third quarter of the previous
fiscal year. Selling and marketing expenses were approximately $798,000, or 13%
of net sales, for the quarter ended December 31, 1996 and were approximately
$201,000, or 16% of net sales, for the third quarter last year. The increase is
due to increases in staff and additional advertising and product promotion
including attendance at manufacturing trade shows. The Company plans to continue
to increase spending in the sales and marketing area by adding staff and
continuing to expand product promotion expenses as part of its growth strategy.
General and Administrative. General and administrative expenses increased from
approximately $173,000 during the third quarter one year ago to approximately
$713,000 for the third quarter of the current year. As a percent of net sales
general and administrative expenses decreased from 14% for the third quarter
last year to 12% this year. The increased amount is due, in part, to the
addition of BASIS and the amortization of goodwill relating to the acquisition
of BASIS, as well as the additional expenses attributable to being a public
company. The Company is currently implementing a plan to consolidate and
centralize many of the administrative activities at its Tucson location and is
implementing a program intended to reduce general and administrative expenses as
a percentage of sales during the next twelve months.
Research and Development. Research and development expenses were approximately
$231,000, or 4% of net sales, in the current period versus approximately
$43,000, or 3% of net sales, for the same period one year ago. The increase of
approximately $188,000 was the result of expensing all development activity
during the current period versus capitalizing development expense during the
prior years' third quarter. In addition, the development staff has been
increased during the period.
Operating Loss. The Company had an operating loss of approximately $447,000 for
the three month period ended December 31, 1996 versus operating income of
approximately $56,000 for the same quarter of the previous fiscal year. The
operating loss was the result of the increased development expense and the
increased operating expenses associated with the acquisitions and growth
strategy.
Interest and Other Income. During the quarter ended December 31, 1996, the
Company incurred approximately $108,000 in interest expense, which was related
to lines of credit and long term debt and included approximately $80,000 of
non-recurring charges. Interest expense for the same period one year ago was
approximately $60,000, all of which was related to bridge financing and repaid
soon after the end of the 1995 quarter.
Income Taxes. The Company had no income tax expense for either the third quarter
of fiscal 1996 or the third quarter of fiscal 1995. 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.
Net Loss. The net loss for the quarter ended December 31, 1996 was approximately
$595,000 compared to a loss of approximately $53,000 for the same period of the
prior year. The net loss for the 1996 period is attributable to the increased
development expenses and the increase in operating expenses in selling and
marketing, and general and administrative expenses as the Company continued to
implement its strategic growth plan.
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NINE MONTHS ENDED DECEMBER 31, 1996 AND 1995
Net Sales. Net sales for the nine months ended December 31, 1996 were
approximately $10,197,000 versus net sales for the same period one year ago of
approximately $1,529,000, an increase of approximately $ 8,668,000. The increase
was due to increases in hardware sales and sales of services, including
maintenance, system integration services and third party software sales,
primarily as a result of the acquisition of BASIS and GRSI. The Company has not
been able to complete its plan of integrating the sale of its software into the
newly acquired subsidiaries as fast as it had initially planned and has
therefore not generated the software sales that it had anticipated. With the
increase in total revenues came a change in the sales mix as sales of hardware
increased as a percent of total sales from 43% to 72% of total sales and sales
of software and services decreased from 57% to 28% of total sales. The increase
in total sales was due to the impact of the Company's acquisition strategy, with
hardware and integration service sales from the Company's subsidiaries, GRSI and
BASIS, driving the change.
Cost of Sales. Cost of sales increased from approximately $899,000, or 59% of
net sales, to approximately $7,887,000, or 77% of net sales, due to the
increased total sales as well as the change in sales mix. The change, as a
percent of total sales, reflects the lower margin that is earned on the sale of
third party hardware compared to the margin earned on the sale of proprietary
software.
Selling and Marketing. Selling and marketing expenses during the nine months
ended December 31, 1996 increased by approximately $799,000 from the nine month
period ended December 31, 1995. Selling and marketing expenses were
approximately $1,225,000, or 12% of net sales, for the nine month period ended
December 31, 1996 and were approximately $426,000, or 28% of net sales, for the
same period in 1995. The increase is due to increases in staff and additional
advertising and product promotion including attendance at manufacturing trade
shows.
General and Administrative. General and administrative expenses increased from
approximately $321,000 during the nine month period ended December 31, 1995, to
approximately $1,938,000 for the nine months ended December 31, 1996. As a
percent of sales, general and administrative expenses remained decreased from
21% at December 31, 1995 to 19% at December 31, 1996. The increased amount is
due to the addition of the GRSI and BASIS subsidiaries and the amortization of
goodwill, as well as increases related to additional reporting requirements
brought on by the Company's March 1996 initial public offering, expenses
associated with the move to a bigger office space as well as additional expenses
indirectly related to the Company's acquisition strategy.
Research and Development. Research and development was approximately $412,000,
or 4% of net sales for the nine months ended December 31, 1996 versus
approximately $129,000, or 8%, for the same period one year ago. The increased
amount was a result of expensing all development work during the period versus
capitalizing most development expense during the prior fiscal nine month period.
Interest and Other Income. During the nine month period ended December 31, 1996,
the Company incurred approximately $504,000 in interest expense and $34,000 of
other income. The interest is related to the current long term debt and lines of
credit as well as interest and the write-off of discounts, totaling $379,000,
associated with the Company's bridge loans which were paid off during the
quarter ended June 30, 1996. For the same period of the previous fiscal year,
the Company had interest expenses of approximately $111,000 and approximately
$73,000 of other expenses, all of which were associated with the write-off of
discounts on warrants offered to investors in the Company's bridge loan
financing.
Income Taxes. The Company had no income tax expense for the nine months ended
December 31, 1995 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.
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Net Loss. The net loss for the nine months ended December 31, 1996 was
approximately $1,735,000 compared to a loss of approximately $462,000 for the
same period of the prior year. The net loss for the 1996 period is attributable
to the decreased margin and the increase in operating expenses in general and
administrative, sales and marketing, and development expense as the Company
continued to implement its strategic growth plan. In addition, the interest
expense of $504,000, mainly attributable to the repayment of bridge notes and
the write-off of discounts associated with the notes, as well as interest on
long term notes and lines of credit significantly impacted the loss.
The Company believes that, as it continues to execute its business plan, sales
will continue to grow, particularly at its recently acquired subsidiaries, GRSI
and BASIS. However, the Company believes that increases in operating expenses
associated with the development and integration of the acquired companies could,
in the near term, exceed increases in revenues, and thereby continue to have an
adverse impact on operating results.
LIQUIDITY AND CAPITAL RESOURCES
Cash, and cash equivalents totaled $1,612,000 at December 31, 1996 compared to
$3,427,000 at March 31, 1996. The decrease in cash was primarily due to the
funds used by operations to implement the Company's growth and acquisition
strategy. During the month of April 1996 the Company paid off all remaining
bridge notes (totaling approximately $595,000), 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 period, 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. The Company also finalized the acquisition of BASIS, issuing
$1,400,000 in common stock and paying $500,000 in cash during the second and
third quarters of this fiscal year.
During the quarter ended December 31, 1996, the Company borrowed approximately
$100,000 of current debt due on June 30, 1997 at a rate of 8%. In addition, the
Company borrowed $820,000 in a private offering of 10% Subordinated Convertible
Notes. The Notes are due on December 31, 1999. The Notes and all accrued
interest payable are convertible at any time on or after September 30, 1997 into
Common Stock of the Company. See Item 2 of this Part II, below.
Year to date, the Company has purchased approximately $785,000 in capital
equipment and purchased software, which included approximately $551,000 in
capital assets obtained in the acquisition of BASIS.
Through the first nine months of this fiscal year the Company has not generated
sufficient cash flows from operations to fund its current operations and, at the
same time, the additional overhead required to continue the Company's growth
strategy and has therefore had to supplement its cash sources with borrowings
from its lines of credit, the Subordinated Convertible Note Offering, and other
short term borrowings. The Company has not been able to implement its plan of
integrating the sale of its software into the newly acquired subsidiaries and
has therefore not generated the software sales that it had anticipated.
Management believes that it must rely on outside sources of funds until revenues
from both hardware and software generate margins which will offset cash
outflows. In the event that such funds cannot be generated from outside sources
the company would have to significantly cut back its acquisition and development
expenditures.
In the future, the Company will 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 current
and future plans for expansion could be materially adversely affected. The
Company, as part of its expansion strategy, regularly reviews possible
opportunities to acquire systems integration companies and businesses which
would expand the Company's geographic market presence. The Company is not
presently a party to any contract or other agreement relating to a potential
acquisition.
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"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This Form 10-QSB may contain forward-looking statements which are made pursuant
to the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Such forward-looking statements involve risks and uncertainties,
including, but not limited to, the impact of competitive products and pricing,
product demand and market acceptance risks, the presence of competitors with
greater financial resources, product development and commercialization risks,
costs associated with the integration and administration of acquired operations,
capacity and supply constraints or difficulties, and the results of financing
efforts. Further information regarding these and other risks is described from
time to time in the Company's filings with the Securities and Exchange
Commission, including the Company's 1996 Form 10-KSB.
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In accordance with Section 13 or 15 (d) of the Exchange Act, the registrant
caused this amendment to be signed on its behalf by the undersigned, thereunto
duly authorized.
PROLOGIC MANAGEMENT SYSTEMS, INC.
Dated: March 14, 1997 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, Treasurer and
Chief Financial Officer (Principal
Financial and Accounting Officer)