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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the quarterly period ended September 30, 1997.
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 Identification No.)
incorporation or organization)
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 September 30, 1997 was
3,711,395.
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 September 30, 1997 and March 31, 1997 3
Condensed Consolidated Statements of Operations for the Three Months and Six Months
Ended September 30, 1997 and September 30, 1996 4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
September 30, 1997 and September 30, 1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Results of Operations and Financial Condition 7
Part II OTHER INFORMATION 12
Item 1 Legal Proceedings 12
Item 2 Changes in Securities 12
Item 3 Defaults upon Senior Securities 12
Item 4 Submission of Matters to a Vote by Security Holders 12
Item 5 Other Information 12
Item 6 Exhibits and Reports on Form 10-QSB 12
Exhibit 11 14
Exhibit 27
SIGNATURES 13
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 MARCH 31, 1997
------------------ --------------
ASSETS (unaudited)
Cash $ 382,772 $ 815,120
Restricted cash 1,000,000 1,000,000
Trade accounts receivable less allowance 2,530,970 2,696,444
for doubtful accounts of $228,594 at
March 31, 1997 and $185,594 at September 30, 1997
Notes receivable 38,889 58,333
Inventories 172,375 293,478
Prepaid expenses 137,079 91,030
----------- -----------
Total current assets 4,262,086 4,954,405
Property and equipment, net 538,475 545,113
Goodwill, net 1,394,912 1,514,162
Other assets 122,444 112,444
----------- -----------
TOTAL ASSETS $ 6,317,917 $ 7,126,124
=========== ===========
LIABILITIES AND EQUITY
Current liabilities
Line of credit $ 1,895,697 $ 1,102,448
Current installments of long term debt 210,065 63,074
Notes payable 613,909 394,570
Accounts payable 1,278,747 2,697,341
Accrued expenses 386,053 352,659
Deferred maintenance revenue 185,884 114,633
----------- -----------
Total current liabilities 4,381,354 4,724,725
Long term debt excluding current portion 1,012,911 980,309
Shareholders' equity
Preferred Stock, no par value, Authorized
1,000,000 shares; 41,667 issued at
September 30, 1997 and 0 issued at
March 31, 1997 250,000 0
Common stock, no par value, Authorized
10,000.000 shares; 3,711,395 issued at
September 30, 1997 and 3,675,395 at March 31, 1997 8,058,415 8,038,955
Accumulated deficit (7,384,763) (6,617,865)
----------- -----------
Net shareholders' equity 923,652 1,421,090
TOTAL LIABILITIES AND EQUITY $ 6,317,917 $ 7,126,124
=========== ===========
See accompanying notes to the condensed consolidated financial statements.
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PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
----------- ----------- ------------ -----------
Revenues
Hardware $ 3,114,283 $ 2,490,377 $ 8,229,127 $ 2,887,699
Licenses 622,653 487,610 1,170,645 553,826
Services 530,123 509,660 1,184,044 801,335
----------- ----------- ------------ -----------
Total Net Revenue $ 4,267,059 $ 3,487,647 $ 10,583,816 $ 4,242,860
Cost of Sales 3,304,668 2,647,161 8,481,787 3,228,250
Gross Margin 962,391 840,486 2,102,028 1,014,610
Operating Expenses
Selling and Marketing 468,135 277,451 942,893 427,099
General and Administrative 754,427 846,524 1,547,035 1,220,029
Research and Development 101,398 99,102 196,832 181,513
----------- ----------- ------------ -----------
1,323,960 1,223,077 2,686,760 1,828,641
Operating Income(Loss) (361,569) (382,591) (584,731) (814,031)
Interest expense (105,647) (38,183) (188,279) (395,595)
Other income (expense) (2,868) 44,508 5,793 69,776
----------- ----------- ------------ -----------
Income (loss) before taxes (470,084) (376,266) (767,217) (1,139,850)
Income Taxes 0 0 0 0
----------- ----------- ------------ -----------
Net loss $ (470,084) $ (376,266) $ (767,217) $(1,139,850)
=========== =========== ============ ===========
Net loss per common share $ (0.13) $ (0.10) $ (0.21) $ (0.31)
Shares used in computing net loss
per share 3,684,428 3,665,395 3,684,428 3,665,395
See accompanying notes to condensed consolidated financial statements.
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PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED SEPTEMBER 30,
1997 1996
----------- -----------
Cash flows from operating activities:
Net loss $ (767,217) $(1,139,850)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 217,639 541,520
Changes in:
Trade accounts receivable 165,474 (2,434,302)
Accounts payable and accrued expenses
(1,385,200) 1,930,398
Other assets and liabilities 155,749 (2,214,520)
----------- ----------
Total adjustments (846,338) (2,176,904)
----------- ----------
Net cash used in operating activities (1,613,555) (3,316,754)
----------- ----------
Cash flows from investing activities:
Purchase of equipment (91,433) (720,976)
----------- ----------
Net cash provided by (used in) investing activities (91,433) (720,976)
Cash flows from financing activities:
Issuance of notes payable and debt 1,064,103 1,816,594
Repayment of debt (60,923) (990,434)
Issuance of Preferred Stock 250,000 --
Issuance of common stock 19,460 1,417,232
------------ -----------
Net cash provided by (used in)
financing activities 1,272,640 2,243,392
Net cash increase in cash and cash equivalents (432,348) (1,794,338)
Cash and cash equivalents, beginning of period 815,120 3,426,981
----------- -----------
Cash and cash equivalents, end of period $ 382,772 $ 1,632,643
=========== ===========
See accompanying notes to condensed consolidated financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Interim Periods
The accompanying condensed consolidated financial statements include the
accounts of Prologic Management Systems, Inc. (the "Company") and its
wholly-owned subsidiaries, Great River Systems, Inc. ("GRS"), and BASIS,
Inc. ("BASIS"). All significant inter-company balances and transactions
have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements
have been prepared by the Company in accordance with generally accepted
accounting 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 1997 Report on Form 10-KSB. The results of operations for the
three months and the six months ended September 30, 1997 are not
necessarily indicative of the results to be expected for the full year.
2. Line of Credit
The Company has a $1,000,000 line of credit with its bank which was
subject to renewal in August 1997. Management and its bank have agreed to
extend the line of credit under substantially the same terms. The interest
rate under the line of credit is the bank's prime rate. The line of credit
is secured by the Company's $1,000,000 money market account. The credit
agreement contains, among other things, restrictive financial covenants.
As of September 30, 1997, borrowings under this agreement were $1,000,000
and the Company was compliant with the covenants.
The Company also maintains a $2,200,000 line of credit for the financing
of accounts receivable and inventory with Deutsche Financial Services
("DFS") for its BASIS subsidiary. This financing facility was subject to
renewal in August 1997. The Company and DFS have agreed to extend the line
of credit through February 1998 under substantially the same terms. The
interest rate is at the prime rate plus 1%. The credit facility is
collateralized by a $300,000 irrevocable letter of credit from the
Company's bank. As of September 30, 1997, borrowings under this agreement
were $895,697. During the extension period, the Company plans to establish
a new line of credit for the financing of accounts receivable at both
BASIS and GRS. The Company has not yet completed the financing for this
line of credit. The Company does not have a commitment letter at this
time; however the Company is negotiating this with several firms.
3. Goodwill
Goodwill arose from the acquisition of GRS and represents the excess of
the purchase price over the estimated fair value of the net assets of GRS.
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 $323,720 at September 30,
1997.
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4. Property and Equipment
Property and equipment as of September 1997 are comprised of the
following:
September 30, March 31,
1997 1997
---------- ----------
Furniture and Fixtures $ 224,273 $ 215,344
Computer equipment and software $1,082,134 $ 999,774
---------- ----------
$1,306,407 $1,215,118
Less accumulated depreciation $ 767,932 $ 670,005
---------- ----------
Net property and equipment $ 538,475 $ 545,113
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following discussion should be read in conjunction with the audited
Consolidated Financial Statements as filed in the Company's annual report Form
10-KSB. Except for the historical information contained herein, the matters
discussed in this 10-QSB 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 10-QSB,
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 systems integration services, networking services and
applications software for the commercial market. The systems integration
services include consulting, maintenance, training and the installation of
hardware on which to implement the Company's as well as third party software
products. The Prologic proprietary applications software is licensed for use to
manufacturers and for use in the wholesale distribution industry. The Company's
products are not directed to the retail consumer market. The financial
information for the periods ended September 30, 1996 includes operating activity
from GRS, a wholly owned subsidiary which was acquired on September 30, 1995,
and two months of the operating activity of BASIS which was acquired in August
1996. The financial information for the periods ended September 30, 1997
includes the operating activity of GRS and BASIS. For additional information on
the combined operating results of the Company and its subsidiaries, see the
Condensed Consolidated Financial Statements of the Company and Notes thereto.
The discussion should be read in conjunction with and is qualified in its
entirety by the Condensed Consolidated Financial Statements of the Company and
Notes thereto.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Net Sales. Net sales for the second quarter of fiscal 1998 were $4,267,059
compared to the second quarter of the previous fiscal year when sales were
$3,487,647. Sales of all products and services increased, with the most
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significant growth coming from the sale of third party hardware where sales
increased by approximately $623,906 from the same period of the previous fiscal
year. A significant portion of the increase in hardware sales came from BASIS
which was acquired in August of 1996 and therefore only two months of sales were
included in the net sales of the previous year's second quarter. Sales of
proprietary and third party software licenses were $622,653 versus sales of the
second quarter of last fiscal year which were $487,610. Sales of services, which
were predominantly integration projects, amounted to $530,123 compared to sales
of the previous year's second quarter when sales were $509,660. Sales of
hardware comprised 73% of the net sales of the current quarter versus hardware
sales of the same period last year which were 71% of total net sales for the
quarter.
Cost of Sales. Cost of sales increased proportionate to the increase in
net sales. Total cost of sales for the second quarter of the current fiscal year
was $3,304,668 or 77% of net sales compared to cost of sales for the same period
last year of $2,647,161 or 76% of net sales. The increase in this rate is
directly due to the change in sales mix, as sales of lower margin third party
hardware and software have increased in relation to sales of services and
proprietary software. The Company's strategy is to increase the sale of
integration services through its subsidiaries and to begin to increase sales of
its proprietary software products by using the distribution channels of its
subsidiaries. As sales of services and software increase in relation to the sale
of hardware the Company expects to see more favorable changes in its gross
profit.
Selling and Marketing. Selling and marketing expenses were $468,135, or
11% of net sales, for the three month period ended September 30, 1997 compared
to $277,451, or 8% of net sales for the same period of the previous fiscal year.
The increase in selling and marketing expenses is due in part to the complete
absorption of BASIS in the second quarter of the current fiscal year versus only
two months for the same quarter last year. The Company expects to continue to
increase sales and marketing expenditures as it implements its growth strategy
and expects the rate of expense to sales dollars to increase somewhat over the
short term.
General and Administrative. General and administrative expenses decreased
from $846,524, or 24% of net sales, for the second quarter of the previous
fiscal year to $754,427, or 18% of net sales, for the second quarter of the
current fiscal year. During the quarter, the Company has continued to reduce its
administrative staff as well as expenses associated with its acquisition
strategy. The Company expects total general and administrative expenses to
continue to decrease as a percentage of sales as the Company begins centralizing
many administrative functions into its Corporate office.
Research and Development. Total research and development expense was
$101,398, or 2% of sales, in the quarter ended September 30, 1997, compared to
research and development expenses of $99,102, or 3% of sales, for the same
period last year. Research and development is primarily concerned with upgrading
current proprietary software modules and developing additional applications for
the existing product line.
Operating Loss. The operating loss for the period decreased to $361,569,
or 8% of sales, from $382,591, or 11% of sales, for the same period last year.
The operating loss improvement was the result of the increased sales as well as
the decrease in the rate of operating expenses to sales, as reductions in
operating expenses began to have an impact.
Interest and Other Income. Interest expense and other expense for the
quarter was $108,515 which was mainly interest paid on the current lines of
credit, short term and long term borrowings. The Company incurred approximately
$6,325 of other income, in excess of interest expenses during the second quarter
of the previous fiscal year. The increase is the result of additional borrowings
required to supplement funds being generated by operations.
Income Taxes. The Company had no income tax expense for the second quarter
of fiscal 1998 and 1997. As of March 31, 1997, the Company had Federal net
operating loss carryforwards of approximately $6,400,000. 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.
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Net Loss. The net loss for the quarter ended September 30, 1997 was
approximately $470,084 versus a loss for the same period of the prior fiscal
year of approximately $376,266. The increase in net operating loss was the
result of the increased interest incurred during the quarter.
SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Net Sales. Net sales for the six months ended September 30, 1997 were
approximately $10,583,816 versus the net sales for the same period one year ago
of approximately $4,242,860 an increase of approximately $6,340,956. The
increase occurred in all sales categories with the largest increase in third
party hardware, which increased by $5,341,428. 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 68% to 78%, and sales of software and services
decreased from 32% to 22% of total sales. BASIS, acquired in August 1996, was
only included for two months in the six month period ended September 30, 1996
and included for the entire six month period of this fiscal year.
Cost of Sales. Cost of sales increased from approximately $3,228,250, or
76% of sales, to approximately $8,481,787, or 80% of 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 integration services and
proprietary software. The Company's strategy is to increase the sale of high
margin integration services and proprietary software products by creating
distribution channels through the acquisition of system integration firms. The
Company expects to begin to see increases in its services and software sales
from its operating subsidiaries in the third and fourth quarter.
Selling and Marketing. Selling and marketing expenses increased by
approximately $515,794 from the six month period ended September 30, 1996.
Selling and marketing expenses were approximately $942,893, or 9% of net sales,
for the six month period just ended and were approximately $427,099, or 10% of
net sales, for the same period last year. The increase is due, in part, to the
inclusion of BASIS into this years numbers, as well as increases in field sales
staff. The Company plans to continue to increase selling and marketing staff and
product promotion expenses as part of its growth strategy.
General and Administrative. General and administrative expenses increased
from approximately $1,220,029 during the six month period last year to
approximately $1,547,035 for the six months ended September 30, 1997. As a
percentage of sales, general and administrative expense decreased from 29% last
year to 15% this year. The increased amount is due to the addition of BASIS and
the amortization of goodwill associated with the BASIS purchase. The Company
believes that general and administrative expenses will continue to decrease as a
percentage of sales.
Research and Development. Research and development was approximately
$196,832, or 2% of net sales for the six months ended September 30, 1997 versus
approximately $181,513, or 4%, for the same period last year. The Company
believes that development expenses will continue to reflect approximately 2% of
total net sales.
Operating Loss. The operating loss for the six month period decreased to
$584,731, or 6% of sales, from the operating loss of $814,031, or 19% of sales,
for the first six months of the prior year. The operating loss improvement was
the result of the increased sales as well as the decrease in the rate of
operating expenses to sales as reductions in operating expenses continued to
have an impact.
Interest and Other Income. Interest expense and other income for the six
months ended September 30, 1997 was $188,279 compared to $395,595 interest
expense for the first six months of the prior year, of which approximately
$355,000 was related to bridge financing prior to the Company's initial public
offering. Interest income for the prior year's six month period totaled
approximately $69,776, compared to $5,793 for the current six month period.
Income Taxes. The Company had no income tax expense for the first six
month period of fiscal 1998 and 1997. As of March 31, 1997, the Company had
Federal net operating loss carryforwards of approximately
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$6,400,000. 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 six months ended September 30, 1997 was
$767,217, or 7% of sales, a significant improvement from the loss of
approximately $1,139,850 which was 27% of sales, for the same period last year.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Capital Resources. Cash and cash equivalents totaled
$382,772 at September 30, 1997 compared to $815,120 at March 31, 1997. The
decrease in cash was the result of funds required for operations and was
primarily used to finance sales.
The Company has a $1,000,000 line of credit with its bank which was
subject to renewal in August 1997. Management and its bank have agreed to extend
the line of credit under substantially the same terms. The interest rate under
the line of credit is the bank's prime rate. The line of credit is secured by
the Company's $1,000,000 money market account. The credit agreement contains,
among other things, restrictive financial covenants. As of September 30, 1997,
borrowings under this agreement were $1,000,000 and the Company was compliant
with the covenants.
The Company also maintains a $2,200,000 line of credit for the financing
of accounts receivable and inventory with Deutsche Financial Services ("DFS")
for its BASIS subsidiary. This financing facility was subject to renewal in
August 1997. The Company and DFS have agreed to extend the line of credit
through February 1998 under substantially the same terms. The interest rate is
at the prime rate plus 1%. The credit facility is collateralized by a $300,000
irrevocable letter of credit from the Company's bank. As of September 30, 1997
borrowings under this agreement were $895,697. During the extension period the
Company plans to establish a new line of credit for the financing of accounts
receivable at both BASIS and GRS. The Company has not yet completed the
financing for this line of credit. The Company does not have a commitment letter
at this time; however the Company is negotiating this with several firms.
During the previous fiscal year, the Company borrowed approximately
$100,000 of current debt due on June 1997 at a rate of 8%. During July 1997, the
note holder agreed to extend the date of the payment to October 1, 1997.
Additionally, in the previous fiscal year the Company borrowed $820,000 in
a private offering of 10% Subordinated Convertible Notes. The Notes are due on
December 31, 1999. Prior to September 30, 1997, with the exception of one
$100,000 note holder, the Company renegotiated the conversion terms with note
holders of the remaining $720,000. The revised terms assign a fixed conversion
price of $3.75 per share. In addition, the note holders will be granted a total
of 25,200 warrants to purchase shares of the Company's common stock at a price
of $2.00 per share. The warrants will expire on December 31, 2001.
During the previous fiscal year the Company borrowed $240,000 in short
term notes collateralized by its computer equipment and office furnishings.
These notes were due on July 31, 1997. Interest on these notes is paid monthly
at a rate of 2%. In July 1997, the note holders agreed to extend the payment of
the notes until October 31, 1997. During the six month period, an additional
$125,000 was borrowed against this equipment. At September 30, 1997, total
borrowings on the short term equipment notes were $365,000. Of the $365,000,
holders of notes totaling $305,000 agreed to extend through December 31, 1997,
and the remaining $60,000 will be paid during the month of November 1997.
During the quarter, the Company purchased approximately $91,433 in capital
equipment and software for use at BASIS and GRS.
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During the quarter ended September 30, 1997 and continuing on into the
second quarter of the current fiscal year, the Company has taken steps to reduce
its corporate overhead and overall operating costs where possible. The Company
believes that these reductions will not significantly impact the overall
strategy of the Company and will create efficiencies that will facilitate
generating positive cash flows from operations.
During July 1997, the Company initiated a private placement offering of
$3,000,000 of 8% Cumulative Convertible Preferred Stock. These shares have
rights to convert to common stock and warrants to purchase additional shares of
common stock of the Company. The offering was made to non-U.S. persons as
defined in Regulation S of the Securities Act of 1933. Shares were offered in
minimum quantities of 16,667 shares ($100,000) and a maximum of 500,000 shares
($3,000,000) at a price of $6.00 per share. The offering period ends at the
earlier of the sale of all of the shares offered or on December 31, 1997.
Convertible shares may be converted by the buyer on the earlier of June 30, 1998
or on the first day that the common stock of the Company is traded publicly on a
European exchange after a secondary offering on such exchange has been effected.
The conversion rate per share of preferred stock is $6.00 divided by the
conversion price. In the event the secondary Offering has been completed prior
to June 30, 1998, the Conversion Price shall be set at the same price as the
common stock offered in the Secondary Offering. In the event a Secondary
Offering has not been completed by June 30, 1998, the Conversion Price shall be
the average trading price of the Company's common stock (NASDAQ: PRLO; BSE: PRC)
during the month of June 1998 with a minimum price of $2.00 per share. For each
share of common stock received through conversion the holder will receive one
warrant (which will expire December 31, 2000) to purchase one share of common
stock of the Company at an exercise price equivalent to the effective conversion
price. The net proceeds from this offering will be used for general working
capital, possible future acquisitions and product development. Through the end
of September 1997, the Company had received subscriptions for $250,000 of the
Preferred Stock. The Company announced in October 1997, the engagement of Europe
Finance et Industrie as the Company's exclusive placement agent in Europe.
Through the first six months of the 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 outflow
of $432,348 with borrowings from its lines of credit, 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 not
generated the software sales it had anticipated and has therefore not generated
the higher margin sales that it had expected. Management believes that it must
rely on outside sources of funds and reductions in operating costs until
revenues from both hardware, services and software generate margins which will
offset cash outflows.
In the future, the Company will require additional equity and/or debt
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.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This form 10-QSB contains 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,
including the Company's 1997 Form 10-KSB.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of the date of this filing, neither the Company nor its subsidiaries
are a party to any legal proceedings, the outcome of which, in management's
opinion, would have a material adverse effect on the Company's operations or
financial position.
ITEM 2. CHANGES IN SECURITIES
Through the end of September 1997, the Company had received subscriptions for
$250,000 of the private placement offering of the 8% Cumulative Convertible
Preferred Stock.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE BY SECURITY HOLDERS
The Company's Annual Meeting of Shareholders (the "Annual Meeting") was held on
October 24, 1997, in Tucson, Arizona. At the Annual Meeting, all five persons
nominated as Directors by the Board of Directors were elected to serve a
one-year term, until their respective successors are elected and qualified at
the 1998 Annual Meeting of Shareholders. The votes for each nominee was as
follows:
Name Votes For Votes Against Votes Abstained Unvoted
- ---- --------- ------------- --------------- -------
James M. Heim 2,866,678 15,540 0 809,177
Richard E. Metz 2,867,178 15,040 0 809,177
Herbert F. Day 2,867,178 15,040 0 809,177
Craig W. Rauchle 2,867,178 15,040 0 809,177
Mark S. Biestman 2,867,178 15,040 0 809,177
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 10-QSB
A. Exhibits:
Exhibit Number Document Page
-------------- -------- ----
11 Schedule of Computation of Net Loss Per Share 13
27 Financial Data Schedule
B. Reports:
No reports on Form 8-K were filed during the quarter ended September 30, 1997.
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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: November 14, 1997 By: /s/ James M. Heim
------------------------------------------
James M. Heim
President and Chief Executive Officer
By: /s/ William E. Wallin
------------------------------------------
William E. Wallin
Vice President, Chief Financial Officer,
Treasurer (Principal Financial and
Accounting Officer)
13