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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 December 31, 1998.
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.
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 December 31, 1998 was 4,681,349.
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, 1998 and March 31, 1998 3
Condensed Consolidated Statements of Operations for the Three Months and Nine Months
Ended December 31, 1998 and December 31, 1997 4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
December 31, 1998 and December 31, 1997 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 13
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults upon Senior Securities 13
Item 4. Submission of Matters to a Vote by Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 10-QSB
Exhibit 11 15
Exhibit 27 16
SIGNATURES 14
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 MARCH 31, 1998
----------------- --------------
(unaudited)
ASSETS
Cash $ 490,085 $ 175,110
Restricted Cash 300,000 300,000
Accounts receivable, less allowance for doubtful accounts
of $273,000 at December 31, 1998 and at March 31, 1998 4,910,143 3,405,603
Inventories 452,056 220,651
Prepaid Expenses 94,332 99,592
------------ -----------
Current Assets 6,246,616 4,200,956
Fixed Assets 1,481,272 1,391,210
Accumulated Depreciation (1,018,803) (878,143)
------------ -----------
Property and equipment - net $ 462,469 $ 513,067
Goodwill - Net 1,089,287 1,272,662
Other Assets 215,120 233,760
------------ -----------
TOTAL ASSETS $ 8,013,492 $ 6,220,445
============ ===========
LIABILITIES AND EQUITY
Accounts Payable 4,356,621 2,585,792
Current Portion of Long Term Debt 863,124 507,057
Accrued Expenses 649,684 607,061
Deferred Revenue 222,860 233,041
------------ -----------
Current Liabilities 6,092,289 3,932,951
Long term debt and notes payable, excluding current portion 126,499 245,768
Line of credit 2,080,766 1,237,863
Convertible subordinated notes 720,000
Shareholders Equity
Series A cumulative convertible preferred stock, no par value, 750,000
shares authorized 16,667 shares
outstanding 100,000 250,000
Series B cumulative convertible preferred stock, no par
value, 100,000 shares authorized, 72,000 shares
outstanding 720,000
Common stock, no par value 10,000,000 shares
Authorized, 4,681,349 shares outstanding at December 31,
1998 and 4,478,724 at March 31, 1998 8,682,939 8,493,270
Warrants 663,795 582,053
Stock Dividends 87,934
Accumulated deficit (10,540,730) (9,241,460)
------------ -----------
(286,062) 83,863
------------ -----------
TOTAL LIABILITIES AND EQUITY $ 8,013,492 $ 6,220,445
============ ===========
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 NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
----------- ------------ ------------ ------------
(unaudited) (unaudited) (unaudited) (unaudited)
Net Sales
Hardware $ 3,499,029 $ 4,366,426 $ 9,063,765 $ 12,595,553
Licenses 292,156 1,041,657 1,640,250 2,212,302
Services 955,036 938,778 3,121,856 2,122,822
----------- ------------ ------------ ------------
$ 4,746,221 $ 6,346,861 $ 13,825,871 $ 16,930,677
Cost of Sales 3,716,960 5,057,098 10,427,734 13,538,885
Gross Profit 1,029,261 1,289,763 3,398,137 3,391,792
Operating Expenses
Selling and marketing 260,729 651,899 964,708 1,594,792
General and administrative 986,494 745,336 3,454,820 2,292,371
Research and development 0 113,141 51,750 309,973
----------- ------------ ------------ ------------
Total Operating Expenses $ 1,247,223 $ 1,510,376 $ 4,471,278 $ 4,197,136
Operating Loss (217,962) (220,613) (1,073,141) (805,344)
Interest Expense (99,032) (113,058) (333,193) (301,348)
Other income (expense) 4,915 (21,800) 19,442 (16,006)
----------- ------------ ------------ ------------
Net loss (312,078) (355,471) (1,386,892) (1,122,698)
Cumulative Preferred Stock Dividend 20,000 87,934
----------- ------------ ------------ ------------
Net loss $ (332,078) $ (355,471) $ (1,474,826) $ (1,122,698)
=========== ============ ============ ============
Loss per common share
Basic $ (0.07) $ (0.10) $ (0.30) $ (0.30)
Diluted $ (0.07) $ (0.10) $ (0.30) $ (0.30)
Weighted average shares of common stock
Basic 4,624,636 3,675,375 4,557,769 3,716,173
Diluted 4,624,636 3,675,375 4,557,769 3,716,173
See accompanying notes to condensed consolidated financial statements.
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PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED DECEMBER 31,
1998 1997
----------- -----------
(unaudited) (unaudited)
Cash flows from operating activities:
Net loss $(1,386,892) $(1,122,698)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 324,039 321,932
Issuance of warrants 81,742
Common Stock Dividend 87,934
Changes in:
Trade accounts receivable (1,504,540) (1,399,871)
Accounts payable and accrued expenses 1,813,452 715,616
Other assets and liabilities (217,687) (4,910)
----------- -----------
Total adjustments $ 584,940 $ (367,233)
----------- -----------
Net cash from (used in)
operating activities (801,995) (1,489,931)
----------- -----------
Cash flows from investing activities
Purchase of equipment (90,065) (115,333)
----------- -----------
Net cash used in investing activities (90,065) (115,333)
Cash flows from financing activities:
Issuance of notes payable and debt 930,568 729,280
Issuance of common stock 39,669 574,581
Issuance of Series B preferred stock 720,000
Issuance of Series A preferred stock 250,000
Repayment of debt (483,202) (324,989)
----------- -----------
Net cash provided by (used in )
financing activities 1,207,035 1,228,872
Net cash increase/decrease in cash and cash equivalents 314,975 (376,392)
Cash and cash equivalents, beginning of period 175,110 815,120
----------- -----------
Cash and cash equivalents, end of period $ 490,085 $ 438,728
=========== ===========
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. ("GRSI"), 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, 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, 1998. The results of operations for the three months
ended December 31, 1998 are not necessarily indicative of the results to
be expected for the full year.
2. Lines of Credit
In March 1998, BASIS and GRSI obtained a long-term credit facility in an
amount that is the lower of $5,000,000 or the sum of 85% of eligible
accounts receivable, and restricted cash (see Note 2). The line also
permits equipment loans in the first year (maximum equipment loan is
$250,000). This line of credit is secured by substantially all of BASIS
and GRSI assets. As of December 31, 1998, borrowings under this line of
credit were $2,254,686. At December 31, 1998 the Company had unused
availability of $69,500 under the line of credit.
The line of credit bears 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 charge in
any month of not less than 9% per annum, and is payable monthly.
Interest is based on a minimum daily loan balance of $1,000,000. The
line matures on March 31, 2001.
The Company is required to pay a monthly minimum fee of $1,500 under the
line of credit. The Company paid a loan facility fee of $50,000 in March
1998, and annual loan facility fees of .25% of the maximum dollar amount
of the facility ($5,000,000) are due annually thereafter. The facility
is renewable upon payment of a fee of .5% of the maximum dollar amount
of the facility if no default is outstanding at the end of the term.
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 originally required that BASIS and GRSI
maintain a combined minimum net worth of $1,000,000. At March 31, 1998,
BASIS and GRSI were not in compliance with this covenant. BASIS and GRSI
obtained a waiver for this covenant from the bank through July 22, 1998,
and subsequently obtained a modification of the agreement for the period
effective July 23, 1998 through maturity which requires BASIS and GRSI
to maintain a combined net worth of $750,000. At December 31, 1998 the
combined net worth was in compliance with the modified covenant.
3. 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, 1998 totaled $61,125. Accumulated
amortization totaled $629,345 at December 31, 1998.
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In September 1995, the Company completed the acquisition of GRSI, a
systems integration company based in St. Paul, Minnesota. All of the
outstanding common stock of GRSI was acquired for 100,000 shares of
common stock of the Company valued at $40,000, the issuance of a
promissory note in the amount of $150,000 and $100,000 of cash. The
acquisition was accounted for as a purchase and accordingly, the
aggregate purchase of $290,000 was allocated to the assets acquired and
liabilities assumed based on their estimated fair values at the date of
acquisition. Cost in excess of net assets acquired of $259,746 was
recorded as goodwill in connection with the acquisition.
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.
4. Property and Equipment
Property and equipment as of December 31, 1998, consists of the
following:
December 31, 1998 March 31, 1998
----------------- --------------
Furniture and leasehold improvements $ 350,027 $ 338,131
Equipment and software 1,131,245 1,053,079
----------- -----------
1,481,272 1,391,210
Less accumulated depreciation (1,018,803) (878,143)
----------- -----------
Net property and equipment $ 462,469 $ 513,067
=========== ===========
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 on
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, 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
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include manufacturing, distribution, and resource tracking software for
commercial clients, as well as its intranet-based sales tracking and reporting
system and intranet-based document management, warehousing and retrieval system.
The Company's products are not directed to the retail consumer market. For
additional information on the combined operating results of the Company and its
subsidiaries, see the Consolidated Financial Statements of the Company and Notes
thereto. The discussion should be read in conjunction with and is qualified in
its entirety by the Consolidated Financial Statements of the Company and Notes
thereto.
As previously reported in the Company's Report on Form 10-KSB for the
fiscal year ended March 31, 1998, 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 SmallCap 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, 1998 AND 1997
Net Sales. Net sales for the third quarter of fiscal 1999 were approximately
$4,746,221 as compared to approximately $6,346,861 for the same period of the
prior fiscal year. Sales of integration services increased to approximately
$955,036 for the three months ended December 31, 1998 from approximately
$938,778 for the same period of the prior fiscal year. Sales of third party
hardware decreased during the third quarter of fiscal 1999 to approximately
$3,499,029 versus hardware sales of approximately $4,366,426 for the same period
of the prior fiscal year. The sales decrease was due in part to sales staff
turnover during the third quarter. During the fourth quarter, the sales
department is being reorganized and restaffed. The Company anticipates this
reorganization will not have a long-term effect. Sales of proprietary software
and related services continued to increase during the three month period.
Cost of Sales. Cost of sales decreased to approximately $3,716,960, or 78% of
net sales, for the three months ended December 31, 1998 from approximately
$5,057,098, or 80% of net sales, for the same period of the prior fiscal year.
The decreased rate is a result of the change in sales mix to higher margin
service sales. The Company's strategy is to continue to increase the sales of
integration services through its subsidiaries and to begin to increase
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sales of its proprietary software products though its subsidiaries' distribution
channels. 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 decreased to
approximately $260,729, or 5.5% of net sales, for the three month period ended
December 31, 1998 compared to approximately $651,899, or 10.3% of net sales, for
the same period of the prior fiscal year. The decrease in selling and marketing
expenses was due to the sales staff turnover during the third quarter.
General and Administrative. General and administrative expenses were
approximately $986,494, or 20.8% of net sales, for the third quarter of the
current fiscal year compared to approximately $745,366, or 11.7% of net sales,
for the third quarter of the prior fiscal year. The increase was due in part to
expanding the Company's technical services staff to support the increase in
integration service sales, increases in corporate staff related to the
consolidation of accounting, management and administrative functions, and
severance costs related to the elimination during fiscal 1999 of certain senior
management positions. The Company was required to retain certain senior
management personnel for prescribed periods pursuant to agreements related to
the acquisitions of the Company's two subsidiaries. The Company expects
severance payments payable under employment agreements with these senior
managers will be completed in the fourth quarter of fiscal 1999. The Company
expects to reduce general administrative expenses as the planned consolidations
continue.
Research and Development. The Company did not incur any research and
development expense during its third quarter of fiscal 1999, and does not expect
to incur any research and development expense during the remainder of the fiscal
year.
Operating Loss. The operating loss for the three month period ended December
31, 1998 decreased to approximately $217,962, or 4.6% of net sales, from
approximately $220,613, or 3.5% of net sales, for the same period last year. The
operating loss was the result of the short-term increase in operating expenses
related to the consolidation of accounting, administration and management and
the decrease in sales, which were greater than the higher margins gained from
the favorable change in sales mix.
Interest, Other Income and Expense. Interest, other income and expense for
the quarter decreased to approximately $94,117 from approximately $134,858 for
the three months ended December 31, 1997. The decrease is attributable to the
conversion of the 10% Subordinated Convertible Notes due December 31, 1999 to
shares of unregistered convertible preferred stock. Interest expense was mainly
interest paid on the current line of credit, short term and long term
borrowings. The Company had other income of approximately $4,915.
Income Taxes. The Company had no income tax expense for the third quarter of
fiscal 1999 and 1998. As of March 31, 1998, the Company had Federal net
operating loss carryforwards of approximately $9,000,000. The utilization of net
operating loss carryforwards will be limited pursuant to applicable provisions
of the Internal Revenue Code and Treasury regulations thereunder.
Net Loss. The net loss for the third quarter ended December 31, 1998
decreased to approximately $312,078 versus a net loss for the same period of
the prior fiscal year of approximately $355,471.
NINE MONTHS ENDED DECEMBER 31, 1998 AND 1997
Net Sales. Net sales for the nine months ended December 31, 1998 were
approximately $13,825,871 versus the net sales for the same period one year ago
of approximately $16,930,677 a decrease of approximately $3,104,806. The sales
decrease was the result of a sales cancellation at the very end of the first
quarter, the result of a change in the customer's business, which would have
added approximately $2,600,000 to the sales of the nine month period
(approximately $2,500,000 in hardware and $100,000 in services). Furthermore,
although the temporary reduction of sales personnel and the elimination of
certain senior management positions during fiscal 1999 has had an impact this
year, the Company believes that this will not have a long-term effect. Sales of
higher margin integration services and third party and proprietary software
increased as a percentage of total sales, from
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13% to 23% of net sales during the nine month period, while sales of third party
hardware and licenses decreased as a percentage of total sales, from 88% to 78%.
Cost of Sales. Cost of sales decreased from approximately $13,538,885, or 80%
of net sales, for the nine month period ended December 31, 1997 to approximately
$10,427,734, or 75% of net sales for the same period in 1998. The change as a
percentage of total sales reflects the execution of the Company's plan to
increase sales of higher integration services and proprietary software. The
Company expects to continue to see increases in its services and software sales
from its operating subsidiaries in the fourth quarter.
Selling and Marketing. Selling and marketing expenses decreased by
approximately $771,415 for the nine months ended December 31, 1998 as compared
to the nine month period ended December 31, 1997. Selling and marketing expenses
were approximately $964,708, or 7.0% of net sales, for the nine month period
ended December 31, 1998 and were approximately $1,594,792, or 9.4% of net sales,
for the same period last year. The decrease in selling and marketing expenses
was due to the sales staff turnover during the third quarter.
General and Administrative. General and administrative expenses were
approximately $2,292,371 for the nine months ended December 31, 1997 as compared
to approximately $3,454,820 for the nine months ended December 31, 1998. The
increase was due in part to expanding the Company's technical services staff to
support the increase in integration service sales, increases in corporate staff
related to the consolidation of accounting, management and administrative
functions, and severance costs related to the elimination during fiscal 1999 of
certain senior management positions. The Company was required to retain certain
senior management personnel for prescribed periods pursuant to agreements
related to the acquisitions of the Company's two subsidiaries. The Company
expects severance payments payable under employment agreements with these senior
managers will be completed in the fourth quarter of fiscal 1999. The Company
expects to reduce general administrative expenses as the planned consolidations
continue.
Research and Development. Research and development expense decreased to
approximately $51,750, or .37% of net sales, for the nine months ended December
31, 1998 versus approximately $309,973, or 1.8% of net sales, for the same
period last year. The Company did not incur any research and development expense
during the third quarter of fiscal 1999. Research and development is primarily
concerned with upgrading current proprietary software products. The Company does
not expect to incur any additional research and development expense during the
remainder of the fiscal year.
Operating Loss. The operating loss for the nine month period was
approximately $1,073,141, or 7.8% of net sales, compared to the operating loss
of approximately $805,344, or 4.8% of net sales, for the first nine months of
the prior fiscal year. The operating loss was the result of decreased sales and
the short-term increase in general and administrative expenses related to
consolidations, which were greater than the higher margins gained from the
favorable change in sales mix.
Interest and Other Income. Interest expense and other income for the nine
months ended December 31, 1998 was approximately $313,751 compared to
approximately $317,354 for the first nine months of the prior fiscal year. The
decrease is attributable to the conversion of the 10% Subordinated Convertible
Notes due December 31, 1999 to shares of unregistered convertible preferred
stock. Interest is paid on the line of credit and other short and long term
borrowings.
Income Taxes. The Company had no income tax expense for the first nine month
period of fiscal 1999 and 1998. As of March 31, 1998, the Company had Federal
net operating loss carryforwards of approximately $9,000,000. The utilization of
net operating loss carryforwards will be limited pursuant to applicable
provisions of the Internal Revenue Code and Treasury regulations thereunder.
Net Loss. The net loss for the nine months ended December 31, 1998 was
approximately $1,386,892, or 10.0% of net sales, versus approximately
$1,122,698, or 6.6% of net sales, for the same period in the prior fiscal year.
The increase in net loss was the result of decreased sales and the short-term
increase in general and administrative expenses related to consolidations, which
were greater than the higher margins gained from the favorable change in sales
mix.
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LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Capital Resources. At December 31, 1998 the Company had a
working capital of approximately $454,327 versus working capital of
approximately $268,000 at March 31, 1998. The cash balance at December 31, 1998
was approximately $790,085, $300,000 of which was restricted as security for the
Company's line of credit.
Cash used by operations during the nine month period ended December 31,
1998 was approximately $801,995. Cash used in operations during the same nine
month period of the previous fiscal year totaled approximately $1,489,931. Cash
used in investing activities was approximately $90,065 at December 31, 1998 and
approximately $115,333 at December 31, 1997. Cash provided by financing
activities for the nine months ended December 31, 1998 totaled approximately
$1,207,035 and approximately $1,228,872 at December 31, 1997.
During fiscal 1998 the Company did not generate sufficient cash flows
from operations to fund its current operations and has had to supplement its
cash outflow with new equity investments, advances on lines of credit, other
short and long term borrowings and credit granted by its suppliers and vendors.
The Company's ability to raise additional capital and the relationships with
these suppliers and vendors are critical to the viability of the Company.
Although the Company has not integrated the sale of its proprietary
software into its subsidiaries the Company has begun to increase its
professional service sales as reflected during the three and nine months ended
December 31, 1998 and has increased margins. Management however, believes that
it must continue to rely on outside sources of funds until sales from
professional services and software consistently generate higher margins to
offset the cash outflows.
In the future, the Company will require additional equity, working
capital and/or debt financing to maintain current operations as well as achieve
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. As the Company's securities
have been delisted by Nasdaq and the Boston Stock Exchange, the Company's
ability to raise capital, particularly by sales of its equity securities, could
be materially and adversely affected.
During 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 replaced a $2.2 million facility that was in
place at its BASIS subsidiary. This new facility is designed to provide working
capital to support the Company's sales growth for both subsidiaries. Among other
things the agreement required that the Company maintain a combined net worth at
its BASIS and GRSI subsidiaries of at least $1,000,000. The Company received a
waiver for non-compliance with this requirement at March 31, 1998 and modified
the agreement in July 1998 to a combined net worth requirement of $750,000 for
both subsidiaries. The total amount of the line of credit outstanding at March
31, 1998 was $1,238,000 with additional availability of approximately $117,000.
At December 31, 1998 the Company had $1,313,898 outstanding on the line with
additional availability of $204,000.
The line matures on March 31, 2001.
During fiscal 1997, the Company borrowed approximately $100,000 at a
rate of 8%, which was scheduled to become due on June 30, 1997. During July
1997, the note holder agreed to extend maturity on a month-to-month basis. As a
result of the extension, the Company issues 10,000 restricted common shares per
month to the note holder in consideration for the term of the extension.
In addition, during fiscal 1997 the Company borrowed $820,000 in a
private offering of 10% Subordinated Convertible Notes due December 31, 1999.
During the third quarter of fiscal 1998, one $100,000 note holder exchanged the
debt for unregistered common stock of the Company at a price of $.625 per share
for a total of 160,000 shares. During the second quarter of fiscal 1998, the
Company renegotiated the conversion terms with the note holders of the remaining
$720,000. The revised terms assign a fixed conversion price of $3.75 per share
and the granted the note holders warrants to purchase a total of 252,000 shares
of the Company's common stock at an
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exercise price of $2.00 per share. These warrants expire on December 31, 2001.
During the first quarter of fiscal 1999, these note holders representing
$720,000 exchanged their notes for 72,000 shares of unregistered convertible
preferred stock at a conversion rate of $3.75 per share. In consideration for
the exchange, the note holders received warrants to purchase an additional
72,000 shares of unregistered common stock at a price of $1.00 per share. These
warrants expire March 31, 2001. The $3.75 conversion rate is subject to
adjustment if the Company offers Convertible Preferred Stock after March 31,
1998 and prior to December 31, 1999 at a lower conversion value, in which case
the holder of these Shares will have the option to convert at the lower
conversion value. The Company may, at the Company's option, redeem the
convertible preferred stock on or before December 31, 1999, at the face value of
the convertible preferred stock plus any outstanding dividends due on a pro rata
basis. If the Preferred Stock has not been redeemed prior to December 31, 1999
and the Company has not raised additional equity of at least $1,500,000 after
March 31, 1998 and before December 31, 1999, then the holder, after December 31,
1999, will have the option to convert at fifty percent (50%) of the average of
the closing "bid" and "asked" price of the Company's common stock as traded
during the month of December 1999.
During the nine months, the Company purchased approximately $90,065 in
capital equipment and software.
Also in fiscal 1998, the Company sold $250,000 of its 8% Cumulative
Convertible Preferred Stock pursuant to Regulation S of the Securities Act of
1933. The shares were sold at a price of $6.00 per share, and may be converted
to common stock after June 30, 1998 at $2.00 per share of common stock. The
Company has the right to pay the dividends in cash or in shares of common stock,
and in fiscal 1998, the Company elected to pay cash dividends totaling $12,657,
in lieu of stock dividends. Subsequent to June 30, 1998, $150,000 of the 8%
Cumulative Convertible Preferred Stock holders converted to common stock at
$2.00 per share. Pursuant to the terms of the offering's conversion feature, the
holder received 75,000 shares of common stock and warrants to purchase an
additional 75,000 shares of common stock at $2.00 per share. These warrants
expire December 31, 2000.
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 development to make the proprietary wholesale
distribution software product line Year 2000 compliant was completed in November
1998. Testing is expected to be completed in February 1999 with delivery of the
Year 2000 compliant product starting immediately thereafter. Internally, the
Company uses its distribution software accounting package and does not foresee
any problems in converting to the Year 2000 compliant version of its software.
The Company does not foresee any problems in working with third-party companies
or clients because of the Year 2000 issue. Furthermore, the Company does not
believe that clients utilizing its software products will have any problems with
their vendors because of the Year 2000 issue due to the use of the Company's
software products. Costs relating to the Year 2000 compliance have been included
in the research and development expenses totaling approximately $51,750 during
the first nine months of fiscal 1999. The Company does not expect to incur any
additional material expenses associated with the Year 2000 compliance.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This form 10-QSB 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,
including the Company's 1998 Report on 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
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 10-QSB
A. Exhibits:
Exhibit Number Document Page
-------------- -------- ----
11.1 Schedule of Computation of Net Loss Per Share 15
27 Financial Data Schedule 16
B. Reports:
No reports on Form 8-K were filed during the quarter ended December 31, 1998.
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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 12, 1999 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)
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INDEX OF EXHIBITS
Exhibit No. Description
- ----------- -----------
11.1 Schedule of Computation of
Net Loss Per Share
27 Financial Data Schedule