U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the quarterly period ended June 30, 2002.
Commission file number: 1-13704
PROLOGIC MANAGEMENT SYSTEMS, INC.
(Name of small business issuer in its charter)
Arizona 86-0498857
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3708 E. Columbia Street, #110, Tucson, Arizona 85714
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (520) 747-4100
Securities registered under Section 12(g) of the Exchange Act:
Common Stock
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Number of shares of common stock outstanding on June 30, 2002 was 7,275,048.
Transitional Small Business Disclosure Format:
Yes ; No X
------ -------
Prologic Management Systems, Inc.
Index
Page
Part I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements 3
Condensed Consolidated Balance Sheets at June 30, 2002
and March 31, 2002 3
Condensed Consolidated Statements of Operations for the
Three Months Ended June 30, 2002 and June 30, 2001 4
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended June 30, 2002 and June 30, 2001 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 9
Part II. OTHER INFORMATION 16
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote by Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
99.1 Certification Pursuant to 18 U.S.C. SECTION 1350 of
James M. Heim, Chief Executive Officer
99.2 Certification Pursuant to 18 U.S.C. SECTION 1350 of
James M. Heim, Chief Financial Officer
99.3 Materials Relating to the Purchase by Registrant of
Certain Assets from Solid Systems, Inc.
SIGNATURES 17
2
PART I. Financial Information
Item 1. Condensed Consolidated Financial Statements
Prologic Management Systems, Inc. and Subsidiaries
Condensed and Consolidated Balance Sheets
June 30, March 31,
2002 2002
---------------- ---------------
ASSETS (unaudited)
Current assets:
Cash $ 448,431 $ 81,280
Accounts receivable, less allowance for doubtful accounts of $591,072 at
June 30, 2002 and March 31, 2002 3,502,411 2,572,634
Inventory 343,253 42,589
Prepaid expenses 50,588 18,358
---------------- ---------------
Total current assets 4,344,683 2,714,861
Property and equipment, net 338,030 254,714
Goodwill, net 408,942 408,942
Deferred financing costs, net 244,335 225,828
Other assets 269,412 92,583
---------------- ---------------
TOTAL ASSETS $ 5,605,402 $ 3,696,928
---------------- ---------------
LIABILITIES, PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities:
Short term debt and notes payable $ 1,551,228 $ 1,369,449
Accounts payable 3,613,120 2,036,522
Sales tax payable 749,013 684,164
Accrued expenses 496,560 768,540
Deferred maintenance revenue 456,466 104,067
---------------- ---------------
Total current liabilities 6,866,387 4,962,742
Long-term debt and notes payable, excluding current portion 6,767,052 6,410,081
---------------- ---------------
Total liabilities 13,633,439 11,372,823
---------------- ---------------
Preferred stock:
Series A cumulative convertible preferred stock, no par value, 16,667 shares
authorized, 16,667 shares issued and outstanding 100,000 100,000
Series B cumulative convertible preferred stock, no par value, 100,000
shares authorized, 9,500 shares issued and outstanding 68,588 68,588
Series C cumulative convertible preferred stock, no par, 100,000 shares
authorized, 55,850 shares issued and outstanding 750,000 750,000
Stock subscription receivable (191,500 ) (191,500 )
---------------- ---------------
727,088 727,088
---------------- ---------------
Stockholders' deficit:
Common stock, no par value, 50,000,000 shares authorized, 7,275,048 and
7,014,591 shares issued and outstanding at June 30, 2002 and March 31,
2002, respectively 10,205,073 10,145,168
Warrants 961,367 961,367
Accumulated deficit (19,921,565 ) (19,509,518 )
---------------- ---------------
Total stockholders' deficit (8,755,125 ) (8,402,983 )
---------------- ---------------
Total liabilities, preferred stock and stockholders' deficit $ 5,605,402 $ 3,696,928
---------------- ---------------
See accompanying notes to condensed consolidated financial statements.
3
PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED AND CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
June 30,
--------------------------------
2002 2001
------------- -------------
(unaudited) (unaudited)
Revenue:
Hardware $ 3,718,026 $ 4,127,208
Software licenses 370,226 1,690,991
Professional services 1,468,948 1,340,837
------------- -------------
Total revenue 5,557,200 7,159,036
Cost of revenue:
Hardware 3,358,337 3,536,381
Software licenses 325,069 1,486,248
Professional services 976,691 621,715
------------- -------------
Total cost of revenue 4,660,097 5,644,344
------------- -------------
Gross profit 897,103 1,514,692
------------- -------------
Operating expenses:
General and administrative 853,099 1,061,852
Selling and marketing 278,020 421,748
Research and development 33,921 44,071
------------- -------------
Total operating expenses 1,165,040 1,527,671
------------- -------------
Operating income (loss) (267,937) (12,979 )
------------- -------------
Other income (expense):
Interest expense (144,110 ) (185,055 )
Other income (expense) -- --
------------- -------------
Total other income (expense) (144,110 ) (185,055 )
------------- -------------
Net income (loss) (412,047 ) (198,034 )
Preferred stock dividend (18,338 ) (22,465 )
------------- -------------
Net (loss) income applicable to common stockholders $ (430,385 ) $ (220,499 )
------------- -------------
Weighted average number of common shares:
Basic and diluted 7,097,594 6,858,058
------------- -------------
Loss per common share:
Basic and diluted $ (0.06 ) $ (0.03 )
See accompanying notes to condensed consolidated financial statements.
4
PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash Three Months Ended June 30,
2002 2001
------------- -------------
(unaudited) (unaudited)
Cash flows from operating activities:
Net (loss) $ (412,047 ) $ (198,034 )
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization 53,112 33,353
Issuance of common stock for interest incurred -- --
Issuance of warrants for services and interest incurred -- --
Change in assets and liabilities:
Restricted Cash -- 300,000
Accounts receivable (111,013 ) (1,698,276 )
Inventory (73,910 ) (43,595 )
Prepaid expenses (60,191 ) (11,220 )
Other assets 15,414 (121,942 )
Accounts payable 1,130,922 1,819,774
Accrued expenses (117,436 ) 467,653
Deferred maintenance revenue (131,461 ) 28,135
------------- -------------
Total adjustments 705,437 773,882
------------- -------------
Net cash provided by continuing operating activities 293,390 575,848
Cash flows from investing activities:
Purchase of equipment (54,905 ) (5,584 )
------------- -------------
Net cash used in investing activities (54,905 ) (5,584 )
------------- -------------
Cash flows from financing activities:
Net change in line of credit
149,666 (273,713 )
Issuance of common stock -- --
Issuance of new debt -- 35,000
Repayment of debt (21,000) (305,196 )
------------- -------------
Net cash provided by (used in) financing activities 128,666 (543,909 )
------------- -------------
Net increase (decrease) in cash 367,151 26,355
Cash, beginning of period 81,280 310,305
------------- -------------
Cash, end of period $ 448,431 $ 336,660
------------- -------------
Supplemental statement of cash flow information:
Cash paid during the quarter for interest $ 11,963 $ 24,518
Non-cash financing and investing activities:
Preferred stock dividends paid in common stock $ 59,905 $ --
Acquisition of Solid Systems:
Assets acquired $ 1,309,829 $ --
Liabilities assumed $ 1,309,829 $ --
See accompanying notes to condensed consolidated financial statements.
5
Notes to Condensed Consolidated Financial Statements
1. Interim Periods
The accompanying condensed consolidated financial statements include
the accounts of Prologic Management Systems, Inc. (the "Company") and
its wholly-owned subsidiary, BASIS, Inc. ("BASIS"). All significant
inter-company balances and transactions have been eliminated in
consolidation.
The accompanying unaudited condensed consolidated financial statements
have been prepared by the Company in accordance with generally accepted
accounting principles, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, the
accompanying condensed consolidated financial statements include all
adjustments (of a normal recurring nature) which are necessary for a
fair presentation of the results for the interim periods presented.
Certain information and footnote disclosures normally included in
financial statements have been condensed or omitted pursuant to such
rules and regulations. Although the Company believes that the
disclosures are adequate to make the information presented not
misleading, these financial statements should be read in conjunction
with the consolidated financial statements and the notes thereto
included in the Company's Report on Form 10-KSB for the fiscal year
ended March 31, 2002. The results of operations for the three month
periods ended June 30, 2002 and 2001 are not necessarily indicative of
the results to be expected for the full fiscal year.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As
previously reported, the Company has suffered recurring losses from
operations and has negative working capital and a stockholders'
deficit. These factors raise substantial doubt about the Company's
ability to continue as a going concern.
2. Acquisition of Assets from Solid Systems, Inc.
On June 15, 2002, the Company closed an acquisition effective May 31,
2002 whereby the Company acquired, in a non-cash asset purchase, four
(4) additional offices and associated personnel and equipment, from
Solid Systems, Inc, an information technology service provider. The
offices are located in Dallas, Austin and Houston, Texas, and in New
Orleans, Louisiana. The Company intends to continue the systems
integration and maintenance business under the name of Solid Systems.
The results of operations of Solid Systems have been included in the
Company's consolidated results of operations from May 31, 2002,
acquisition date, through the end of the period.
Pursuant to the agreement, Solid Systems, Inc. assets were sold and
transferred to the Company in consideration for the assumption of
liabilities. The transaction was accounted for using the purchase
method. Assets totaling approximately $1,309,000 included: accounts
receivable ($907,000), prepaid maintenance contracts and prepaid
expenses ($90,000), inventories ($227,000), trade names ($25,000) and
computer equipment and furniture ($60,000). The Company intends to use
the equipment and office space it acquired from Solid Systems to
continue the systems integration and enterprise services business.
Liabilities totaling approximately $1,309,000 included: accounts
payable ($445,000), accrued expenses ($380,000) and estimated present
value of amounts required to fulfill maintenance contracts ($484,000).
In the transaction, the Company also acquired the rights to the Solid
Systems Inc. mark, the solidsystems.com domain name and Solidstor mark.
The Company assumed lease agreements for its Austin, Dallas and New
Orleans locations. The Austin office leases 2,400 square feet of office
space under a lease that expires in May 2004. The Dallas office leases
2,053 square feet of office space under a lease that expires in October
2002. The New Orleans office leases 2,400 square feet of office space
under a lease that expires May 2004. The office lease for the Houston
office has expired, and the Company is currently in the process of
moving into new office space in Houston.
6
The unaudited proforma combined historical results of operations, as if
Solid Systems had been acquired at the beginning of the period, are
estimated to be:
Three months
Year ended ended June 30,
March 31, 2002 2002
------------------ -----------------
Revenue $ 36,068 $ 6,340
Net loss available to common shareholders $ (7,522) $ (808)
Basic and diluted loss per share $ (1.08) $ (0.11)
The proforma results include the operations of the Company for the year
ended March 31, 2002 and three months ended June 30, 2002 and the
operations of Solid Systems for the year ended December 31, 2001 and
three months ended March 31, 2002 and are not necessarily indicative of
what actually would have occurred if the acquisition had been completed
as of the beginning of each fiscal period presented, nor are they
necessarily indicative of future consolidated results.
3. Change in Methods of Procurement and Sales
In the quarter ended September 30, 2000, the Company elected to
transition its method of obtaining certain third party vendor product
lines and service contracts, which impacts the presentation of the
financial statements. Under this procurement method, the Company
records only its markup on third party products and services; the costs
of the products and the equivalent gross sale prices are not
recognized. The resulting effect is a reduction in net sales and cost
of sales. Gross profit and operating income is unaffected by this
change. The Company has not transitioned any other sales to the
procurement method and does not anticipate doing so in the upcoming
quarters.
4. Line of Credit
During the quarter ended June 30, 2001, the Company entered into a
financing agreement with a key lender. This agreement provides the
Company with an immediate partial advance on all sales and requires the
Company to immediately assign the related receivables to the lender.
Upon collection of the related receivables, the lender pays the
remaining balance to the Company. The receivables are assigned with
recourse and advances over 90 days outstanding bear interest at a rate
of 10% per annum. At June 30, 2002, the Company was liable for $428,525
under this agreement.
5. Property and Equipment
Property and equipment as of June 30, 2002, consists of the following:
June 30, 2002 March 31, 2002
------------- ----------------
Furniture and leasehold improvements $ 273,481 $ 253,481
Equipment and software 1,033,349 938,443
------------- --------------
Total property and equipment 1,306,830 1,191,924
Less accumulated depreciation 968,800 937,210
------------- --------------
Net property and equipment $ 338,030 $ 254,714
============= ==============
6. Inventory
Inventory consists primarily of third-party computer hardware and
third-party software products, which are typically awaiting transfer to
a customer, and is stated at the lower of cost (first-in, first-out) or
market.
7. Long Term Debt
In December 2000, the Company signed a $5 million note, converting
approximately $5 million of its accounts payable, with 10% interest and
a due date of April 2, 2002. In August 2002, the Company renegotiated
the balance of the note. The new note bears interest at 6% and is due
in April 2004. The balance of the new promissory note at June 30, 2002
is $6,384,686 with approximately $363,000 accrued interest at June 30,
2002. The new note requires the Company to make monthly payments of 40%
of its available operating profits each month. The note further
requires that the Company direct 50% of any future sums received by,
committed to, or invested in the Company as an additional equity
capital infusion, towards repayment of the unpaid balance of the note.
7
8. Earnings Per Share
FASB Statement of Financial Accounting Standard No. 128, "Earnings Per
Share" ("SFAS 128") provides for the calculation of Basic and Diluted
earnings per share. Basic earnings per share includes no dilution and
is computed by dividing income available to common shareholders by the
weighted average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution of
securities that could share in the earnings of the entity. For the
three months ended June 30, 2002 and 2001, potential common stock,
consisting of stock options, warrants and convertible preferred stock
are excluded from the computation of diluted earnings per share because
they are antidilutive.
9. Related Party Transactions
During the first quarter of fiscal 2002, the Company borrowed $35,000
from an organization partially owned by an officer and shareholder;
$35,000 was repaid in the fourth quarter of fiscal 2002.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
The Company provides systems integration services, software
development, technology products and related services. The majority of the
Company's revenues are generated from systems integration services 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, network design and
connectivity, and security and encryption design and deployment. The Company's
software development expertise provides an internal resource for development
needs in integration and custom projects. The Company's proprietary products
include manufacturing, distribution, and resource tracking software for
commercial clients, as well as its e-commerce solutions. 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, which are
set forth in the Company's Annual Report on Form 10-KSB for the fiscal year
ended March 31, 2002. The discussion herein should be read in conjunction with
and is qualified in its entirety by such Consolidated Financial Statements of
the Company and Notes thereto.
The Company's securities were delisted from both the NASDAQ Stock
Market and the Boston Stock Exchange in August 1998. Delisting resulted from the
Company's failure to maintain the minimum net tangible asset requirement of the
NASDAQ Stock Market. Trading of the Company's securities continue to be
conducted on the OTC Bulletin Board or in the non-NASDAQ over-the-counter
market. As a result, a holder of the Company's securities may find it more
difficult to dispose of, or to obtain accurate quotations as to the market value
of, the Company's securities. In addition, purchases and sales of the Company's
securities may be subject to Rule 15g-9 (the "Rule") promulgated by the
Securities and Exchange Commission (the "SEC"). The Rule imposes various sales
practice requirements on broker-dealers who sell securities governed by the Rule
to persons other than established customers and accredited investors (generally
institutions with assets in excess of $5 million or individuals with a net worth
in excess of $1 million or annual income exceeding $200,000 or $300,000 jointly
with their spouse). For transactions covered by the Rule, the broker-dealer must
make a special suitability determination for the purchaser and have received the
purchaser's written consent to the transaction prior to sale. Consequently, the
Rule may have an adverse effect on the ability of broker-dealers to sell the
Company's securities and may affect the salability of the Company's securities
in the secondary market.
The SEC has also adopted rules that regulate broker-dealer practices in
connection with transactions in "penny stocks." Penny stocks generally are
equity securities with a price less than $5.00 per share, other than securities
registered on certain national securities exchanges or quoted on the NASDAQ
system. With the Company's securities delisted from the NASDAQ Small Cap Market,
they may come within the definition of penny stocks because the trading price of
the Company's common stock is 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.
ACQUISITION OF ASSETS FROM SOLID SYSTEMS, INC.
On June 15, 2002, the Company closed an acquisition effective May 31,
2002 whereby the Company acquired, in a non-cash asset purchase, four (4)
additional offices and associated personnel and equipment, from Solid Systems,
Inc, an information technology service provider. The offices are located in
Dallas, Austin and Houston, Texas, and in New Orleans, Louisiana. (See Note 2 of
the Condensed Consolidated Financial Statements)
9
CRITICAL ACCOUNTING POLICIES
Revenue Recognition
The Company recognizes revenue from the sale of third-party hardware
and software products upon shipment from the vendor to the end user, or when
shipped from the Company, whichever is appropriate Title transfers FOB shipping
point. Revenue is recognized on sales of third-party maintenance agreements upon
receipt of the billing invoice from the vendor at which time the Company retains
no further obligation to the customer or vendor. Revenue from professional
services is recognized upon completion of the work and notification from the
customer of their acceptance. Revenue from software licensing is recognized in
accordance with Statement of Position 97-2, Software Revenue Recognition.
Revenue from software licensing is recognized when delivery of the software has
occurred, a signed non-cancelable license agreement has been received from the
customer and any remaining obligations under the license agreement are
insignificant. Revenue associated with agreements to provide product support
services is recognized as related services are provided. Revenue from annual or
other renewals of maintenance contracts is deferred and recognized on a
straight-line basis over the term of the contracts.
Impairment of Long Lived Assets
In assessing the recoverability of long lived assets, including
goodwill, we must make assumptions regarding estimated future cash flows and
other factors to determine the fair value of the respective assets. If these
estimates or their related assumptions change in the future, we may be required
to record impairment charges for these assets not previously recorded.
RESULTS OF OPERATIONS
Net Sales. Net sales for the first quarter of fiscal 2003 were
$5,557,200 compared to $7,159,036 for the same period of the prior fiscal year,
a decrease of $1,601,836, or approximately 22.4%. The sales decrease was due
primarily to the economic downturn that caused clients to reduce and/or defer
hardware and software purchases during the quarter. Sales of third party
hardware for the period were $3,718,026, a decrease of approximately 9.9%
compared to third party hardware sales for the same period one year ago of
$4,127,208. Sales of software licenses, which included third party licenses as
well as proprietary software, were $370,226 for the period, a decrease of
approximately 78.1% compared to sales of $1,690,990 for the first quarter of the
previous fiscal year. Service sales for the period, which were comprised
predominately of integration services, were $1,468,948 compared to $1,340,837
for the corresponding period of the previous fiscal year, an increase of
approximately 9.6%. The Company continues to concentrate on sales of services,
which carry higher margins than hardware and third party software sales.
Historically, the Company's revenues vary significantly from period to
period. This is due to the high revenues associated with the initial stages of a
typical system implementation in contrast to the relatively lower revenues
associated with services and products which may be furnished by the Company to
the customer after completion of the initial installation. Accordingly, the
Company's revenues may vary significantly from period to period for a variety of
reasons, including but not limited to the timing of customer orders for products
and services, deferrals and cancellations of orders, and capital spending
patterns of customers and prospective customers in the specific industries and
areas in which the Company's customers have historically been concentrated.
Cost of Sales. Cost of sales was $4,660,097, or 83.9% of net sales, for
the quarter ended June 30, 2002, versus $5,644,344, or 78.8% of net sales, for
the same period of the previous year. The overall decreased cost of sales was
primarily the result of the decline in sales. The Company expects to see the
margins on sales of third party products continue to decline in the long term as
a result of continued competition and pricing pressure in the computer market.
The Company is attempting to offset the increasing cost of third party products
by increasing sales of higher-margin related services.
Selling and Marketing. Selling and marketing expenses were $278,020, or
4.4% of net sales, for the three month period ended June 30, 2002, compared to
$421,748, or 5.9% of net sales, for the same period of the previous fiscal year.
The decrease in the amount of expenses is primarily the result of reduced
commission expense related to the decrease in sales.
10
General and Administrative. General and administrative expenses for the
first quarter of fiscal 2003 were $853,099, or 13.5% of net sales, compared to
$1,061,852, or 14.8% of net sales, for the first quarter of the previous fiscal
year. The decrease in these expenses is attributable to the Company's aggressive
reduction in operating expenses in the second half of fiscal 2002, in response
to uncertain economic conditions. The Company normally expects general and
administrative expenses to generally reflect long range sales trends, rather
than short-term sales cycles.
Research and Development. Research and development expenses were
$33,921, or 0.5% of net sales, for the first quarter of fiscal 2003, as compared
to $44,071, or 0.6% of net sales, for the first quarter of the previous fiscal
year. Research and development includes development expenses related to
enhancing the Company's application software products and providing clients with
e-commerce capabilities in business-to-business operations.
Operating Income (loss). Operating loss for the period was $267,937, or
a loss of 4.8% of net sales, versus an operating loss of $12,979, or a loss of
0.2% of net sales, for the same period last year. The operating loss resulted
from a reduction of sales volume in the first quarter of fiscal 2003.
Interest Expense and Other Income. Interest expense and other income
for the quarter was $144,110, compared to $185,055 for the corresponding period
of the prior year. Interest expense is on both long-term and short-term debt.
Income Taxes. The Company had no income tax expense for the first
quarters of fiscal 2003 and 2002. As of June 30, 2002, the Company had Federal
net operating loss carry forwards of approximately $13,330,000. The utilization
of net operating loss carry forwards will be limited pursuant to the applicable
provisions of the Internal Revenue Code and Treasury regulations.
Net Income (loss). Net loss for the quarter ended June 30, 2002 was
$412,047, or a loss of approximately $0.06 per share, versus $198,034, or
approximately $0.03 per share, for the same period of the prior fiscal year. The
net loss increase was the result of reduced sales volume.
11
Liquidity and Capital Resources
At June 30, 2002 the Company had a working capital deficit of
approximately $2,522,000 versus a deficit of approximately $2,248,000 at March
31, 2002. As a result of the working capital deficit at March 31, 2002 (the
Company's fiscal year end), the Company's independent certified public
accountants have expressed substantial doubt about the Company's ability to
continue as a going concern. The total cash balance at June 30, 2002 was
$448,431.
Cash provided by operations during the quarter ended June 30, 2002 was
$293,390, compared to $575,848 for the corresponding period in fiscal 2002. This
was due primarily to decreased operating income during the quarter. Cash used in
investing activities was $54,905 at June 30, 2002 and $5,584 at June 30, 2001.
Cash provided by financing activities for the quarter ended June 30, 2002 was
$128,666, compared to cash used in financing activities of $543,909 for the
corresponding period in fiscal 2002. The improvement resulted primarily from
increased borrowings under a long-term debt arrangement and the lack of any
significant issuances of equity.
At June 30, 2002, the Company had current debt obligations, or debt
that will become due within twelve months, of $1,531,228. It is unlikely that
the Company will be able to service this debt from funds generated by operations
alone. As a result, the Company will require additional equity, debt financing,
or deferment of debt repayment to maintain current operations and service
current debt. The Company continues to review its strategic alternatives,
including raising capital through debt or equity financing. The Company has no
commitments at this time from third parties for any such financing.
During the three months ended June 30, 2002, the Company purchased
approximately $55,000 of capital equipment and software.
Historically the Company has been unable to generate sufficient
internal cash flows to support operations, and has been dependent upon outside
capital sources to supplement cash flow. New equity investments, lines of credit
and other borrowings, and credit granted by its suppliers have enabled the
Company to sustain operations over the past several years. In August 1998, the
Company had failed to meet the "continued listing criteria" established by
NASDAQ and the Company's securities were delisted from the NASDAQ Small Cap
Market. The subsequent lack of shareholder liquidity in the Company's securities
has materially adversely affected the Company's ability to attract equity
capital. Additionally, the lack of capital resources has precluded the Company
from effectively executing its strategic business plan. The ability to raise
capital and maintain credit sources is critical to the continued viability of
the Company.
During fiscal year 2000, the Company authorized a class of securities
designated Series C 10% Cumulative Convertible Preferred Stock, consisting of
100,000 shares with a Stated Value of $10.00 per share, a dividend rate of 10%
and an Applicable Conversion Value of $2.25. On December 30, 1999, the Company
authorized the sale of 75,000 shares of the Series C Preferred, including 37,500
shares to a related party and 37,500 shares to an entity in which officers of
the Company have an interest, for an aggregate of $750,000, pursuant to two
subscription agreements. Of the $750,000 in proceeds, $220,780 represented
conversion of debt from a related party, and $529,220 was subscribed to in cash.
Including the conversion of debt and $337,720 in cash payments, the Company has
received $558,500, representing 55,850 shares of the Series C Preferred Stock,
and has extended the due date for the remaining $191,500.
During the quarter ended June 30, 2001, the Company entered into a
financing agreement with a key lender. The agreement provides the Company with
an immediate partial advance on all sales and requires the Company to
immediately assign the related receivables to the lender. Upon collection of the
related receivables, the lender pays the remaining balance to the Company. The
receivables are assigned with recourse and advances over 90 days outstanding
bear interest at a rate of 10% per annum. At June 30, 2002, the Company was
liable for $428,525 under this agreement.
During fiscal 2000, the Company and one of its primary vendors agreed
to convert $1,212,000 of the Company's trade payables to the vendor into a
promissory note. The promissory note included interest at 11%. At June 30, 2001,
the principal balance was approximately $723,000.
During fiscal 2001, the Company signed a settlement agreement with
Sunburst Acquisitions IV, Inc. The settlement agreement resulted in 1,959,972 of
our outstanding shares being returned to the Company and cancelled,
12
and $100,000 in settlement expense cost reimbursement to Sunburst, of which,
$25,000 was paid in cash and the Company executed a short-term promissory note
for the remaining $75,000, bearing interest at 10% per annum. As of June 30,
2002, the principle balance of this note remains $75,000.
In December 2000, the Company signed a $5 million note, converting
approximately $5 million of its accounts payable, with 10% interest and a due
date of April 2, 2002. In the second quarter of fiscal 2002, the Company
renegotiated the balance of the note. The new note bears interest at 6% and is
due in April 2003. The balance of the new promissory note at June 30, 2002 is
$6,384,686 with approximately $363,000 accrued interest at June 30, 2002. The
new note requires the Company to make monthly payments of 40% of its available
operating profits each month. The note further requires that the Company direct
50% of any future sums received by, committed to, or invested in the Company as
an additional equity capital infusion, towards repayment of the unpaid balance
of the note.
During fiscal 1998 and 1997, the Company borrowed $365,000 in
short-term notes collateralized by its computer equipment and office
furnishings. Subsequently, $170,000 of these notes was exchanged for 288,000
shares of common stock and $65,000 in principle was repaid. The interest rate on
the notes is 2% per month. As of June 30, 2002, the remaining principle balance
on these notes, which is currently due, was $108,000.
13
Plan of Operations
The Company's improved performance in fiscal 2001 began losing momentum
in fiscal 2002 with the general economic downturn, and was further aggravated by
the terrorist attacks and threats that began in September 2001. In response, the
Company's management implemented more aggressive plans to reduce operating
costs, increase service sales, and other strategies to minimize the impact on
revenues as clients took an increasingly conservative position on hardware and
software spending. The Company will continue to reduce expenses wherever
practicable and focus on securing service revenues, which have not been as
susceptible to market conditions as the demand for computer hardware and
software.
In addition to the Company's recent expansion into Texas and Louisiana,
as reported in the Company's Form 10-KSB for the fiscal year ended March 31,
2002, the Company is considering the acquisition of one or more systems
integration/high technology service companies in other regions of the United
States to increase its market coverage, sales and profitability. In conjunction
with any acquisition(s), the Company would need to raise equity capital to
provide additional working capital for the consolidated entity. The Company has
no commitments at this time from third parties for any such acquisition(s) or
financing.
The Company May Face Interruption Of Production And Services Due To Increased
Security Measures In Response To Terrorism
Our business depends on the free flow of products and services through
the channels of commerce. Recently, in response to terrorists' activities and
threats aimed at the United States, transportation, mail, financial and other
services have been slowed or stopped altogether. Further delays or stoppages in
transportation, mail, financial or other services could have a material adverse
effect on our business, results of operations and financial condition.
Furthermore, we may experience an increase in operating costs, such as costs for
transportation, insurance and security as a result of the activities and
potential activities. We may also experience delays in receiving payments from
payers that have been affected by the terrorist activities and potential
activities. The U.S. economy in general is being adversely affected by the
terrorist activities and potential activities and any economic downturn could
adversely impact our results of operations, impair our ability to raise capital
or otherwise adversely affect our ability to grow our business.
Recently Issued Accounting Pronouncements
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS 144 requires that these
long-lived assets be measured at the lower of carrying amount or fair value less
cost to sell, whether reported in continuing operations or in discontinued
operations. Therefore, discontinued operations will no longer be measured at net
realizable value or include amounts for operating losses that have not yet
occurred. SFAS 144 is effective for financial statements issued for fiscal years
beginning after December 15, 2001 and, generally, are to be applied
prospectively. The Company believes the adoption of this statement will have no
material impact on its financial statements.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections, which rescinds FASB Statement No. 4, Reporting Gains and Losses
from Extinguishment of Debt, and an amendment of that Statement, FASB Statement
No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. This
Statement amends FASB Statement No. 13, Accounting for Leases, to eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. The Company believes
the adoption of this Statement will have no material impact on its financial
statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities, which addresses accounting for
restructuring and similar costs. SFAS No. 146 supersedes previous
accounting guidance, principally Emerging Issues Task Force (EITF) Issue No.
94-3. PGE NEG will adopt the provisions of SFAS No. 146 for restructuring
activities initiated after December 31, 2002. SFAS No. 146 requires that the
liability for costs associated with an exit or disposal activity be recognized
when the liability is incurred. Under EITF No. 94-3, a liability for an exit
cost was recognized at the date of a companys commitment to an exit plan.
SFAS No. 146 also establishes that the liability should initially be measured
and recorded at fair value.
14
Accordingly, SFAS No. 146 may affect the timing of recognizing future
restructuring costs as well as the amount recognized.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act
of 1995
Management's discussion and analysis in this Form 10-QSB and the
exhibits included herein should be read in conjunction with the audited
Consolidated Financial Statements as filed in the Company's annual report on
Form 10-KSB for the fiscal year ended March 31, 2002. Except for the historical
information contained herein, the matters discussed in this Form 10-QSB are
forward-looking statements that involve a number of risks and uncertainties.
There are numerous important factors and risks, including the rapid change in
hardware and software technology, market conditions, the anticipation of growth
of certain market segments and the positioning of the Company's products and
services in those segments, seasonality in the buying cycles of certain of the
Company's customers, the timing of product announcements, the release of new or
enhanced products, the introduction of competitive products and services by
existing or new competitors and the significant risks associated with the
acquisition of new products, product rights, technologies, businesses, the
management of growth, the Company's ability to attract and retain highly skilled
technical, managerial and sales and marketing personnel, and the other risks
detailed from time to time in the Company's SEC reports, including reports on
Form 10-KSB and Form 10-QSB, that could cause results to differ materially from
those anticipated by the forward-looking statements made herein. Therefore,
historical results and percentage relationships will not necessarily be
indicative of the operating results of any future period.
15
PART II. Other Information
Item 1. Legal Proceedings
There have been no material developments in the matter, Pace
Investment Co., Inc., et al. v. Prologic Management Systems, Inc.,
CV 20003999, previously reported in the Company's reports on 10-QSB.
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 8-K
A. Exhibits filed herewith:
99.1 Certification Pursuant to 18 U.S.C. SECTION 1350 of
James M. Heim, Chief Executive Officer
99.2 Certification Pursuant to 18 U.S.C. SECTION 1350 of
James M. Heim, Chief Financial Officer
99.3 Materials Relating to the Purchase by Registrant of
Certain Assets from Solid Systems, Inc.
B. Reports:
No reports on Form 8-K were filed during the quarter ended
June 30, 2002.
16
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PROLOGIC MANAGEMENT SYSTEMS, INC.
DATED: August 15, 2002 By: /s/ James M. Heim
------------------------------
James M. Heim
Chief Executive Officer
Chief Financial Officer
17
Exhibit 99.1 to 10-QSB
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Prologic Management Systems,
Inc. (the "Company") on Form 10-QSB for the period ending June 30, 2002, as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, James M. Heim, Chief Executive Officer of the Company, certify, to
the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ James M. Heim
---------------------------------
James M. Heim
Chief Executive Officer
Prologic Management Systems, Inc.
August 15, 2002
Exhibit 99.2 to 10-QSB
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Prologic Management Systems,
Inc. (the "Company") on Form 10-QSB for the period ending June 30, 2002, as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, James M. Heim, Chief Financial Officer of the Company, certify, to
the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(3) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(4) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of the Company.
/s/ James M. Heim
---------------------------------
James M. Heim
Chief Financial Officer
Prologic Management Systems, Inc.
August 15, 2002
Exhibit 9.3 to form 10-QSB
Purchase by Prologic Management Systems, Inc. of certain assets
from Solid Systems, Inc.
Index
Page Number(s)
Description of Transaction 2-3
Prologic Management Systems, Inc.
Proforma Statement of Operations
Year ended March 31, 2002 4
Proforma Statement of Operations
Three months ended June 30, 2002 5
Solid Systems, Inc. Legacy Operations
Divisional Statements of Net Assets
December 31, 2001 and March 31, 2002 6-15
Description of Transaction
Acquisition of Assets from Solid Systems, Inc.
On June 15, 2002, the Company closed an acquisition effective May 31,
2002 whereby the Company acquired, in a non-cash asset purchase, four (4)
additional offices and associated personnel and equipment, from Solid Systems,
Inc, a systems integration and maintenance service provider. The offices are
located in Dallas, Austin and Houston, Texas, and in New Orleans, Louisiana. The
Company intends to continue the systems integration and maintenance business
under the name Solid Systems Division of Basis. Inc.
Pursuant to the agreement, Solid Systems Inc. assets were sold and
transferred to the Company in consideration for the assumption of liabilities.
The transaction was accounted for using the purchase method. Assets totaling
approximately $1,300,000 included: accounts receivable, prepaid maintenance
contracts and prepaid expenses, computer equipment, and office equipment and
furniture. The Company intends to use the equipment and office space it acquired
from Solid Systems to continue the systems integration and enterprise services
business. Liabilities totaling approximately $1,300,000 included: accounts
payable, accrued expenses, deferred revenue and sales tax expense.
In the transaction, the Company also acquired the rights to the Solid
Systems Inc. mark, the solidsystems.com domain name and Solidstor mark. The
Company assumed lease agreements for its Austin, Dallas and New Orleans
locations. The Austin office leases 2,400 square feet of office space under a
lease that expires in May 2004. The Dallas office leases 2,053 square feet of
office space under a lease that expires in October 2002. The New Orleans office
leases 2,400 square feet of office space under a lease that expires May 2004.
The office lease for the Houston office has expired, and the Company is
currently in the process of moving into new office space in Houston.
Narrative Description of the accompanying Proforma Statements
The objective of the proforma financial information is to provide investors and
others with information about the continuing impact of the transaction by
showing how it might have affected historical financial statements if the
transaction had been consummated on April 1, 2001, the beginning of the prior
fiscal year of Prologic The proforma operating statements present the way
Prologic statements would have changed for the fiscal year ended March 31, 2002,
by adding together the Prologic results for the year ended March 31, 2002, with
the Solid Systems, Inc Legacy Operations for the year (in this case the Solid
Systems, Inc. Legacy Operations numbers used are for their year ended December
31, 2001) after making adjustments which give effect to events that are (i)
directly attributable to the transaction, (ii) expected to have a continuing
impact on Prologic, and (iii) are factually supportable. No adjustments have
been made to the Pro-Forma Statement of Operations for the Year Ended March 31,
2002. The adjustments made in the Pro-Forma Statement of Operations for the
Three Months ended June 30, 2002, are adjustments made to exclude from the
Prologic actual June 30, 2002, Operating Statement the activity from the
operation by Prologic of the Legacy Business during June 2002.
The proforma results are not necessarily indicative of what actually would have
occurred if the transaction had been completed as of the beginning of each
fiscal period presented, nor are they necessarily indicative of future
consolidated results.
2
Future Operations
Solid Systems, Inc's Legacy Operations ("Legacy Operations" is the description
used by Solid Systems, Inc. to describe their systems integration, professional
services and maintenance business) was engaged in the same business as Basis,
Inc., a wholly owned subsidiary of Prologic Management Systems, Inc. Upon the
acquisition by Prologic of the "Legacy Division", Prologic has continued the
business as the Solid Systems Division of Basis, Inc. The location, personnel,
customers, products and service have essentially remained the same.
A change that has occurred subsequent to acquisition is that Prologic and its'
subsidiary Basis, Inc. now provide accounting, administrative and management
services at a much lower cost than was being allocated by Solid Systems, Inc. to
the Legacy Operations. This has the effect of reducing the corporate overhead
allocated to the division with a corresponding increase in reported operating
income from the division. Prologic has not been required to add substantial cost
to its corporate overhead to provide such services to the division nor does it
anticipate that it will be necessary to do so in the future other than increases
required to support increased sales.
3
Prologic Management Systems, Inc
Pro Forma Statement of Operations
Year ended March 31, 2002
(Dollars in thousands, except share data)
Prologic Solid Systems
Actual Actual
Year-ended Year-ended Pro Forma Pro Forma
March 31, 2002 Dec. 31, 2002 Adjustments Consolidation
-------------- ------------- ----------- -------------
Revenues
Hardware 11,741 9,219 - 20,960
Licenses 3,140 1,737 - 4,877
Services 4,570 5,661 - 10,231
-------------- ------------- ----------- -------------
Total Net Revenue 19,451 16,617 - 36,068
Cost of Sales
Hardware 10,237 8,172 - 18,409
Licenses 2,709 1,276 - 3,985
Services 2,119 4,556 - 6,675
-------------- ------------- ----------- -------------
Total Cost of Sales 15,065 14,004 - 29,069
Gross Margin 4,386 2,613 - 6,999
Operating Expenses
Selling and Marketing 1,680 1,536 3,216
General and Administrative 4,413 3,564 7,977
Research and Development 150 150
Write Down of Assets 2,029 2,029
Depreciation & Amortization - 417 417
Loss on disposal of property (23) - (23)
-------------- ------------- ----------- -------------
Total Operating Expenses 6,243 7,546 - 13,789
Operating Income (Loss) (1,857) (4,933) - (6,790)
Interest Income (expense) (661) - (661)
-------------- ------------- ----------- -------------
Income (loss) (2,518) (4,933) - (7,451)
Preferred Stock Dividend -
Cumulative Preferred Stock Dividend (71) (71)
-------------- ------------- ----------- -------------
Net loss available to Common (2,589) (4,933) - (7,522)
============== ============= =========== =============
Weighted Avg. # of Shs. Outstanding 6,938,576 6,938,576
Net Income (loss) Per Common Share (0.37) (1.08)
Note to Proforma Statement
The proforma statement results are not necessarily indicative of
what would have occurred if the acquisition had occurred at the
beginning of the fiscal year, nor are they necessarily indicative
of future results. Prologic did not acquire assets from SSI that
could have resulted in the depreciation expense shown above, nor
did Prologic acquire any of the SSI corporate assets, personnel or
expenses that resulted in the SSI corporate allocations to G & A
and Selling and Marketing during the period. Also, the Write Down
of Assets would not have occurred if Prologic had consummated the
transaction as of April 1, 2001, since Prologic only acquired
$85,000 of assets from SSI.
4
Prologic Management Systems, Inc
Pro Forma Statement of Operations
Three months ended June 30, 2002
(Dollars in thousands, except share data)
Prologic Solid Systems
Actual Actual Pro Forma Pro Forma
Three months Three months
ended 6/30/02 ended 3/31/02 Adjustments Consolidation
Revenues
Hardware 3,718 555 (307) (2) 3,966
Licenses 370 75 (21) (2) 424
Services 1,469 610 (129) (2) 1,950
-------------- -------------- -------------- -----------------
Total Net Revenue 5,557 1,240 (457) 6,340
Cost of Sales
Hardware 3,358 493 (279) (2) 3,572
Licenses 325 65 (21) (2) 369
Services 977 461 (32) (2) 1,406
-------------- -------------- -------------- -----------------
Total Cost of Sales 4,660 1,019 (332) 5,347
Gross Margin 897 221 (125) 993
Operating Expenses
Selling and Marketing 278 197 (32) (2) 443
General and Administrative 853 365 (118) (2) 1,100
Research and Development 34 34
Depreciation & Amortization - 62 62
-------------- -------------- -------------- -----------------
1,165 624 (150) 1,639
Operating Income (Loss) (268) (403) 25 (646)
Interest Income (expense) (144) - (144)
-------------- -------------- -------------- -----------------
Income (loss) (412) (403) 25 (790)
Preferred Stock Dividend -
Cumulative Preferred Stock Dividend (18) (18)
-------------- -------------- -------------- -----------------
Net loss available to Common (430) (403) 25 (808)
============== ============== ============== =================
Weighted Avg. # of Shs. Outstanding 7,097,594 7,097,594
Net Income (loss) Per Common Share (0.06) (0.11)
Footnotes to Proforma Statement
(1) The proforma statement results are not indicative of what would have
occurred if the acquisition had occurred at the beginning of the
fiscal quarter, nor are they indicative of future results.
Solid Systems, Inc. had begun a plan of liquidation after December
31, 2001, and did not actively market or sell products or services
after that date. In addition, Prologic did not acquire assets from
SSI that could have resulted in the depreciation expense shown
above, nor did Prologic acquire any of the SSI corporate assets,
personnel or expenses that resulted in the SSI corporate allocations
to G & A and Selling and Marketing during the period.
(2) Operations of Solid Systems from the date of acquisition, May 31,
2001, through June 30, 2002 excluded to avoid double counting.
5
SOLID SYSTEMS, INC.
Legacy Operations
Divisional Statements of Net Assets
December 31, 2001 and March 31, 2002
(With Independent Auditors' Report Thereon)
6
Independent Auditors' Report
The Board of Directors and Stockholders
Solid Systems, Inc.:
We have audited the accompanying balance sheet of Solid Systems, Inc. Legacy
Operations as of December 31, 2001, and the related statements of operations and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Solid Systems, Inc. Legacy
Operations as of December 31, 2001, and the results of its operations and its
cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America.
KPMG LLP
July 25, 2002
SOLID SYSTEMS, INC.
LEGACY OPERATIONS
Balance Sheets
(Dollars in thousands)
December 31, March 31,
2001 2002
---------------------- ----------------------
(Unaudited)
Assets
Current Assets:
Cash and cash equivalents........................................... $ - $ -
Trade accounts receivable, net of allowance for doubtful
accounts of $142 and $148 as of December 31, 2001
and March 31, 2002, respectively................................. 1,789 851
Inventories......................................................... 71 82
Prepaid expenses and other current assets........................... 265 249
---------------------- ----------------------
Total current assets................................................... 2,125 1,182
Net property and equipment (note 3).................................... 166 134
---------------------- ----------------------
Total assets............................................ $ 2,291 $ 1,316
====================== ======================
Liabilities and Net Assets
Current Liabilities:
Trade accounts payable.............................................. $ 1,468 $ 623
Accrued expenses.................................................... 463 351
Deferred revenue.................................................... 545 534
---------------------- ----------------------
Total current liabilities.............................................. 2,476 1,508
Net assets............................................................. (185) (192)
---------------------- ----------------------
Total liabilities and net assets........................ $ 2,291 $ 1,316
====================== ======================
See accompanying notes to financial statements.
8
SOLID SYSTEMS, INC.
LEGACY OPERATIONS
Statements of Operations
(Dollars in thousands)
Year Ended Three-Month
Period Ended
December 31, March 31,
2001 2002
---------------------- ----------------------
(Unaudited)
Revenue:
Hardware.......................................... $ 9,219 $ 555
Professional services............................. 5,661 610
Software.......................................... 1,737 75
---------------------- ----------------------
Total revenue........................................ 16,617 1,240
Cost of revenue:
Hardware.......................................... 8,172 493
Professional services............................. 4,556 461
Software.......................................... 1,276 65
---------------------- ----------------------
Total cost of revenue................................ 14,004 1,019
---------------------- ----------------------
Gross profit......................................... 2,613 221
Operating expenses:
General and administrative........................ 3,564 365
Sales and marketing............................... 1,536 197
Depreciation and amortization..................... 417 62
Write down of assets due to impairment............ 2,029 -
---------------------- ----------------------
Total costs and expenses............................. 7,546 624
---------------------- ----------------------
Operating loss....................................... (4,933) (403)
Loss on disposal of property and equipment........... (23) -
---------------------- ----------------------
Loss before income taxes............................. (4,956) (403)
Income taxes......................................... - -
---------------------- ----------------------
Net loss............................................. (4,956) (403)
Net assets, beginning of period...................... 3,406 (185)
Contribution from Solid Systems, Inc................. 1,365 396
---------------------- ----------------------
Net assets, end of period............................ $ (185) $ (192)
====================== ======================
9
SOLID SYSTEMS, INC.
LEGACY OPERATIONS
Statements of Cash Flows
(Dollars in thousands)
Year Ended Three-Month
Period Ended
December 31, March 31,
2001 2002
------------------------ ------------------------
(Unaudited)
Cash flows from operating activities:
Net loss.......................................................... $ (4,956) $ (403)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization............................... 417 62
Write-down of assets due to impairment...................... 2,029 -
Loss on sale of property and equipment...................... 23 -
Changes in assets and liabilities:
Trade accounts receivable, net........................... 6,533 938
Inventories.............................................. 378 (11)
Prepaid expenses and other current assets................ 352 16
Trade accounts payable................................... (4,861) (845)
(358) (112)
Accrued expenses......................................... )
Deferred revenue......................................... (904) (11)
------------------------ ------------------------
Net cash used in operating activities................................ (1,347) (366)
Cash flows from investing activities:
Purchases of property and equipment............................... (18) (30)
Cash flows from financing activities:
Contribution from Solid Systems, Inc.............................. 1,365 396
------------------------ ------------------------
Net increase (decrease) in cash and equivalents...................... - -
Cash and cash equivalents, beginning of period....................... - -
------------------------ ------------------------
Cash and cash equivalents, end of period....................... $ - $ -
======================== ========================
10
Exhibit 99.3 to form 10-QSB
15
1. The Company
These financial statements reflect the results of operations and
financial position of the Systems Integration and Enterprise Support
Services lines of business of Solid Systems, Inc. ("SSI"). For purposes
of these financial statements, the aforementioned Systems Integration and
Enterprise Support Services lines of business are referred to as the
"Legacy Operations" or "the Company."
SSI provides information technology ("IT") and data center services to
customers in Texas and Louisiana. SSI is headquartered in Houston, Texas
and maintains sales and technical support offices in Austin, Texas;
Dallas, Texas and New Orleans, Louisiana. In May 2001, SSI commenced
principle operations of commercial data centers in Houston and Baton
Rouge, Louisiana.
Services offered by the Company include:
o Enterprise Support - The Company's team of technically certified
engineers provide customers with a variety of computer
integration, installation and maintenance services. Integration
and installation services are typically provided on a time and
materials basis. Maintenance services, which include helpdesk,
hardware and software support and break/fix services, are
provided pursuant to contractual terms executed with each
customer. Such contracts are typically one year in length and are
prepaid by the customer at the beginning of the contract term.
o Systems Integration - These services include hardware and
software procurement, system/network design and configuration and
implementation. The Company offers products from many leading
hardware and software providers including Sun Microsystems,
Oracle, Hewlett Packard and Veritas.
Subsequent to December 31, 2001, SSI began a voluntary liquidation of its
operations. In connection therewith, on June 17, 2002, SSI's Legacy
Operations were sold to Prologic Management Systems, Inc. ("Prologic").
Prologic, an Arizona corporation, provides commercial systems integration
and professional and software development services to customers in
Arizona, California and Oregon. As a result of this sale and the expected
continuance of these operations, the accompanying financial statements
have been prepared assuming that the Legacy Operations are a going
concern.
These financial statements have been prepared on a carve-out basis by
aggregating the historical financial information of the Legacy Operations
as if these operations were a discrete operation for the periods
presented. The Legacy Operations are not a separate legal entity and have
not been separately financed. SSI has not maintained separate cash
accounts for any of its operations, including the Legacy Operations.
Therefore, all cash receipts and disbursements have been recorded through
the cash accounts of SSI. As the Legacy Operations have generated
negative cashflow from operations, these operations have been in a
negative cash position. Contributions to support the working capital
needs of the Legacy Operations have been treated as contributions to net
assets.
2. Summary of Significant Accounting Policies
Allocated Expenses
Sales and marketing and general and administrative expenses include the
allocation of corporate overhead costs by SSI. These costs, which
principally consist of personnel, accounting, legal and corporate office
expenses, were allocated based upon headcount. For the year ended
December 31, 2001 and the three-month period ended March 31, 2002, sales
and marketing expenses include allocated expenses totaling $350,000 and
$27,000, respectively. Allocated general and administrative expenses
aggregated $2,536,000 and $307,000 during those same periods.
See accompanying notes to financial statements.
11
Unaudited, Interim Financial Statements
The unaudited financial statements as of March 31, 2002 and for the
three-month period then ended include, in the opinion of management, all
adjustments (consisting of normal recurring adjustments) necessary to
present fairly the Company's financial position, results of operations
and cash flows. Operating results for the three-month period ended March
31, 2002 are not necessarily indicative of the results that may be
expected for the full year.
Inventories
Inventories are stated at the lower of specific cost or market,
determined using the first-in, first-out method. As of each of December
31, 2001 and March 31, 2002, inventories consisted of computer hardware
held for resale.
Property and Equipment
Property and equipment are stated at cost. Maintenance and minor repairs
and replacements are charged directly to expense as incurred; major
renewals and betterments are capitalized.
Depreciation of property and equipment is computed on the straight-line
basis over the estimated useful lives of the assets. Estimated useful
lives of the Company's assets are as follows:
Tool and test equipment 5 years
Furniture and fixtures 7 years
Leasehold improvements 3 - 5 years
Maintenance equipment 3 years
Income Taxes
Income taxes are accounted for utilizing the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date. A valuation allowance is
provided when management cannot determine whether or not it is more
likely that the net deferred tax asset will be realized.
2. Summary of Significant Accounting Policies - Continued
As the Legacy Operations are not a separate legal entity, but are rather
a line of business of SSI, there is no separate tax reporting for the
Legacy Operations. However for the preparation of these financial
statements, income tax was calculated as if the Legacy Operations had
filed a separate income tax return.
Revenue Recognition
The Company recognizes revenue in accordance with the provisions of
Statement of Position No. 97-2, Software Revenue Recognition, as amended,
which identifies four essential criteria that must be met before revenue
can be recognized: 1) persuasive evidence of an arrangement exists; 2)
delivery has occurred or services have been rendered; 3) the fee for the
arrangement is fixed or determinable; and 4) collectibility is reasonably
assured. The Company uses customer purchase orders and contracts to
evidence arrangements with customers.
Revenues related to Systems Integration activities consist of hardware
and software sales. These revenues are recognized at the point of
delivery. Professional services revenues include Enterprise Support
Service revenues, as well as revenues from consulting services, which are
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recognized at the time the service is performed. Enterprise Support
Service revenues consist of hardware maintenance and repair contract
revenues. The total amount of the contract is typically prepaid by the
customers at the beginning of the contract period. The Company recognizes
revenue under these contracts ratably over the contract term.
Impairment of Long-lived Assets and Long-lived Assets to Be Disposed Of
The Company reviews its long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future
undiscounted net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the
assets exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to
sell. During the year ended December 31, 2001, the Company recognized an
impairment loss related to certain inventory and fixed assets totaling
approximately $2.0 million.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company's management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
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3. Property and Equipment
Property and equipment consisted of the following as of December 31, 2001
and March 31, 2002 (in thousands):
December 31, 2001 March 31, 2002
------------------- -------------------
(Unaudited)
Furniture and fixtures............................. $ 1,036 $ 1,036
Tools and test equipment........................... 791 791
Maintenance equipment.............................. - 30
Leasehold improvements............................. 91 91
------------------- -------------------
1,918 1,948
Less accumulated depreciation and
amortization................................... (1,752) (1,814)
------------------- -------------------
$ 166 $ 134
=================== ===================
4. Accrued Expenses
Accrued expenses consisted of the following as of December 31, 2001 and
March 31, 2002 (in thousands):
December 31, 2001 March 31, 2002
------------------- -------------------
(Unaudited)
Sales tax payable.................................. $ 169 $ 143
Accrued commissions................................ 82 44
Accrued expenses................................... 212 164
------------------- -------------------
$ 463 $ 351
=================== ===================
5. Leases
SSI leases office space to support the Legacy Operations under
noncancelable operating leases with third parties expiring in various
years through 2004. Future minimum lease payments under these
noncancelable operating leases related to the Legacy Operations as of
December 31, 2001 approximated $84,000 in 2002, $53,000 in 2003 and
$22,000 in 2004.
Rental expense under the Legacy Operations' operating leases for the year
ended December 31, 2001 and the three-month period ended March 31, 2002
approximated $191,000 and $25,000, respectively.
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6. Income Taxes
The Legacy Operations' primary temporary differences relate to its
allowance for doubtful accounts, differences in depreciation of property
and equipment and net operating loss carryforwards. As of December 31,
2001 and March 31, 2002, the Legacy Operations have recorded a valuation
allowance against the full amount of its deferred tax assets as
management has determined that it is more likely than not that the
Company will not be able to utilize these assets.
7. Defined Contribution Plan
SSI maintains a 401(k) retirement plan for the benefit of its employees.
Under the plan and trust document, eligible employees may contribute up
to 15% of their compensation to this plan. SSI may elect a discretionary
contribution equal to a percentage of compensation. The employee's annual
contributions are limited under IRS regulations.
During the year ended December 31, 2001, the Legacy Operations made
contributions totaling $96,000 to the 401(k) plan on behalf of Legacy
Operations employees. Such amounts have been included in operating
expenses in the accompanying statement of operations. No contributions
were made to the 401(k) plan during the three months ended March 31,
2002.
8. Business and Credit Concentrations
SSI maintains cash balances in one financial institution that frequently
exceed federally insured limits.
Approximately 35% and 58% of the Legacy Operations' sales for the year
ended December 31, 2001 and the three months ended March 31, 2002,
respectively, were derived from ten customers. Approximately 59% and 44%
of accounts receivable at December 31, 2001 and March 31, 2002,
respectively, were due from the Legacy Operations' five largest customer
account balances. Management estimates an allowance for doubtful accounts
based on the credit-worthiness of its customers as well as general
economic conditions. Consequently, an adverse change in those factors
could affect the Legacy Operations' estimate of its bad debts.
9. Commitments and Contingencies
SSI is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on
the Legacy Operations' consolidated financial position, results of
operations or liquidity.
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