U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 2003.
Commission file number: 1-13704
PROLOGIC MANAGEMENT SYSTEMS, INC.
(Name of small business issuer in its charter)
Arizona 86-0498857
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
110 South Church Avenue, #3362, Tucson, Arizona 85701
(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 September 30, 2003 was
7,275,048.
Transitional Small Business Disclosure Format:
Yes X No
--- ---
1
Prologic Management Systems, Inc.
Index
Page
----
Part I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements 3
Condensed Consolidated Balance Sheets at September 30, 2003 (unaudited) and March 31, 2003 3
Condensed Consolidated Statements of Operations for the Three and Six Months Ended
September 30, 2003 (unaudited) and September 30, 2002 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
September 30, 2003 (unaudited) and September 30, 2002 (unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 10
Item 3. Controls and Procedures 17
Part II. OTHER INFORMATION 17
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote by Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 18
2
PART I. Financial Information
Item 1. Condensed Consolidated Financial Statements
Prologic Management Systems, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
September 30, March 31,
2003 2003
---------------- ---------------
ASSETS (unaudited)
Current assets:
Cash $ 278,524 $ 216,904
Accounts receivable, less allowance for doubtful accounts of $89,713 at
September 30, 2003 and $217,264 at March 31, 2003 1,846,061 4,175,496
Inventory 185,007 245,257
Prepaid expenses 182,274 175,270
---------------- ---------------
Total current assets 2,491,866 4,812,927
Property and equipment, net 254,587 324,494
Deferred financing costs, net 50,223 93,267
Other assets 173,458 163,049
---------------- ---------------
TOTAL ASSETS $ 2,970,134 $ 5,393,737
================ ===============
LIABILITIES, PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities:
Line of credit $ 610,000 $ 205,000
Short term debt and notes payable 2,886,890 2,782,770
Long term interest on accrued liabilities (In default) 844,196 --
Long-term debt and notes payable (In default) 6,336,686 --
Accounts payable 1,950,453 3,931,356
Sales tax payable 516,749 762,160
Accrued expenses 560,193 616,008
Deferred maintenance revenue 755,609 916,545
---------------- ---------------
Total current liabilities 14,460,776 9,213,839
Long term interest on accrued liabilities -- 653,708
Long-term debt and notes payable -- 6,349,686
---------------- ---------------
Total liabilities 14,460,776 16,217,233
---------------- ---------------
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 shares
issued and outstanding at September 30, 2003 and March 31, 2003 10,205,073 10,205,073
Warrants 970,766 961,366
Accumulated deficit (23,393,569) (22,717,023)
---------------- ---------------
Total stockholders' deficit (12,217,730) (11,550,584)
---------------- ---------------
Total liabilities, preferred stock and stockholders' deficit $ 2,970,134 $ 5,393,737
================ ===============
See accompanying notes to condensed consolidated financial statements.
3
Prologic Management Systems, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
Three Months Ended Six Months Ended
September 30, September 30,
2003 2002 2003 2002
-------------- ------------- -------------- --------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenue:
Hardware $ 818,820 $ 1,955,117 $ 4,089,872 $ 5,673,143
Software licenses 330,050 631,520 1,334,809 1,001,746
Professional services 1,326,795 1,130,198 3,716,618 2,599,146
-------------- ------------- -------------- --------------
Total revenue 2,475,665 3,716,835 9,141,299 9,274,035
Cost of revenue:
Hardware 620,782 1,798,928 3,397,848 5,157,264
Software licenses 331,248 548,419 1,226,062 873,488
Professional services 697,089 684,621 2,228,496 1,661,312
-------------- ------------- -------------- --------------
Total cost of revenue 1,649,119 3,031,968 6,852,406 7,692,064
-------------- ------------- -------------- --------------
Gross profit 826,546 684,867 2,288,893 1,581,971
-------------- ------------- -------------- --------------
Operating expenses:
General and administrative 1,036,014 1,226,754 2,023,167 2,113,774
Selling and marketing 328,065 308,256 685,655 586,276
-------------- ------------- -------------- --------------
Total operating expenses 1,364,079 1,535,010 2,708,822 2,700,050
-------------- ------------- -------------- --------------
Operating loss (537,533) (850,143) (419,929) (1,118,079)
-------------- ------------- -------------- --------------
Interest and other income (expense):
Interest expense (112,162) (152,814) (256,644) (299,014)
Other income (expense) -- 1,800 25 3,890
-------------- ------------- -------------- --------------
Total other income (expense) (112,162) (151,014) (256,619) (295,124)
-------------- ------------- -------------- --------------
Net loss (649,695) (1,001,157) (676,548) (1,413,203)
Preferred stock dividend (18,338) (18,338) (36,676) (36,676)
-------------- ------------- -------------- --------------
Net loss available to common
Stockholders $ (668,033) $ (1,019,495) $ (713,224) $ (1,449,879)
============== ============= ============== ==============
Weighted average number of common shares:
Basic and diluted 7,014,591 7,275,048 7,014,591 7,230,806
============== ============= ============== ==============
Loss per common share:
Basic and diluted $ (0.10) $ (0.14) $ (0.10) $ (0.20)
============== ============= ============== ==============
See accompanying notes to condensed consolidated financial statements.
4
Prologic Management Systems, Inc. and Subsidiaries
Condensed CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash Six Months Ended September 30,
2003 2002
------------- -------------
(unaudited) (unaudited)
Cash flows from operating activities:
Net loss $ (676,548) $ (1,413,203)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization 116,122 114,226
Issuance of warrants for services 9,400 --
Change in assets and liabilities:
Accounts receivable 2,329,435 263,399
Inventory 60,250 15,558
Prepaid expenses (7,004) (38,559)
Other assets (10,409) (95,499)
Accounts payable (1,980,903) 798,141
Accrued expenses (110,736) (389,229)
Deferred maintenance revenue (160,937) 116,074
------------- -------------
Total adjustments 245,218 784,111
------------- -------------
Net cash (used in) provided by operating activities (431,330) (629,092)
------------- -------------
Cash flows from investing activities:
Purchase of equipment (3,170) (141,159)
------------- -------------
Net cash (used in) provided by investing activities (3,170) (141,159)
------------- -------------
Cash flows from financing activities:
Net change in line of credit 405,000 579,356
Proceeds from debt 91,120 --
Issuance of new debt -- 192,605
Repayment of debt -- (47,199)
------------- -------------
Net cash provided by (used in) financing activities 496,120 724,762
------------- -------------
Net increase (decrease) in cash 61,620 (45,489)
Cash, beginning of period 216,904 81,280
------------- -------------
Cash, end of period $ 278,524 $ 35,791
============= =============
Supplemental statement of cash flow information:
Cash paid during the quarter for interest $ 45,044 $ 31,074
Cash paid during the quarter for taxes -- --
Non-cash financing and investing activities:
Preferred stock dividends paid in common stock $ -- $ 13,458
See accompanying notes to condensed consolidated financial statements.
5
Notes to Condensed Consolidated Financial Statements
1. Basis of Presentation - Interim Periods
The accompanying unaudited condensed consolidated financial statements
include the accounts of Prologic Management Systems, Inc. (the "Company")
and its wholly-owned subsidiary, BASIS, Inc. ("BASIS"), including its Solid
Systems division which was acquired May 31, 2002. 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, 2003. The results of operations
for the three and six-month periods ended September 30, 2003 and 2002 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. The Company's independent auditors qualified their opinion on the
Company's March 31, 2003 financial statements by including an explanatory
paragraph in which they expressed 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 completed 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 results of
operations of Solid Systems have been included in the Company's
consolidated results of operations since May 31, 2002, the acquisition
date.
The unaudited proforma combined historical results of operations, as if
Solid Systems had been acquired at the beginning of the first quarter ended
June 30, 2002, were estimated to be:
Six months ended
September 30, 2002
----------------------
Revenue $ 10,057
Net loss available to common shareholders $ (1,827)
Basic and diluted loss per share $ (0.25)
The proforma results include the operations of the Company for the six
months ended September 30, 2002, and were not necessarily indicative of
what actually would have occurred if the acquisition had been completed as
of the beginning of the period presented, nor are they necessarily
indicative of future consolidated results.
3. 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, if any,
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
September 30, 2003, the Company was liable for $1,787,820 under this
agreement, which is included in the current portion of short-term debt and
notes payable.
6
On March 26, 2003, the Company entered into an agreement with a key lender
in the form of a line of credit with an interest rate of eight percent (8%)
per annum, which shall be payable in arrears on the 10th day of each month
commencing April 10, 2003. All outstanding principal and accrued, but
unpaid interest, if not paid earlier, were due and payable on September 26,
2003. The note is secured by all of the Company's assets. The total advance
could not exceed $610,000. At March 31, 2003 and September 30, 2003, the
Company was liable for $205,000 and $610,000, respectively, under this
agreement. As of the date of this report the Company has not repaid any of
the outstanding principal or interest and the key lender has notified the
Company that the note is in default. The Company has no source of funds to
cure this default.
4. Property and Equipment
Property and equipment consists of the following:
September 30, March 31,
2003 2003
------------- -------------
Furniture and leasehold improvements $ 204,243 $ 236,250
Equipment and software 1,092,774 1,131,665
------------ -----------
Total property and equipment 1,297,017 1,367,915
Less accumulated depreciation (1,042,430) (1,043,421)
------------ -----------
Net property and equipment $ 254,587 $ 324,494
============ ===========
5. Inventory
Inventory consists primarily of parts associated with servicing maintenance
contracts and, to a lesser degree, 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.
6. 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 an
initial due date of April 2, 2002. The note is secured by a pledge to the
note holder of substantially all of the Company's assets. In August 2002,
the Company renegotiated the terms of the note. The current note bears
interest at 6% and is due in April 2004, with the option of the maker to
extend the maturity date to April 2005. The balance of the current
promissory note at September 30, 2003 is $6,336,686 with approximately
$844,196 accrued interest at September 30, 2003. The current note requires
the Company to make monthly payments of 40% of its available operating
profits each month. This 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 this note. In August 2002, the Company further amended the note
to add weekly payments of $1,000. As of the date of this report the Company
has not repaid any of the outstanding principal or interest and the key
lender has notified the Company that the note is in default. The Company
has no source of funds to cure this default.
7. Earnings Per Share
FASB Statement of Financial Accounting Standards 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 and six
months ended September 30, 2003 and 2002, potential common stock,
consisting of stock options, warrants and convertible preferred stock
totaling 1,917,411 and 2,275,111, respectively, are excluded from the
computation of diluted earnings per share because they are antidilutive.
7
8. Stock-Based Compensation
The Company accounts for employee stock options or similar equity
instruments in accordance with Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123).
SFAS No. 123 defines a fair-value-based method of accounting for employee
stock options or similar equity instruments. This statement gives entities
a choice to recognize employee related compensation expense by adopting the
new fair-value method or to measure compensation using the intrinsic value
method under Accounting Principles Board (APB) Opinion No. 25 "Accounting
for Stock Issued to Employees", the former standard. If the former standard
for measurement is elected, SFAS No. 123 requires supplemental disclosure
to show the effect of using fair value measurement criteria.
The Company has elected to account for its stock-based compensation plans
under APB No. 25 and has therefore recognized no compensation expense in
the accompanying consolidated financial statements for stock-based awards
granted as the option price for all options grants exceeded the fair value
of the Company's common stock on the date of grant.
If the Company had accounted for its stock-based compensation plans using a
fair value based method of accounting, the Company's net loss and loss per
common and common share equivalent would have been as follows:
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
09/30/2003 09/30/2002 09/30/2003 09/30/2002
-------------- ---------------- --------------- -------------
Net loss available to common
stockholders, as reported $ (668,033) $ (1,019,495) $ (713,224) $ (1,449,879)
Deduct: Total stock-based
compensation expense determined
under fair value based method for
all awards, net of related tax effects 0.00 0.00 (13,000) (10,927)
-------------- -------------- ------------- ------------
Pro forma net loss available to
common stockholders $ (668,033) $ (1,019,495) $ (726,224) $ (1,460,806)
============== ============== ============= ============
Net loss per share (basic and
diluted), as reported $ (0.10) $ (0.14) $ (0.10) $ (0.20)
Net loss per share (basic and
diluted), pro forma (0.10) (0.14) (0.10) (0.20)
------------- -------------- ----------- ------------
The effects of applying SFAS No. 123 for pro forma disclosures for the
periods ended September 30, 2003 and September 30, 2002 are not likely to
be representative of the effects on reported net loss and loss per common
and common share equivalent for future years, because options vest over
several years and additional awards generally are made each year.
9. Recently Issued Accounting Pronouncements
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." SFAS No. 145 rescinded three previously issued statements and
amended SFAS No. 13, "Accounting for Leases." The statement provides
reporting standards for debt extinguishments and provides accounting
standards for certain lease modifications that have economic effects
similar to sale-leaseback transactions. The statement is effective for
certain lease transactions occurring after May 15, 2002 and all other
provisions of the statement shall be effective for financial statements
issued on or after May 15, 2002. The adoption of SFAS No. 145 did not have
a material effect on the Company's consolidated financial position or
results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which updates accounting and
reporting standards for personnel and operational restructuring. The
Company will be required to adopt SFAS No. 146 for exit, disposal or other
restructuring activities that are initiated after December 31, 2002, with
early application encouraged. The Company does not expect the adoption of
SFAS No. 146 to have a material effect on the Company's consolidated
financial position or results of operations.
8
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an Amendment to SFAS No. 123."
SFAS No. 148 provides alternative methods of transition for a voluntary
change to the fair value based method on accounting for stock-based
employee compensation. The Company currently does not intend to adopt SFAS
No. 123 for stock-based employee compensation and accordingly does not
expect the implementation of SFAS No. 148 to have a material effect on the
Company's consolidated financial position or results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities," to improve accounting for
derivative instruments. SFAS 149 requires that contracts with comparable
characteristics be accounted for similarly. It clarifies when a contract
with an initial net investment should be considered a derivative.
Additionally, it clarifies when a derivative includes a financing component
that should be reported as a financing activity in the statement of cash
flows. SFAS No. 149 generally is effective for contracts entered into or
modified after June 30, 2003, and for hedging relationships designated
after June 30, 2003. The adoption of SFAS No. 149 did not have a material
effect on the Company's consolidated financial position or results of
operations.
In June 2003 the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
SFAS No. 150 requires certain instruments, including mandatory redeemable
shares, to be classified as liabilities, not as part of shareholders'
equity or redeemable equity. For instruments that are entered into or
modified after May 31, 2003, SFAS No. 150 is effective immediately upon
entering the transaction or modifying the terms. For other instruments
covered by Statement 150 that were entered into before June 1, 2003,
Statement 150 is effective for the first interim period beginning after
June 15, 2003. The Company has evaluated the provisions of SFAS No. 150 and
does not expect SFAS No. 150 to have a material effect on the Company's
consolidated financial position or results of operations.
In November 2002, the FASB issued interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees. Including indirect
Guarantees of Indebtedness of Others," which disclosures are effective for
financial statements for periods ending after December 15, 2002. While the
Company has various guarantees included in contracts in the normal course
of business, primarily in the form of indemnities, these guarantees would
only result in immaterial increases in future costs, but do not represent
significant commitments or contingent liabilities of the indebtedness of
others.
In January 2003, the FASB issued interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46) which requires the consolidation of
variable interest entities, as defined. FIN 46 is applicable immediately
for variable interest entities created after January 1, 2003. For variable
interest entities created prior to January 1, 2003, the provisions of FIN
46 are applicable no later than July 1, 2003. The Company does not
currently believe that any material entities will be consolidated as a
result of FIN 46.
10. Commitments and Contingencies
Pace Investment Co., Inc., et al. v. Prologic Management Systems, Inc., CV
20003999 (previously reported in the Company's reports on 10-QSB):
In the first quarter of fiscal 2004, the parties negotiated a settlement
agreement whereby the Company would issue the plaintiffs 2.63 shares of
Prologic common stock for each dollar ($1.00) of money originally invested
by the plaintiffs, reduced by the number of common shares that have been
issued to each current preferred stockholder as dividends on the preferred
stock. The total number of shares of common stock to be issued to the
plaintiffs is 1,197,634 shares. The parties have agreed to dismiss with
prejudice all claims in this case. The settlement agreement will be
effective upon execution by the parties, after which time the common shares
due thereunder will be issued. The Company expects the settlement agreement
to be executed in the fourth quarter of fiscal 2004. Holders of the
Company's Series A, Series B and Series C Preferred Stock have also agreed
to convert their preferred shares to shares of the Company's common stock
utilizing the same formula as that of the Pace settlement. The total
additional shares to be issued over and above the initial conversion rate
for all shares of Series A, B and C Preferred Stock will be recorded as a
deemed dividend of approximately $190,000 when effective in the fourth
quarter of fiscal 2004.
9
Holualoa Butterfield Industrial LLC v. Prologic Management Systems, Inc.,
C20035918, Superior Court for the State of Arizona in and for the County of
Pima, filed October 23, 2003. A complaint was filed by Holualoa against
Prologic to collect approximately $194,000 allegedly owed by Prologic for
the lease of office space in Tucson, Arizona. The complaint claims $64,032
in rent charges and $129,968 are disputed charges.
11. Subsequent Events
In November 2003, the Company was notified that it was in default to a key
lender on a $610,000 note due and payable September 26, 2003, and on a
$5,000,000 note due and payable in April 2004. As of the date of this
report the Company has not repaid any of the outstanding principal or
interest and the Company has no source of funds to cure this default.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Introduction
The Company provides systems integration services, maintenance services,
technology products and related services. The Company's revenues are generated
from systems integration, maintenance services, and related product sales. The
Company's services include systems integration, maintenance services, 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
discussion should be read in conjunction with the Condensed Consolidated
Financial Statements of the Company and its subsidiary and Notes thereto,
included herein at Item 1 of Part I.
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 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.
10
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. In the fourth
quarter of the fiscal year ended March 31, 2003, the Company determined its
goodwill was impaired and wrote-off the entire balance of $408,942.
Results of Operations
Three Months Ended September 30, 2003 and 2002
- ----------------------------------------------
Net Revenue. Net revenue for the second quarter ended September 30, 2003
was $2,475,665 compared to $3,716,835 for the same period of the previous year,
a decrease of $1,241,170, or approximately 33.4%. The revenue decrease was due
primarily to a decrease in revenue from hardware sales and software licenses,
offset somewhat by an increase in sales of services. Revenue from sales of third
party hardware for the quarter ended September 30, 2003 was $818,820, a decrease
of approximately 58.1%, compared to $1,955,117 for the same period of the
previous year. Revenue from sales of third party software licenses for the
quarter ended September 30, 2003, was $330,050, a decrease of approximately
47.7%, compared to $631,520 for the same period of the previous year. Revenue
from sales of professional services for the quarter ended September 30, 2003,
which was comprised predominately of maintenance support services, was
$1,326,795, an increase of approximately 17.4%, compared to $1,130,198 for the
same period of the previous year. 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.
Costs of Sales. Costs of revenue were $1,649,119, or 66.6% of net revenue,
for the quarter ended September 30, 2003, compared to $3,031,968, or 81.6% of
net revenue, for the same period of the previous year. The overall decreased
costs of revenue were primarily the result of the decrease 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.
11
General and Administrative. General and administrative expenses for the
quarter ended September 30, 2003 were $1,036,014, or 41.8% of net revenue,
compared to $1,226,754, or 33.0% of net revenue, for the same period of the
previous year. The decrease in these expenses is attributable to the Company's
reduction in operating expenses 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.
Selling and Marketing. Selling and marketing expenses were $328,065, or
13.3% of net revenue, for the quarter ended September 30, 2003, compared to
$308,256, or 8.3% of net revenue, for the same period of the previous year. The
increase in the amount of expenses is primarily the result of increased sales
expenses resulting from the prior quarter.
Operating Income (loss). Operating loss for the quarter ended September 30,
2003 was $537,533, or loss of 21.7% of net revenue, compared to an operating
loss of $850,143, or a loss of 22.9% of net revenue, for the same period of the
previous year. The improvement resulted from a favorable change in the sales mix
toward increased revenues from sales of higher margin services and software
licenses in the second quarter of fiscal 2004.
Interest Expense and Other Income (expense). Interest expense and other
income for the second quarter ended September 30, 2003 was $112,162, compared to
$151,014 for the same period of the previous year. Interest expense is on both
long-term and short-term debt.
Income Taxes. The Company had no income tax expense for the second quarters
of fiscal 2004 and 2003. As of September 30, 2003, the Company had Federal net
operating loss carry forwards of approximately $17,400,000. 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 Loss. Net loss for the quarter ended September 30, 2003 was $649,695,
or a loss of approximately $0.10 per share, compared to a loss of $1,001,157, or
a loss of approximately $0.14 per share, for the same period of the previous
year. The net loss improvement resulted from a favorable change in the sales mix
toward increased revenues from sales of higher margin services and software
licenses in the second quarter of fiscal 2004.
Six Months Ended September 30, 2003 and 2002
- --------------------------------------------
Net Revenue. Net revenue for the first six months of fiscal 2004 was
$9,141,299 compared to $9,274,035 for the same period of the previous fiscal
year, a decrease of $132,736, or approximately 0.01%. The revenue decrease was
due primarily to the continuing economic downturn that caused clients to reduce
and/or defer hardware and software purchases during the six-month period.
Revenue from sales of third party hardware for the six months ended September
30, 2003 was $4,089,872, a decrease of approximately 27.9% over sales for the
same period of the previous fiscal year of $5,673,143. Revenue from sales of
third party software licenses was $1,334,809 for the six months ended September
30, 2003, an increase of approximately 33.2% over revenue of $1,001,746 for the
first six months of the previous fiscal year. Revenue from service sales for the
six months ended September 30, 2003, which were comprised predominately of
integration, maintenance and support services, was $3,716,618, compared to
$2,599,146 for the same period of the previous fiscal year, an increase of
approximately 43.0%. The increase in service sales reflects the Company's
efforts to increase sales of higher margin services, which have been less
susceptible to market conditions than the demand for computer hardware.
Cost of Sales. Cost of sales for the six months ended September 30, 2003
was $6,852,406, or 75.0% of total net sales, compared to $7,692,064, or 82.9% of
net sales, for the same period of the previous fiscal year. The overall
decreased cost of sales was primarily the result of the increase in higher
margin services sales. The Company does not expect to see improved margins on
sales of third party products in the near term, as the economic downturn
continues to drive 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.
General and Administrative. General and administrative expenses for the six
months ended September 30, 2003 were $2,023,167, or 22.1% of net sales, compared
to $2,113,774, or 22.8% of net sales, for the same period of the previous fiscal
year. The decrease in these expenses is attributable to the Company's reduction
in operating expenses 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.
12
Selling and Marketing. Selling and marketing expenses for the six months
ended September 30, 2003 were $685,655, or 7.5% of net sales, compared to
$586,276, or 6.3% of net sales, for the same period of the previous fiscal year.
The increase in the amount of expenses is primarily the result of increased
sales expenses resulting from the prior quarter. The Company normally expects
sales and marketing expenses to generally reflect long range sales trends,
rather than short-term sales cycles.
Operating Income (loss). Operating loss for the six months ended September
30, 2003 was $419,929, or a loss of approximately 4.6% of net sales, compared to
a loss of $1,118,079, or a loss of 12.1% of net sales, for the same period of
the previous fiscal year. The operating loss resulted from the continuing
economic downturn that caused clients to reduce and/or defer hardware and
software purchases.
Interest Expense and Other Income (expense). Interest expense and other
expense for the six months ended September 30, 2003 was $256,619, compared to
$295,124 for the same period of the previous fiscal year, which was mainly
interest paid on the current lines of credit and short term borrowings. The
increase was primarily attributable to interest accrued on the $5 million note
due April 2004.
Income Taxes. The Company had no income tax expense for the first six
months of fiscal 2004 and 2003. As of September 30, 2003, the Company had
Federal net operating loss carry forwards of approximately $17,400,000. 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). The Company had a net loss of $676,548, or a loss of
approximately $0.10 per share, for the first six months of fiscal 2004, as
compared to a net loss of $1,413,203, or a loss of approximately $0.20 per
share, for the same period of the previous fiscal year. The loss was the result
of the decrease in sales resulting from an economic downturn that caused clients
to delay a significant number of orders during the six-month period.
Liquidity and Capital Resources
At September 30, 2003 the Company had a working capital deficit of
approximately $11,969,000 versus a deficit of approximately $4,401,000 at March
31, 2003. As a result of the working capital deficit at March 31, 2003 (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 September 30, 2003 was
$278,524.
Cash used in operations during the quarter ended September 30, 2003 was
$431,330, compared to $629,092 for the corresponding period in fiscal 2002. Cash
used in investing activities was $3,170 at September 30, 2003 and $141,159 in
the six months ending September 30, 2002. Cash provided by financing activities
for the period ended September 30, 2003 was $496,120, compared to financing
activities of $724,762 for the corresponding period in fiscal 2002.
At September 30, 2003, the Company had current debt obligations, or debt
that will become due within twelve months, of $10,067,772. 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.
During the three months ended September 30, 2003, the Company purchased
$3,170 of capital equipment or software.
The Company's ability to continue in operations during the last several
years has depended upon the continuing receipt of financial accommodations from
a key lender. These financial accommodations are discussed in the paragraphs
below. In November 2003, this lender notified the Company that it was in default
on a $610,000 note that was due and payable on September 26, 2003, and on a
$5,000,000 note due and payable in April 2004. As of the date of this report,
the Company has not repaid any of the outstanding balances under either of these
notes, and the Company does not have a source of funds to cure these defaults.
The Company's obligations to this lender are secured by security interests
covering all or substantially all of the Company's assets. As of the date of
this report, the lender has not moved to take possession of or to commence the
disposition of its collateral, and the Company and the lender are in discussions
concerning potential steps that may be taken to resolve the disputes. At this
time, the Company can give no assurances concerning the outcome of this
situation.
13
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 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 a minority interest, for an aggregate of $750,000, pursuant to
two subscription agreements. Of the $750,000 in proceeds, $220,780 represented
conversion of current 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 received $558,500, representing 55,850 shares of the Series C Preferred
stock, and extended the due date for the remaining $191,500. In the first
quarter of fiscal 2004, all holders of the Company's Series A, Series B and
Series C Preferred Stock agreed to convert their preferred shares to shares of
the Company's common stock utilizing the same formula as that of the Pace
settlement (see Part II, Item 1 of this report). The shares are expected to be
issued in fiscal 2004.
During fiscal 2002, 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, if any, 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 September 30, 2003, the Company was liable for
$1,787,820 under this agreement, which is included in the current portion of
short-term debt and notes payable.
On March 26, 2003, the Company entered into an agreement with a key lender
in the form of a line of credit for total advances not to exceed $610,000 and
with an interest rate of eight percent (8%) per annum, which shall be payable in
arrears on the 10th day of each month commencing April 10, 2003. All outstanding
principal and accrued, but unpaid interest, if not paid earlier, was due on
September 26, 2003. The note is secured by all of the Company's assets. At March
31, 2003 and September 30, 2003, the Company was liable for $205,000 and
$610,000, respectively, under this agreement. As of the date of this report the
Company has not repaid any of the outstanding principal or interest and the key
lender has notified the Company that the note is in default. The Company has no
source of funds to cure this default.
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 includes interest at 11%. At September 30,
2003, 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 shares of
the Company's common stock being returned to the Company and cancelled, and
$100,000 in settlement expense cost reimbursement to be paid 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
September 30, 2003, the principal 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 an
initial due date of April 2, 2002. The note is secured by a pledge to the note
holder of substantially all of the Company's assets. In August 2002, the Company
renegotiated the terms of the note. The current note bears interest at 6% and is
due in April 2004, with the option of the maker to extend the maturity date to
April 2005. The balance of the current promissory note at September 30, 2003 is
$6,336,686 with approximately $844,196 accrued interest at September 30, 2003.
The current 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. In August 2002, the Company further amended the note
to include weekly payments of $1,000. As of the date of this report the Company
has not repaid any of the outstanding principal or interest and the key lender
has notified the Company that the note is in default. The Company has no source
of funds to cure this default.
14
In fiscal 1997, the Company borrowed $100,000 with an interest rate of 8%
and a scheduled maturity date of June 30, 1997. Subsequently, the maturity date
was extended with a revised interest rate of 2% per month plus 10,000 shares per
month of restricted common stock. During fiscal 2000, the Company issued 120,000
shares of common stock as interest towards the note. In March 2000, the Company
renegotiated the terms of the note and eliminated the common stock interest
component. The replacement note is unsecured, in the amount of $164,500, which
includes interest and expenses previously accrued, and bears interest at 3% per
month. As of September 30, 2003, the remaining balance of this note, including
principal and interest, was $25,503.
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 principal was repaid. The interest rate on the notes is 2%
per month. As of September 30, 2003, the remaining principal balance on these
notes, which is currently overdue, is $100,000.
At September 30, 2003, the Company owed approximately $374,590 in prior
sales tax. The Company has negotiated monthly payments on this outstanding
balance. The Company is remitting sales taxes on a timely basis on current sales
and is current on all other tax obligations.
Plan of Operations
The Company's apparent improving performance in fiscal 2001 was
subsequently adversely impacted by the general national and regional economic
downturn, and the situation was further aggravated by the terrorist attacks and
threats that began in September 2001. In fiscal 2002, the Company's management
implemented aggressive measures to reduce operating costs, increase service
sales, and other strategies to minimize the impact on revenues as customers and
potential customers took an increasingly conservative position on hardware and
software spending.
The Company, during fiscal 2003 and 2004, has continued to reduce
controllable expenses, reduce its reliance upon low margin hardware sales, and
focused on securing higher margin maintenance contracts, professional service
engagements and third party software license revenues, which have been less
susceptible to adverse economic conditions than the demand for computer
hardware.
In the first six months of fiscal 2004, the Company has continued to effect
a favorable change in its sales mix, increasing sales of higher margin services
and software licenses, while reducing its reliance on hardware sales. For the
period ended September 30, 2003, revenue from sales of services and software
licenses represented 55.3% of total sales, compared to 38.8% of total sales for
the same period of the prior fiscal year, while hardware sales represented 44.7%
of total sales, compared to 61.2% of total sales for the same period of the
prior fiscal year.
In November 2003, our principal lender notified the Company that it was in
default under a $610,000 note, which was due and payable on September 26, 2003,
and in default on a $5,000,000 note due and payable in April 2004. The Company's
obligations to the lender are secured by security interests covering
substantially all of the Company's assets. As of the date of this report, the
Company is in discussion with the lender concerning this situation. The Company
does not have the cash or a source of funds to pay these notes. At this time,
the lender has not taken action to foreclose on its security of to collect the
amounts due under the notes, other than to give notice of the defaults. The
Company intends to continue to discuss the situation with the lender, and the
Company anticipates that it will review any and all alternatives that may be
available to it to resolve the defaults, although the Company at this time lacks
a definitive plan under which it might resolve or remedy the defaults.
15
Recently Issued Accounting Pronouncements
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." SFAS No. 145 rescinded three previously issued statements and
amended SFAS No. 13, "Accounting for Leases." The statement provides reporting
standards for debt extinguishments and provides accounting standards for certain
lease modifications that have economic effects similar to sale-leaseback
transactions. The statement is effective for certain lease transactions
occurring after May 15, 2002 and all other provisions of the statement shall be
effective for financial statements issued on or after May 15, 2002. The
implementation of SFAS No. 145 did not have a material impact on the Company's
consolidated financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which updates accounting and
reporting standards for personnel and operational restructurings. The Company
will be required to adopt SFAS No. 146 for exit, disposal or other restructuring
activities that are initiated after December 31, 2002, with early application
encouraged. The Company does not expect the adoption of SFAS No. 146 to have a
material effect on the Company's consolidated financial position or results of
operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an Amendment to SFAS No. 123." SFAS
No. 148 provides alternative methods of transition for a voluntary change to the
fair value based method on accounting for stock-based employee compensation. The
Company currently does not intend to adopt SFAS No. 123 for stock-based employee
compensation and accordingly does not expect the implementation of SFAS No. 148
to have a material effect on the Company's consolidated financial position or
results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities," to improve accounting for
derivative instruments. SFAS 149 requires that contracts with comparable
characteristics be accounted for similarly. It clarifies when a contract with an
initial net investment should be considered a derivative. Additionally, it
clarifies when a derivative includes a financing component that should be
reported as a financing activity in the statement of cash flows. SFAS No. 149
generally is effective for contracts entered into or modified after June 30,
2003, and for hedging relationships designated after June 30, 2003. The adoption
of SFAS No. 149 did not have a material effect on the Company's consolidated
financial position or results of operations.
In June 2003 the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity" SFAS
No. 150 requires certain instruments, including mandatorily redeemable shares,
to be classified as liabilities, not as part of shareholders' equity or
redeemable equity. For instruments that are entered into or modified after May
31, 2003, SFAS No. 150 is effective immediately upon entering the transaction or
modifying the terms. For other instruments covered by Statement 150 that were
entered into before June 1, 2003, Statement 150 is effective for the first
interim period beginning after June 15, 2003. The Company is evaluating the
provisions of SFAS No. 150. The Company anticipates conversion of all its
redeemable preferred stock into common stock by the end of the second quarter of
fiscal 2004 and, accordingly, does not expect SFAS No. 150 to have a material
effect on the Company's consolidated financial position or results of
operations.
In November 2002, the FASB issued interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees. Including indirect
Guarantees of Indebtedness of Others," which disclosures are effective for
financial statements for periods ending after December 15, 2002. While the
Company has various guarantees included in contracts in the normal course of
business, primarily in the form of indemnities, these guarantees would only
result in immaterial increases in future costs, but do not represent significant
commitments or contingent liabilities of the indebtedness of others.
In January 2003, the FASB issued interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46) which requires the consolidation of
variable interest entities, as defined. FIN 46 is applicable immediately for
variable interest entities created after January 1, 2003. For variable interest
entities created prior to January 1, 2003, the provisions of FIN 46 are
applicable no later than July 1, 2003. The Company does not currently believe
that any material entities will be consolidated as a result of FIN 46.
16
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995
Management's discussion and analysis should be read in conjunction with the
audited Consolidated Financial Statements contained elsewhere in this quarterly
report on Form 10-QSB. Except for the historical information contained herein,
the matters discussed in this report on 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.
Item 3. Controls and Procedures
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our principal
executive officer and principal financial officer, of the effectiveness of the
design and operation of our disclosure controls and procedures. Based on this
evaluation, our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information required to be disclosed in our periodic
reports filed with the Securities and Exchange Commission.
In addition, we evaluated our internal control over financial reporting and
there have been no changes that have materially affected, or are reasonable
likely to materially affect, our internal control over financial reporting.
PART II. Other Information
Item 1. Legal Proceedings
Pace Investment Co., Inc., et al. v. Prologic Management Systems,
Inc., CV 20003999 (previously reported in the Company's reports on
10-QSB):
In the first quarter of fiscal 2004, the parties negotiated a
settlement agreement whereby the Company would issue the plaintiffs
2.63 shares of Prologic common stock for each dollar ($1.00) of money
originally invested by the plaintiffs, reduced by the number of common
shares that have been issued to each current preferred stockholder as
dividends on the preferred stock. The total number of shares of common
stock to be issued to the plaintiffs is 1,197,634 shares. The parties
have agreed to dismiss with prejudice all claims in this case. The
settlement agreement will be effective upon execution by the parties,
after which time the common shares due thereunder will be issued. The
Company expects the settlement agreement to be executed in the fourth
quarter of fiscal 2004. Holders of the Company's Series A, Series B
and Series C Preferred Stock have also agreed to convert their
preferred shares to shares of the Company's common stock utilizing the
same formula as that of the Pace settlement.
AVNET Computer Marketing Group v. Prologic Management Systems, Inc.,
C20032814, Superior Court for the State of Arizona in and for the
County of Pima, filed May 16, 2003. A complaint was filed by AVNET
against Prologic to collect approximately $150,000 AVNET is owed for
product delivered to Solid Systems, Inc. Prologic has answered the
complaint. A trial date of January 23, 2004 has been set for this
matter.
17
Jonathan Neil & Associates, Inc. v. Basis, Inc. RG03-12011011,
Superior Court for the State of California, Alameda County, filed
October 7, 2003. A complaint was filed against Basis, Inc. to collect
approximately $265,000 owed for product delivered to Basis by Pioneer
Standard Electronic, Inc.
Holualoa Butterfield Industrial LLC v. Prologic Management Systems,
Inc., C20035918, Superior Court for the State of Arizona in and for
the County of Pima, filed October 23, 2003. A complaint was filed by
Holualoa against Prologic to collect approximately $194,000 allegedly
owed by Prologic for the lease of office space in Tucson, Arizona.
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:
31.1 Certification of Chief Executive Officer pursuant to Item 601(b)(31) of Regulation S-B. (Filed herewith)
31.2 Certification of Chief Financial Officer pursuant to Item 601(b)(31) of Regulation S-B. (Filed herewith)
32.1 Certification of Chief Executive Officer pursuant to item 601(b)(32) of Regulation S-B. (Filed herewith)
32.2 Certification of Chief Financial Officer pursuant to item 601(b)(32) of Regulation S-B. (Filed herewith)
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PROLOGIC MANAGEMENT SYSTEMS, INC.
DATED: November 19, 2003 By: /s/ John W. Olynick
----------------------------
John W. Olynick
Chief Executive Officer
By: /s/ Edwin G. Hubert
----------------------------
Edwin G. Hubert
Chief Financial Officer