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 June 30, 2004
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.)
4633 E. Broadway Blvd., #110, Tucson, Arizona 85711
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (520) 955-4748
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, 2004 was 7,275,048.
Transitional Small Business Disclosure Format:
Yes _____; No __X__
Prologic Management Systems, Inc.
Index
Page
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Part I. FINANCIAL INFORMATION 3
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at June 30, 2004
(unaudited) and March 31, 2004 3
Condensed Consolidated Statements of Operations for the
Three Months Ended June 30, 2004 (unaudited) and June 30,
2003 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended June 30, 2004 (unaudited) and June 30,
2003 (unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition 8
Item 3. Controls and Procedures 13
Part II. OTHER INFORMATION 13
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults upon Senior Securities 13
Item 4. Submission of Matters to a Vote by Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Employment Agreement of James M. Heim
SIGNATURES 14
2
PART I. Financial Information
ITEM 1. Condensed Consolidated Financial Statements
PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, March 31,
2004 2004
-------------- --------------
ASSETS (unaudited)
Current assets:
Cash $ 545 $ 1,581
Prepaid expenses 6,318 8,782
-------------- --------------
TOTAL ASSETS $ 6,863 $ 10,363
============== ==============
LIABILITIES, PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 1,659,962 $ 1,632,612
Notes payable 1,131,756 1,131,756
Sales tax payable 375,936 375,936
Accrued expenses 589,987 559,987
Accrued dividends 197,038 178,700
-------------- --------------
Total liabilities 3,954,679 3,878,991
-------------- --------------
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 558,500 558,500
-------------- --------------
727,088 727,088
-------------- --------------
Stockholders' deficit:
Common stock, no par value, 50,000,000 shares
authorized, 7,275,048 shares issued and
outstanding at June 30, 2004 and March 31,
2004 10,205,073 10,205,073
Warrants 970,766 970,766
Accumulated deficit (15,850,743) (15,771,555)
-------------- --------------
Total stockholders' deficit (4,674,904) (4,595,716)
-------------- --------------
-------------- --------------
TOTAL LIABILITIES, PREFERRED STOCK AND
STOCKHOLDERS' DEFICIT $ 6,863 $ 10,363
============== ==============
See accompanying notes to condensed consolidated financial statements.
3
PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
June 30,
--------------------------------
2004 2003
-------------- --------------
(unaudited) (unaudited)
Revenue:
Operating expenses:
General and administrative $ 60,850 $ 38,553
Total operating expenses 60,850 38,553
-------------- --------------
Operating Loss (60,850) (38,553)
-------------- --------------
Other Income (expense):
Interest expense - (144,482)
Other income (expense) - 25
-------------- --------------
Total other expense - (144,457)
-------------- --------------
Loss Before Income Taxes and Discontinued
Operations (60,850) (183,010)
-------------- --------------
Income Tax (Benefit) Provision - -
-------------- --------------
Loss From Continuing Operations (60,850) (183,010)
-------------- --------------
Loss (Income) From Discontinued Operations - (156,160)
-------------- --------------
Net Loss (60,850) (26,850)
Preferred stock dividend (18,338) (18,338)
-------------- --------------
Net Loss available to Common Stockholders $ (79,189) $ (45,188)
============== ==============
Weighted average number of common shares:
Basic and diluted 7,275,048 7,275,048
============== ==============
Loss per common share:
Basic and diluted $ (0.01) $ (0.01)
============== ==============
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 Three Months Ended June 30,
2004 2003
-------------- --------------
(unaudited) (unaudited)
Cash flows from operating activities:
Net loss $ (60,850) $ (26,849)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Issuance of warrants for services - 9,400
Change in assets and liabilities:
Prepaid expenses 2,465 -
Accounts payable 57,350 17,221
-------------- --------------
Net cash provided (used in) by continuing
operations (1,036) (228)
-------------- --------------
Net cash provided (used in) by discontinued
operations - 230,928
-------------- --------------
Net cash provided (used in) by operating
activities (1,036) 230,700
-------------- --------------
Cash flows from investing activities:
Purchase of equipment - -
-------------- --------------
Net cash used in investing activities - -
-------------- --------------
Cash flows from financing activities:
Net change in line of credit - 242,500
Repayment of debt - (657,473)
-------------- --------------
Net cash provided by (used in) financing
activities - (414,973)
-------------- --------------
Net increase (decrease) in cash (1,036 ) (184,273)
Cash, beginning of period 1,581 216,904
-------------- --------------
Cash, end of period $ 545 $ 32,631
============== ==============
Supplemental statement of cash flow
information:
Cash paid during the quarter for interest $ - $ 35,923
Cash paid during the quarter for taxes - -
Non-cash financing and investing activities:
Warrants issued for services performed $ - $ 9,400
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"). 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, 2004. The results of operations
for the three-month periods ended June 30, 2004 and 2003 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 in its Report on Form 10-KSB for the fiscal year ended March 31,
2004, as a result of a foreclosure action, the Company has no business
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, 2004 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. Foreclosure Action.
As previously reported it its Report on Form 10-KSB, On February 24, 2004,
GE Access foreclosed on and took possession of all of the assets of
Prologic Management Systems, Inc. and the Company's BASIS, Inc. subsidiary,
resulting in a consolidated balance sheet on February 29, 2004, showing
zero tangible assets. As part of the foreclosure agreement, GE Access
agreed to waive its deficiency claim against the Company subject to certain
terms and conditions placed on the Company. This included compliance with
the conditions of the foreclosure and representations by the Company as to
asset disclosure. As of the date of this report, the Company believes it is
in compliance with these terms and conditions.
As of the date of this filing, the Company has no operations and no sources
of revenue. The Company does not have any current agreements or plan to
replace the assets or business units taken under the foreclosure action.
Please note that the financial information contained herein is historical
and should be not taken as any indication of any future performance.
3. Creditor Legal Proceedings.
As previously reported in its Report on Form 10-KSB for the year ended
March 31, 2004, the Company is currently engaged with four creditors in
legal proceedings. All of these actions were filed prior to February 24,
2004 foreclosure action (See Part II, Item 1 Legal Proceedings).
4. 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 month periods
ended June 30, 2004 and June 30, 2003, potential common stock, consisting
of stock options, warrants and convertible preferred stock totaling
1,977,111, and 2,537,523, respectively, are excluded from the computation
of diluted earnings per share because they are antidilutive.
6
5. 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.
6. Recently Issued Accounting Pronouncements
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 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 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 has evaluated the provisions of SFAS No. 150.
The redeemable preferred stock does not meet the criteria for
classification as liabilities in accordance with SFAS No. 150. Therefore,
all of preferred stock that was previously presented between liabilities
and equity on the balance sheet remains presented as such. The Company
anticipates conversion of all its redeemable preferred stock into common
stock by the end of the second quarter of fiscal 2005.
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.
7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Statements contained in this Quarterly Report on Form 10-QSB, which are not
purely historical, are "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, Section 21E of the U.S.
Securities Exchange Act of 1934, as amended and the Securities Litigation Reform
Act of 1995, including but not limited to statements regarding the Company's
expectations, hopes, beliefs, intentions or strategies regarding the future.
Action results could differ materially from the projected in any forward-looking
statements as a result of a number of factors, including those detailed in "Risk
Factors" below and elsewhere in this Report on Form 10-QSB. The forward-looking
statements are made of the date hereof, and the Company assumes no obligation to
update the forward-looking statements, or to update the reasons why actual
results could differ materially from those projected in the forward-looking
statements.
INTRODUCTION
Prior to the foreclosure action in February of 2004, the Company provided
systems integration services, technology products and related services. The
majority of the Company's revenues were generated from systems integration and
related product sales. However, as a result of this foreclosure, the Company
ceased to have business operations. For additional information on the combined
operating results of the Company and its subsidiary for the prior fiscal year,
see the Consolidated Financial Statements of the Company and Notes thereto
contain in the Annual Report on Form 10-KSB for the fiscal year ended March 31,
2004. The discussion should be read in conjunction with and is qualified in its
entirety by the Consolidated Financial Statements of the Company and Notes
thereto.
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.
8
CRITICAL ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Prologic and its
subsidiary, BASIS. All significant intercompany accounts and transactions have
been eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and all highly liquid investments
with maturity of three months or less when purchased.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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 revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Fair Value of Financial Instruments
The estimated fair value of financial instruments has been determined by the
Company using available market information and valuation methodologies.
Considerable judgment is required in estimating fair values. Accordingly, the
estimates may not be indicative of the amounts the Company could realize in a
current market exchange.
The carrying amount of accounts payable and accrued expenses approximate fair
value due to the short maturity of these instruments. The terms of notes payable
and other long-term obligations approximate the terms in the marketplace at
which they could be replaced. Therefore, the fair value approximates the
carrying value of these financial instruments.
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.
Income Taxes
The Company accounts for income taxes utilizing the asset and liability
approach, which requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of temporary differences between the
basis of assets and liabilities for financial reporting purposes and tax
purposes. 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. A valuation allowance is
provided when management cannot determine whether or not it is likely that the
net deferred tax asset will be realized.
RESULTS OF OPERATIONS
General and Administrative. General and administrative expenses for the
quarter ended June 30, 2004 were $60,850, as compared to $38,553 for the same
period of the previous year. The increase in these expenses is attributable to
the expenses related to the reorganization efforts for the Company.
9
Operating Income (loss). Operating loss for the quarter ended June 30, 2004
was $60,850, as compared to an operating loss of $38,553 for the same period of
the previous year.
Interest Expense and Other Income. The interest expense and other income
was $144, 457 for the same period of the previous year. Due to the insolvency of
the Company, no interest expense was accrued for the current quarter ended June
30, 2004. Expenses for the prior year is composed primarily of interest incurred
on the approximately $10 million in notes payable and advances payable and other
short-term obligations.
Income (Loss) from Continuing Operations. The loss from continued
operations for the quarter ended June 30, 2004 was $60,850, as compared to
$183,010 for the same period of the prior fiscal year.
Income (Loss) from Discontinued Operations. The operating income from
discontinued operations was $156,100 for the same period of the prior fiscal
year.
Income Taxes. The Company had no income tax expense for the first quarters
of fiscal 2005 and 2004. As of June 30, 2004, the Company had Federal net
operating loss carry forwards of approximately $12,175,000. 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 June 30, 2004 was $60,850, or a
loss of approximately $0.01 per share, compared to a loss of $26,850, or a loss
of approximately $0.004 per share, for the same period of the previous year. The
increase in net loss was due to the foreclosure action and the resultant loss of
income from Discontinued Operations.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2004 the Company had a working capital deficit of approximately
$3,948,000 versus a deficit of approximately $3,869,000 at March 31, 2004. 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 June 30, 2004 was $545.
Cash used by continuing operations for the quarter ended June 30, 2004 was
approximately $1,000 compared to cash used by continuing operations of $250 in
the same period of the previous year. Cash provided by discontinued operations
for the quarter ended June 30, 2003 was approximately $231,000. Total net cash
used in operating activities for the quarter ended June 30, 2004 was
approximately $1,000 compared to cash provided by operating activities of
$231,000 in the same period of the previous year. Cash used in financing
activities for the quarter ended June 30, 2003 was approximately $415,000.
During the three months ended June 30, 2004, the Company did not purchase
any capital equipment or 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.
At June 30, 2004, the Company had current debt obligations, or debt that
will become due within twelve months, of $3,955,000. Of these obligations,
approximately $950,000 are specific obligations of Prologic and the remaining
$3,000,000 are related to the Company's operating subsidiary BASIS, Inc. and its
former operating division Solid Systems. The Company will not be able to service
or repay any of this debt. As a result, the Company will need to renegotiate the
terms of these obligations; conversion to equity; and any other means to
eliminate the debt to allow the Company to attract additional capital. The
Company continues to review its strategic alternatives, including raising
capital through debt or equity financing in conjunction with the conversion of
the existing debt.
10
PLAN OF OPERATIONS
In light of the foreclosure action, the management focus is on trying to
restructure the debt on the balance sheet with the intent of converting a
significant amount of the debt to equity. If this can be accomplished
effectively and in a reasonable period of time, management would then consider
the acquisition or merger with one or more companies, which would be a good
candidate for the public entity. Currently, the board intends to work with
existing shareholders in order to achieve these goals. However, it is likely
that in conjunction with any such suitable acquisition or merger, the Company
would likely need to raise capital to provide the necessary working capital for
the consolidated entity. The Company has no commitments at this time from third
parties for any such financing and/or any acquisitions or mergers.
RISK FACTORS
An investment in the Company should be considered speculative, and to a
high degree of risk. In addition to the other information contained in the
Annual Report on Form 10-KSB for the fiscal year ended March 31, 2004,
prospective investors should carefully consider the following risk and
speculation factors:
Unproven Plan of Operations. As a consequence of the change of control of
the Registrant in March of 2004 and the foreclosure on the business assets and
operations, all efforts that were previously initiated in an attempt to develop
a viable systems integration business have been abandoned at this time. In place
thereof, the Company has adopted as a new plan of operations the strategy of
reorganizing the Company's creditors and then attracting capital based on a new
business operation. To date, the Company has no agreements or plans to acquire
any new business operations. In the near term, the Company is focusing on
continued timely SEC reporting and working with creditors. There can be no
assurance that the intended business and operations of the Company will be
successful. Any future success that the Company might enjoy will depend on many
factors including factors which may be beyond the control of the Company, or
which cannot be predicted at this time. The Company may encounter unforeseen
difficulties or delays in the implementation of its plan of operations. There
can be no assurance that such difficulties or delays will not have a material
adverse effect upon the financial condition, business prospects and operations
of the Company and the value of an investment in the Company. The value of an
investment in the Company can also be adversely affected by a number of external
factors, such as conditions prevailing in the securities markets and/or the
economy generally. Consequently, an investment in the Company is highly
speculative and no assurance can be given that purchasers of the Company's
securities will realize any return on their investment or that purchasers will
not lose their entire investment.
Issuance of Additional Securities. The Company may be required to issue
additional shares of Common Stock to raise capital and/or satisfy existing
creditors. The Company may need to issue additional shares of Common Stock in
connection with a prospective acquisition, in lieu of wages and services
provided to the Company, upon exercise of stock option grants, or for another
corporate purpose. Issuance of additional shares of Common Stock would result in
dilution of the percentage interest in the Company's Common Stock of all
stockholders ratably, and might result in dilution in the book value of a share
of the Company's Common Stock, depending on the price and other terms on which
the additional shares are issued.
Lack of Operating Capital. The Company does not have adequate working
capital to execute it's current short term operating plans and is dependant on
receiving capital and/or assistance from several of the Company's stockholders.
Continued support from the shareholders is critical to the effective
reorganization efforts of the Company and without this support, it is doubtful
the Company would be able to execute its short-term plans.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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.
11
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 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 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 has evaluated the
provisions of SFAS No. 150. The redeemable preferred stock does not meet the
criteria for classification as liabilities in accordance with SFAS No. 150.
Therefore, all of preferred stock that was previously presented between
liabilities and equity on the balance sheet remains presented as such. The
Company anticipates conversion of all its redeemable preferred stock into common
stock by the end of the second quarter of fiscal 2005.
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.
"SAFE HARBOR" Statement under the Private Securities Litigation Reform Act of
1995
Management's discussion and analysis should be read in conjunction with the
Consolidated Financial Statements contained elsewhere in this quarterly report
on Form 10-QSB for the quarter ended June 30, 2004. 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 market conditions, the anticipation of growth of certain market
segments, the volatility inherent in the capital and financial markets, the
Company's ability to manage acquisitions and 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. This is
especially important given the recent foreclosure action and the fact that the
Company has no operations and no sources of revenue. The Company does not have
any current plans or agreements to replace the assets or business units taken
under the foreclosure action. Please note that the financial information
contained herein is historical and should be not taken as any indication of any
future performance.
12
ITEM 3. CONTROLS AND PROCEDURES
Within the 90 days prior to the filing of this report, the Company has
carried out an evaluation, under the supervision and with the participation of
our chief executive officer ("CEO") and chief financial officer ("CFO"), of the
effectiveness of the design and operation of our disclosure controls and
procedures as defined in Rule 15d-14(c) under the Securities and Exchange Act of
1934. Based on this evaluation, our CEO and CFO concluded that our disclosure
controls and procedures are effective to ensure that information required to be
disclosed in our reports that we file with or submit to the Securities and
Exchange Commission ("SEC") is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms.
In addition, we reviewed our internal controls, and there have been no
significant changes in our internal controls or in other factors that could
significantly affect those controls subsequent to the date of the last
evaluation.
PART II. Other Information
Item 1. Legal Proceedings
As previously reported, on August 1, 2000, certain holders of the
Company's Series B Convertible Preferred Stock filed an action in the
Arizona Superior Court, Pima County (Pace Investment Co., Inc., et al.
v. Prologic Management Systems, Inc., CV 20003999). The Company filed
a counterclaim against the Plaintiffs, petitioning the court to,
amongst other things, affirm the Company's position and deny the
Plaintiffs' claims. During the prior fiscal year, the parties agreed
to dismiss all claims without prejudice. The parties intend to resolve
the dispute without the aide of the courts.
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
plaintiff requested from the court an Entry of Default and it was
granted on March 11, 2004 for a total amount of $196,028, which
includes costs and legal fees of $5,898.
Jonathan Neil & Associates, Inc. v. Basis, Inc., RG03-120611, Superior
Court, State of California, Alameda County, filed October 7, 2003. A
complaint was filed by Jonathan Neil & Associates against Basis to
collect approximately $265,000 owed by Basis to Pioneer Standard
Electronics, Inc. On December 8, 2003, the plaintiff requested from
the court an Entry of Default. An Entry of Default was granted on
January 12, 2004 for a total amount of $373,919 which includes
interest of $83,332, plus costs and legal fees of $25,312.
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 19, 2003. A complaint was filed by Avnet
against Prologic to collect approximately $150,000 owed by Prologic to
Avnet. Prologic does not deny this debt and has agreed to a stipulated
judgment for the full debt owed in this matter. An Entry of Default
was granted on January 13, 2004 for a total amount of $150,522, which
includes costs and legal fees of $212.
Nextera Business Performance Group, Inc. v. Prologic Management
Systems, Inc., MICV2003-05209-H, Superior Court, Commonwealth of
Massachusetts, Middlesex County, filed December 23, 2003. A complaint
was filed by Nextera against Prologic to collect approximately $80,000
owed by Prologic under the terms of a promissory note. On April 14,
2004, the plaintiff requested from the court an Entry of Default. An
Entry of Default was granted on May 28, 2004 for a total amount of
$85,340, which includes interest of $17,340.
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
See Notes to Condensed Consolidated Financial Statements - Foreclosure
Action.
13
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)
32.1 Certification of Chief Executive Officer pursuant to Item
601(b)(32) of Regulation S-B. (Filed herewith)
10.18 Employment Agreement of James M. Heim
B. Reports:
On April 1, 2004, the Company filed a Report on Form 8-K, reporting
under Item 1. Changes in Control of Registrant, the March
resignation of three board members and the appointment of three new
board members. The board then elected James M. Heim as President
and Treasurer and elected Martin A. Diamond as Vice President and
Secretary of the Company.
On June 1, 2004, the Company filed a Report on Form 8-K, reporting
under Item 4. Changes in Registrant's Certifying Accountant, the
dismissal of the Company's independent accountants, BDO Siedman,
LLP and the selection of Epstein, Weber & Conover, PLC as
independent accountants for the Company's fiscal year ending March
31, 2004.
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 14, 2004 By: /s/ James M. Heim
-------------------------------
James M. Heim
Chief Executive Officer
14