SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
- -------
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from to
Commission File Number: 33-15097-D
AFFILIATED RESOURCES CORPORATION
(Exact name of registrant as specified in its charter)
Colorado 84-1045715
(State or other Jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3050 Post Oak Boulevard
Suite 1080, Houston, Texas 77056
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (713) 355-8940
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 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 No X
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
stock as of the latest practicable date.
Common Stock, $.003 Par Value 16,547,743
(Shares outstanding as of July 16, 1999)
Transitional Small Business Disclosure Format (Check One) Yes No X
1
<PAGE>
AFFILIATED RESOURCES CORPORATION
QUARTERLY REPORT ON FORM 10-QSB FOR THE INTERIM
PERIOD ENDED JUNE 30, 1999
TABLE OF CONTENTS
Page
Number
Part I. Financial Information
Item I. Financial Statements
Balance Sheets at June 30, 1999 and December 31, 1998............. 1
Statements of Operations for the Three Months Ended June 30, 1999
and 1998...........................................................3
Statements of Cash Flows for the Three Months Ended June 30, 1999
and 1998...........................................................4
Notes to Financial Statements.....................................5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................6
Part II. Other Information
Item 1. Legal Proceedings..................................................9
Item 7. Reports on Form 8-K...............................................10
Signatures........................................................10
i
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AFFILIATED RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------------------- ---------------------
(Unaudited)
ASSETS
Current Assets
<S> <C> <C>
Cash and cash equivalents $ 13,503 $ 144,123
Accounts receivable - trade 51,985
Inventory 783,036 966,584
Prepaid expenses 9,518 18,699
-------------------- ---------------------
Total Current Assets 858,042 1,129,406
-------------------- ---------------------
Property and Equipment
Land 41,000 41,000
Buildings 1,068,200 1,064,000
Warehouse equipment 2,432,407 2,450,000
Office equipment and furniture 83,130 76,552
Vehicles 39,784 39,784
Leasehold improvements 9,925 7,277
-------------------- ---------------------
3,674,446 3,678,613
Less: Accumulated depreciation 129,236 5,300
-------------------- ---------------------
3,545,210 3,673,313
Goodwill, net of accumulated amortization of $114,063 and $-0- at
June 30, 1999 and December 31, 1998, respectively 3,307,860 3,421,923
Deposits 3,201 3,201
-------------------- ---------------------
$ 7,714,313 $ 8,227,843
==================== =====================
</TABLE>
See Accompanying Notes to the Financial Statements
1
<PAGE>
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------------------- ---------------------
(Unaudited)
LIABILITIES
Current Liabilities
<S> <C> <C>
Current maturities of long-term debt $ 432,797 $ 236,624
Accounts payable 1,378,541 1,430,057
Accrued expenses 530,455 352,330
Advances payable 23,000 23,000
-------------------- ---------------------
Total Current Liabilities 2,364,793 2,042,011
Long-Term Debt 140,000 141,846
-------------------- ---------------------
2,504,793 2,183,857
-------------------- ---------------------
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock, $1 par value, 10,000,000 shares
authorized, no shares outstanding
Common Stock, $.003 par value, 25,000,000 shares authorized,
16,547,743 and 16,451,743 shares issued and outstanding at June
30, 1999 and December 31, 1998, respectively 49,643 49,355
Additional Paid-In Capital 15,528,192 15,320,480
Accumulated Deficit (8,862,766) (7,630,070)
Unamortized Stock Compensation (1,505,549) (1,695,779)
-------------------- ---------------------
5,209,520 6,043,986
-------------------- ---------------------
$ 7,714,313 $ 8,227,843
==================== =====================
</TABLE>
See accompanying notes to consolidated financial
statements.
2
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AFFILIATED RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the For the
Six Months Six Months
Ended Ended
June 30, June 30,
1999 1998
-------------------- --------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Revenues $ 405,390
Cost of Revenues 446,540
--------------------
Gross Margin (41,150)
Selling, general and administrative expenses 695,760 $ 1,328,117
Depreciation and amortization expenses 237,999
Operating expenses 239,437
-------------------- --------------------
1,173,196 1,328,117
-------------------- --------------------
Loss from Operations (1,214,346) (1,328,117)
Other Income (Expense)
Interest expense (18,350)
Settlement of litigation (86,000)
Debt forgiveness 297,007
Loss on disposal of property and equipment (64,593)
-------------------- --------------------
(18,350) 146,414
-------------------- --------------------
Net Loss $ (1,232,696) $ (1,181,703)
==================== ====================
Net Loss Per Share $ (.07) $ (.08)
===================== ====================
Weighted Average Shares Outstanding 16,499,743 14,668,096
==================== ====================
</TABLE>
See accompanying notes to consolidated financial
statements.
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<PAGE>
AFFILIATED RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the For the
Six Months Six Months
Ended Ended
June 30, June 30,
1999 1998
-------------------- ---------------------
(Unaudited) (Unaudited)
Cash Flows From Operating Activities:
<S> <C> <C>
Net loss $ (1,232,696) $ (1,181,703)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization expense 237,999 6,074
Loss on disposal of assets 64,593
Stock issued for services 313,187
Non-cash compensation expense 190,230 932,320
Debt forgiveness (297,007)
Changes in assets and liabilities:
Accounts receivable (51,985)
Inventory 183,548
Prepaid expenses 9,181 11,045
Accounts payable and accrued liabilities 126,608 143,598
-------------------- ---------------------
Net Cash Used in Operating Activities (537,115) (7,893)
Cash Flows From Investing Activities:
Purchase of equipment (20,302)
Proceeds from sale of equipment 24,469 23
-------------------- ---------------------
Net Cash Provided by Investing Activities 4,167 23
Cash Flows From Financing Activities:
Proceeds from debt 210,000 5,742
Payments of debt (15,672)
Sale of common stock 208,000
-------------------- ---------------------
Net Cash Provided by Financing Activities 402,328 5,742
-------------------- ---------------------
Net Decrease in Cash Equivalents (130,620) (2,128)
Cash and Cash Equivalents at Beginning of Period 144,123 2,583
-------------------- ---------------------
Cash and Cash Equivalents at End of Period $ 13,503 $ 455
==================== =====================
</TABLE>
See accompanying notes to consolidated financial
statements.
4
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AFFILIATED RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
Note 1 - Basis of Presentation
The consolidated financial statements of Affiliated Resources Corporation
(formerly Synaptix Systems Corporation) (the "Company") included herein are
unaudited for all periods ended June 30, 1999 and 1998. They reflect all
adjustments (consisting of normal recurring adjustments) which are, in the
opinion of management, necessary to fairly depict the results for the periods
presented. Certain information and note disclosures, normally included in
financial statements prepared in accordance with generally accepted accounting
principles, have been condensed or omitted pursuant to rules and regulations of
the Securities and Exchange Commission. It is suggested that these financial
statements be read in conjunction with the audited financial statements for the
years ended June 30, 1998 and the six months ended December 31, 1998, which are
included in the Company's annual report. The Company believes that the
disclosures made herein are adequate to make the information presented not
misleading.
Note 2 - Earnings Per Common and Common Equivalent Share
Earnings per common and common equivalent share are based on the average number
of common shares and dilutive common share equivalents outstanding for the six
months ended June 30, 1999 and 1998.
Note 3 - Acquisitions
Effective December 29, 1998, the Company acquired from Evans Systems, Inc., all
of the outstanding stock of ChemWay Systems, Inc., which is engaged in the
business of producing, packaging and marketing automotive after-market chemical
products. The purchase price of $6,000,000 consisted of 1,500,000 shares of
common stock valued at $4 per share. The acquisition has been accounted for as a
purchase, and the operations are included in the accompanying consolidated
financial statements from the date of acquisition.
The Purchase Agreement requires the Company to fulfill certain obligations,
including funding of $1,500,000 to satisfy creditors of ChemWay and providing
working capital for current operations and repayment of a $232,500 note payable
to Chase Bank. The Company has pledged all of the assets of ChemWay Systems,
Inc. to secure the obligations.
Effective July 8, 1998, the Company acquired all of the outstanding stock of
CobolTexas, Inc. in exchange for 641,026 shares of common stock, which is
contractually restricted. The acquisition is accounted for as a pooling of
interests and recorded at the net book value of CobolTexas, Inc. There were no
operations of CobolTexas, Inc. prior to the acquisition. CobolTexas, Inc. is
engaged in the remediation of computer systems involving the year 2000 problems.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The following discussion contains forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and
Section 27A of the Securities Act of 1933, as amended, and is subject to the
safe harbors created by those sections. These forward- looking statements are
subject to significant risks and uncertainties, including those identified in
the section of this Form 10-QSB and in the Company's Annual Report on Form
10-KSB, filed with the SEC on August 9, 1999, which may cause actual results to
differ materially from those discussed in such forward-looking statement. The
forward-looking statements within this Form 10-QSB are identified by words such
as "believes," "anticipates," "expects," "intends," "may" and other similar
expressions. However, these words are not the exclusive means of identifying
such statements. In addition, any statements which refer to expectations,
projections or other characterizations of future events or circumstances are
forward looking statements. The Company undertakes no obligation to publicly
release the results of any revisions, to these forward-looking statements which
may be made to reflect events or circumstances occurring subsequent to the
filing of this Form 10-QSB with the Securities and Exchange Commission. Readers
are urged to carefully review and consider the various disclosures made by the
Company in this report and in the Company's other reports filed with the
Securities and Exchange Commission, including its Form 10-KSB, that attempt to
advise interested parties of the risks and factors that may affect the Company's
business.
Introduction
During the six months ended December 31, 1998, the Company acquired
CobolTexas Inc., in exchange solely for shares of the Company's voting stock,
all of the stock of CobolTexas Inc. CobolTexas owns a software product that uses
on-line technology to solve the Year 2000 technology (Y2K) problems for COBOL
and PL1 software users. CobolTexas is primarily exploring business as a
subcontractor or licensor to software remediation companies. The focus has been
on those companies who are currently negotiating with domestic and international
organizations and governments to enter into contracts for services to be
rendered in connection with solutions to year 2000 problems. Under this
scenario, the CobolTexas email response systems which uses on-line technology to
identify and create year 2000 solutions over the Internet for both Cobol and PL1
software becomes an analysis tool of the remediation company. Although to date
no sales have materialized, management feels that this approach provides the
best alternative for use of the product, while at the same time reducing
potential liability.
On December 30, 1998 the Company acquired all the outstanding stock of
ChemWay Systems, Inc., a corporation that blends and packages chemicals for the
automotive aftermarket. The Company commenced operations of ChemWay on January
7, 1999, and during the first quarter of 1999, ChemWay's facilities became fully
operational with respect to providing customers with a full line of its
products. Additionally, ChemWay is aggressively pursuing new product lines and
marketing alliances to expand to a national market. While this process has been
severely hampered by a lack of adequate working capital, ChemWay has begun to
generate sales and is shipping
6
<PAGE>
product. The Company raised approximately $1,005,000 in private placement during
the fiscal year ended December 31, 1998, $754,385 of which was used to pay
ChemWay debt and other costs assumed pursuant to the Purchase Agreement. The
Purchase Agreement for the acquisition, as amended through the date of this
filing, requires the Company to fulfill certain covenants including, but not
limited to, (i) receiving at least $1,500,000 in additional proceeds from the
sale of Common Stock in a private placement, and (ii) paying the mortgage
indebtedness on the ChemWay's commercial industrial facility described below
(which amounted to $232,500 plus principal and interest at December 31,1998). As
of this filing, the Company had not fulfilled the obligations but believes that
it will be able to fulfill its obligations on a timely basis. Various of the
Company's obligations under the Purchase Agreement are secured by a pledge of
substantially all of the fixed assets of ChemWay.
Management is continuing in its endeavor to identify acquisition
candidates that it believes will be suited to management's business plan to
generate sufficient revenues and provide an asset base for continued growth.
When evaluating acquisitions, the ability to use leverage in order to reduce the
issuance of stock, will be a significant factor, especially in the near term.
Management's business strategy is to focus on the acquisition of those companies
whose product or service is technically innovative or market proven, whose
market penetration can be significantly expanded through enhanced marketing or
additional capitalization, and believes that these acquisitions will generate
sufficient revenues and provide an asset base for continued growth.
Based on management's evaluation of business opportunities and
discussions with investors, it has been decided to focus the Company's expansion
activities on those companies, products or services which are related to or can
make use of ChemWay products or services. This endeavor may involve expanded
retail and promotional opportunities. Management is confident that, based on
current discussions with investors, the new focus of the Company will provide
the basis for sufficient capital for operations and planned acquisitions.
Results of Operations
Analysis of Six Months ended June 30, 1999 Compared to Six Months ended
June 30, 1998
The following discussion is included to describe the Company's
financial position and results of operations for the six months ended June 30,
1999 an 1998, respectively. The financial statements and notes thereto contain
detailed information that should be referred to in conjunction with this
discussion.
Revenues/Cost of Revenues
The Company recorded revenues of $405,390 for the six months ended June
30, 1999, compared with $0 for 1998. Revenues were generated from the sale of
ChemWay products. Cost of Revenues was disproportionately high due to
manufacturing inefficiencies resulting from the start up of operations and lower
than optimal production rates.
7
<PAGE>
General and Administrative Expenses
General and administrative expenses were $695,760 and $1,328,117 for
the six months ended June 30, 1999 and 1998, respectively. The 1998 figure
contains audit adjustments of $821,768 to record options and stock compensation
to former employees during the period 7-1-97 to 12-31-97. When this adjustment
is taken into consideration, the June 30, 1999 expense represents an increase of
$189,411 over the same period in 1998. These increases were mainly attributable
to salaries and compensation paid by stock, as well as professional fees related
primarily to the acquisition of ChemWay and the start up of its operations.
Income Taxes
The Company had no income tax expense. As of June 30, 1999, the Company
had net operating loss carryfowards of approximately $6,400,000. The utilization
of net operating carryforwards will be severely limited as determined pursuant
to applicable provisions of the Internal Revenue Code and U. S. Treasury
regulations thereunder.
Net Loss
The Company had a net loss of $1,232,696 ($.07 per share) for the six
months ended June 30, 1999, compared with a net loss of $1,181,703 ($.08 per
share) for the same period in 198. The net loss for the six months ended June
30, 1999 was attributable to an increase in administrative and operating
expenses. This increase in expenditures was planned under the Company's
operating plan following the acquisition of the ChemWay subsidiary in 1998. The
plan anticipated that ChemWay would require a start up period leading to full
operational capability before revenues would be realized. Also, the plan
anticipates that unit cost of production will decrease as a result of
efficiencies gained through increased production and volume purchase of raw
materials.
Liquidity and Capital Resources
At March 31, 1999, the Company maintained a negative liquidity position
which is evidenced by a current ratio of .36 to 1. Management will continue to
restructure the Company and seek to increase the Company's current ratio and
liquidity, and generate capital which would provide cash flow for future
operations and expansion.
Financial Condition
Based on management's evaluation of business opportunities and
discussions with investors, it has been decided to focus the Company's expansion
activities on those companies, products or services which are related to or can
make use of ChemWay products or services. This endeavor may involve expanded
retail and promotional opportunities. Management is confident that, based on
current discussions with investors and lenders, the new focus of the Company
will provide the basis for sufficient capital for operations and planned
acquisitions. There can be no assurance that the Company will be able to raise
sufficient additional capital to achieve these objectives or meet its working
capital needs.
8
<PAGE>
At June 30, 1999, the Company had a working capital deficiency of
$1,506,751, compared to a working capital deficiency of $804,360 at June 30,
1998. The cash balance at June 30, 1999 was approximately $13,503 and at June
30, 1998 was $455.
Cash used by operations totaled $537,115 (largely attributable to
operating losses at the start up of ChemWay operations) for the six months ended
June 30, 1999, compared to $7,893 for the same period in 1998. Cash provided by
investing activities for the six months ended June 30, 1999 was approximately
$4,167. Cash provided by financing activities during the six months ended June
30, 1999 totaled $402,328, which included the proceeds from the sale of stock.
Depreciation and Amortization Expenses
Depreciation and amortization was $237,999 compared to $0 for the same
period in 1998. This was attributable mainly tot he acquisition of ChemWay and
the start up of its operations.
Operating Expenses
Operating Expenses were $239,437 compared to $0 for the same period in
1998. This was attributable mainly to ChemWay operations.
Loss from Operations
The Company had an operating loss of $1,214,346 for the six months
ended June 30, 1999 and $1,328,117 for the same period in 1998. The loss for the
period ended June 30, 1999 was the result of general and administrative costs as
described above and a significantly higher cost of revenues due to manufacturing
inefficiencies during the start up of operations and the inability to take
advantage of volume discounts on the purchase of raw materials.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, the Company is involved in various legal proceedings
arising in the ordinary course of business. To management's knowledge, the
Company is not currently involved in any legal proceedings and is not aware of
any legal proceeding threatened against it, except for a claim that was made by
an individual that was formerly employed by an unrelated company. The Company
does not believe that this claim has merit.
At the time of the acquisition of ChemWay, a number of vendor claims
had been incurred in the normal course of business. Since the acquisition of
ChemWay, several of the items have been paid and the Company believes that the
final disposition of the items will not have a materially adverse effect upon
the financial statements of the Company.
9
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Item 7. Exhibits and Reports on Form 8-K
A. Exhibits
None.
B. Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
AFFILIATED RESOURCES CORPORATION
Dated: September 29, 1999 By: /s/ Peter C. Vanucci
------------------------------------------
Peter C. Vanucci, Chairman and CEO
10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Affiliated Resources Corporation June 30, 1999 financial statements and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000817125
<NAME> Affiliated Resources Corporation
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-3-1999
<CASH> 13,503
<SECURITIES> 0
<RECEIVABLES> 51,985
<ALLOWANCES> 0
<INVENTORY> 783,036
<CURRENT-ASSETS> 858,042
<PP&E> 3,674,446
<DEPRECIATION> (129,236)
<TOTAL-ASSETS> 7,714,313
<CURRENT-LIABILITIES> 2,364,793
<BONDS> 0
0
0
<COMMON> 49,643
<OTHER-SE> 5,159,877
<TOTAL-LIABILITY-AND-EQUITY> 7,714,313
<SALES> 405,390
<TOTAL-REVENUES> 405,390
<CGS> 446,540
<TOTAL-COSTS> 446,540
<OTHER-EXPENSES> 1,173,196
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,350
<INCOME-PRETAX> (1,232,696)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,232,696)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,232,696)
<EPS-BASIC> (.07)
<EPS-DILUTED> (.07)
</TABLE>
