FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1997
OR
[ ] 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 33-20432
PROFORMIX SYSTEMS, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 75-2228828
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
50 Tannery Road, Branchburg, New Jersey 08876
(Address of Principal Executive Office) (Zip Code)
(908) 534-6400
(Registrant's telephone number including area code)
WHITESTONE INDUSTRIES, INC.
(Former Conformed Name)
July 14, 1997
(Date of Name Change)
Indicate by check mark whether the Registrant (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 [x] No [ ]
The number of shares of Registrant's Common Stock, $0.0001 par value,
outstanding as of September 30, 1997, was 2,800,646 shares.
<PAGE>
PROFORMIX SYSTEMS, INC. AND SUBSIDIARIES
INDEX
Page
Number
------
PART 1 - FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited)
Consolidated Balance Sheet
- September 30, 1997 3
Consolidated Statements of Operations
- Three and nine months ended September 30, 1997 and 1996 4
Consolidated Statements of Cash Flows
- Nine months ended September 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6 - 10
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 11 - 12
PART II - OTHER INFORMATION 13 - 14
SIGNATURES 15
2
<PAGE>
PART I - Item 1
PROFORMIX SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited)
September 30, 1997
------------------
ASSETS
Current Assets
Cash .................................................... $ 18,474
Accounts receivable, net of allowance for
Doubtful accounts of 43,394 ............................. 227,287
Inventories ............................................. 320,039
Prepaid expenses ........................................ 43,428
-----------
Total Current Assets .................................... 609,228
Property, plant and equipment ........................... 708,711
Other assets ............................................ 111,296
-----------
TOTAL ASSETS ............................................... 1,429,235
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable and accrued expenses ................... 1,572,907
Dividends payable ....................................... 24,750
Prepayments received .................................... 335,750
Loans and notes payable ................................. 1,271,579
Current maturities long-term debt ....................... 740,894
Current maturities lease obligations .................... 7,660
-----------
Total Current Liabilities ............................... 3,953,540
Long-term debt, less current portion .................... 1,309,741
Lease obligations, less current portion ................. 26,518
-----------
TOTAL LIABILITIES .......................................... 5,289,799
STOCKHOLDERS' EQUITY
Preferred Stock Ser.A, $0.01 par value,
3,000,000 shares authorized, 0 and
100,000 shares issued and outstanding ................... --
Cumulative Preferred Stock, $0.001 par value,
10 shares issued and outstanding ........................ 0
Common Stock, $0.0001 par value, 30,000,000 shares
authorized, 2,800,646 issued and outstanding ............ 280
Contributed capital ..................................... 222,750
Additional paid-in capital .............................. 1,909,116
Accumulated deficit ..................................... (5,992,710)
-----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) ....................... (3,860,564)
TOTAL LIABILITIES AND EQUITY ............................... $ 1,429,235
===========
See notes to consolidated financial statements
3
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PROFORMIX SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues .......................... $ 744,177 $ 627,531 $ 2,389,763 $ 2,488,161
Cost of Goods Sold ............. 329,697 220,930 1,026,393 854,086
----------- ----------- ----------- -----------
Gross Profit ...................... 414,480 406,601 1,363,370 1,634,075
Selling expenses ............... 251,909 321,374 879,179 1,043,902
General & adminstrative expenses 550,708 319,334 1,226,616 1,152,322
----------- ----------- ----------- -----------
Operating Income (Loss) ........... (388,137) (234,107) (742,425) (562,149)
Miscellaneous income ........... 79,653 0 79,653 0
Interest expense (net) ......... (83,035) (87,191) (252,358) (257,791)
Loss on disposal of assets ..... (31,724) (1,769) (31,724) (1,769)
Amortization debt issue cost ... 0 (39,324) 0 (117,972)
Miscellaneous expenses ......... (15,946) 0 (20,946) 0
Non-Operating Income (Expenses) ... (51,052) (128,284) (225,375) (377,532)
----------- ----------- ----------- -----------
Loss from Continuing Operations ... (439,189) (362,391) (967,800) (939,681)
Loss from Discontinued Operations . 0 (232,055) (12,060) (761,745)
----------- ----------- ----------- -----------
Net Loss .......................... $ (439,189) $ (594,446) $ (978,860) $(1,701,426)
=========== =========== =========== ===========
Loss per Common Share
Continuing operations .......... $ (0.17) $ (0.31) $ (0.52) $ (0.80)
Dicontinued operations ......... 0 (0.20) (0.01) (0.64)
----------- ----------- ----------- -----------
Net Loss per Common Share ......... $ (0.17) $ (0.51) $ (0.53) $ (1.44)
=========== =========== =========== ===========
Weighted Average Number of
Common Shares Outstanding ...... 2,646,561 1,163,108 1,843,129 1,183,748
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
PROFORMIX SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
1997 1996
--------- ---------
Cash Flows from Operating Activities
Net income (loss) ............................... $(967,800) $(939,681)
Adjustments to net income (loss)
Depreciation and Amortisation ................ 76,741 192.927
Loss on disposition of assets ................ 25,341 1,769
Decreases (increases) in Assets
Accounts receivable .......................... 232,249 427,436
Inventories .................................. (52,399) 172,388
Prepaid expenses ............................. 15,513 28,311
Other assets ................................. (156) (423,734)
Increases (decreases) in Liabilities
Accounts payable and accrued expenses ........ (39,738) 371,238
--------- ---------
Net Cash Provided (Used) by Operating Activities ... (710,249) (169,346)
Cash Flows from Investing Activities
Capital expenditures ............................ (49,653) (68,379)
--------- ---------
Net Cash Provided (Used) by Investing Activities ... (49,653) (68,379)
Cash Flows from Investing Activities
Proceeds from loans payable ..................... 51,250 314,730
Proceeds from notes payable ..................... 436,349 0
Proceeds from issue of long-term debt ........... 0 111,007
Repayment of loans ................................. 0 (100,307)
Repayment of notes .............................. (100,000) (12,163)
Repayment of long-term debt ..................... (53,751) (90,000)
Change in subordinated debentures ............... 101,849) (47)
Issuance of common stock ........................ 544,870 0
--------- ---------
Net Cash Provided (Used) by Financing Activities ... 776,869 223,220
Net Cash Flows from Continuing Operations .......... 16,967 (14,505)
Net Cash Flows from Discontinued Operations ........ 0 (1,134)
--------- ---------
Net Increase (Decrease) in Cash .................... 16,967 (15,639)
Cash at Beginning of Period ........................ 1,507 18,934
Cash at End of Period .............................. 18,474 3,295
See notes to consolidated financial statements
5
<PAGE>
PROFORMIX SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(Unaudited)
NOTE 1 - BUSINESS COMBINATION AND PRINCIPLES OF CONSOLIDATION
On July 2, 1997, Whitestone Industries, Inc., incorporated in the State of
Delaware on April 19, 1988, extended an offer to all holders of the common stock
of Proformix, Inc., a company incorporated in the State of Delaware in October
1991, to exchange their shares into newly to be issued common stock of
Whitestone Industries, Inc. at the rate of 3.4676 shares of Proformix common
stock to 1 share of Whitestone common stock, and subsequently changed its name
to Proformix Systems, Inc. ("the Company"), and to holders of Proformix
Cumulative Preferred Stock to exchange their shares into newly to be issued
Cumulative Preferred Stock of Whitestone Industries, Inc. at the rate of 1 to 1.
The exchange transaction when completed will result in the former Proformix,
Inc. shareholders owning approximately 90% of the combined entity. Prior to the
offer, Whitestone Industries had divested itself of all assets and substantially
all liabilities. At the time of this submission, holders of approximately 97% of
Proformix, Inc. common stock have agreed to the stock exchange and tendered
their shares. The business combination which took the form of a reverse
acquisition has been accounted for as a Purchase. Subsequent to the exchange,
the Company and Proformix, Inc. remain as two separate legal entities whereby
Proformix, Inc. operates as a subsidiary of Proformix Systems, Inc., however,
the operations of the newly combined entity are comprised solely of the
operations of Proformix,Inc. The accompanying financial statements include the
accounts of Proformix Systems, Inc. and of Proformix, Inc. and its wholly owned
subsidiary Corporate Ergonomic Solutions, Inc. In the process of compiling the
balance sheet, the amounts for Retained Deficit and Additional Paid-In Capital
lastly shown in the Company's June 30, 1997, 10-QSB report (for Whitestone
Industries, Inc.) were offset to zero. The past results of operations for
Whitestone Industries, Inc. are summarized as Discontinued Operations. All
intercompany accounts and transactions have been eliminated in consolidation.
NOTE 2 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions on Form 10-QSB and, therefore, may not in
all cases include all information and footnotes necessary for a fair
presentation of financial position, results of operations and cash flows in
conformity with generally accepted accounting principles. However, in the
opinion of management, such consolidated financial statements reflect all
adjustments necessary for a fair presentation of the results of operations and
financial position for the interim periods presented. Operating results for the
interim periods are not necessarily indicative of the results that may be
expected for the full fiscal year.
6
<PAGE>
NOTE 3 - EARNINGS (LOSS) PER SHARE
For time periods preceding the July 2, 1997, stock exchange, the per share
information is computed based on the sum of the weighted average numbers of
shares outstanding during the periods for both Whitestone Industries, Inc. and
Proformix, Inc., whereby the Whitestone shares were restated to take into
account a June 1997 reverse stock split and the Proformix, Inc. shares were
restated for the equivalent number of shares of Proformix Systems, Inc. pursuant
to the July 2, 1997, stock exchange offer. After June 30, 1997, the number of
shares represents the shares of the combined entity only.
NOTE 4 - GOING CONCERN UNCERTAINTY
The audited financial statements for the year ended December 31, 1996, for the
Company's subsidiary Proformix, Inc. contain an opinion of the auditors that due
to negative working capital as of December 31, 1996, and negative cash flows
from operations for the year ended December 31, 1996, there exist substantial
doubts about the company's ability to continue as a going concern. During the
first 9 months in 1997, Proformix, Inc. and the Company experienced continued
negative cash flows from operations. The Company's present plans to overcome
these difficulties, for which realization can not be assured, include raising of
$1,000,000 to $1,500,000 in new equity capital in addition to the $515,750
raised through September 30, 1997. In addition, the Company expects to increase
sales from the introduction of new products, hopefully resulting in profits and
positive cash flow sufficient to pay current and future obligations.
NOTE 5 - DETAILS OF ASSETS AND LIABILITIES AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Inventories:
Inventory consists of product components and finished goods which are stated at
the lower of cost (determined by the first-in-first-out method) or market.
Property, Plant and Equipment:
Property, plant and equipment as of September 30, 1996, consist of the
following:
Molds $756,579
Equipment 137,522
Furniture and fixtures 49,436
Leasehold improvements 16,035
--------
959,572
Less accumulated depreciation 250,861
--------
708,711
========
Molds are being depreciated using the units of production method based upon the
estimated useful life of 1,000,000 units. Depreciation on the equipment,
furniture and fixtures, and leasehold improvements is computed on the straight
line method over the estimated useful lives of such assets, between 5 and 10
years.
7
<PAGE>
Prepayments Received:
During the quarter ended September 30, 1997, the Company has offered for sale
shares of its common stock and units comprised of common shares and warrants,
pursuant to exemptions from the registration provisions of the Securities Act of
1933, as amended, (the "Act"). Pending completion of such transactions any funds
received have been accounted for as Prepayments.
Loans and Notes Payable:
During April through June 1995 Proformix, Inc. sold a total of sixteen units
consisting of an aggregate $1,600,000 one-year 12% promissory notes, all of
which remain outstanding as of September 30, 1997, and 160,000 shares of its
common stock (equivalent to 46,141 post-exchange shares of the Company) to
private investors. The notes were subsequently extended and $1,175,000 of such
notes were modified to (i) mature by April 30, 2000, (ii) change from 12% to 8%,
(iii) convert all interest accrued until April 30, 1997 into shares of common
stock of Proformix, Inc., and (iv) paying future interest in cash on a quarterly
basis. The remaining $425,000 of such notes are shown in current liabilities.
On March 4, 1996, Proformix, Inc. secured a line-of-credit facility from a local
bank, guaranteed by the Company's President and which is cross-collateralized
with the below mentioned $1,000,000 long-term debt, under which it borrowed
$250,000 which were to be repaid within 12 months but remain outstanding as of
September 30, 1997. In May 1997 Proformix, Inc. obtained an extension, through
September 30, 1997, and is currently negotiating with the bank for a further
extension of the maturity of this loan. A verbal moratorium of principal has
been agreed to by the company and the bank pending a review of the Company's
future ability to pay.
On April 17, 1997, Proformix, Inc. issued a $318,849 one-year 5% promissory note
to a private investor in exchange for retiring other promissory notes and the
repayment of a past-due subordinated debenture, with the face value of all such
obligations to third parties equaling the 5% note to that investor.
In addition, Proformix, Inc. has borrowed funds under short term loan agreements
under the following terms and conditions:
Pursuant to six promissory notes signed throughout 1996, several investors
advanced the company a total of $145,000 payable upon demand with interest at
12% per annum.
Pursuant to a promissory note dated September 5, 1996, an investor advanced
Proformix, Inc. $20,000 accruing interest at the rate of 10% per annum with the
outstanding principal balance and interest due and payable upon the date of the
earliest occurrence of any one of the following events. (1) the closing of any
financing or refinancing of the Company's debt, (2) the closing of any sale by
Proformix, Inc. of any of its equity or debt, (3) the closing of any sale by
Proformix, Inc. of any of its assets or (4) January 2, 1997. The note was paid
in full on April 18, 1997.
On December 4, 1996, Proformix, Inc. repurchased 500,000 shares of its common
stock and retired same against issuance of a promissory note maturing twelve
months thereafter and accruing interest at 5% per annum and due December 4,
1997.
Pursuant to a promissory note dated January 22, 1996, the Company's president
advanced the sum of $64,730 which is due upon demand and accruing interest at
the rate of 12% per annum.
Long-Term Debt:
Long-term liabilities include $1,175,000 of 8% promissory notes as described
above.
Pursuant to a promissory note signed on July 28, 1993, Proformix, Inc. borrowed
a total of $1,000,000 with interest at 2% above the lending institutions' prime
lending rate. Principal
8
<PAGE>
payments on such note commenced on July 31, 1994. Such note matured on June 30,
1997 and is secured by a first security interest in all tangible and intangible
assets of Proformix, Inc. Payments of all principal, interest, and other related
expenses have been guaranteed by the Company's President who further
collateralized these obligations with a $300,000 certificate of deposit and his
100% interest in his equity in the Company. In addition, the loan is guaranteed
by the New Jersey Economic Development Authority (NJEDA) which will assume an
amount equal to seventy-five percent of the then outstanding principal amount
upon an event of default. The note was originally payable in thirty-six (36)
consecutive monthly installments of $27,778. On September 26, 1994, Proformix,
Inc. negotiated a nine month principal moratorium on such note effective with
the principal payment that was due and not made on July 31, 1994. The principal
payments deferred pursuant to the moratorium amounted to $250,002 and were due
June 30, 1997. As of December 31, 1995, Proformix, Inc. was not in compliance
with certain covenants related to the loan agreement with the lender. As a
result, Proformix, Inc. requested and obtained a waiver from the lender from
June 30, 1994 through December 30, 1995.
On March 4, 1996, Proformix, Inc. refinanced its long-term debt. The balance
remaining is payable with fixed principal payments of $15,000 plus interest at
Wall Street Journal prime plus 2%. Payments of all principal, interest and other
related expenses have been guaranteed by the Company's President who is further
required to collateralize this obligation with $225,000 consisting of marketable
securities and/or certificates of deposit. In addition, the loan is guaranteed
by the NJEDA which will assume an amount equal to seventy-five percent of the
then outstanding principal amount upon an event of default. In February 1997,
Proformix, Inc. requested and obtained a 3 months' waiver on principal payments.
In May 1997, Proformix, Inc. requested another 3 months' deferment for principal
payments on which it obtained approval, subject to repayment of the remaining
principal at the earlier of (a) the receipt by Proformix, Inc. of new equity in
an amount no less than $1,500,000 or (b) June 30, 1998. Proformix, Inc., has
resumed principal payments in September, 1997. The balance remaining on
September 30, 1997, is $708,888.
In May, 1997, Proformix, Inc. settled litigation with a former associate of the
Company by agreeing to a $75,000 settlement, of which $55,739 is outstanding as
of September 30, 1997, payable in monthly installments of $2,917.
NOTE 6 - DISCONTINUED OPERATIONS
On June 16, 1997, Royal Capital, Inc. ("Royal") entered into an agreement with
the Company and its then president, Donald R. Yu, whereby Royal (i) acquired
100,000 shares of the Company's preferred stock held by Mr. Yu, and (ii)
acquired the voting proxy of 1,120,000 (pre-split) shares of common stock. The
consideration paid to Mr. Yu was $100,000. As a result, Royal obtained a voting
majority of the Company's capital stock. On June 24, 1997, the Company, Royal,
and Proformix, Inc. entered into an acquisition agreement whereby the Company
acquired all or substantially all of the outstanding shares of capital stock of
Proformix, and changed its name to Proformix Systems, Inc. In order to enter
into the aforesaid agreement, the Company's then Board of Directors authorized a
137 : 1 reverse split of its outstanding shares of common stock, and spin off of
the shares of its wholly owned subsidiary Golden Bear Entertainment Corporation
to its then current shareholders in form of a stock dividend. This distribution
effectively eliminated all assets and liabilities from the books of the Company.
The accompanying financial statements classify the results of all operations of
Whitestone Industries, Inc. prior to the acquisition, as discontinued
operations.
9
<PAGE>
NOTE 7 - MATERIAL EVENTS
On May 12, 1997, the Company's subsidiary Proformix, Inc. entered into a
financial and marketing consulting agreement with Royal Capital, Inc. ("Royal"),
whereby Royal would act as a consultant to the company, seeking to attract new
equity capital totaling between $1,500,000 and $2,000,000 on a best efforts
basis to provide working capital, fund further product development and marketing
efforts, and finance the expected growth in business. These efforts have to-date
resulted in the receipt by the Company of $200,000 in equity, and another
$505,750 in equity-designated funds (see Notes to Consolidated Financial
Statements).
Royal agreed to provide the services of its Chairman and President in order to
more closely work with Proformix' management in achieving the critical and
strategic objectives of the Company. For the most part, such services are to the
exclusion of any other ergonomic company engaged in the business in which
Proformix is currently engaged, and shall continue until the earlier of
Proformix receiving not less than $2.0 million or such other amounts as both
Royal and Proformix shall agree upon in writing, or for a period of three (3)
years.
Royal and Proformix recognized that the success and future of Proformix are
dependent upon Proformix obtaining sufficient capital over a relatively short
time period in order to maintain continuing operations and build ongoing revenue
from a revamped sales organization. Royal and Proformix also acknowledged that
Proformix did not have the capital resources to recruit and provide current cash
compensation to experienced and proven executive personnel such as Royal's
Chairman and President. Thus, given these issues and circumstances, both Royal
and Proformix agreed that Royal will provide the services as outlined above
based on Royal's ability to work with Proformix towards increasing the value of
the Company to its shareholders. In consideration of such services Royal was
awarded a stock grant of 2.9 million shares (pre-split, equal to 836,313
post-split shares) of the common stock of Proformix, Inc. In addition, Royal was
granted options to purchase common shares of the Company or of any succeeding or
acquiring entity..
On May 8, 1997, the Company's subsidiary Proformix, Inc. entered into an
agreement with Schweiger & Associates, a management consulting company, whereby
that firm's principal, Anthony W. Schweiger ("Schweiger"), would act as interim
operations consultant for the purpose of (i) effecting a restructuring of
Proformix' operations towards improved profitability, and (ii) changing its
capital structure in order to diminish the threat of immediate insolvency. In
consideration of such services, Schweiger was awarded a stock grant of 700,000
shares (pre-split, equal to 201,869 post-split shares) of the common stock of
Proformix, Inc., and is receiving monthly fee payments.
On August 29, 1997, the Company signed a letter of intent to acquire Cornell
Ergonomics, a software developer of a unique ergonomic assessment tool based on
the "Rapid Upper Limb Assessment" (RULA) methodology. Pursuant to that
understanding as subsequently revised, Proformix will obtain an exclusive
license from Cornell Ergonomics to the software and will have the option to
acquire the licensor at a later time.
On September 10, 1997, the Company signed a letter of intent to acquire
Magnitude LLP of Chester, New Jersey, a software developer specializing in
ergonomic monitoring and alarm software which will be marketed in conjunction
with Proformix' patented keyboarding systems, subject to negotiation and
execution of a final agreement.
10
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Business Acquisition
On July 2, 1997, the Company extended an offer to all shareholders of Proformix,
Inc. for an exchange of their common shares into newly to be issued common
shares of the Company at the rate of 3.4676 to 1. At September 30, 1997,
approximately 97% of the outstanding stock of Proformix, Inc. has been
exchanged.
Proformix, Inc., a privately held company, was founded in October 1991 and
incorporated in the State of Delaware. The Company is engaged in the design,
manufacture, and marketing of research based ergonomic accessories for the
computerized workplace. Its primary product is a patented keyboarding system
which independent research has confirmed eliminates the incidence of repetitive
trauma injuries believed to be associated with computer use. To fund the further
expansion of product design and marketing activities Proformix in May 1996 filed
for an Initial Public Offering which however did not come to fruition due to the
business failure of its designated underwriter.
In late 1996 the Company introduced the second generation of its keyboard tray.
The IntelliTray(TM) incorporates a state-of-the-art pointing device in an
ergonomically optimal position. The GlidePoint(TM) technology employed herein is
provided by Cirque Corporation, which has worked with Proformix to mesh the
respective products. GlidePoint(TM) obviates the need for a mouse or other
pointing device in a cost-effective and technologically superior manner.
Coinciding with the evolution of the company's keyboarding system and in the
aftermath of recent widely publicized litigation for injuries suffered from
extended computer use, is an awakening in the marketplace to the issues
associated with repetitive trauma injuries and the benefits, both in terms of
employee productivity and liability avoidance, which are offered by sound
ergonomic planning and products such as those made by Proformix. A substantially
enhanced version of the GlidePoint(TM) technology was released to the Company by
Cirque late in the third quarter. The Company expects to release this
enhancement to its customers sometime in the fourth quarter of 1997.
Simultaneously with the stock exchange offer, the former management and Board of
Directors of the Company resigned, and the members of the executive management
of Proformix, Inc. assumed their respective functions as executive management of
the Company. Simultaneously, a new Board of Directors was appointed which will
serve until the next annual meeting of the shareholders of the Company.
Results of Operations:
Prior to the acquisition of Proformix, Inc. in July 1997 the Company had not
realized any sales revenues this year. Thus, the accompanying statements of
operations for 1997 reflect only the operations of Proformix, Inc.
11
<PAGE>
Revenues during the quarter and the nine months period ended September 30, 1997,
totaled $744,177 and $2,389,763 respectively, as compared to $627,531 and
$2,488,161 for the same periods a year ago. Decreases in selling expenses of
between 15 and 20% for the quarter and the nine months period compared to last
year, which were attributable to cost savings measures particularly in the sales
promotion area, were largely offset by increases in general and administrative
expenses. These increases have predominantly non-recurring character and are
associated with the restructuring and repositioning of the Company's operations.
The operating results for the quarter and for the nine months period ended
September 30, 1997, are losses of $388,137 and $742,425 respectively, compared
to losses of $234,107 and $562,149 for the same periods a year ago. The net loss
for the quarter was $439,189 and for the nine months period was $978,860, which
compares with a net loss of $594,446 for the same quarter a year ago and with a
loss of $1,701,426 for the nine months ended September 30, 1996. Last year's
figures include losses from discontinued operations, in the amount of $232,055
and $761,745 for the quarter and the nine months, respectively.
The Company is currently introducing to the market its new ErgoRanger(TM) line
of keyboarding systems which has already received encouraging responses from
existing and potential new customers. At the same time the Company is well
underway in a process of reorganizing its sales force, and changing its primary
marketing focus towards medium to large national companies which are believed to
be more cognizant of the increasing health risks to office personnel, and of the
potential financial liabilities to their companies, associated with repetitive
stress injuries arising out of the use of computers. These efforts take place in
the face of a continuing liquidity constraint. While the lack of working capital
is slowing the Company's ability to restructure its operations towards renewed
growth and profitability, Management expects a positive growth trend to take
hold in the next two quarters.
Liquidity and Capital Resources
During the last quarter the Company has received a total of $515,750 in new
equity funding. At October 10, 1997, an additional $190,000 in funding has been
received.
Despite this cash infusion the Company's working capital deficit remains in
excess of $3 million, primarily as a consequence of cash losses from operating
activities which resulted from lower than expected sales caused by delays in the
introduction of the new products due to the shortage of funds. Cash consumed by
operations during 1997 amounted to $710,249, compared to $169,346 during the
same period last year. The cash outflow was largely financed by issuance of
common stock and by short term borrowings, the latter contributing to the
working capital deficit.
At September 30, 1997, the Company's short term liabilities exceed its current
assets by $3,344,312 . A large portion of accounts payable and accrued expenses
are either overdue or otherwise beyond original terms. The Company has
negotiated extended payment terms with key suppliers, and entered into several
pay-out agreements with other creditors. A formal extension of its revolving
credit with its primary lending bank, however, has not yet been obtained, and
most of its promissory notes and other obligations are to be repaid within
relatively short time periods of less than twelve months. Management expects to
obtain additional liquidity by continuing to pursue additional outside funding,
and to realize positive cash flow from increased revenues during the upcoming
quarters, so as to be able to meet its maturing obligations in a timely fashion.
12
<PAGE>
PART II - OTHER INFORMATION
Item 1 LEGAL PROCEEDINGS
(a) In October 1996, the Company entered into an agreement with a Latvian
company to obtain certain financing. The Latvian company agreed to buy equity in
the Company and to provide loan financing, against transfer of 2,183,750 shares
(pre-split, equal to 15,940 post-split shares). Subsequent to the issue and
transfer of these shares the Company learned that the agreed to funding was not
provided. In February 1997 the Company filed lawsuit challenging the Latvian's
company entitlement to the 2,183,750 shares transferred. Since then, transfer of
these shares has been enjoined by the United States District Court for the
Northern District of California pending resolution.
(b) In June 1997, The Company was named, among other parties, in a lawsuit
by a shareholder. The Company believes it has jurisdictional defenses in this
matter, and does not believe that any loss would be material.
(c) In November 1996, Proformix, Inc. became the subject of two lawsuits
instituted by a shareholder. One suit asserts that the shareholder had a
consulting agreement with the Company pursuant to which the Company had agreed
to pay $125,000 a year for five years and that the Company has defaulted in
performance of its obligations under that agreement. The Company never signed
such an agreement. The Company denies any obligation and is vigorously defending
this litigation. The shareholder has also started suit along with other members
of his family alleging that he has been damaged because the Company acted
against the best interest of its stockholders. The claimants have not provided
any details in support of these allegations, nor specified the claimed amount of
damages. The Company denies in engaging in any activity contrary to the best
interests of its shareholders, including the claimants.
Item 2 CHANGES IN SECURITIES
On July 15, 1997, the Company effected a reverse split of its outstanding
Common Stock in the ratio 137 : 1 and changed its name to Proformix Systems,
Inc. The reverse split has no effect on the par value or authorized number of
shares of Common Stock. The Company effected this reverse split and name change
in connection with the acquisition of Proformix, Inc. through an exchange of
common stock at the ratio of one share of Common Stock for every 3.4676 shares
of Proformix, Inc. common stock.
In July 1997, the Company issued 173,600 unregistered shares of its Common
Stock to designees of Royal Capital, Inc. against a grant of 313,597 shares to
Royal for services rendered, pursuant to a resolution of the Company's Board of
Directors of June 16, 1997.
Between July and September 1997, the Company issued an aggregate of
1,143,562 unregistered shares of its Common Stock to holders of common stock of
Proformix, Inc. pursuant to a stock exchange offer extended by the Company on
July 2, 1997.
13
<PAGE>
Between July and October 1997, the Company issued 345,000 unregistered
shares of its Common Stock to designees of Royal Capital, Inc. against a grant
of 836,313 shares to Royal pursuant to a consulting agreement of May 8, 1997.
In September 1997 the Company issued 179,600 unregistered shares of its
Common Stock to designees of Royal Capital, Inc. against an equity investment of
$200,000 made by Royal in May, 1997.
In September 1997 the Company issued 1,869 unregistered shares of its
Common Stock to A.W. Schweiger for services rendered.
Item 3 DEFAULTS ON SENIOR SECURITIES - None
Item 4 SUBMISSION OF MATTERS TO A VOTE OF
SECURITIES' HOLDERS - None
Item 5 OTHER INFORMATION - None
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
Form 8-K filed on July 17, 1997
Form 8-K filed on July 31, 1997
Information Statement filed on Form 14-C on July 1, 1997
14
<PAGE>
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, thereunto duly authorized.
PROFORMIX SYSTEMS, INC.
Date: November 14, 1997 By: /s/ Michael G. Martin
-------------------------------------
Michael G. Martin
President and Chief Executive Officer
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