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 March 31, 1998
OR
[ ]TRANSITION REPORT PURSUANT O 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)
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 March 31, 1998, was 3,824,965 shares.
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PROFORMIX SYSTEMS, INC. AND SUBSIDIARIES
INDEX
Page
Number
------
PART 1 - FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited)
Consolidated Balance Sheet
- March 31, 1998 3
Consolidated Statements of Operations
- Three months ended March 31, 1998 and 1997 4
Consolidated Statements of Cash Flows
- Three months ended March 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6-12
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
PART II - OTHER INFORMATION 14-15
SIGNATURES 16
FINANCIAL DATA SCHEDULE 17
2
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PART I - Item 1
PROFORMIX SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited)
March 31, 1998
--------------
ASSETS
Current Assets
Cash ..................................................... $ 5,246
Accounts receivable, net of allowance for
doubtful accounts of 27,038 .............................. 734,923
Inventories .............................................. 216,641
Prepaid expenses .............................................. 826,357
-----------
Total Current Assets .................................. 1,783,167
Property, plant and equipment ............................ 470,217
Acquired software assets ................................. 1,133,567
Other assets ............................................. 99,698
-----------
TOTAL ASSETS .................................................. $ 3,486,649
===========
LIABILITIES AND STOCKHOLDERs' EQUITY
LIABILITIES
Accounts payable and accrued expenses .................... $ 1,414,181
Dividends payable ........................................ 29,250
Prepayments received ..................................... 100,000
Loans and notes payable .................................. 1,521,579
Current maturities long-term debt ........................ 394,081
Current maturities lease obligations ..................... 8,589
-----------
Total Current Liabilities ............................. 3,467,680
Long-term debt, less current portion ..................... 1,643,210
Lease obligations, less current portion .................. 17,975
-----------
TOTAL LIABILITIES ............................................. 5,128,865
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, 3,824,965 issued and outstanding ............. 383
Contributed capital ...................................... 263,250
Additional paid-in capital ............................... 4,979,543
Accumulated deficit ...................................... (6,885,392)
-----------
TOTAL STOCKHOLDERs' EQUITY (DEFICIT) .......................... (1,642,216)
-----------
TOTAL LIABILITIES AND EQUITY .................................. $ 3,486,649
===========
See notes to consolidated financial statements
3
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PROFORMIX SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
---------------------------
1998 1997
---- ----
Revenues ..................................... $ 1,012,418 $ 582,263
Cost of Goods Sold ...................... 491,737 263,940
----------- -----------
Gross Profit ................................. 520,681 318,323
Selling expenses ........................ 299,197 284,654
General & administrative expenses ....... 448,503 349,779
----------- -----------
Operating Income (Loss) ...................... (227,019) (316,110)
Miscellaneous income .................... 0 0
Interest expense (net) .................. (80,717) (87,192)
Miscellaneous expenses .................. 0 0
----------- -----------
Non-Operating Income (Expenses) .............. (80,717) (87,192)
----------- -----------
Net Loss ..................................... $ (307,736) $ (403,302)
=========== ===========
Loss per Common Share ........................ $ (0.09) $ (0.37)
=========== ===========
Weighted Average Number of
Common Shares Outstanding ............... 3,361,736 1,086,530
See notes to consolidated financial statements
4
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PROFORMIX SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
1998 1997
---- ----
Cash Flows from Operating Activities
Net income (loss) ......................... $ (307,736) $ (403,302)
Adjustments to net income (loss)
Depreciation and Amortization .......... 50,889 24.784
Decreases (increases) in Assets
Accounts receivable .................... (420,431) 254,903
Inventories ............................ 39,860 7,135
Prepaid advertising .................... (750,000) 0
Prepaid expenses ....................... (28,753) 17,022
Other assets ........................... 0 472
Increases (decreases) in Liabilities
Accounts payable and accrued expenses .. 5,605 127,361
----------- -----------
Net Cash Provided (Used) by Operating Activities (1,410,566) 28,375
Cash Flows from Investing Activities
Rolina acquisition ........................ (1,152,780) 0
Capital expenditures ...................... (72,484) (7,593)
----------- -----------
Net Cash Provided (Used) by Investing Activities (1,225,264) (7,593)
Cash Flows from Financing Activities
Proceeds from notes payable ............... 225,000 0
Conversion of equity subscriptions ........ (175,000) 0
Repayment of notes ........................ (20,000) (5,000)
Repayment of long-term debt ............... (58,250) (15,000)
Issuance of common stock .................. 2,664,780 0
----------- -----------
Net Cash Provided (Used) by Financing Activities 2,636,530 (20,000)
Net Increase (Decrease) in Cash ................ 700 782
Cash at Beginning of Period .................... 4,546 1,507
----------- -----------
Cash at End of Period .......................... $ 5,246 $ 2,289
=========== ===========
See notes to consolidated financial statements
5
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PROFORMIX SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
BACKGROUND
Proformix Systems, Inc. (the "Company" or "Proformix") was incorporated as a
Delaware corporation on April 19, 1988 under the name "Fortunistics, Inc.",
subsequently changed to "Whitestone Industries, Inc." ("Whitestone").
On July 2, 1997, the Company submitted a stock exchange offer to the
shareholders of Proformix, Inc., a Delaware corporation. Prior to this stock
exchange, the Company spun off the shares of its wholly owned subsidiary
Golden Bear Entertainment Corporation to its then current shareholders in
the form of a stock dividend. This distribution effectively eliminated all
assets and liabilities from the books of the Company prior to the
acquisition of Proformix, Inc.
The exchange offer to the Proformix, Inc. shareholders called for the
exchange of the common stock in Proformix, Inc. into newly to be issued
common stock of Whitestone at the rate of 3.4676 shares of Proformix, Inc.
common stock to 1 share of Whitestone common stock, and to holders of
Proformix Cumulative Preferred Stock, to exchange their shares into newly to
be issued Cumulative Preferred Stock of Whitestone at the rate of 1 to 1.
Holders of approximately 97% of Proformix, Inc. common stock have agreed to
the stock exchange and tendered their common shares in exchange for
Whitestone common shares. The remaining 3% of Proformix, Inc. stockholders
hold a minority interest which is valued at $0.
For accounting purposes, the acquisition has been treated as an acquisition
of Whitestone by Proformix, Inc. and a recapitalization of Proformix, Inc.
The historical financial statements prior to July 2, 1997 are those of
Proformix, Inc. Proforma information is not presented since the combination
is considered a recapitalization. Subsequent to the exchange, the Company
and Proformix, Inc. remain as two separate legal entities whereby Proformix,
Inc. operates as a subsidiary of the Company, however, the operations of the
newly combined entity are currently comprised solely of the operations of
Proformix, Inc.
Concurrent with the stock exchange offer, the Company changed its name to
Proformix Systems, Inc. Proformix designs, manufactures, markets and
distributes ergonomically designed computer keyboard trays, peripheral items
and accessories (together, a "Keyboarding System") designed to alleviate and
prevent certain health problems believed to be related to the use of
computers. Proformix also markets a unique proprietary software suite under
the name EMS(TM) which represents a comprehensive ergonomic-based
productivity solution developed to train people working on computers,
monitor computer-use related activities and evaluate a user's risk exposure
and propensity towards injury or loss of effectiveness in connection with
his/her day-to-day work.
Proformix Inc.'s wholly owned subsidiary, Corporate Ergonomic Solutions,
Inc. ("Ergonomics") was incorporated in the State of New Jersey during
October 1992. Ergonomics, which commenced operations in September 1997, was
formed primarily to market Proformix's products. Prior to that, its
operations had not been significant.
6
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Proformix Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Proformix
Systems, Inc. and its subsidiaries, Proformix, Inc. and Corporate Ergonomic
Solutions, Inc. All significant intercompany balances and transactions have
been eliminated.
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.
Depreciation and Amortization
Property, plant and equipment are recorded at cost. Certain molds were being
depreciated using the units of production method based upon an estimated
useful life of 300,000 units. Depreciation on equipment, furniture and
fixtures and leasehold improvements is computed on the straight line method
over the estimated useful lives of such assets between 5-10 years.
Maintenance and repairs are charged to operations as incurred.
System design costs are amortized on a straight-line basis over an estimated
useful life of 10 years. Organization costs and deferred finance charges are
amortized using the straight line method over a period of 4-5 years.
Capitalized software assets are depreciated on a straight-line basis over an
estimated useful life of 10 years (see "Acquisition of Rolina Corporation").
Securities Issued for Services
The Company accounts for stock options issued for services by reference to
the fair market value of the Company's stock on the date of stock issuance
or option grant. Compensation expense is recorded for the fair market value
of the stock issued, or in the case of options, for the difference between
the stock's fair market value on the date of grant and the option exercise
price.
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standard (SFAS) No. 123, "Accounting for Stock-based
Compensation". The statement generally suggests, but does not require,
employee stock-based compensation transactions be accounted for based on the
fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable. As permitted by
the statement, the Company has elected to continue to follow the
requirements of Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", which does not require compensation to be
recorded if the consideration to be received is at least equal to the fair
value at the measurement date. The adoption of SFAS No. 123 does not have a
material impact on the financial statements.
Income Taxes
The Company provides for income taxes based on enacted tax law and statutory
tax rates at which items of income and expenses are expected to be settled
in the Company's income tax return. Certain items of revenue and expense are
reported for Federal income tax purposes in different periods than for
financial reporting purposes, thereby resulting in deferred income taxes.
Deferred taxes are also recognized for operating losses that are available
to offset future
7
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Proformix Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized. The
Company has incurred net operating losses for financial-reporting and
tax-reporting purposes. The benefit for income taxes has been offset
entirely by a valuation allowance against the related deferred tax asset.
Net Loss Per Share
Net loss per share, in accordance with the provisions of Financial
Accounting Standards Board No. 128, "Earnings Per Share", is computed by
dividing net loss by the weighted average number of shares of Common Stock
outstanding during the period. Common Stock equivalents have not been
included in this computation since the effect would be anti-dilutive.
Revenue Recognition
Revenue from product sales is recognized at the time of shipment provided
that the resulting receivable is deemed probable of collection.
ACQUISITION OF ROLINA CORPORATION
On February 2, 1998, Proformix Software, Inc., Proformix Systems, Inc.,
Rolina Corporation (a New Jersey corporation), and its sole shareholder
entered into an Agreement and Plan of Merger whereby Proformix Systems, Inc.
acquired 100% of the outstanding stock of Rolina and merged Rolina into
Proformix Software, Inc. The only material asset of Rolina were rights to
certain ergonomic software packages known as "ErgoSentry" and "Surveyor",
and associated customer lists. These assets were capitalized at a value
equal to the amounts paid in cash and notes - together $375,000 - plus the
fair market value at the time of the transaction of 155,556 new and
restricted shares of the common stock of the Company issued to the former
Rolina principal, for a total amount of $1,152,780. While management
believes this amount to be fair value for the assets thus acquired, it will
move to obtain an independent appraisal of the value of such assets. Should
this appraisal result in an assessment lower than the currently capitalized
value, a portion thereof will be reclassified in the books of the Company as
goodwill.
In addition, the Company issued to Rolina's sole shareholder common stock
purchase options for the purchase of an aggregate 250,000 shares at prices
ranging from $4.04 to $5.00, and also entered into an agreement to
repurchase, under certain circumstances, the 155,556 shares mentioned first
above, or portions thereof (see "Commitments and Contingencies").
PREPAID EXPENSES
Prepaid expenses include a position of $750,000 resulting from an agreement
in February 1998 with BNN Business News Network Inc., a nationwide media
advertising and radio network company, whereby the Company purchased
advertising time on the Business News Network's broadcasts, usable over a
period of three years and aggregating $900,000 in retail value, against
issuance of 150,000 new and restricted common shares. The services purchased
were capitalized at the fair market value of the stock issued, for a total
of $750,000. The resulting asset will be amortized as utilized, over the
timeframe of next three years.
8
<PAGE>
Proformix Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
LOANS AND NOTES PAYABLE
Proformix, Inc. had borrowings under short term loan agreements with the
following terms and conditions at March 31, 1998:
On April 17, 1997, Proformix, Inc. issued a $316,849 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% $ 316,849 note to
that investor. $ 316,849
Pursuant to five promissory notes signed throughout 1995 and
1996, several investors advanced Proformix, Inc. a total of
$190,000 payable upon demand with interest at 12% per annum. 125,000
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 accruing
interest at 5% per annum and due December 4, 1997. This note is
overdue at December 31, 1997 and no demand for payment has been
made through May 14, 1998. 75,000
Pursuant to a promissory note dated January 22, 1996, an
officer of the Company advanced $64,730, of which $10,000 has
been repaid as per March 31, 1998. The sum of $54,730 is due
upon demand and accruing interest at the rate of 12% per annum. 54,730
Line of credit extended by Carnegie Bank on March 4, 1996
amounting to $250,000 due to be repaid March 4, 1997 unless
demanded earlier accruing interest at the prime rate plus 2%
per annum with the prime rate defined as quoted by the Wall
Street Journal. The agreement requires that the line shall be
completely out of debt for at least one thirty consecutive day
period annually and is collateralized by all the inventory,
accounts receivable, equipment, and financial instruments of
Proformix, Inc. This obligation is overdue as of March 31, 1998
and no demand for payment has been made through May 14, 1998. 250,000
Pursuant to a promissory note dated November 17, 1997, accruing
interest at 12% per annum, an investor, who was a consultant,
advanced the Company $50,000, a portion of which remains
outstanding as of March 31, 1998. The note bears interest at
12% and is due January 7, 1998. This note was not paid on the
scheduled due date but has been extended pursuant to a verbal
agreement. 25,000
---------
Total $ 846,579
=========
LOANS AND NOTES PAYABLE (Proformix Systems, Inc.)
Pursuant to the Acquisition Agreement with Rolina Corporation,
a portion of the cash payments are to be made on a deferred
payment schedule, between June and September 1998. At present,
the outstanding balance under this arrangement is $ 225,000
=========
NOTES PAYABLE FROM PRIVATE PLACEMENT OFFERING
During February through June 1995, an underwriter acting as
placement agent offered on behalf of Proformix, Inc. in a
private offering a minimum of five (5) and a maximum of twenty
(20) units, resulting in the placement of $1,600,000 in
promissory notes, all of which are outstanding as of March 31,
1998, and 160,000 shares of Proformix, Inc. common stock. In
May 1997 a restructuring agreement caused the reclassification
of $1,150,000 of these notes to long-term debt. These notes
were extended and modified to (i) mature by April 30, 2000,
(ii) change interest rates 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 an a quarterly basis. One such note, however, for $100,000
was still being negotiated for purchase and restructuring as of
March 31, 1998. The remaining $450,000 of non-restructured
notes are shown in current liabilities and are in default as of
March 31, 1998 $1,600,000
==========
9
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Proformix Systems, Inc. and Subsidiaries
Notes to the Financial Statements
LONG-TERM DEBT
Long-term debt as of December 31, 1997 is comprised of the
following:
Pursuant to a promissory note signed on July 28, 1993,
Proformix, Inc. borrowed a total of $1,000,000 repayable with
interest at 2% above the lending institutions' prime lending
rate. On March 4, 1996, Proformix, Inc. refinanced the
repayment of its long-term debt. The remaining balance of
$663,888 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 continue to
be guaranteed by an officer of the Company who has
collateralized this obligation with $225,000 consisting of
marketable securities and/or certificates of deposit. Such
marketable securities with a value of $242,951 have been taken
by the lending institution as collateral. In addition, the loan
remains 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 deferment on principal
payments. In May 1997, Proformix, Inc. requested another 3
month deferment for principal payments as to 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. $ 633,888
Note payable to an officer of the Company issued in place of
accrued royalties, principal due April 14, 1998 accruing
interest at a rate of 5% per annum. 111,007
Discounted present value of a non-interest bearing $70,000
settlement with a former investor of Proformix, Inc. to be paid
in 24 equal monthly payments commencing July 1, 1997. The
imputed interest rate used to discount the note is 8% per
annum. 40,567
Discounted present value of a non-interest bearing $176,000
settlement with former counsel of Proformix, Inc. to be paid in
24 monthly payments commencing September 1, 1997. The imputed
interest rate used to discount the note is 8% per annum. 101,829
-----------
Total 887,291
Less current maturities 394,081
-----------
Long-term debt, net of current maturities $ 493,210
===========
10
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Proformix Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
COMMITMENTS AND CONTINGENCIES
Licensing Agreement
On August 29, 1997, the Company signed a letter of intent to acquire Cornell
Ergonomics ("Cornell") a software developer of a unique ergonomic assessment
tool. This agreement was subsequently revised, on December 1, 1997, through
a Software Distribution and Option Agreement whereby the Company obtained a
two-year exclusive license to distribute and sub-license a certain software
product. The Company also has the exclusive right, under certain
circumstances, to purchase either the assets of Cornell or all of the issued
and outstanding capital stock of Cornell.
Put Option pursuant to Rolina Agreement and Plan of Merger
In connection with the February 2, 1998, Merger Agreement for the purchase
of Rolina Corporation, the Company issued 155,556 shares of its common stock
to the former principal of Rolina. Pursuant to the terms of this Agreement,
the Company issued a Common Stock Put Option which if exercised by the
holder during a 90 day time period beginning two years after the date of the
Agreement, would require the Company to purchase the above common stock at
the price of $2.41 per share.
Acquisition of Vanity Software Publishing Corporation
On March 6, 1998, the Company executed a letter of intent, to offer a block
of the Company's stock for the outstanding stock of Vanity Software
Publishing Corporation, a Canadian privately held firm. Vanity owns all
rights to a certain ergonomic software package known as "ErgoBreak". The
letter of intent was subsequently modified to reflect the Company's
intention to acquire all of the assets, subject to certain liabilities of
Vanity Software Publishing Corporation, against issuance of 224,000 shares
of the common stock of the Company and warrants to purchase an additional
224,000 shares at a price of $5.00 per share. The Vanity transaction was
consummated after the end of the first quarter. (see "Subsequent Events").
Employment Agreements
Pursuant to the Rolina Agreement, the Company on February 2, 1998, entered
into a five year employment agreement with the former principal of Rolina
whereby it employs him in the capacity as president of its software
operations. The agreement, among other things, calls for a minimum annual
salary of $120,000.
On February 16, 1998, the Company entered into a five year employment
agreement with a former associate of Rolina whereby it employs him in the
capacity as development manager for its software operations. The agreement,
among other things, calls for a minimum annual salary of $80,000.
RELATED PARTY TRANSACTIONS
Subscriptions Payable
During July 1997 one of the Company's board members advanced the Company
$100,000 as evidenced by two 8% promissory notes. It was subsequently agreed
that the notes would be converted to common shares which were to be offered
privately pursuant to an exemption provided by Rule 504 of Regulation D
promulgated under the Securities Act of 1933, as amended. The Company,
however, decided not to consummate such offering, and
11
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Proformix Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
instead the shares were offered under Rule 506 of Regulation D promulgated
under the Securities Act of 1933, as amended, under which the notes will be
converted to common shares and warrants. Pending completion of such
transactions, any funds received have been accounted for as subscriptions
payable.
MAJOR CUSTOMERS
For the quarter ended March 31, 1998, the Company had a major customer,
sales to which represented approximately 59% of the Company's revenues. The
loss of this customer would have a materially adverse effect on the Company,
at least in the short term.
CHANGES IN KEY PERSONNEL
In January 1998, Michael Martin, the CEO and Chairman of the Company's Board
of Directors recommended to the Board that the position of CEO be held by a
separate individual. Accordingly, Jerry Swon, the former Chairman of the
Board of Directors of Royal Capital, Inc. became President and CEO of
Proformix Systems, Inc. and its subsidiaries.
In February 1998, John Perry, the Company's Executive Vice President,
resigned his position with the Company.
SUBSEQUENT EVENTS
Asset Purchase Agreement with Vanity Software Publishing Corporation
On April 30, 1998, the Company signed an agreement to acquire all of the
assets, subject to the assumption certain liabilities of Vanity Software
Publishing Corporation, in exchange for 224,000 shares of the common stock
of the Company and warrants to purchase an additional 224,000 shares at a
price of $5.00 per share. The liabilities assumed by the Company, all
payable in cash at the time of closing, total approximately US$ 150,000. The
transaction meets the requirements of pertinent Canadian laws governing the
sale of Canadian businesses. The closing took place in the first week of
May, 1998.
The major asset of Vanity Software Publishing Corporation is a proprietary
ergonomic software package sold under the name ErgoBreak(TM) which the
Company plans to integrate into its own software products suite marketed
under the EMS(TM) label.
Capital Raising Activities
Between April 1, 1998, and May 12, 1998, the Company received an aggregate
$1,550,000 in additional equity capital through the private sale of 387,500
shares of its common stock. In addition, 500,000 shares were issued for
consulting services. This additional capital and the cash flow generated by
expected increases in sales are considered by management to be sufficient
for the Company to meet its current and anticipated future obligations.
12
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Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations:
Revenues during the quarter ended March 31, 1998, totaled $1,012,418, a 74%
increase over the same period a year ago.(1) Selling expenses amounted to
$299,197 compared to $284,654 during the same period last year, while general
and administrative expenses increased from $349,779 for the first quarter in
1997 to $448,503 this year. The relatively large increase in G&A expenses is
attributable to the ongoing program of repositioning the Company towards a
technological enterprise capable of delivering overall integrated solutions to
the commercial market for ergonomic risk complexes and productivity enhancements
in the office environment, encompassing both hardware and software. These
increases are expected to continue into the second and third quarters. The
operating result for the quarter ended March 31, 1998, was a loss of $227,019,
compared to a loss of $316,110 for the same period a year ago. The net loss for
the quarter was $307,736 or $0.09 per share, which compares to a net loss of
$403,302 or $0.11 per share for the same quarter a year ago.
The Company is currently introducing to the market its new Proformix EMS(TM)
suite of software products which complement its patented keyboarding systems.
This unique product is the first integrated suite of software tools that
provides a complete compliance system for evaluation and management of ergonomic
risk factors in the workplace. The software also provides a unique and effective
productivity tool that can make a verifiable difference in any company's bottom
line. In marketing this product, the Company directs 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 their
potential exposure resulting from repetitive stress injuries arising out of the
use of computers. This package enables a company to not only address the issue
of health risks involving employees and to minimize resulting potential
liabilities, but delivers a powerful tool to increase overall productivity.
The sales cycle for larger projects involving software related products is
relatively long, and the new products therefore are not expected to yield
significant new revenues before later in this fiscal year. Management however
expects its core keyboarding systems business to show further increases in
revenues during the upcoming quarters.
Liquidity and Capital Resources
During the first quarter in 1998 the Company has received a total of $1,137,000
in new equity capital, of which $962,000 was received in cash, and $175,000 from
the closing of certain equity subscriptions where funds had actually been
received prior to December 31, 1997. At May 12, 1998, an additional $1,550,000
in funding has been received.
These cash infusions permitted the Company to finance both a considerable
expansion of overall business activity and the resultant increase in receivables
as well as the acquisition of certain proprietary software assets which are
considered crucial by management for the Company's medium- to long-term
profitability see "Acquisition of Rolina Corporation" in the footnotes to
Financial Statements. The equity additions from private placements, the Rolina
acquisition, and the BNN transaction (see section "Prepaid Expenses" in "Notes
to Financial Statements") significantly improved the Company's balance sheet.
The working capital deficit which stood at $2,806,682 on December 31, 1997,
decreased to $1,684,513 at March 31, 1998. A significant further improvement
took place during April when the Company received an additional cash infusion of
amounts in excess of $1.5 million from new private equity placements.
- --------
(1) Comparisons herein are based on the Company versus Proformix, Inc.
13
<PAGE>
PART II - OTHER INFORMATION
Item 1 LEGAL PROCEEDINGS
In November 1996, Proformix, Inc. became the subject of two lawsuits
instituted by a shareholder and members of his family. One suit alleged breach
of contract and was seeking damages of $1,250,000. The other suit alleged that
plaintiff and members of his family have been damaged because the company did
not act in the best interest of its shareholders in failing to enter into a
merger with an entity named Regency, Affiliates. It is the Company's position
that both of these suits were without merit. However, in order to save time and
management resources the Company agreed to a settlement with the plaintiffs in
both cases pursuant to which the claims will be dismissed against payment by the
Company of $20,000.
In February 1997, the Company instituted a lawsuit in the U.S. District
Court for the Northern District of California, (Donald Yu and Whitestone
Industries, Inc. vs. Alex Vilnis, Baltic Trust Company et al; Case No.
C97-0484MHP) against Mr. Alex Vilnis, Vilnis Laurins, The Baltic Trust Company
and the International Exchange Co. Ltd. of Latvia. Both of these companies are
controlled by Mr. Alex Vilnis. The Company is alleging fraud and is also seeking
to obtain equitable relief involving the cancellation of 15,940 current common
shares (equivalent to pre-split 2,183,750 shares) issued to International
Exchange Co. Ltd. The Company had sought to enter into a loan and stock sale
financing agreement with Baltic Trust Co. and subsequently ascertained that the
transaction involved a scheme pursuant to which the Company would not receive
the negotiated consideration for the issuance of its shares. As a result of the
initiation of the lawsuit, the Company has been successful in obtaining a
temporary restraining order with regard to any possible transfer of the shares
at issue, and is in the process of obtaining a default judgment against the
above defendants. While the Company anticipates that it will be difficult to
obtain and enforce any damages awarded to the Company, it believes that it would
be in a position to successfully preempt any effort by the Defendants to
transfer or liquidate the shares.
Item 2 CHANGES IN SECURITIES
During the first quarter of 1998 and through May 12, 1998, the Company issued
the following unregistered securities:
(i) 150,000 shares of Common Stock to an entity which provides a platform
for advertising the Company's products. The Company received as consideration
advertising credits equivalent to $900,000 in retail value. The issuance of the
aforesaid shares was made pursuant to Section 4(2) of the Securities Act;
(ii) 50,000 shares of Common Stock at a purchase price of $2.00 per share
to an individual. The Company issued the aforesaid shares pursuant to Section
4(2) of the Securities Act.
(iii) 4,758 shares of Common Stock to Proformix, Inc. shareholders
pursuant to the Company's acquisition of Proformix, Inc. and its subsequent
exchange offer to Proformix, Inc. shareholders. The Company issued these shares
pursuant to Section 4(2) of the Securities Act;
(iv) 100,644 shares of Common Stock to Royal Capital, Inc. pursuant to
Royal's exercise of a stock option at $1.7338 per share. The stock option was
granted for services rendered, and the shares were issued pursuant to Section
4(2) of the Securities Act;
(v) 1,353,000 shares of Common Stock issued to foreign entities, thereby
raising $2,412,000 in gross proceeds, pursuant to Regulation S of the Securities
Act;
14
<PAGE>
(vi) 155,556 shares of Common Stock pursuant to Section 4(2) of the
Securities Act, to the principal of Rolina Corporation in the course of that
entity's acquisition by the Company.
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 - None
15
<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: May 13, 1998 By: /s/ Jerry Swon
-------------------------------------
Jerry Swon
President and Chief Executive Officer
16
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<PERIOD-START> JUL-01-1997
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