SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND
EXCHANGE OF 1934
For the Transition Period From ____ to ____
Commission File No. 33-20432
PROFORMIX SYSTEMS, INC.
Exact Name of Registrant as Specified in its Charter
DELAWARE 75-2228828
State or Other Jurisdiction of IRS Employer
Incorporation or Organization Identification Number
50 Tannery Road, Branchburg, New Jersey 08876
Address of Principal Executive Offices Zip Code
(908) 534-6400
Registrants Telephone Number, Including Area Code
WHITESTONE INDUSTRIES, INC.
(Former Conformed Name)
July 14, 1997
(Date of Name Change)
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Title of Each Class Name of Each Exchange on Which Registered
NONE NONE
Securities Registered pursuant to Section 12(g) of the Exchange Act:
NONE
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of 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 ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
The Registrant's revenues for the fiscal year ended December 31, 1997,
were $3,125,009.
Common stock, par value $.0001 per share ("Common Stock"), was the only class of
voting stock of the Registrant outstanding on April 8, 1998. Based on the
closing price of the Common Stock on the OTC Electronic Bulletin Board as
reported on April 8, 1998, ($4.75), the aggregate market value of the 3,049,585
shares of the Common Stock held by persons other than officers, directors and
persons known to the Registrant to be the beneficial owner (as the term is
defined under the rules of the Securities and Exchange Commission) of more than
five percent of the Common Stock on April 8, 1998, was approximately
$14,485,000. By the foregoing statements, the Registrant does not intend to
imply that any of the officers, directors, or beneficial owners are affiliates
of the registrant or that the aggregate market value, as computed pursuant to
rules of the Securities and Exchange Commission, is in any way indicative of the
amount which could be obtained for such shares of Common Stock.
As of April 8, 1998, 3,824,965 shares of Common Stock, $.0001 par value,
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: SEE EXHIBIT INDEX
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PROFORMIX SYSTEMS, INC.
CONTENTS
PART I. Page
Item 1. Business.................................................... 4
Item 2. Properties ................................................. 10
Item 3. Legal Proceedings .......................................... 10
Item 4. Submission of Matters to a Vote of Security Holders ........ 10
PART II.
Item 5. Market for Registrant's Common Equity and
Related Shareholder Matters ................................ 11
Item 6. Management's' Discussion and Analysis of
Financial Condition and Results of Operations .............. 13
Item 7. Financial Statements and Supplementary Data ................ 16
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure ..................... 16
PART III.
Item 9. Directors and Executive Officers of the Registrant ......... 17
Item 10. Executive Compensation ..................................... 19
Item 11. Security Ownership of Certain Beneficial Owners
and Management ............................................. 21
Item 12. Certain Relationships and Related Transactions ............. 22
Item 13. Exhibits and Reports on Form 8-K ........................... 22
Signatures.................................................. 23
Exhibit Index............................................... 24
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PART I
ITEM 1: BUSINESS
Background
Proformix Systems, Inc. (the "Company" or "Proformix") was incorporated as
a Delaware corporation on April 19, 1988 under the name Fortunistics Inc. On
March 4, 1993, the Company changed its name to Whitestone Industries, Inc. On
July 14, 1997, the Company changed its name to Proformix Systems, Inc.
On June 16, 1997, Royal Capital, Inc. ("Royal"), a New Jersey corporation,
entered into an agreement with Whitestone Industries, Inc., 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 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., a company
incorporated in the State of Delaware in October 1991, entered into an
acquisition agreement ("Acquisition Agreement") whereby the Company would offer
to acquire the outstanding stock of Proformix, Inc. At that time, the Company
effected a 1:137 reverse split of its outstanding shares of common stock, and
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.
Pursuant to the Acquisition Agreement, Proformix Inc. shareholders were
offered one share of the Company's common stock for every 3.4676 shares of
Proformix. Inc. common stock, and one share of preferred stock for every one
share of Proformix, Inc. preferred stock. At the time of this filing, 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. As a result, the
Company and Proformix, Inc. remain as two separate legal entities whereby
Proformix, Inc. operates as a subsidiary of the Company. The operations of the
newly combined entity are currently comprised solely of the operations of
Proformix, Inc.
For a detailed description of the Company's business before 1997, please
refer to the Company's report on Form 10-KSB for the fiscal year ended December
31, 1996, incorporated herein by reference thereto.
The Company is currently subject to the reporting requirements of Section
15(d) of the Securities Exchange Act of 1934. The Company has the authority to
issue an aggregate of thirty million (30,000,000) common shares, par value
$.0001, three million (3,000,000) Series A preferred shares, par value $.01, and
two thousand five hundred (2,500) cumulative preferred shares, par value $.001.
As of December 31, 1997, there were outstanding 2,898,507 common shares
and 10 cumulative preferred shares.
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Narrative Description of Business
The Company designs, develops, manufactures, and markets research-based
ergonomic accessory products for the computerized workplace. As the utilization
of computers in the office has increased significantly in the last years, so has
the rate of health problems believed to be related to the use of computers.
Computer ergonomics focuses on optimizing the design of technology that allows
people to successfully interact with computers, with a minimum of associated
health risks. A successful technology delivery system positively impacts the
cost of doing business by improving the comfort, productivity, job satisfaction
and safety of the computer user, while reducing the costs of absenteeism and
work related disability. Ergonomists know that science and research are
prerequisite to the design of effective products. Most suppliers, however, treat
ergonomic equipment as a sideline, afterthought or detail. The Proformix
approach is markedly different. By scientifically testing, evaluating and
verifying design concepts and systems, the Company is able to provide its
customers with appropriate and effective technologies.
The corporate philosophy of the Company on such products considers both
the entire body and the work being performed, resulting in computerized work
settings that are as safe, comfortable, and productive as they can be. Moreover,
because optimizing how people use computers is the only concern of the Company,
its customers benefit from an unequaled package of research, design, education,
training and service delivered in the most cost-effective manner possible.
During 1996, the issues of repetitive stress injuries ("RSI") and the
potential of liability to employers from the effects of carpal tunnel syndrome
and other RSI's on employees was forcibly brought to the forefront of corporate
consciousness through a widely publicized suits involving a major computer
maker. In a parallel development, there appears to be a renewed effort by both
federal and state government to develop laws dealing with ergonomics in the work
environment. The impact of RSI's is rising. The Bureau of Labor Statistics
reports that 25% of all injuries that result in lost work time are due to
repetitive stress problems. These injuries technically comprise more than 100
different types of job-induced injuries resulting from wear and tear on the
body. Moreover, they currently cost employers an estimated $20 billion a year in
workman's compensation claims. The federal government estimates that an
additional $80 billion is lost in related costs such as absenteeism and reduced
productivity. The RSI issues in the United States are mirrored in the rest of
the developed world. The Company believes that the growing recognition of these
trends will give rise to a rapidly expanding market for the Company's products.
The Industry
The Company operates in only one business segment: the development,
manufacturing, and sales of ergonomic products for the computerized workplace
environment. More specifically, the Company sells specialized keyboard trays
integrated with touchpad-based data entry devices, and complemented by a wide
array of peripheral accessories such as mousing platforms, monitor risers and
glare screens and copy holders. In addition, the Company licenses highly
sophisticated and proprietary software that provides computer based training,
workpacing and monitoring tools, as well as a computer workstation assessment
tool. All these product offerings generally subscribe to ergonomic design
criteria, supported by independent research.
Historically, accessory products similar to the Company's products have
been sold along with traditional office furniture products through established
reseller or dealer channels, and, to a lesser degree, through office supply
stores. The Company early on recognized that keyboard trays and similar
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accessories are not just an adjunct to the office furniture but, owing to the
fact that they actually constitute the interface between the human operator and
the computer, occupy a critical juncture in the greatest number of work
processes in today's information and data processing driven economy, and that
their importance in terms of potential for productivity enhancement and health
risk amelioration has been largely and significantly underestimated in the past.
The Company thus set out to promote awareness of the health risks and negative
effect on productivity associated with many of the traditional tools of the
computerized workplace, and to develop alternatives based on the science of
Ergonomics. In doing so, it positions itself outside of the traditional office
furniture industry, towards areas associated with risk management, productivity
enhancement and employee wellness.
The Company's business operates primarily in the United States of America.
The Company did not derive material revenues from export sales, nor did it
maintain any foreign operations.
Products, Patents, Trademarks
As the number of computers has grown, so has the number of computer users
who experience cumulative trauma disorders ("CTDs"). These disorders, inclusive
of back ache, neck ache, tenosynovitis and carpal tunnel syndrome, are believed
to result from minor injuries to the musculo-skeletal system caused by the
physical stress of performing work using computers and computer accessories over
a prolonged period of time. Recently, studies have indicated that these injuries
may be attributed to computer users not maintaining correct posture and neutral
positions when using computers.
In 1991 Cornell University undertook laboratory testing and engaged in a
study on ergonomics and computer accessories, focusing specifically on the
ergonomic design of the Company's keyboard trays and accessories, to determine
whether their design, and the theory behind such design, provided computer users
with an "always neutral" position of wrist and arm as well as whether the
computer user's positions were natural and correct. Such study further assessed
whether the Company's products could be shown to alleviate or prevent certain
CTDs. The study was first published in December 1991. Cornell University and the
Honeywell Corporation administered further testing, the results of which were
published in January 1995.
The findings of Cornell University verified that the inclining slope of
conventional keyboards put increased pressure on the carpal tunnel, a narrow
channel in the wrist containing a nerve, artery and nine flexor tendons, which
could cause inflammation or damage and increased the risk of carpal tunnel
syndrome. Initially, the study found that the downward sloping and increased
palm support of the Proformix Keyboarding System provided the computer users
with a combined Aalways neutral" wrist position with broad palm support, which
minimized pressure on the carpal tunnel and muscular activity associated with an
unsupported forearm, 67% of the time. The study found that the Company's
keyboarding system guides computer users to sit with their arms and legs
properly positioned in order to reduce back, neck, shoulder, and eye strain.
The center piece of the Company's product offerings is a patented
keyboarding system consisting of a unique height adjustable keyboard support
platform embracing a preset negative or forward slope and integrated palm rest.
In addition, there are several variations of mouse platforms and accessory
products such as document holders, monitor risers, and glare screens.
A newer version of the Company's keyboarding system, the IntelliTray(TM),
introduced in 1997, integrates a touchpad input device based on Cirque
Corporation's Glidepoint(TM) technology into the palm rest, a design feature for
which a patent is pending.
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Proformix also recently introduced its new ErgoRanger(TM) keyboarding
system which offers enhanced installation and user flexibility while preserving
the ergonomic design advantages of the Company's basic keyboarding system.
Perhaps most importantly, the Company intends to offer comprehensive
ergonomic-based productivity solutions that include proprietary software
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. 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 Company holds title, by assignment, to a United States patent for an
"Adjustable Ergonomic Support for Computer Keyboards", as amended, and a United
States patent for a "Hinged Connection for a Tilt-Up Device", as well as several
trademarks. There can be no assurance, however, that the Company's products will
not be vulnerable to attempts by competitors to copy them or obtain protection
on similar products. In addition, there can be no assurance that a third party
will not design products which perform the same or similar functions as the
Company's products, using technology other than that covered by the Company's
patents.
The Company also (i) has been granted a license for the exclusive rights
to ErgoSure(TM), a RULA (Rapid Upper Limb Assessment) based evaluation tool, and
(ii) in February 1998 acquired the rights to ErgoSentry(TM), a computer based
training and work pacing system and monitoring tool. While the Company believes
that it currently has a strategic competitive advantage in ergonomic software,
there can be no assurance that competitors will not attempt to copy the
Company's products or obtain protection on similar products.
On March 6, 1998, the Company executed a letter of intent, with Vanity to
issue a tender offer 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".
Business Strategy
In the past, the Company has focused its marketing approach almost
exclusively towards broad-based distribution of its products through established
OEM, dealer, and other reseller channels within the contract furniture and
office supply industries. While successful in that approach, the Company has
begun, without abandoning the before mentioned strategy, to strengthen its
direct sales force and marketing tools to develop a more focused
dealer-supported targeted approach towards bringing overall ergonomic solutions
through the combination of its patented keyboarding systems and its proprietary
ergonomic software, to larger commercial and industrial users. Key parameters of
this new marketing approach are the emphasis on risk management and productivity
enhancement, and the development of strategic marketing relationships with
leading ergonomic consultants.
Manufacturing
The Company performs most of the assembly, quality assurance, packaging
and shipping of its products in its Branchburg, New Jersey, facilities. The
Company owns all of the molding tools for the manufacture of the plastic
components of its products. The Company subcontracts all of its manufacturing
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and some of its assembly requirements to several companies within close
proximity of the Company's facilities. In the event that any of the primary
suppliers became unable or unwilling to provide such services to the Company,
while potentially causing some delays or disruptions in the flow of materials,
there are other comparable potential suppliers available which could be utilized
in such event. The Company's molds are insured for replacement, although they
are made of steel and aluminum and are therefore at little risk for fire or
smoke or water damage.
Competition
In its hardware business, the Company competes with established suppliers
of office furniture and with other entities. A majority of the companies with
which the Company competes are substantially larger, have more substantial
histories, backgrounds, experience and records of successful operations, greater
financial, technical, marketing and other resources, more employees and more
extensive facilities than the Company now has, or will have in the foreseeable
future. It is also likely that other competitors will emerge in the near future.
The Company competes with these entities on the basis of the quality and design
of its patented products whose ergonomically advantageous features have been
confirmed through independent research. However, there can be no assurance that
the Company will be successful, now or in the future, in its efforts to compete
profitably.
With respect to its ergonomic software business, the Company is not aware
of any products which directly compete with its newly introduced integrated
software product suite which is marketed by the Company under the trade name
"EMS". Although there are several competitors to individual component parts of
EMS, no other product offers a comparable breadth of function and integration in
such areas as worksite evaluation, employee training and workpacing.
Seasonality and Dependency
The industry segment in which the Company does business is not seasonal.
The Company in 1997 derived 39% of its total business from one customer, and
expects to do a significant amount of business with this same customer in 1998.
Accordingly, the loss of this customer, unless replaced with one or more new
accounts of comparable magnitude, would have a material adverse effect on the
results of operations of the Company.
License Agreements
On December 1, 1997, the Company entered into a two year Software
Distribution and Option Agreement with Cornell Ergonomics Inc., a Delaware
corporation, pursuant to which it is licensed on an exclusive basis, to
distribute and sub-license a certain software product known as "ErgoSure" which
the Company intends to market in conjunction with its own proprietary software
products. The Agreement also grants the Company the right to acquire full title
and ownership to that product, at a later time and under specified
circumstances.
Agreement to Acquire Rolina Corporation
In September 1997 the Company started negotiations to acquire, for a
combination of cash and equity, Magnitude L.L.C. ("Magnitude or Rolina"), an
early stage software business which had developed an ergonomic software product
that was being marketed under the name, ErgoSentry. Magnitude
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subsequently changed its name to Rolina Corporation. The transaction with Rolina
closed in February 1998. Steven D. Rudnik, the president and CEO of Rolina,
entered into an employment agreement with the Company and was appointed
president of the Company's software division.
Employees
As of December 31, 1997, the Company employed 25 persons, of whom three
were primarily engaged in research and development and software related
activities, eight were primarily engaged in sales and marketing, five in general
managerial, administrative and clerical functions, and nine in operations and
assembly and shipping of the Company's products. The Company has no collective
bargaining agreements with its employees.
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ITEM 2: PROPERTIES
The Company leases approximately 14,100 square feet of office and
warehouse space at 50 Tannery Road, Branchburg, New Jersey, where it maintains
its executive and administrative headquarters, product assembly, warehousing,
and distribution facilities. The current lease agreement ends on October 31,
1999, and calls for monthly rental payments of approximately $6,200 plus
expenses.
ITEM 3: 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 Proformix, Inc.
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 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders during this
fiscal period.
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PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
The Company's common stock currently trades on the Electronic Bulletin
Board of the OTC market, under the symbol PRFX. Since the Company's acquisition
of Proformix, Inc. in July 1997, the Common Stock has been listed as follows (no
price notations for prior quarters are listed here because any such share prices
and trading reflected activities which bear no resemblance to the Company's
current business):
OTC-BB
------
1997 High/Ask Low/Bid
- ---- -------- -------
Third Quarter ................ $7 $6 1/8
Fourth Quarter ............... 7 3 1/4
As of December 31, 1997, there were approximately 200 shareholders of
record for the Company's common stock. The number of record holders does not
include holders whose securities are held in street name.
The Company has not declared or paid, nor has it any present intention to
pay, any cash dividends on its common stock. The Company is obliged, under
certain circumstances, to pay cash dividends on its outstanding cumulative
preferred stock.
Recent Sales of Unregistered Securities
Pursuant to an Offering Memorandum dated August 14, 1997, the Company
issued a total of 28,611 shares of common stock at a purchase price of $4.50,
and 28,611 warrants for the purchase of common stock exercisable at $4.50 per
share, thereby raising $128,750 in gross proceeds. The aforesaid offering of
securities was made in reliance on the exemption provided by Regulation D of the
Securities Act of 1933, as amended ("Securities Act"), and Rule 506 promulgated
thereunder.
During the fourth quarter of 1997 and the first quarter of 1998, the
Company issued the following 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, which
exempts transactions not involving a public offering;
(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) 26,387 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;
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(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) 465,500 shares of common stock issued to foreign entities, thereby
raising $862,000 in gross proceeds, pursuant to Regulation S of the Securities
Act;
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ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The selected financial information presented below under the captions
"Statement of Operations" and "Balance Sheet" for the years ended December 31,
1997 and 1996 is derived from the financial statements of the Company and should
be read in conjunction with the financial statements and notes thereto.
On July 2, 1997, the Company then known as Whitestone Industries Inc.,
after divesting itself of substantially all operations, assets, and liabilities,
extended an offer to all holders of the common stock of Proformix, Inc. to
exchange their shares into newly to be issued common stock of the Company. 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. and its wholly owned subsidiary Corporate Ergonomic Solutions, Inc.
Therefore, the discussion below only pertains to the operations of Proformix,
Inc. for the prior fiscal year and the current fiscal year until the date of the
acquisition of Proformix, Inc. through the Company, and to the operations of the
Company thereafter. The past results of operations for Whitestone Industries,
Inc. are summarized as Discontinued Operations. All intercompany accounts and
transactions have been eliminated in consolidation.
SELECTED FINANCIAL DATA
December 31,
------------
1997 1996
---- ----
Balance Sheet
Total assets ....................... $ 1,152,250 $ 1,659,901
Current liabilities ................ 3,429,825 4,346,890
Long-term debt ..................... 1,719,435 717,378
Working capital (deficit) .......... (2,806,682) (3,559,266)
Shareholders' Equity (deficit) ..... $ (3,997,010) $ (3,430,885)
For The Year Ended December 31,
------------------------------
1997 1996
---- ----
Statement of Operations
Total revenues ..................... $ 3,125,009 $ 3,284,243
Operating loss ..................... (1,128,170) (515,005)
Loss before extraordinary item ..... (1,507,745) (1,376,093)
Net loss ........................... (1,507,745) (2,045,806)
Net loss per common share .......... $ (0.76) $ (1.84)
Number of shares used in computing
per share data ..................... 2,094,724 1,160,864
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Results of Operations for the Year Ended December 31, 1997
For the year ended December 31, 1997, the Company had gross revenues of
$3,125,009 (previous year $3,284,243) generated exclusively by its subsidiary
Proformix, Inc. through its keyboarding systems business.
Gross profits amounted to $1,673,805 for a 54% gross margin ($2,279,051
respectively 69% in 1996). After deducting selling expenses of $1,181,030 and
general and administrative expenses of $1,620,945, the Company realized an
operating loss of $1,128,170 (compared to an operating loss of $515,005 in
1996). Non-operating expenses after offset against $90,977 gain from the
restructuring of certain liabilities, totaled $379,575, including $338,038 net
interest expense and $132,514 loss on disposal of assets, primarily for
write-offs of obsolete molds and tooling because of changes in product design in
the course of on-going development efforts.
During the year, the Company made extraordinary efforts to complete design
enhancements to its existing products, and expand its product line in order to
appeal to a wider range of potential customers. Also, it restructured its sales
force after experiencing relatively disappointing results from its efforts to
expand its presence in the office supplies market as represented by larger
national distributors and chain stores, to change towards a more direct and
focused selling approach directed to larger commercial users, with the goal of
being able to more effectively present its enlarged product spectrum to this
audience. In particular, the addition of proprietary ergonomic software products
during the latter part of the year and at the beginning of 1998 (see Section
"Subsequent Events" in Notes to Financial Statements, attached hereto as Exhibit
A) transformed the Company from a source of mere hardware products to a supplier
of total ergonomic packages including risk management and productivity
enhancement tools which are novel and unparalleled in the industry, and of
particular potential interest to the medium and large corporate customer. These
undertakings in the face of very limited financial resources strained the
Company's personnel, financial, and operational resources, and are contributing
reason for the overall disappointing developments in revenue growth and net
operating results. However, at the end of the year the Company finds itself well
positioned to aggressively pursue a much larger and potentially more rewarding
market than earlier in the year.
The decrease in gross margin from the year before stems from (i) changes
in product design, in particular the introduction of the IntelliTrayJ and
ErgoRangerJ products which carry a somewhat lesser margin, and (ii) changes in
the customer-, discount-, and sales channel mix. The latter changes are
attributed to relatively permanent shifts in the market place and the manner in
which the Company responded and are not expected to reverse themselves. While
having a dampening effect on the Company's gross margin they also gave rise, on
the other hand, to parallel developments which decreased selling expenses, thus
more or less balancing out. Looking forward, however, management expects to
again incur increases in selling expenses, as a planned further restructuring to
a more direct marketing strategy, coupled with more aggressive advertising and
promotional campaigns, takes hold. These increases in expenses will be justified
by the expected growth in revenues.
General and administrative expenses increased by 18% over the level of the
preceding year, primarily due to staff expansions and non-recurring recruiting
expenses. A portion of the increase was also attributable to the transformation
of the previously private company Proformix, Inc. into a public entity by way of
the reverse acquisition, and the maintenance of that status since then.
Continuing operations yielded a net loss of $1,507,745 or $(0.76) per
share for the year. This compares to a net loss of $2,045,806 or $(1.84) per
share during the previous year.
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Liquidity and Capital Resources
On June 24, 1997, the Company, Royal Capital Inc. (a New Jersey
corporation) and Proformix, Inc., entered into an acquisition agreement as a
consequence of which the Company, on July 2, 1997, issued a stock exchange offer
to the shareholders of Proformix, 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 spun off 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 prior to the
acquisition of Proformix, Inc. 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. The
operations of the newly combined entity are currently comprised solely of the
operations of Proformix, Inc., whereby the parent company's role, i.e. Proformix
Systems, Inc., centers around the undertaking of financing efforts.
At December 31, 1997, the working capital deficit amounted to $2,806,682
as opposed to a deficit of $3,559,266 at December 31, 1996. The relative
increase in working capital was a direct consequence of financing activities
more closely described below, which more than offset the losses incurred.
These financing activities fall roughly into two areas: (1) the
restructuring by Proformix, Inc., prior to the acquisition by the Company, of
debt incurred in a 1995 Private Placement Offering by Proformix, Inc. which
transferred in excess of $1,000,000 in current notes payable to long-term
liabilities (see "Notes to Financial Statements" - Exhibit A) coupled with the
conversion of approximately $345,000 in accrued interest and other liabilities
into equity, and (2) the raising by the Company of new capital in the form of
proceeds derived from the private placement of the Company's common shares with
domestic investors under exemptions pursuant to Rule 506, and with foreign
investors pursuant to Regulation S promulgated under the Securities Act of 1933,
as amended, totaling $605,750 by December 31, 1997, with an additional $275,000
funds received under subscriptions for subsequent equity issuance. The latter
activities not only relatively strengthened the balance sheet but contributed
needed liquidity to ameliorate a severe cash shortage which hampered
management's progress in speedily repositioning the Company, throughout a major
part of the year. Instrumental in these capital raising efforts was the
engagement and cooperation of Royal Capital Inc., with whom the Company entered
into a consulting agreement in May 1997 (see "Business"). These capital raising
efforts will continue into the new year, and are expected to yield a sufficient
amount of equity and cash for management to further stabilize the financial
situation of the Company, and complete its plans with regard to the
repositioning of Proformix in a technology company focused on providing
ergonomic solutions for risk curtailment and productivity enhancement.
Between January 1, 1998, and April 15, 1998, the Company received an
aggregate $2,837,000 in additional equity capital against issuance of 788,366
shares, including $2,562,000 in cash and $275,000 representing the conversion of
subscription prepayments received prior to December 31, 1997. In addition,
250,000 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.
15
<PAGE>
ITEM 7: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Financial Statements and Notes to Financial Statements are
attached hereto as Exhibit A and incorporated herein by reference.
ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
On July 26, 1997, the Company dismissed Feldman Radin & Co., P.C. ("FRC"),
the Company's former independent accountant, previously engaged as the principal
accountant to audit the Company's financial statements. On July 26, 1997, the
Company's Board of Directors recommended and approved the hiring of Rosenberg
Rich Baker Berman & Company, Certified Public Accountants ("Rosenberg"), 380
Foothill Road, Bridgewater, New Jersey, as the Company's principal independent
accountant.
The Company is unaware of any disagreements between the Company and FRC on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure. The Company authorized FRC to
respond fully to inquiries of Rosenberg concerning the subject matter of each
and every disagreement or event, if any, known by FRC.
16
<PAGE>
PART III
ITEM 9: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS
The names and ages of all directors and executive officers of the Company are as
follows:
Name Position Term(s) of Office
---- -------- -----------------
Michael G. Martin, Age 48 President, Chief Executive July 31, 1997,
Officer until January 15, 1998
Michael G. Martin, Age 48 Director, Chairman July 31, 1997,
of the Board until present
Jerry Swon, Age 48 President, Chief Executive January 15, 1998,
Officer until present
Joerg H. Klaube, Age 56 Vice President, Secretary, July 31, 1997,
Chief Financial Officer until present
John M. Perry, Age 54 Executive Vice President July 31, 1997,
until February 13, 1998
Peter J. Buscetto, Age 50 Director October 7, 1997,
until present
Paul Chernis, Age 63 Director July 31, 1997,
until present
There are no family relationships among the Company's Officers and
Directors.
All Directors of the Company hold office until the next annual meeting of
the shareholders and until successors have been elected and qualified. Executive
Officers of the Company are appointed by the Board of Directors at the annual
meeting of the Company's shareholders and hold office for a term of one year or
until they resign or are removed from office.
Resumes:
Michael G. Martin - Chairman of the Board. Mr. Martin founded Proformix,
Inc. in 1991 and has served as President and a Director of that entity since its
inception, and as President, CEO, and Director of the Company since July 1997.
Prior to forming Proformix, Inc., from 1983 to 1987, Mr.Martin founded and was
President of CenterCore Inc., where he developed the CenterCore Workstation
system for office furniture. Between 1987 and Proformix, Inc.'s inception in
1991, Mr.Martin was researching, developing and testing ergonomic products for
what is now the Company.
Jerry Swon - President and Chief Executive Officer. Mr. Swon was appointed
President and Chief Executive Officer in January 1998. Prior to joining the
Company, Mr. Swon was Chairman of Royal Capital, Inc., a New Jersey corporation
specializing in acquisitions and project financing. From 1993 to 1996, Mr. Swon
was President and CEO of Concord Energy, Inc., a public oil and gas company.
17
<PAGE>
Joerg H. Klaube - Chief Financial Officer. Mr. Klaube joined Proformix,
Inc. in December 1994 as Vice President Finance & Administration. From 1993 to
1994 he was Vice President Administration for Comar Technologies Inc., a
computer retail firm, and from 1983 to 1993 Chief Financial Officer for
Unitronix Corporation, a public software design and computer marketing firm.
Prior to that, Mr. Klaube was employed for 16 years with Siemens Corp., the U.S.
subsidiary of Siemens AG, where he served most recently as Director of Business
Administration for its Telecommunications Division. He graduated from the
Banking School in Berlin, Germany, and holds an MBA degree from Rutgers
University.
John M. Perry - Executive Vice President in charge of Operations for
Proformix, Inc., since September 1994. Mr. Perry resigned from the Company's
employ effective February 13, 1998.
Peter J. Buscetto - Director. Mr. Buscetto was appointed director of the
Company in October 1997. He is President /CEO of PJB Associates, Inc., a Georgia
consulting and investment company. Mr. Buscetto has an extensive marketing and
operational background that extends over twenty-five years in the retail field.
He was involved with the expansion of CompUSA where he served as Senior VP of
Operations, CCO, and President of CompUSA East. Prior to that, he spent fifteen
years with the Hechinger Company, a Landover based Home Center company. He held
various operational positions with the Hechinger Company, the last of which was
Senior VP Operations for Home Quarters and a wholly owned subsidiary. PJB
Associates is actively involved with several companies both as an investor and
consultant, throughout the US and Europe.
Paul Chernis - Director. Mr. Chernis was appointed a director of the
Company in July 1997. He has been a partner in the law firm Silverman, Collura,
Chernis & Balzano, P.C. since June 1990 and specializes in corporate and
securities law. His law firm renders legal services to the Company. Mr. Chernis
is a graduate of New York University School of Law, and prior to entering
private practice in 1972, he served as Assistant Regional Administrator of the
New York Regional Office of the Securities and Exchange Commission.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
The Company is not subject to the reporting requirements of Section 16(a)
of the Securities Exchange Act of 1934.
18
<PAGE>
ITEM 10: EXECUTIVE COMPENSATION
The following table sets forth the cash compensation and executive
capacities for the fiscal year ended December 31, 1997, for each executive
officer whose aggregate cash remuneration exceeded $100,000, and for all
executive officers as a group:
Name of individual Capacity in which served Aggregate cash compensation (1)
- ------------------ ------------------------ -------------------------------
Michael G. Martin President, CEO, Director $ 108,347 (2)
All executive officers
as a group (3 persons) $ 261,966 (3)
- ----------
(1) The value of other non-cash compensation extended to or paid for
individuals named above did not exceed 10% of the aggregate cash
compensation paid to such individual, or to all executive officers as a
group.
(2) In September 1997 the Company issued 60,000 shares of its common stock to
Mr. Martin pursuant to an employment agreement entered into in July 1997.
The shares at the time of the grant were assumed to have a de minimis fair
market value because of the Company's financial situation, history of
losses, and a then thin trading market for its securities.
(3) In June 1997 Proformix, Inc. issued 75,000 shares of its common stock,
subsequently exchanged into 21,629 shares of the common stock of the
Company, to Mr. Perry as additional compensation. The shares at the time
of the grant were assumed to have a de minimis fair market value because
of Proformix, Inc.'s financial situation and history of losses
19
<PAGE>
Stock Options:
The following table sets forth stock options granted pursuant to the
Company's 1997 Stock Option Plan to executive officers, directors, and
beneficial owners of more than 10 percent of any class of equity securities of
the Company:
- --------------------------------------------------------------------------------
Number of Common % of Total Options
Shares Underlying Granted to Employees Exercise Expiration
Name Options Granted in Fiscal Year Price ($/Sh.) Date
- --------------------------------------------------------------------------------
J. Klaube 28,838* 9.2 1.7338 4/30/04
J. Klaube 40,000 12.4 4.50 10/15/04
J. Perry 40,000 12.4 4.50 10/15/04
P. Buscetto 40,000 n/a 2.00 10/15/04
P. Chernis** 40,000 n/a 2.00 10/15/04
The following options were granted to a beneficial owner of more than 10
percent of common equity securities of the Company, outside the Company's 1997
Stock Option Plan:
Royal Capital Inc. 192,256* n/a 1.0428 12/31/97
Royal Capital Inc. 166,622* n/a 1.7338 5/12/98
Royal Capital Inc. 166,622* n/a 3.4676 5/12/99
Royal Capital Inc. 166,622* n/a 5.6175 5/12/00
- ----------
* Options granted by Proformix, Inc. prior to its acquisition by the Company,
and subsequently converted into options for Proformix Systems, Inc. stock in
accordance with the exchange ratio stipulated in the Stock Exchange Offer of
July 2, 1997.
** Mr. Chernis has assigned 2/3 of his options to two of his law partners.
1997 Stock Option Plan:
The Company's 1997 Stock Option Plan, as filed with the Securities and
Exchange Commission ("Commission") on July 1, 1997 with an Information Statement
pursuant to Section 14(c), and with a Registration Statement on Form S-8 filed
with the Commission on September 8, 1997, is hereby incorporated by reference.
Compensation of Directors:
The Company currently pays no outside directors' fees.
20
<PAGE>
ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth, as of April 8, 1998, the record and
beneficial ownership of common stock of the Company by each officer and
director, all officers and directors as a group, and each person known to the
Company to own beneficially, or of record, five percent or more of the
outstanding shares of the Company:
Title Name and Address of Amount and Nature of Percent
of Class Beneficial Owner Beneficial Ownership (1) of Class
- -------- ---------------- ------------------------ --------
Common Michael G. Martin 660,153 17.26%
Stock 65 Nicole Avenue
Bridgewater, NJ 08807
Jerry Swon 615,093(2) 14.2%
5 Kerby Lane
Mendham, NJ 07945
Joerg Klaube 28,838(3) **
4 Claire Drive
Bridgewater, NJ 08807
John M. Perry 21,629(4) **
11 Rupells Road
Clinton, NJ 08809
Peter Buscetto 0 **
Paul Chernis 0 **
Royal Capital Inc. 541,201(5) 12.51%
75 Claremont Road
Bernardsville, NJ 07924
All Directors and Officers 1,304,084 29.96%
as a Group (5 persons)
- ----------
(1) For purposes of this table, a person or group of persons is deemed to have
"beneficial ownership" of any shares of Common Stock which such person has the
right to acquire within 60 days of April 8, 1998. For purposes of computing the
percentage of outstanding shares of Common Stock held by each person or group of
persons named above, any security which such person or persons has or have the
right to acquire within such date is deemed to be outstanding but is not deemed
to be outstanding for the purpose of computing the percentage ownership of any
other person. Except as indicated in the footnote to this table and pursuant to
applicable community property laws, the Company believes based on information
supplied by such persons, that the persons named in this table have sole voting
and investment power with respect to all shares of Common Stock which they
beneficially own.
(2) Includes 541,201 shares and options owned by Royal Capital Inc. and 73,892
shares owned by Jane Swon, Mr. Swon's wife. Jerry Swon is Chairman and his wife
Jane is the principal stockholder of Royal Capital, Inc.
(3) Represents options to purchase a like number of shares.
(4) Mr. Perry is no longer with the Company.
(5) Includes options to purchase 499,866 shares.
21
<PAGE>
ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In June 1997, Royal Capital Inc. received 2,900,000 shares of the common
stock of Proformix, Inc. for services rendered pursuant to a consulting
agreement dated May 12, 1997. These shares were subsequently exchanged for
836,313 shares of the Company's common stock upon consummation of the
acquisition of Proformix, Inc.
In June 1997, Anthony W. Schweiger received 700,000 shares of the common
stock of Proformix, Inc. for services rendered pursuant to a consulting
agreement dated May 12, 1997. These shares were subsequently exchanged for
201,869 shares of the Company's common stock upon consummation of the
acquisition of Proformix, Inc.
In June 1997, John M. Perry, then Executive Vice President of the Company,
received 75,000 shares of the common stock of Proformix, Inc. as additional
compensation. These shares were subsequently exchanged for 21,629 shares of the
Company's common stock pursuant to the acquisition of Proformix, Inc.
In September 1997, Michael G. Martin, Chairman and CEO of the Company,
received 60,000 shares of the common stock of the Company, as additional
remuneration pursuant to his employment agreement dated July 18, 1997.
ITEM 13: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The Exhibits that are filed with this report or that are incorporated by
reference are set forth in the Exhibit Index attached hereto.
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during the quarter ended December
31, 1997.
22
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act, the
Registrant has caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
PROFORMIX SYSTEMS, INC.
By: /s/ Jerry Swon Date: April 15, 1998
-----------------------------
Jerry Swon
President, Chief Executive Officer
(Principal Executive Officer)
By: /s/ Joerg H. Klaube Date: April 15, 1998
-----------------------------
Joerg H. Klaube
Secretary, Chief Financial Officer
(Principal Financial Officer)
In accordance with the requirements of the Securities Exchange Act, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Name Date
---- ----
/s/ Michael G. Martin April 15, 1998
--------------------------
Michael G. Martin, Chairman
/s/ Peter J. Buscetto April 15, 1998
--------------------------
Peter J. Buscetto, Director
/s/ Paul Chernis April 15, 1998
--------------------------
Paul Chernis, Director
23
<PAGE>
EXHIBIT INDEX
(A) Financial Statements and Notes to Financial Statements
(2.1) Agreement dated June 16, 1997, between the Company, Royal Capital Inc.
and Donald Yu
(2.2) Stock Exchange Agreement dated June 24, 1997, between the Company,
Royal Capital Inc. and Proformix Inc.
(2.3) Information Statement pursuant to Section 14(c) as filed with the
Commission on July 1, 1997, regarding Change of Name, Stock Split, and
Ratification of 1997 Stock Option Plan, incorporated herein by
reference.
(2.4) Stock Exchange Offer dated July 2, 1997, by the Company to the
shareholders of Proformix, Inc. and Statement regarding Change in
Control of registrant and Acquisition or Disposal of Assets, filed with
the Commission on Form 8-K on July 17, 1997, incorporated herein by
reference.
(4) Designation for Cumulative Preferred Stock filed January 13, 1998, with
the State of Delaware, and incorporated herein by reference.
(10.1) Consulting Agreement dated May 12, 1997, between Proformix Inc. and
Royal Capital Inc.
(10.2) Consulting Agreement dated May 12, 1997, between Proformix Inc. and
Anthony W. Schweiger filed by the Company with the Commission on Form
S-8 on August 19, 1997, and incorporated herein by reference.
(10.3) Employment Agreement dated July 18, 1997, between the Company and
Michael G. Martin filed by the Company with the Commission on Form S-8
on August 19, 1997, and incorporated herein by reference.
(11) Statement re: Computation of earnings per share.
(16) Documentation regarding change in certifying accountant incorporated by
reference to Form 8-K filed on July 31, 1997, filed by the Company with
the Commission, and incorporated herein by reference.
(21) Subsidiaries of the Company:
(i) Proformix, Inc. is a corporation formed under the laws of the State
of Delaware and is the name under which it conducts business.
(ii) Corporate Ergonomic Systems Inc. - a wholly owned subsidiary of
Proformix, Inc. - is a corporation formed under the laws of the State
of New Jersey and is the name under which it conducts business.
(23) Independent Auditors' Consent - attached to Exhibit A.
(27) Financial Data Schedule - attached to Exhibit A.
24
<PAGE>
OTHER DOCUMENTS INCORPORATED HEREIN BY REFERENCE
(a) The Company's Quarterly Reports on Form 10-QSB for the periods ended
March 31, 1997, June 30, 1997, and September 30, 1997.
(b) All other reports filed by the Company pursuant to Section 13(a) or
15(d) of the Exchange Act since the Company's fiscal year ended
December 31, 1996.
25
<PAGE>
Proformix Systems, Inc. and Subsidiaries
Index to the Consolidated Financial Statements
December 31, 1997
Page
Independent Auditors' Report............................................ 1
Financial Statements
Consolidated Balance Sheet......................................... 2
Consolidated Statements of Operations.............................. 3
Consolidated Statement of Stockholders Equity (Deficit)............ 4-5
Consolidated Statements of Cash Flows.............................. 6-7
Notes to the Consolidated Financial Statements..................... 8-20
<PAGE>
Independent Auditors' Report
To the Board of Directors and Stockholders of
Proformix Systems, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Proformix
Systems, Inc. and Subsidiaries as of December 31, 1997 and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for the two years ended December 31, 1997 and 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Proformix Systems,
Inc. and Subsidiaries as of December 31, 1997 and the consolidated results of
their operations and their cash flows for the years ended December 31, 1997 and
1996, in conformity with generally accepted accounting principles.
Bridgewater, New Jersey
March 23, 1998
(April 15, 1998, as to SUBSEQUENT EVENTS)
1
<PAGE>
Proformix Systems, Inc. and Subsidiaries
Consolidated Balance Sheet
December 31, 1997
Assets
Current Assets
Cash $ 4,546
Accounts receivable net of allowance
for doubtful accounts of $27,058 314,492
Inventories 256,501
Prepaid expenses 47,604
-----------
Total Current Assets 623,143
Property, plant and equipment 423,125
Other assets 105,982
-----------
Total Assets 1,152,250
===========
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities
Accounts payable and accrued expenses 1,363,716
Trade acceptance payable 44,860
Subscriptions payable 275,000
Dividends payable 27,000
Loans payable 866,579
Current maturities of notes payable 450,000
Current maturities of long-term debt 394,081
Current maturities of capitalized
lease obligations 8,589
-----------
Total Current Liabilities 3,429,825
Notes payable, less current portion 1,150,000
Long-term debt, less current portion 551,460
Obligations under capital leases,
excluding current maturities 17,975
-----------
Total Liabilities 5,149,260
-----------
Minority Interest --
Stockholders' Equity (Deficit)
Preferred stock Series A, $.01 par value,
authorized 3,000,000 shares; issued and
outstanding, 0 shares --
Cumulative preferred stock, $.0001 par value;
2,500 shares authorized, 10 shares
issued and outstanding --
Common stock, $.0001 par value,
30,000,000 shares authorized;
2,898,507 shares issued
and outstanding 290
Contributed capital 243,000
Additional paid in capital 2,314,856
Accumulated deficit (6,555,156)
-----------
Total Stockholders' Equity (Deficit) (3,997,010)
-----------
Total Liabilities and Stockholders' Equity (Deficit) $ 1,152,250
===========
See notes to the consolidated financial statements.
2
<PAGE>
Proformix Systems, Inc. and Subsidiaries
Consolidated Statements of Operations
Year Ended December 31,
---------------------------
1997 1996
----------- -----------
Net Sales $ 3,125,009 $ 3,284,243
Cost of goods sold 1,451,204 1,005,192
----------- -----------
Gross Profit 1,673,805 2,279,051
Selling, general and administrative
expenses 2,801,975 2,794,056
----------- -----------
(Loss) From Operations (1,128,170) (515,005)
----------- -----------
Other Income (Expense)
Miscellaneous income 90,977 --
Obsolete production return reserve -- (425,529)
Lawsuit settlement -- (64,489)
Interest expense (338,038) (339,236)
Loss on disposition of assets (132,514) (31,834)
----------- -----------
Total Other (Expense) (379,575) (861,088)
----------- -----------
(Loss) Before Provision for Income
Taxes and Extraordinary Item (1,507,745) (1,376,093)
Provision for Income Taxes -- --
----------- -----------
(Loss) Before Extraordinary Item (1,507,745) (1,376,093)
----------- -----------
Extraordinary Item - abandoned initial
public offering expenses
(net of $0 income tax effect) -- (669,713)
----------- -----------
Net (Loss) $(1,507,745) $(2,045,806)
=========== ===========
Net (Loss) Per Common Share:
(Loss) Before Extraordinary Item $ (.76) $ (1.26)
=========== ===========
Net (Loss) $ (.76) $ (1.84)
=========== ===========
Weighted Average of Common Shares
Outstanding 2,094,724 1,160,864
=========== ===========
See notes to the consolidated financial statements.
3
<PAGE>
Proformix Systems, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity (Deficit)
Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
Convertible Cumulative
Preferred Shares Preferred Shares Common Stock
------------------- ----------------------- -------------------
Shares Amount Shares Amount Shares Amount
-------- --------- --------- ---------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1996 -- $ -- 10 $ -- 4,417,655 4,418
Retirement of 1,000,000 shares for
consideration of $75,000 -- -- -- -- (1,000,000) (1,000)
Dividends on cumulative preferred
shares -- -- -- -- -- --
Dividends cumulative preferred
shares waived -- -- -- -- -- --
Net loss, year ended December 31, -- -- -- -- -- --
-------- --------- --------- ---------- --------- ------
Balances, December 31, 1996 -- -- 10 -- 3,417,655 3,418
Dividends on cumulative preferred
shares -- -- -- -- -- --
Dividends on cumulative preferred
shares waived -- -- -- -- -- --
Issuances of common stock granted
for services performed -- -- -- -- 1,210,000 1,210
Issuances of common stock pursuant
to stock option exercise per
consulting agreement -- -- -- -- 701,343 702
Issuance of common stock for
conversion of accrued interest
on private placement notes -- -- -- -- 281,539 282
Issuance of common stock pursuant to
consulting agreement -- -- -- -- 2,900,000 2,900
-------- --------- --------- ---------- --------- ------
Subtotal - Proformix, Inc. -- -- 10 -- 8,510,537 8,512
-------- --------- --------- ---------- --------- ------
Exchange of Proformix, Inc.
preferred stock for preferred
stock of the Company -- -- (10) -- -- --
Recapitalization pursuant to reverse
acquisition:
Exchange of Proformix, Inc.
common shares 3.4676 to 1 common
share of the Company -- -- -- -- (8,266,757) (8,267)
Proformix, Inc. common shares
not tendered and accounted
for as a minority interest -- -- -- -- (243,780) (245)
-------- --------- --------- ---------- --------- ------
Subtotal - Proformix, Inc. -- -- -- -- -- --
-------- --------- --------- ---------- --------- ------
<CAPTION>
Additional Stockholders'
Contributed Paid in Accumulated Equity
Capital Capital Deficit (Deficit)
----------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Balances, January 1, 1996 $ 81,000 $ 1,435,108 $(2,821,605) $(1,301,079)
Retirement of 1,000,000 shares for
consideration of $75,000 -- (74,000) -- (75,000)
Dividends on cumulative preferred
shares -- -- (9,000) (9,000)
Dividends cumulative preferred
shares waived 81,000 -- (81,000) --
Net loss, year ended December 31, -- -- (2,045,806) (2,045,806)
------- --------- ---------- ----------
Balances, December 31, 1996 162,000 1,361,108 (4,957,411) (3,430,885)
Dividends on cumulative preferred
shares -- -- (9,000) (9,000)
Dividends on cumulative preferred
shares waived 81,000 -- (81,000) --
Issuances of common stock granted
for services performed -- 44,790 -- 46,000
Issuances of common stock pursuant
to stock option exercise per
consulting agreement -- 216,636 -- 217,338
Issuance of common stock for
conversion of accrued interest
on private placement notes -- 281,250 -- 281,532
Issuance of common stock pursuant
to consulting agreement -- (2,900) -- --
------- --------- ---------- ----------
Subtotal - Proformix, Inc. 243,000 1,900,884 (5,047,411) (2,895,015)
------- --------- ---------- ----------
Exchange of Proformix, Inc.
preferred stock for preferred
stock of the Company -- -- -- --
Recapitalization pursuant
to reverse acquisition:
Exchange of Proformix, Inc.
common shares 3.4676 to 1
common share of the Company -- 8,267 -- --
Proformix, Inc. common shares
not tendered and accounted
for as a minority interest -- 245 -- --
------- --------- ---------- ----------
Subtotal - Proformix, Inc. 243,000 1,909,396 (5,047,411) (2,895,015)
------- --------- ---------- ----------
</TABLE>
See notes to the consolidated financial statements.
4
<PAGE>
Proformix Systems, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity (Deficit)
Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
Convertible Cumulative
Preferred Shares Preferred Shares Common Stock
------------------- --------------------- ----------------------------
Shares Amount Shares Amount Shares Amount
-------- --------- -------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Opening common and preferred stock of
the Company prior to the exchange
with Proformix, Inc. -- -- 35,036 -- 43,064 4
Cancelation of the Company's preferred
stock -- -- (35,036) -- -- --
Issuance of common stock of the Company
to Royal Capital, Inc. -- -- -- -- 313,600 32
Fractional shares canceled -- -- -- -- (18) --
Exchange of the Company's common stock,
one common share for 3.4676 common
shares of Proformix, Inc. -- -- -- -- 2,384,000 238
Exchange of the Company's preferred
stock for preferred stock of
Proformix, Inc. -- -- 10 -- -- --
-------- --------- --------- ---------- ------------- ---------
Subtotal - the Company -- -- 10 -- 2,740,646 274
-------- --------- --------- ---------- ------------- ---------
Issuance of common stock to President
pursuant to grant -- -- -- -- 60,000 6
Issuance of common stock to domestic
private individuals pursuant to
an exemption under Rule 506 -- -- -- -- 28,611 3
Issuance of common stock to foreign
investors pursuant to Reg. S. -- -- -- -- 69,250 7
Net loss, year ended December 31, 1997 -- -- -- -- -- --
-------- --------- --------- ---------- ------------- ---------
Balances, December 31, 1997 -- $ -- 10 $ -- 2,898,507 $ 290
======== ========= ========= ========== ============= =========
<CAPTION>
Total
Additional Stockholders
Contributed Paid in Accumulated Equity
Capital Capital Deficit (Deficit)
------------- ------------ -------------- -------------
<S> <C> <C> <C> <C>
Opening common and preferred stock of
the Company prior to the exchange
with Proformix, Inc. -- (4) -- --
Cancelation of the Company's preferred
stock -- -- -- --
Issuance of common stock of the Company
to Royal Capital, Inc. -- (32) -- --
Fractional shares canceled -- -- -- --
Exchange of the Company's common stock,
one common share for 3.4676 common
shares of Proformix, Inc. -- (238) -- --
Exchange of the Company's preferred
stock for preferred stock of
Proformix, Inc. -- -- -- --
------------- ------------ -------------- -------------
Subtotal - the Company -- 1,909,122 -- --
------------- ------------ -------------- -------------
Issuance of common stock to President
pursuant to grant -- (6) -- --
Issuance of common stock to domestic
private individuals pursuant
to an exemption under
Rule 506 -- 128,747 -- 128,750
Issuance of common stock to foreign
investors pursuant to Reg. S. -- 276,993 -- 277,000
Net loss, year ended December 31, 1997 -- -- (1,507,745) (1,507,745)
------------- ------------ -------------- -------------
Balances, December 31, 1997 $ 243,000 $ 2,314,856 $ (6,555,156) $ (3,997,010)
============= ============ ============== =============
</TABLE>
See notes to the consolidated financial statements.
5
<PAGE>
Proformix Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year Ended December 31,
---------------------------
1997 1996
----------- ------------
Cash Flows From Operating Activities
Net Income (Loss) $(1,507,745) $(2,045,806)
Adjustments to Reconcile Net (Loss) to
Net Cash
(Used) by Operating Activities
Depreciation and amortization 268,155 109,072
Loss on disposition of assets 132,514 31,834
Bad debt provision 370 --
Forgiveness of debt 90,977 --
Decreases (Increases) in Assets
Accounts receivable 144,674 801,643
Inventories 11,139 86,011
Prepaid expenses 11,337 83,594
Other assets (1,127) 214,449
Increases in Liabilities
Accounts payable and accrued expenses 170,117 517,556
Trade acceptance payable 44,860 --
Advances payable 275,000 --
----------- ------------
Net Cash (Used) by Operating Activities (359,729) (201,647)
----------- ------------
Cash Flows From Investing Activities
Purchases of equipment and fixtures (56,372) (119,762)
----------- ------------
Net Cash (Used) by Investing Activities (56,372) (119,762)
----------- ------------
Cash Flows From Financing Activities
Repayment of notes payable -- (12,163)
Proceeds from long-term debt -- 111,007
Repayment of long-term debt (148,950) (135,000)
Repayment of capital lease obligations (7,660) --
Repayment of officer loans payable (30,000) --
Proceeds from loans payable 25,000 416,579
Repayment of loans payable (25,000) (75,307)
Proceeds from issuance of common stock 605,750 --
----------- ------------
Net Cash Provided by Financing Activities 419,140 305,116
----------- ------------
Net increase (decrease) in cash 3,039 (16,293)
Cash at beginning of period 1,507 17,800
----------- ------------
Cash at end of period $ 4,546 $ 1,507
=========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest Paid $ 142,875 $ 117,044
=========== ============
Taxes Paid $ 425 $ --
=========== ============
See notes to the consolidated financial statements.
6
<PAGE>
Proformix Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year Ended December 31,
-------------------------------
1997 1996
----------- --------------
Schedule of non-cash financing activities
Promissory note issued in connection
with retirement of 1,000,000 Proformix,
Inc. common shares $ -- $ 75,000
=========== ==============
Capitalized lease obligations incurred
for use of equipment $ -- $ 25,644
=========== ==============
In connection with the issuance of
common stock, 281,539 Proformix,
Inc. shares were issued as
consideration for accrued
interest on $1,175,000 of
private placement notes $ 281,539 $ --
=========== ==============
Promissory note issued in connection
with retirement of other promissory
notes and the repayment of a past due
subordinated debenture $ 316,849 $ --
=========== ==============
In connection with the issuance of
common stock, 75,000 Proformix, Inc.
shares were issued as consideration
for past services $ 46,000 $ --
=========== ==============
In connection with a stock option
exercise, 34,676 Proformix, Inc.
shares were issued in connection
with a reduction in accrued expenses $ 17,338 $ --
=========== ==============
See notes to the consolidated financial statements.
7
<PAGE>
Proformix Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Organization
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 June 16, 1997, Royal Capital, Inc. ("Royal"), a New Jersey
Corporation, entered into an agreement with the Company, then known as
Whitestone Industries, Inc., and its then president, whereby Royal (i)
acquired 100,000 shares of the Company's preferred stock held by the
President and (ii) acquired the voting proxy of 1,120,000 (pre-split)
shares of common stock. The consideration paid to the President was
$100,000. Thus, Royal obtained a voting majority of the Company's
capital stock.
On June 24, 1997, the Company, Royal, and Proformix, Inc., a company
incorporated in the State of Delaware in October 1991, entered into an
acquisition agreement as a consequence of which the Company on July 2,
1997, submitted a stock exchange offer to the shareholders of
Proformix, 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 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 gave them the
choice to exchange their shares 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. The exchange transaction
resulted in the former Proformix, Inc. shareholders owning
approximately 90% of the combined entity. 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 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.
8
<PAGE>
Proformix Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
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 1,000,000 units. During 1997, the company
changed the estimated useful life of these molds to 300,000 units. The
effect of this change in estimate increased the Company's net loss for
1997 by $169,073. 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.
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.
9
<PAGE>
Proformix Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Securities Issued for Services, Continued
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.
Deferred Offering Costs
Deferred offering costs amounting to $669,713 consisting of
professional fees had been incurred related to a contemplated initial
public offering of Proformix, Inc.'s common stock and had been
capitalized during 1995. At December 31, 1996, these capitalized
deferred costs were expensed as an extraordinary item since Proformix,
Inc. abandoned the pursuit of its initial public offering.
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 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. Accordingly, the benefit for income taxes has
been offset entirely by a valuation allowance against the related
deferred tax asset for the year ended December 31, 1997.
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.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
10
<PAGE>
Proformix Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
CONCENTRATIONS OF BUSINESS AND CREDIT RISK
The Company maintains cash balances in several financial institutions which
are insured by the Federal Deposit Insurance Corporation up to $100,000.
Balances in these accounts may, at times, exceed the federally insured
limits.
The Company provides credit in the normal course of business to customers
located throughout the U.S. The Company performs on going credit
evaluations of its customers and maintains allowances for doubtful accounts
based on factors surrounding the credit risk of specific customers,
historical trends, and other information.
INVENTORIES
Inventories consisted of the following at December 31, 1997:
Product components $ 119,408
Finished goods 137,093
--------------
$ 256,501
==============
ROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at December 31,
1997:
Molds $ 627,617
Equipment 133,494
Furniture and fixtures 50,696
Leasehold improvements 16,035
Transportation equipment 3,075
---------------
830,917
Less accumulated depreciation 407,792
---------------
$ 423,125
===============
Depreciation expense charged to operations was $237,189 and $68,434 in 1997 and
1996, respectively.
LOANS PAYABLE
Proformix, Inc. had borrowings under short term loan agreements with the
following terms and conditions at December 31, 1997:
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% 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. 135,000
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 March 23,
1998. 75,000
11
<PAGE>
Proformix Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
LOANS PAYABLE, Continued
Pursuant to a promissory note dated January 22, 1996, an
officer of the Company advanced the sum of $64,730 which is
due upon demand and accruing interest at the rate of 12%
per annum. 64,730
Line of credit extended by Carnegie Bank on March 4, 1996
amounting to $250,000 due 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 (a requirement not met by
Proformix, Inc.) and is collateralized by all the
inventory, accounts receivable, equipment, and financial
instruments of Proformix, Inc. 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. While a verbal moratorium of
principal has been agreed to by Proformix, Inc. and
Carnegie Bank, N.A. pending a review of Proformix, Inc.'s
future ability to pay, this obligation is overdue as of
December 31, 1997 and no demand for payment has been made
through March 23, 1998. 250,000
Pursuant to a promissory note dated November 17, 1997, an
investor, who was a consultant to the Company, advanced the
Company $25,000. 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 $ 866,579
==========
NOTES PAYABLE
Private Placement Offering
During February through June 1995, an underwriter acting as placement
agent offered on behalf of Proformix, Inc. in a private placement
offering a minimum of five (5) and a maximum of twenty (20) units. The
first 5 units were offered on a "best efforts all or none" basis and
the remaining 15 units on a "best efforts" basis. Each unit consisted
of a $100,000, 12% promissory note and 10,000 shares of Proformix,
Inc.'s common stock. The promissory notes were originally due on the
earlier of 12 months from their issuance or the completion of a public
or private financing of either debt or equity securities of Proformix,
Inc. whereby, if such financing was for less than the principal amount
of said notes, then the principal amount of said notes were to be
repaid on a pro-rata basis. These notes were subsequently extended for
an additional 6 months, and further by an additional 9 months. 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 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 December
31, 1997. The remaining $450,000 of non-restructured notes are shown in
current liabilities and are in default as of December 31, 1997.
The private offering was completed in June 1995 resulting in Proformix,
Inc. selling a total of sixteen (16) units and receiving net proceeds
of $1,364,061 after deducting private placement agent's commission and
legal fees amounting of $235,939. In connection therewith, Proformix,
Inc. issued 160,000 shares of its $.001 common stock at par. The total
amount of such notes outstanding at December 31, 1997 was $1,600,000.
12
<PAGE>
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. Principal
payments on such note commenced on July 31, 1994. The note had a
scheduled maturity date of 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 an officer of the Company
who further collateralized these obligations with a $300,000
certificate of deposit and his 100% interest in his equity in
Proformix, Inc. 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 the 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 as to compliance
with such covenants from the lender from June 30, 1994 through
December 30, 1995.
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 of 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 (a) the receipt by Proformix, Inc. of new equity in an
amount no less than $1,500,000 or (b) June 30, 1998. $663,888
Note 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. 49,318
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. 121,328
-------
Total 945,541
Less current maturities 394,081
-------
Long-term debt, net of current maturities $551,460
========
13
<PAGE>
Proformix Systems, Inc. and Subsidiaries
Notes to the Financial Statements
LONG-TERM DEBT, Continued
Total maturities of long-term debt are as follows:
Year Ending December 31,
1998 $394,080
1999 247,573
2000 180,000
2001 123,888
--------
$945,541
========
CAPITALIZED LEASE OBLIGATIONS
The Company leases office equipment under a non-cancelable capital lease
agreement expiring January 19, 2001. The capital lease obligation has
been recorded at the present value of future minimum lease payments,
discounted at a interest rate of 8.643%. The capitalized cost of
equipment at December 31, 1997 amounted to $13,936 net of accumulated
depreciation of $9,292.
The following is a schedule of minimum lease payments due under capital
leases at December 31, 1997:
Year Ending December 31,
------------------------
1998 $ 11,096
1999 8,876
2000 8,876
2001 2,219
--------------
Total minimum capital lease payments 31,067
Less amounts representing interest 4,503
--------------
Present value of net minimum capital
lease payments 26,564
Less current maturities of capital
lease obligations 8,589
--------------
Obligations under capital leases,
excluding current maturities $ 17,975
==============
14
<PAGE>
Proformix Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
INCOME TAXES
At December 31, 1997, The Company has net operating loss carry forwards
approximating $6,400,000 which expire between the years 2008 and 2012 and
are subject to certain annual limitations.
The Company's total deferred tax asset and valuation allowance at December
31, 1997 are as follows:
Total deferred tax asset $ 2,560,000
Less valuation allowance (2,560,000)
----------------
Net deferred tax asset $ -
================
401(k) PLAN
The Company adopted the qualified Proformix, Inc. sponsored 401(k) plan
covering substantially all full time employees under which eligible
employees may elect to contribute, within statutory limits, a percentage of
their annual compensation. The Company matches up to 50% of the employee's
contribution which may not exceed 3% of the employee's total compensation
for the plan year. Contributions to the plan were $17,800 and $15,364 for
the years ended December 31, 1997 and 1996, respectively.
STOCK OPTION PLANS
In April 1996, Proformix, Inc. adopted its 1996 Stock Incentive Plan ("the
1996 Plan"). The 1996 Plan provides that certain options granted thereunder
are intended to qualify as "incentive stock options" (ISO) within the
meaning of Section 422A of the United States Internal Revenue Code of 1986,
while non-qualified options may also be granted under the Plan. The initial
plan and subsequent amendments provided for authorization of up to 480,000
shares. Pursuant to the above described stock exchange offer on July 2,
1997, all options under the 1996 Plan were converted into shares of the
Company at a rate of 3.4676 shares of Proformix, Inc. to 1 share of the
Company.
In September 1997, the Company adopted its 1997 Stock Incentive Plan ("the
1997 Plan"). The 1997 Plan provides that certain options granted thereunder
are intended to qualify as "incentive stock options" (ISO) within the
meaning of Section 422A of the United States Internal Revenue Code of 1986,
while non-qualified options may also be granted under the Plan. The initial
plan and subsequent amendments provided for the grant of options for up to
1,000,000 shares. The purchase price per share of common stock deliverable
upon exercise of each ISO shall not be less than 100% of the fair market
value of the common stock on the date such option is granted. If an ISO is
issued to an individual who owns, at the time of grant, more than 10% of
the total combined voting power of all classes of the Company's common
stock, the exercise price of such option shall be at least 110% of the fair
market value of the common stock on the date of grant and the term of the
option shall not exceed five years from the date of grant. The purchase
price of shares subject to non-qualified stock options shall be determined
by a committee established by the Board of Directors with the condition
that such prices shall not be less than 85% of the fair market value of the
common stock at the time of grant.
15
<PAGE>
Proformix Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
STOCK OPTION PLANS (cont.)
Qualified and Non-Qualified
Shares Under Option December 31,
---------------------------------
1997 1996
--------------- --------------
Outstanding, beginning of year -- --
Granted during the year 596,144 --
--------------- --------------
Exercised during the year at $1.73 per share (10,000) --
--------------- --------------
Outstanding, end of year (at prices ranging
from $1.73 to $4.50 per share) 586,144 --
=============== ==============
Eligible, end of year for exercise (at
prices ranging from $1.73 to $4.50
per share) 283,144 --
=============== ==============
At December 31, 1997, the weighted average exercise price and weighted average
remaining contractual life is $3.36 per share and 6 years 4 months,
respectively.
At December 31, 1997, there were 552,280 shares reserved for future grants.
WARRANTS
The Company issued common stock purchase warrants as follows:
Exercise
No. of Price Vesting
Date of Grant Shares Per Share Exercise Term Rights
- --------------- ------ --------- ------------------------------ -----------
Start Expiration
-------------- ---------------
May 1, 1997 10,000 $4.00 May 1, 1997 April 30, 2000 Upon Issue
August 14, 1997 28,611 4.50 August 14, 1997 August 14, 1999 Upon Issue
At December 31, 1997, there were 38,611 shares eligible for exercise at prices
ranging from $4.00 to $4.50 per share.
COMMITMENTS AND CONTINGENCIES
Lease Agreement
Proformix, Inc. leases its administrative offices and warehouse
pursuant to a lease agreement dated November 1, 1993. which was
extended on November 1, 1996. Such lease expires on October 31, 1999
and requires monthly payments of $5,974 from May 1, 1994 to October 31,
1996, $6,094 from November 1, 1996 to April 30, 1998 and $6,216 from
May 1, 1998 to October 31, 1999. Ergonomics leases office space
pursuant to a lease agreement dated November 1, 1997. Such lease
expires November 1, 1998 and requires monthly payments of $600. Under
such lease agreements, Proformix, Inc. and Ergonomics are required to
make future minimum lease payments as follows (including Proformix,
Inc.'s operating expenses which approximate $1,750 per month):
Year Ending December 31,
------------------------
1998 $ 100,504
1999 79,660
-------------
Total $ 180,164
=============
Included in general and administrative expenses is rent expense which amounted
to $96,544 and $92,580 for the years ended December 31, 1997 and 1996,
respectively.
16
<PAGE>
Proformix Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
COMMITMENTS AND CONTINGENCIES, Continued
Litigation
In October 1996, the Company entered into an agreement with a Latvian
company to obtain certain financing. The Latvian company agreed to buy
700,000 pre-split shares of the Company's common stock for $500,000 and to
additionally provide loan financing of $400,000, to be secured by 1,483,750
pre-split shares of stock owned by certain shareholders. Subsequent to the
issue and transfer of the 2,183,750 pre-split shares, the Company learned
that the agreed to funds were not provided and in February 1997, a lawsuit
was filed as to ownership of the 2,183,750 pre-split shares (15,940
post-split) transferred. Since then, these shares have been enjoined by the
United States District Court for the Northern District of California
pending resolution. The Company is not aware of any further developments
regarding this matter and expects a favorable outcome.
Two lawsuits were instituted against Proformix, Inc. by a stockholder of
Proformix, Inc.
One suit asserts that the stockholder had a consulting agreement with
Proformix, Inc. pursuant to which Proformix, Inc. had agreed to pay
$125,000 a year for five years and that Proformix, Inc. has defaulted in
performance of its obligations.
The stockholder has also initiated suit along with other shareholder
members of his family alleging damages because Proformix, Inc. acted
inconsistent with the best interest of its stockholders. Other
miscellaneous claims were asserted in that suit.
It is Proformix, Inc.'s position that both of these suits are without
merit, however, a verbal settlement had been reached with the plaintiffs in
both cases pursuant to which all claims would be dismissed upon Proformix,
Inc. making six monthly payments totaling $20,000 commencing November 1,
1997. This potential liability has been recorded by Proformix, Inc. No
payments have yet been made by Proformix, Inc. since it has not received
from the plaintiff's attorneys the necessary settlement documents. The
settlement may also be contingent upon approval by a bankruptcy court since
the stockholder has filed a petition of reorganization.
An additional suit was bought against Proformix, Inc. by a claimant for
legal fees. The suit was settled upon the agreement by the Company
(guaranteed by an officer of the Company) to pay a total of $176,000
consisting of an initial payment of $20,000 and the balance in equal
monthly installments of $6,500 each over a period of 24 months, commencing
September 1, 1997. In addition, the Company and the officer agreed that in
the event any payment was in default, they each would consent to judgement
for the total legal fees demanded of $238,564 less any payments made to
that point. The Company was not in default as of December 31, 1997.
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.
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Proformix Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
COMMITMENTS AND CONTINGENCIES, Continued
Employment Agreements
In July of 1997 the Company entered into an employment agreement with
Proformix, Inc.'s President, to serve as the Company's President and Chief
Executive Officer for a period of five years. Base salary under the
agreement is $108,000 per annum with annual increases determined by the
Board of Directors. The agreement also calls a first year bonus of 140,000
shares of the Company's stock, and 200,000 shares in any year thereafter in
which the Company's after tax net profits exceed $1,000,000 for each of its
first three full fiscal years during the employment term beginning with
calendar year 1998. Eligibility for benefit programs, with the exception of
any key employee stock option plan, and a fully paid
medical/hospitalization policy is provided under the agreement. The Company
will also provide reimbursement of ordinary and necessary business expenses
and a monthly car allowance. A noncompetition/nonsolicitation restriction
applies for 36 months after termination of employment. The agreement
provides for severance compensation equal to three months of base salary if
employment is terminated by the Company for cause.
The Vice President and Chief Financial Officer of Proformix, Inc. entered
into an employment agreement on April 15, 1996. The agreement is for a term
of three years expiring April 14, 1999. Pursuant to the terms of the
agreement, the officer is to receive an annual salary of $100,000 subject
to annual review by the Board of Directors with the first such review at
September 1, 1996, and an annual bonus as determined by the Board. Pursuant
to the agreement, Proformix, Inc. would pay the premiums on a $400,000 life
insurance policy for the benefit of individuals designated by the officer.
The agreement restricts the officer from competing with Proformix, Inc. for
a period of two years after the termination of his employment under certain
circumstances. The agreement provides for severance compensation to be
determined pursuant to a formula established therein to be paid to the
officer if his employment with Proformix, Inc. is not renewed upon
expiration of the initial or any renewal term thereof, his employment is
terminated by Proformix, Inc. other than as permitted by the agreement, or
any successor to Proformix, Inc.after a change of control or other
reorganization of Proformix, Inc. fails to assume the agreement.
Consulting Agreements
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. In
consideration of such services, Royal was granted, in addition to other
consideration, 2.4 million options to purchase common shares of Proformix,
Inc. (equal to 692,122 recapitalized shares of the Company) or any
succeeding or acquiring entity at exercise prices ranging from $1.04 to
$5.62 per share of the Company. Through December 31, 1997 options to
acquire 192,256 shares of the Company were exercised at a price of $1.04
per share. As of March 23, 1998, an aggregate of approximately $1,840,000
in additional equity has been raised pursuant to Royal's efforts.
In December 1997 the Company started negotiations with Royal for the
purpose of raising another $1,500,000 to $2,000,000 on terms similar to
those of the May 1997 agreement.
On May 12, 1997, the Company's subsidiary Proformix, Inc. entered into an
agreement with a management consultant. In consideration of such services,
whereby, in addition to other consideration, the consultant was awarded
150,000 stock options to Proformix Inc.'s common stock (equal to 43,258
shares of the Company of which 33,258 remain unexercised at December 31,
1997).
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Proformix Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
RELATED PARTY TRANSACTIONS
Additional Remuneration
In June 1997, an Executive Vice President of the Company received 75,000
shares of the common stock of Proformix, Inc., subsequently converted to
21,629 shares of the common stock of the Company, as additional
remuneration.
In September 1997, an officer of the Company received 60,000 shares of the
common stock of the Company, as additional remuneration, pursuant to his
employment agreement of July 18, 1997.
Subscriptions Payable
During July 1997 one of the Company's board members advanced the Company
$100,000 as evidenced by two 8% promissory notes which were subsequently
agreed to be converted to common shares pursuant to the filing of an
Offering Memorandum offering shares 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
instead pursued an offering 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. During November and December 1997, one investor advanced the
Company $175,000 which was to be used for the purchase of common stock
pursuant to the filing of a Private Placement offering shares to qualified
investors pursuant to an exemption provided by Regulation S promulgated
under the Securities Act of 1933, as amended. Pending completion of such
transaction, these funds have been accounted for as subscriptions payable.
On January 26, 1998, 87,500 shares of common stock were issued to this
investor.
MAJOR CUSTOMERS
For the year ended December 31, 1997, the Company had a major customer,
sales to which represented approximately 39% of the Company's revenues. The
Company had an accounts receivable balance due from this customer of
$156,710 at December 31, 1997. The loss of this customer would have a
materially adverse effect on the Company.
MAJOR SUPPLIERS
The Company owns all of the molding tools for the manufacture of the
plastic components of its products. The Company subcontracts all of its
manufacturing and some of its Company's assembly requirements to several
companies within close proximity of the Company's facilities. Among them
are one supplier which undertakes all of the injection-molding, and another
supplier which manufactures most of the metal components of the Company's
product lines. In the event that either of these two primary suppliers
became unable or unwilling to provide such services to the Company, while
potentially causing some delays or disruptions in the flow of materials,
there are other comparable potential suppliers available which could be
utilized in such an event. The Company's molds are insured for replacement,
although they are made of steel and aluminum and are therefore at little
risk for fire, smoke or water damage.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash, accounts receivable, accounts payable, accrued expenses, notes
payable, long-term debt and capitalized lease obligations:
The Carrying amount approximates fair value because of the short term
maturity of these instruments.
19
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Proformix Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
Limitations
Fair value estimates are made at a specific point in time, based on
relevant information and information about the financial instrument. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
SUBSEQUENT EVENTS
Formation of Proformix Software, Inc.
On January 14, 1998, Proformix Systems, Inc. formed a new wholly owned
subsidiary, Proformix Software, Inc. as a Delaware corporation.
Acquisition of Rolina Corporation
On February 2, 1998, Proformix Software, Inc., Proformix Systems, Inc.,
Rolina Corporation (a New Jersey corporation), and it's 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.
Changes in Key Personnel
In January 1998, the President of the Company relinquished his position and
became Chairman of the Company's Board of Directors. Simultaneously, the
former Chairman of the Board of Directors of Royal Capital, Inc. assumed
the President and CEO of Proformix Systems, Inc. and its subsidiaries.
In February 1998, the Company's Executive Vice President resigned from his
employment with the Company.
Acquisition of Vanity Software Publishing Corp.
On March 6, 1998, the Company executed a letter of intent, with Vanity to
issue a tender offer 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".
Capital Raising Activities
Between January 1, 1998, and April 15, 1998, the Company received an
aggregate $2,837,000 in additional equity capital against issuance of
788,366 shares, including $2,562,000 in cash and $275,000 representing the
conversion of subscription prepayments received prior to December 31, 1997.
In addition, 250,000 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.
20
STOCK PURCHASE AGREEMENT ("Agreement"), effective as of June ___, 1997, by
and among Royal Capital, Inc., a Delaware corporation with offices located at 75
Claremont Road, Bernardsville, New Jersey 07924 (the "Company"); Whitestone
Industries, Inc., a Delaware corporation with offices located at 19200 Von
Karmen Avenue, Irvine, California 92715 ("Whitestone"); and Donald R. Yu, an
individual residing at 6363 Christie Avenue, Emeryville, California 94608
("Stockholder").
WHEREAS, the Company desires to acquire control of Whitestone through the
acquisition of all outstanding shares of stock of Whitestone held by the
Stockholder in accordance with the terms and conditions set forth herein; and
WHEREAS, the Stockholder desires to acquire control of Golden Bear
Entertainment Corp. ("Golden"), a wholly owned subsidiary of Whitestone, through
the acquisition of all outstanding shares of capital stock of Golden held by
Whitestone at time of Closing in accordance with the terms and conditions set
forth herein;
NOW, THEREFORE, in consideration of the covenants set forth herein, it is
agreed as follows:
ARTICLE I
THE EXCHANGE
1.1 Terms of Purchase. On the basis of the representations, warranties,
covenants and agreements contained herein, and subject to the terms and
conditions of this Agreement.
(i) The Stockholder shall sell, assign, transfer and convey to the Company
at the Closing Date (as hereinafter defined) or as soon thereafter as
practicable 1,120,000 shares of Whitestone Common Stock, $.0001 par value
("Common
<PAGE>
Stock") and 100,000 shares of Whitestone Series A Preferred Stock, $.01
par value ("Preferred Stock")(collectively the "Whitestone Shares"). The
Stockholder shall deliver at the Closing Date certificates representing
the Whitestone Shares duly endorsed in blank or accompanied by stock
powers duly endorsed in blank, in each case in proper form for transfer,
with signatures guaranteed as reasonably requested by the Company and with
all stock transfer and other required documentary stamps affixed thereto.
(ii) In consideration for the Whitestone Shares, (i) the Company shall
deliver to Stockholder at the Closing Date a check or wire in the amount
of $100,000, of which $10,000 has been previously paid; and (ii)
Whitestone shall issue to Stockholder certificates representing all
outstanding shares of the capital stock of Golden ("Golden Shares") held
by Whitestone.
ARTICLE II
CLOSING
2.1 Closing. The Closing contemplated by Article 1 of this Agreement shall
be held at the offices of Silverman, Collura, Chernis & Balzano, P.C. within
five days after the conditions set forth in Article 7 of this Agreement have
been satisfied, unless another place or on such date as is agreed upon in
writing by the parties (the "Closing Date").
2.2 After the Closing Date and from time to time thereafter, the parties
to this Agreement shall execute such additional instruments and take such other
action as either party may reasonably request in order to effectuate the
transactions contemplated by this Agreement.
2
<PAGE>
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Whitestone and the Stockholder as
follows:
3.1 Organization and Standing. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has all requisite power, qualification and authority, corporate or
otherwise, to own, lease and operate its properties and assets and carry on its
business as and in the places where such properties and assets are now owned,
leased or operated or such business is now being conducted.
3.2 Authorization. The Company has all requisite power and authority to
execute, deliver and perform this Agreement. All necessary corporate proceedings
of the Company have been duly taken to authorize the execution, delivery and
performance of this Agreement by the Company. This Agreement has been duly
authorized, executed and delivered by the Company, constitutes the legal valid
and binding obligation of the Company, and is enforceable in accordance with the
terms hereof.
3.3 No Further Action Needed. No consent, authorization, approval, order,
license, certificate, permit, declaration or filing with, any federal, state,
local or other governmental authority or any court or other tribunal is required
by the Company for the execution, delivery or performance of this Agreement by
the Company. No consent of any party to any contract, agreement, instrument,
lease, license, arrangement, or understanding to which the Company is a party,
or to which it or any of its properties or assets are subject, is required for
the execution, delivery or performance of this Agreement. The execution,
delivery and performance of this Agreement will not violate, result in a breach
of, conflict with, or entitle any party to terminate
3
<PAGE>
or call a default under any term of any contract, agreement, instrument, lease,
license, arrangement, or understanding whereby the Company is a party to, or
violate or result in a breach of any term of the Certificate of Incorporation
(or other charter document) or by-laws of the Company, or violate, result in a
breach of, or conflict with any law, rule, regulation, order, judgment, or
decree binding on the Company or to which any of its operations, business,
properties or assets are subject.
3.4 Veracity of Statements. Neither this Agreement nor the representations
and warranties by the Company contained herein or in any documents,
instruments,certificates or schedules furnished pursuant hereto or in connection
with the transactions contemplated hereby contains any untrue statement of a
material fact or omits to state a material fact necessary to make the statements
or facts contained herein and therein not misleading. There is no fact which
adversely affects, or in the future may adversely affect, the business,
operations, affairs, condition or prospects of the Company's assets and/or
business which has not been set forth in this Agreement.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF WHITESTONE AND STOCKHOLDER
Whitestone and Stockholder hereby represent and warrant to the Company as
follows:
4.1 Organization and Standing. Whitestone is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware
and has all requisite power and authority, corporate or otherwise, to own, lease
and operate its properties and to carry on its businesses in the places where
such properties are now owned, leased or operated or such business is now being
conducted, or contemplated to be conducted.
4
<PAGE>
4.2 Authorization. Whitestone has all requisite power and authority,
corporate and otherwise, to enter into this Agreement and to assume and perform
its obligations hereunder. The execution and delivery of this Agreement and the
performance by Whitestone of its obligations hereunder will be duly authorized
by all necessary corporate action. No further action or approval, corporate or
otherwise, will be required in order to constitute this Agreement as a valid,
binding and enforceable obligation of Whitestone.
4.3 Capitalization. The authorized capital stock of Whitestone consists of
30,000,000 shares of $.0001 par value Common Stock ("Common Stock"), of which
5,924,320 shares are issued and outstanding. Each of such outstanding shares of
Common Stock is validly authorized, validly issued and fully paid and
non-assessable, has not been issued and is not owned or held in violation of any
preemptive right of stockholders. At the Closing Date, the Whitestone Shares
shall be validly issued, fully paid and non-assessable.
4.4 Lack of Commitment to Issue Securities. There is not presently
outstanding nor is there any commitment, plan, or arrangement to issue, any
options, warrants or other rights calling for the issuance of any shares of
stock of Whitestone or any security or other instrument convertible into,
exercisable for or exchangeable for stock of Whitestone, except as disclosed on
Schedule 4.4 attached hereto.
4.5 Financial Condition. Annexed hereto as Schedule 4.5 are true and
correct copies of the following: (i) audited consolidated balance sheets of
Whitestone for its last three fiscal years ended December 31, 1996, 1995, and
1994; (ii) the unaudited balance sheet of Whitestone as of March 31, 1997 (most
recent date available); (iii) audited consolidated statements of income,
statements of retained earnings, and statements of changes in financial position
and/or
5
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cash flow of Whitestone for the last three fiscal years ended December 31, 1996,
1995 and 1994; and (iv) the unaudited consolidated statements of income,
consolidated statements of retained earnings, and consolidated statements of
changes in financial position and/or cash flow of Whitestone for the three (3)
months ended March 31, 1997 (most recent available). Each such balance sheet
presents fairly the consolidated financial condition, assets, liabilities, and
stockholders' equity of Whitestone as of its date; each such statement of income
and statement of retained earnings presents fairly the consolidated results of
operations of Whitestone for the period indicated; and each such statement of
changes in financial position and/or cash flow presents fairly the consolidated
information purported to be shown therein. The financial statements referred to
in this Section 4.5 have been prepared in accordance with generally accepted
accounting principles consistently applied throughout the periods involved, are
correct and complete, and are in accordance with the books and records of
Whitestone.
4.6 Lack of Material Changes. Since March 31, 1997 (the most recent
audited financial statement date) except as described on Schedule 4.6 annexed
hereto,
(a) There has not been any material adverse change in the financial
condition, results of operations, business, properties, assets,
liabilities, or future prospects of Whitestone.
(b) Whitestone has not authorized, declared, paid, or effected any
dividend or liquidating or other distribution in respect of its
capital stock or any direct or indirect redemption, purchase, or
other acquisition of any such stock.
6
<PAGE>
(c) The operations and business of Whitestone have been conducted in all
respects only in the ordinary course.
(d) Whitestone has not mortgaged, pledged or subjected to lien or other
encumbrances any of its assets.
(e) Whitestone has not suffered an extraordinary loss (whether or not
covered by insurance) or waived any right of substantial value.
(f) Whitestone has not sold or transferred any of its assets having a
book value of $100,000 or more or canceled any debts or claims,
except, in each case, in the ordinary course of business.
(g) There has not been any issuance of the Whitestone's capital stock,
bonds or other corporate securities.
(h) There has not been any strike, lockout, labor trouble or any similar
event or condition of any character adversely affecting the business
of Whitestone.
(i) There has not been any increase in the compensation payable or to
become payable by Whitestone to any of its officers, employees or
agents, or any known payment or arrangement made to or with any of
such persons, except as disclosed to the Company.
There is no fact known to Whitestone which materially adversely affects or
in the future (as far as Whitestone can foresee) may materially adversely affect
the financial condition, results of operations, business, properties, assets,
liabilities, or future prospects of Whitestone;
7
<PAGE>
provided, however, that Whitestone express no opinion as to political or
economic matters of general applicability.
4.7 Tax and Other Liabilities. (i) Whitestone has no liability or
obligation of any nature, accrued or contingent, including without limitation
liabilities for federal, state, local, or foreign taxes, liabilities to
customers or suppliers, direct or indirect, claims, losses, damages,
deficiencies (including deferred income tax and other net tax deficiencies),
costs, expenses, obligations, guarantees, or responsibilities, whether accrued,
absolute, or contingent, known or unknown, fixed or unfixed, liquidated or
unliquidated, secured or unsecured, (hereinafter collectively referred to as
"Liabilities") other than the following:
(a) Liabilities for which full provision and/or disclosure has been made
on the audited balance sheet (the "Last Balance Sheet") as of
December 31, 1996 (the "Last Balance Sheet Date") referred to in
Section 4.5 of this Agreement; and
(b) Other liabilities arising since the Last Balance Sheet and prior to
the Closing Date in the ordinary course of business which are not
inconsistent with the representations and warranties of Whitestone
or any other provision of this Agreement. To the extent that any
other liabilities in excess of $3,000 have arisen since the Last
Balance Sheet, such other liabilities are described in Schedule 4.7
annexed hereto.
(ii) Without limiting the generality of the foregoing, the amounts set up as
provisions for taxes on the Last Balance Sheet are sufficient for all accrued
and unpaid federal, state, local and foreign taxes of Whitestone, whether or not
due and payable and whether or not disputed, under
8
<PAGE>
tax laws, as in effect on the Last Balance Sheet Date or now in effect, for the
period ended on such date and for all fiscal years prior thereto. Whitestone has
filed all federal tax returns required to be filed by them. Whitestone has paid
(or has established on the Last Balance Sheet a reserve for) all taxes,
assessments, and other governmental charges payable or remittable by it or
levied upon it or its properties, assets, income, or franchises which are due
and payable. Whitestone has not received reports as to adjustments from any
taxing authority during the past five years and Whitestone knows of no
governmental or other proceeding (formal or informal), or investigation pending,
threatened, or in prospect with respect to any such report or the subject matter
of any such report.
4.8 Litigation and Claims. There is no litigation, arbitration, claim,
governmental or other proceeding (formal or informal), or investigation pending,
threatened, or in process (or any basis therefore known to Stockholder or
Whitestone) with respect to Whitestone, or any of its or his business,
properties, or assets except as disclosed on Schedule 4.8 attached. Whitestone
is not affected by any present or threatened strike or other labor disturbance
nor to the knowledge of Whitestone, is any union attempting to represent any
employee of the Company as collective bargaining agent. Whitestone is not in
violation of, or in default with respect to, any law, rule, regulation, order,
judgment, or decree; nor is Whitestone required to take any action in order to
avoid such violation or default.
4.9 Assets. The financial statements annexed hereto as Schedule 4.5
contain a true and complete list of all real and other properties and material
assets (including but not limited to machinery, equipment, inventories, and
intangibles owned, leased, used in its business and/or licensed by Whitestone
(collectively the "Assets"). The Assets constitute all such properties and
9
<PAGE>
assets which are necessary to conduct the business of Whitestone as presently
conducted and/or as Whitestone contemplates conducting.
4.10 Title to Assets. Whitestone has good and marketable title to all of
the Assets (except real and other properties and assets as are held pursuant to
leases as referred to in Article 4.14 herein, free and clear of all liens,
mortgages, security interests, pledges, charges, conditional sales agreements
and security investments, and encumbrances (except as are listed in the
financial statements attached to the Agreement as Schedule 4.5).
4.11 Accounts and Notes Receivable. All accounts and notes receivable
reflected on the Last Balance Sheet, and those arising since the Last Balance
Sheet Date constitute valid and binding obligations, have been collected or are
and will be good and collectible, in each case at the aggregate recorded amounts
thereof without right of recourse, defense, deduction, return of goods,
counterclaim, offset, or set off on the part of the obligor, and, if not
collected, can reasonably be anticipated to be paid within 60 days of the date
incurred.
4.12 Lack of Restrictions. No real property owned, leased, licensed, or
used by Whitestone lies in an area which is, or to the knowledge of Whitestone,
will be, subject to zoning, use, or building code restriction which would
prohibit, and no state of facts relating to the actions of another person or
entity or its ownership, leasing, licensing, or use of any real or personal
property exists or will exist which would prevent, the continued effective
ownership, leasing, licensing, or use of such real property in the business in
which Whitestone is now engaged or the business in which it contemplates
engaging.
4.13 Contracts and Other Instruments. (i) Schedule 4.13 accurately and
completely details all contracts, licenses, instruments and agreements to which
Whitestone is a party,
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<PAGE>
including but not limited to, all telephone agency agreements, supply
agreements, manufacturer agreements, price protection agreements,
distributorship agreements, OEM agreements, partnership agreements, dealership
agreements, fiduciary agreements, license agreements, marketing agreements,
commission agreements, sales agency agreements, other agency agreements, bank
credit agreements, factoring agreements, loan agreements, indentures, promissory
notes, guarantees, undertakings, other evidences of indebtedness, letters of
credit, joint venture agreements, operating agreements, management agreements,
agreements for the acquisition of merger or combination with any other company,
corporation or businesses signed within the last two years, employment
agreements, labor agreements, salesmen commission agreements, independent
contractor agreements, sales or purchase agreements for a term in excess of one
year which have an aggregate sale or purchase price in excess of $50,000;
contracts, agreements, arrangements, or understandings with any stockholder, any
director, officer, or employee, any relatives or affiliate of any stockholder or
of any such director, officer, or employee, or any other corporation or
enterprise in which any stockholder, any such director, officer, or employee, or
any such relative or affiliate then had or now has a 5% or greater equity or
voting or other substantial interest; government contracts, franchise
agreements, management agreements, advisory agreements, consulting agreements,
advertising agreements, construction agreements, warehousing agreements,
engineering agreements, design agreements, major utility agreements and any
other agreements which involve the payment of in excess of $50,000 prior to the
date it can be terminated without penalty or premium (all of which contracts,
licenses, instruments, and agreements are hereinafter referred to collectively
as the "Contracts").
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(ii) Neither Whitestone nor any other party to any such Contract, to the
best of Whitestone's knowledge, is now or expects in the future to be in
violation or breach of, or in default with respect to complying with, any
material provision thereof, and each such Contract, is in full force and effect
and is the legal, valid, and binding obligation of the parties thereto and is
enforceable as to them in accordance with their respective terms. Neither
Whitestone nor any other party to any such Contract has given notice of
termination or taken any action inconsistent with the continuance thereof. The
execution, delivery, and performance of this Agreement will not prejudice any
such Contract. Whitestone is not party to or bound by any other contract,
agreement, instrument, lease, license, arrangement, or understanding, or subject
to any charter or other restriction, which has had or may in the future have a
material adverse effect on the financial condition, results of operations,
business, properties, assets, liabilities, or future prospects of Whitestone.
4.14 Leases. Schedule 4.14 attached hereto describes all of Whitestone's
leases and subleases to which Whitestone is a party ("Leases"). Whitestone
enjoys peaceful and undisturbed possession under all such leases. All such
Leases are legal, valid and binding agreements and Whitestone is a tenant or
possessor in good standing thereunder, free of any default or breach whatsoever
and quietly enjoys the premises provided for therein. Each rental, royalty or
other payment due thereunder has been made; each act required to be performed
which, if not performed, would constitute a material breach thereof has been
duly performed; and no prohibited acts have been performed thereunder which, if
presented, would constitute a material breach thereof. Each of such leases is in
full force and effect and there is not under
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any such lease any default or claim of default or event which, with or without
notice of the lapse of time or both would constitute a breach or default
thereunder.
4.15 Capital Projects. As of the date of this Agreement, Whitestone has
not undertaken any capital projects the cost of completion of which would exceed
$3,000 except as listed in Schedule 4.15 attached hereto and made a part hereof.
4.16 Environmental Laws. Whitestone is in material compliance with all
federal, state and local laws regarding environmental matters.
4.17 ERISA Matters. Whitestone does not have, nor does it contribute to,
any pension, profit sharing, option, other incentive plan, or any other type of
employee benefit plan (as defined in Section 3(3) of the Employee Retirement
Income Security Act of 1974), or any obligation to or customary arrangement with
employees for bonuses, incentive compensation, or severance pay.
4.18 Insurance. Schedule 4.18 attached hereto and made a part hereof is a
complete and correct list of all insurance policies of any kind held by
Whitestone. Each such policy is valid and enforceable; all premiums and other
payments due from Whitestone on account of any such policy have been paid, there
is no act or failure to act which has or might cause any such policy to be
canceled or terminated.
4.19 Labor Disputes. Whitestone is not a party to any union representation
or labor contract. Whitestone has not received any notice from any labor union
or group of employees that such union or group represents or believes or claims
it represents or intends to represent any of the employees of Whitestone; no
strike or work interruption by any of its employees is planned, under
consideration, threatened or imminent; and Whitestone has not made any loan
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or given anything of value, directly or indirectly, to any officer, official,
agent or representative of any labor union or group of employees. Whitestone is
not delinquent in payments to any of its employees for any wages, salaries,
commissions, bonuses or other direct compensation for any services performed by
them to the date hereof or amounts required to be reimbursed to such employees.
In the event of termination of the employment of any of its employees,
Whitestone will not by reason of anything done prior to the Closing Date be
liable to any of said employees for "severance pay" or any other payments.
Whitestone is in compliance with all federal, state and local laws and
regulations respecting labor, employment and wages and hours; and there is no
unfair labor practice complaint against Whitestone pending before the National
Labor Relations Board or any comparable state or local agency.
4.20 Liens on Assets. Except as reflected on Whitestone's financial
statements (Schedule 4.5) Whitestone has good and marketable title to all of its
assets and such assets are not subject to any mortgages, pledges, liens,
conditional sales agreements, encumbrances and security interests or claims
except for minor imperfections in title and encumbrances, if any, which
singularly and in the aggregate are not substantial in amount and do not
materially detract from the value of the property subject thereto or impair the
use thereof in Whitestone's business.
4.21 Condition of Tangible Assets. As of the Closing Date, all of
Whitestone's assets will be in normal, operating and useable condition, in a
state of good maintenance and repair, subject to ordinary wear and tear and
scheduled maintenance items, taking into consideration the age and utilization
thereof, and will conform to all applicable ordinances, regulations and other
laws (including those relating to building and zoning and environmental
protection and occupational safety and health).
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4.22 Validity of Contemplated Transactions. The execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated hereby (i) have been duly approved by the unanimous consent of the
Board of Directors of Whitestone; (ii) do not and will not contravene, violate
and/or result in a breach or default under any provision of the Certificate of
Incorporation or Bylaws of Whitestone as presently in effect; (c) do not
violate, are not in conflict with, and do not constitute a default under, or
cause the acceleration of any payments pursuant to, or otherwise impair the good
standing, validity, or effectiveness of any material agreement, contract,
license, indenture, instrument, lease, or mortgage, or subject Whitestone or any
of its assets to any indenture, mortgage, contract, commitment, or agreement,
other than this Agreement, to which Whitestone is a party or by which Whitestone
or any of its assets are bound; and (d) does not violate any material provision
of law, rule, regulation, order, permit, or license to which Whitestone is
subject.
4.23 Subsidiaries. Whitestone owns no shares of capital stock or other
equity interest in any corporation, partnership, joint venture or other business
organization or enterprise, except as set forth in the financial statements
included in Schedule 4.5 annexed hereto.
4.24 Bank Accounts. Schedule 4.24 annexed hereto lists the names and
addresses of every bank and other financial institution in which Whitestone
maintains an account (whether checking, savings or otherwise), lock box or safe
deposit box, and the account numbers and names of persons having signing
authority or other access thereto.
4.25 Questionable Payments. Neither Whitestone, any director, officer,
agent, employee, or other person associated with or acting on behalf of
Whitestone has, directly or indirectly: (i) used any corporate funds for
unlawful contributions, gifts, entertainment, or other
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unlawful payment to foreign or domestic governmental officials or employees or
to foreign or domestic governmental officials or employees or to foreign or
domestic political parties or campaigns from corporate funds; (ii) violated any
provision of the Foreign Corrupt Practices Act of 1977; (iii) established or
maintained any unlawful or unrecorded fund of corporate monies or other assets;
(iv) made any false or fictitious entry on the books or records of Whitestone;
(v) made any bribe, rebate, payoff, influence payment, kickback, or other
unlawful payment; (vi) given any favor or gift which is not deductible for
federal income tax purposes; and/or (viii) made any bribe, kickback, or other
payment of a similar or comparable nature, whether lawful or not, to any person
or entity, private or public, regardless of form, whether in money, property, or
services, to obtain favorable treatment in securing business or to obtain
special concessions, or to pay for favorable treatment for business secured or
for special concessions already obtained.
4.26 Directors and Officers. A true and complete list as of the date of
this Agreement indicating Whitestone's directors and officers, each of whom has
been duly elected is as follows:
NAME POSITION
---- --------
Donald Yu President, Chief Executive and Director
Geoge Eshoo Secretary, Treasurer and Director
Marianne Rossi Asst. Secretary
4.27 Liabilities. The financial statements annexed hereto as Schedule 4.5
reflect a true and complete list of all Whitestone bank loans, lines of credit,
financial institution indebtedness and other liabilities (including but not
limited to accounts payable and accrued expenses) outstanding as of the date of
this Agreement, which schedule includes the name of the creditor,
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amount outstanding as of the date of this Agreement and essential repayment
terms and conditions.
4.28 Public Company. The Common Stock of the Whitestone is registered with
the United States Securities and Exchange Commission ("SEC") pursuant to Section
12(g) of the Securities Exchange Act of 1934 ("Exchange Act"). The Company is
not current with respect to its filing obligations to the Commission as a
"reporting company." It has filed all required reports but for Forms 10-QSB for
the quarterly periods ended September 30, 1996 and March 31, 1997, and Form
10-KSB for the year ended December 31, 1996. To the best of the Whitestone's
knowledge and belief, there are no pending or foreseeable enforcement
proceedings or investigations relative to the Company commenced by either the
SEC or any state securities bureau.
ARTICLE 5
COVENANTS OF THE COMPANY
5. Covenants of the Company. The Company covenants as follows:
5.1 The representations and warranties of the Company contained in this
Agreement and in the schedules hereto shall be true and correct in all respects
as of the Closing Date. The Company shall give Whitestone prompt notice of any
change in any of the information contained in the representations and warranties
of the Company, the schedules hereto or the documents furnished by the Company
in connection herewith which occurs prior to the Closing Date. Upon the
happening of any occurrence or event prior to the Closing Date, which shall have
a material adverse effect upon the business or assets of the Company, Whitestone
shall have the right to
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terminate this Agreement by written notice to the Company and upon such
termination, no party shall have any further liability or obligation under this
Agreement.
5.2 The Company shall, prior to the Closing Date, deliver to Whitestone
the unanimous consent of its Board of Directors, which consent evidences the
approval of this Agreement and the transactions contemplated hereby.
5.3 The Company will, prior to the Closing Date, comply with all laws
affecting operation of its business, will not operate the said business other
than in the ordinary course, and will give notice to Whitestone of any event or
circumstance not in the ordinary course which materially affect the Company's
business or the Assets.
5.4 The Company shall use its best efforts to take or cause to be taken
all action and do or cause to be done all things necessary, proper or advisable
to consummate the transactions contemplated by this Agreement, including,
without limitation, to obtain all consents, approvals and authorizations of
third parties, to make all filings with and give all notices to third parties
which may be necessary or required in order to effectuate the transactions
contemplated hereby and to provide all information necessary to enable the
Company to meet its disclosure responsibilities to the SEC, NASD and the
investment community.
ARTICLE 6
COVENANTS OF WHITESTONE AND STOCKHOLDER
Whitestone and Stockholder covenant as follows:
6.1 The representations and warranties of Whitestone and Stockholder
contained in this Agreement shall be true and correct in all material respects
as of the Closing Date, and Whitestone and the Stockholder shall give the
Company prompt notice of any change in any of
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the information contained in the representations and warranties of Whitestone
and Stockholder hereunder or the documents furnished by Whitestone in connection
herewith which occurs prior to the Closing Date.
6.2 Whitestone will use its best efforts to, prior to the Closing Date,
comply with all laws affecting the operation of its business.
6.3 Whitestone shall use its best efforts to take or cause to be taken all
action and do or cause to be done all things necessary, proper or advisable to
consummate the transactions contemplated by this Agreement, including, without
limitation, to obtain all consents, approvals and authorizations of third
parties and to make all filings with and give all notices to third parties which
may be necessary or required in order to effectuate the transactions
contemplated hereby.
ARTICLE 7
CONDITIONS OF CLOSING
7.1 The obligation of the Company to close hereunder shall be subject to
the fulfillment and satisfaction by Stockholder and/or Whitestone, prior to or
at the Closing Date, of the following conditions or the written waiver thereof
by the Company:
(i) Board Meeting. Whitestone's Board of Directors shall have approved all
of the transactions described in this Agreement by either a vote or
written consent of the majority of Board members, and a majority of
Whitestone's stockholders shall have executed consents approving the
transactions contemplated by this Agreement. At the Board meeting, the
outgoing Board of Directors shall adopt the following resolutions:
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a) A recapitalization of Whitestone including a reverse stock split
of Whitestone's Common Stock in a ratio requested by the Company;
b) Designation of incoming directors;
c) Resignation of outgoing directors, effective as soon as past due
reports on Forms 10-QSB and Form 10-KSB have been filed with the SEC;
d) Declaration of a stock dividend of 5% of Golden's outstanding
common stock to be distributed to Whitestone's shareholders of record on
the day preceding the Closing Date'
e) Amendment of Whitestone's Certificate of Incorporation to provide
for the aforementioned reverse split and to effect a name change to
Proformix, Inc.; and
f) Approval of the filing of Registration Statement on Form S-8 with
respect to shares to be issued to consultants Seymour Kroll and Carl Henn.
(ii) Representations and Warranties. The representation and warranties of
Whitestone and the Stockholder in this Agreement shall be true and correct
in all material respects when made and shall be true and correct in all
material respects on and as of the Closing Date.
(iii) Reporting Obligations. Whitestone shall file with the SEC all
delinquent Exchange Act reports including, but not limited to, Form 10-QSB
for the quarter ended September 30, 1996, Form 10-KSB for the year ended
December 31, 1996, and Form 10-QSB for the quarter ended March 31, 1997.
The outgoing Board of Directors will be responsible for the filing of such
delinquent reports.
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(iv) Delivery of Officers' Certificate. A certificate signed by
Whitestone's CEO shall be delivered to the Company certifying that each of
the warranties and representations set forth in this Agreement are true
and accurate as of the date of the Closing Date and that no event or
occurrence has transpired as of the Closing Date which has or will have a
material adverse effect upon the business or assets being acquired.
(v) Compliance with Agreement. Whitestone shall have performed and
complied with all of its covenants and obligations under this Agreement
and the Letter of Intent dated May 15, 1997, and Whitestone and the
Stockholder further specifically agree to file all required Exchange Act
reports, issue all shares of stock, including issuance to the Stockholder
of all the outstanding capital stock of Golden, less the 5% stock dividend
provided for hereinabove, and to perform and comply with all other
covenants and obligations which are to be discharged after the effective
date hereof as set forth hereunder.
(vi) Absence of Suit. No action, suit or proceedings before any court or
any governmental or regulatory authority shall have been commenced or
threatened and, no investigation by any governmental or regulatory
authority shall have been commenced against Whitestone seeking to
restrain, prevent or change the transactions contemplated hereby, or
questioning the validity or legality of any such transactions, or seeking
damages in connection with any of such transactions.
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(vii) Receipt of Approvals, Etc. All approvals, consents and/or waivers
for Whitestone that are necessary to effect the transactions contemplated
hereby shall have been received.
(viii) Accuracy of Financial Statements. All balance sheets, statements of
income, statements of changes in financial position and/or cash flows and
other financial statements of Whitestone furnished to the Company pursuant
to this Agreement shall be true, accurate and prepared in accordance with
generally accepted accounting principles.
(ix) Proceedings and Instruments Satisfactory; Certificates. All
proceedings, corporate or otherwise, to be taken in connection with the
transactions contemplated by this Agreement shall have occurred and all
appropriate documents incident thereto as the Company may reasonably
request shall have been delivered to the Company.
(x) Opinion of Counsel. Whitestone shall produce an opinion of counsel as
of the Closing Date addressed to the Company to the effect that (i) this
Agreement has been duly executed and delivered by Whitestone and the and
constitutes a legal, binding obligation of Whitestone and Stocholder
enforceable in accordance with its terms; (ii) Whitestone has taken all
action necessary to authorize the execution and performance of this
Agreement; and (iii) that the Whitestone Shares are duly authorized,
validly issued, fully paid and non-assessable.
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7.2 The obligation of Whitestone to close hereunder shall be subject to
the fulfillment and satisfaction, prior to or at the Closing Date, of the
following conditions by the Company or the written waiver thereof by the
Whitestone:
(i) Representatives and Warranties. The representation and warranties of
the Company in this Agreement shall be true and correct in all material
respects when made and shall be true and correct in all material respects
on and as of the Closing Date.
(ii) Delivery of Officers' Certificate. The Company shall deliver to the
Company a certificate signed by its CEO, certifying that each of the
warranties and representations of the Company set forth in this Agreement
is true and accurate as of the date of the Closing Date and that no event
or occurrence has transpired as of the Closing Date which has or will have
a material adverse effect upon the business or assets being acquired.
(iii) Compliance with Agreement. The Company shall have performed and
complied with materially all of their obligations and delivered all monies
to the Stockholder required to be delivered under this Agreement and the
Letter of Intent dated May 15, 1997.
(iv) Absence of Suit. No action or lawsuit shall have been commenced
against the Company, seeking to restrain, prevent or change the
transactions contemplated hereby, or questioning the validity or legality
of any such transactions, or seeking damages in connection with any of
such transactions.
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(v) Receipt of Approvals, Etc. All approvals, consents and/or waivers for
the Company that are necessary to effect the transactions contemplated
hereby shall have been received.
(vi) Proceedings and Instruments Satisfactory; Certificates. All
proceedings, corporate or otherwise, to be taken in connection with the
transactions contemplated by this Agreement shall have occurred and all
appropriate documents incident thereto as Whitestone may reasonably
request shall have been delivered to Whitestone.
ARTICLE 8
INDEMNIFICATION
8.1 By the Company. The Company shall defend and promptly indemnify and
save Whitestone and the Stockholder harmless from, against, for and in respect
of and shall pay any and all damages, losses, obligations, liabilities, claims,
encumbrances, deficiencies, costs and expenses, including, without limitation,
reasonable attorneys' fees and other costs and expenses incident to any action,
investigation, claim or proceeding (all hereinafter collectively referred to as
"Losses") suffered, sustained, incurred or required to be paid by Whitestone and
the Stockholder by reason of the Company's breach of any warranty,
representation or covenant hereunder.
8.2 By Whitestone. Whitestone shall defend and promptly indemnify the
Company and its officers and directors, and save and hold them harmless from,
against, for and in respect of and shall pay any and all damages, losses,
obligations, liabilities, claims, encumbrances, deficiencies, costs and
expenses, including without limitation, reasonable attorneys' fees and
24
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other costs and expenses incident to any suit, action, investigation, claim or
proceeding (all hereinafter collectively referred to as "Losses") suffered,
sustained, incurred or required to be paid by the Company by reason of (i) the
existence of any and all obligations and/or liabilities of Whitestone which were
not disclosed to the Company in this Agreement; (ii) any breach or failure of
observance or performance of any representation, warranty, covenant, agreement
or commitment made by Whitestone and the Stockholder hereunder or relating
hereto or as a result of any such representation, warranty, covenant, agreement
or commitment being untrue or incorrect in any respect, or (iii) any and all
actions, suits, investigations, proceedings, demands, assessments, audits,
judgments and claims arising out of any of the foregoing or from any
misrepresentation or omission from any schedule to this Agreement, certificates,
financial statements or from any document furnished or required to be furnished
hereunder.
ARTICLE 9
EXPENSES
9.1 Expenses. The parties agree to bear their expenses individually, each
in respect of all expenses of any character incurred by it in connection with
this Agreement or the transactions contemplated hereby.
ARTICLE 10
SECURITIES ACT PROVISIONS
10.1 Restrictions on Disposition of Shares. The Company and Stockholder
covenants and warrants that the Whitestone Shares and the Golden Shares,
respectively, to be received from the Stockholder and Whitestone, respectively,
pursuant to this Agreement are acquired for their own respective accounts and
not with the present view towards the distribution thereof
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without compliance with securities laws and they will not dispose of the
Whitestone Shares and Golden Shares except (i) pursuant to an effective
registration statement under the Securities Act of 1933, as amended, or (ii) in
any other transaction which, in the opinion of Whitestone's or Golden's counsel,
as the case may be, is exempt from registration under the Securities Act of
1933, as amended, or the rules and regulations of the SEC thereunder. In order
to effectuate the covenants of this subsection 10.1 an appropriate legend has
been be placed upon each of the certificates of stock at the time of
distribution of the Whitestone and Golden Shares by the Stockholder and
Whitestone pursuant to this Agreement, and stop transfer instructions shall be
placed with the transfer agent for said Shares.
10.2 Evidence of Compliance with Private Offering Exemption. The
Stockholder agrees to supply the Company with such evidence as counsel for the
Company may require in order to evidence the private offering character of the
distribution of shares made pursuant to this Agreement.
10.3 Notice of Limitation Upon Disposition. The Company and the
Stockholder is aware that the Whitestone Shares and Golden Shares distributed
pursuant to this Agreement will not have been registered pursuant to the
Securities Act of 1933, as amended, and therefore, under current interpretations
and applicable rules, said Shares can not be publicly sold for a period of at
least one year, and at the expiration of such one year period, sales of said
Shares may be confined to brokerage transactions of limited amounts requiring
certain notification filings with the SEC and such disposition may be available
only if Whitestone are current in its filings with the SEC under the Securities
Act of 1933, as amended, or other public disclosure requirements.
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ARTICLE 11
MISCELLANEOUS PROVISIONS
11.1 Entire Agreement. This Agreement and the Letter of Intent dated May
15, 1997 constitutes the entire agreement of the parties with respect to the
subject matter hereof.The representations, warranties, covenants and agreements
set forth in this Agreement and in any financial statements, schedules or
exhibits delivered pursuant hereto constitute all the representations,
warranties, covenants and agreements of the parties hereto and upon which the
parties have relied and except as may be specifically provided herein. No
change, modification, amendment, addition or termination of this Agreement or
any part thereof shall be valid unless in writing and signed by or on behalf of
the party to be charged therewith.
11.2 Survival of Covenants, etc. All warranties, representations and
covenants set forth herein shall survive the Closing Date of this Agreement.
11.3 Notices. Any and all notices or other communications or deliveries
required or permitted to be given or made pursuant to any of the provisions of
this Agreement shall be deemed to have been duly given or made for all purposes
if sent by Federal Express delivery or by certified or registered mail, return
receipt requested and postage prepaid or hand delivered as follows:
For the Company:
Royal Capital, Inc.
75 Claremont Road
Bernardsville, NJ 07924
Copy to:
Silverman, Collura, Chernis & Balzano. P.C
381 Park Avenue Suite, Suite 1601
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New York, New York 10016
For Stockholder:
6363 Christie Avenue
Emeryville, California 94608
11.4 Waiver. No waiver of the provisions hereof shall be effective unless
in writing and signed by the party to be charged with such waiver. No waiver
shall be deemed a continuing waiver or waiver in respect of any subsequent
breach or default, either of a similar or different nature, unless expressly so
stated in writing.
11.5 Governing Law. This Agreement shall be governed, interpreted and
construed in accordance with the laws of the State of New York applicable to
contracts to be performed entirely within that State. Any dispute in any way
related to the subject matter of this Agreement shall be litigated exclusively
within the State of New York and all parties hereto, including shareholders of
the Company consent to the jurisdiction of the State and/or United States
District Courts of New York. Should any clause, section or part of this
Agreement be held or declared to be void or illegal for any reason, all other
clauses, sections or parts of this Agreement which can be affected without such
illegal clause, section or part shall nevertheless continue in full force and
effect.
11.6 Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns or heirs and personal representatives; provided, however, that no party
may assign any of its rights or delegate any of its duties under this Agreement
without the prior written consent of the other parties hereto.
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11.7 Captions. The headings, captions or titles of paragraphs under
sections or subsections of this Agreement are for convenience and reference only
and do not in any way modify, interpret or construe the intent of the parties or
effect any of the provisions of this Agreement.
11.8 Time Periods. Any time period provided for herein which shall end or
expire on a Saturday, Sunday, or legal holiday shall be deemed extended to the
next full business day thereafter.
11.9 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same Agreement.
11.10 Confidentiality. Neither this Agreement nor any memorandum of this
Agreement shall be recorded in the Public Records of any State or County. The
parties hereto agree to keep this Agreement confidential, as well as any
information or document obtained by either party in connection with this
transaction, except to the extent disclosure is required to or by any government
agency or regulatory or quasi-regulatory body. Whitestone will not release any
information by press release or otherwise regarding this transaction without the
prior consent of the Company.
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11.11 Joint Draftsmanship. The preparation of this Agreement has been a
joint effort of the parties and this Agreement shall not, solely as a matter of
judicial construction, be construed more severely against one of the parties
than the other.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed on the date and year first above written.
ROYAL CAPITAL INCORPORATED
By:_____________________________
Bruce Deichl, President
WHITESTONE INDUSTRIES, INC.
By:_____________________________
Donald R. Yu, President
________________________________
Donald R. Yu, Individually
<PAGE>
1. Article 1.1(i) is amended as follows:
(i) The Stockholder shall sell, assign, transfer and convey to the Company
at the Closing Date (as hereinafter defined), or as soon thereafter as
practicable, 100,000 shares of Whitestone Series A Preferred Stock, $.01
par value ("Preferred Stock"). The Stockholder shall arrange for an
irrevocable proxy to be executed by a Whitestone shareholder providing the
Company with sole voting power of 1,120,000 shares of Whitestone Common
Stock, $.0001 par value ("Common Stock") (the Preferred Stock and Common
Stock collectively referred to herein at the "Whitestone Shares"). The
Stockholder shall deliver at the Closing Date certificates representing the
Preferred Stock duly endorsed in blank or accompanied by stock powers duly
endorsed in blank, in each case in proper form for transfer, with
signatures guaranteed as reasonably requested by the Company and with all
stock transfer and other required documentary stamps affixed thereto. The
Stockholder shall also deliver at the Closing Date an executed irrevocable
proxy pursuant to the terms described above.
ROYAL CAPITAL INCORPORATED
By:____________________________
Bruce Deichl, President
WHITESTONE INDUSTRIES, INC.
By:____________________________
Donald Yu, President
_____________________________
Donald Yu, Individually
<PAGE>
1. Article 1.1(ii) is amended to provide for the escrow of $60,000 of the
purchase price, to be released to Stockholder upon the satisfaction of the
following conditions:
(a) The Stockholder will provide the litigation documents relating to
the injunction and stop transfer instructions pertaining to 1,120,000
shares of Whitestone Industries, Inc. Common Stock held or record by
Stockholder; and
(b) The filing of all delinquent Securities Exchange Act of 1934
reports by Stockholder as described in Article 4.28.
ROYAL CAPITAL INCORPORATED
By:____________________________
Bruce Deichl, President
WHITESTONE INDUSTRIES, INC.
By:____________________________
Donald Yu, President
_____________________________
Donald Yu, Individually
STOCK EXCHANGE AGREEMENT
Agreement made as of this 24th day of June, 1997 by, between and among:
WHITESTONE INDUSTRIES, INC., a Delaware corporation with offices at
19200 Von Karmen Avenue, Irvine, California 92715 ("Whitestone");
ROYAL CAPITAL, INC., a New Jersey corporation, with offices located
at 75 Claremont Road, Bernardsville, New Jersey 07924 ("Royal");
PROFORMIX, INC., a Delaware corporation with offices located at 50
Tannery Road, Branchburg, New Jersey 08876 ("Proformix"); and
WHEREAS, Whitestone, a public company, has authorized and shall file an
Information Statement ("Information Statement") pursuant to Regulation 14(C) of
the Securities Exchange Act of 1934 authorizing, among other matters, a (i) name
change to Proformix, Corp.; (ii) reverse split of its outstanding common stock,
$.0001 par value ("Whitestone Common Stock"), in the ratio of 137 to 1; and
(iii) the designation of a series of Cumulative Preferred Stock, $.001 par
value, the "Effective Date" of which Information Statement to be on or about
July 18, 1997;
WHEREAS, Whitestone, a public company, desires to acquire the outstanding
common stock of Proformix, and Proformix is desirous of being acquired by
Whitestone, so that the business of Proformix becomes the business of
Whitestone;
WHEREAS, Whitestone has reserved for issuance and exchange a total of
3,151,335 shares of Whitestone Common Stock, representing approximately 90% of
the outstanding shares of Whitestone Common Stock, which will enable existing
Proformix Shareholders to receive Whitestone common stock in a ratio to be more
particularly described elsewhere herein;
<PAGE>
WHEREAS, the Shareholders own all, or substantially all, of the
outstanding shares of Proformix Common Stock, $.001 par value, and ten (10)
shares of Cumulative Preferred Stock, $.001 par value (collectively, "Proformix
Stock"); and
WHEREAS, the Shareholders, as listed in Exhibit A attached hereto, desire
to assign their respective shares of Proformix Stock to Whitestone in exchange
for up to 90% of Whitestone Common Stock;
NOW, THEREFORE, in consideration of the premises and mutual covenants
hereinafter set forth, the parties agree as follows:
ARTICLE 1
TRANSACTION TERMS
1. Terms. On the basis of the representations, warranties, covenants and
agreements contained herein, and subject to the terms and conditions of this
Agreement:
1.1 The Shareholders shall sell, assign, transfer and convey to Whitestone
at the Closing Date (as hereinafter deemed) all or substantially all of the
issued and outstanding shares of Proformix Stock free and clear of any liens,
pledges, claims or encumbrances of any nature whatsoever. On the Closing Date,
the Shareholders shall deliver to Whitestone certificates representing the
Proformix Stock duly endorsed in blank or accompanied by stock powers duly
executed and in the name of Whitestone in proper form for transfer with
signatures guaranteed as reasonably requested by Whitestone in order to vest in
Whitestone ownership of the Proformix Stock.
1.2 In consideration of the sale, transfer, conveyance and assignment of
the Proformix Stock contemplated herein on the Closing Date:
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(a) Whitestone shall issue and deliver to the Shareholders, or their
designees, up to an aggregate of 3,151,335 post-reverse split shares of
the common stock of Whitestone, in the ratio of one (1) share of
Whitestone Common Stock for every 3.316897 shares of Proformix, and one
share of Whitestone Cumulative Preferred Stock for every share of
Proformix Cumulative Preferred Stock (sometimes referred to herein as "the
Exchange.") All of such Whitestone Common Stock shall be validly
authorized, duly issued, fully paid and non-assessable. Subsequent to the
Exchange, Whitestone will have outstanding a total of 3,500,000 shares of
Common Stock, and ten shares of Cumulative Preferred Stock. Accordingly,
the Whitestone Common Stock so issued to the Shareholders will represent
up to 90% of Whitestone's outstanding securities.
ARTICLE 2
CLOSING
2.1 Closing. The Closing contemplated by Article 1 of this Agreement shall
be held on June 24, 1997 at the offices of Proformix at the address first stated
above upon satisfaction and/or waiver of the conditions set forth in this
Agreement (the "Closing Date").
2.2 After the Closing Date and from time to time thereafter, the parties
to this Agreement shall execute such additional instruments and take such other
action as either party may reasonably request in order to effectuate the
transactions contemplated by this Agreement.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF WHITESTONE
Whitestone represents and warrants to Proformix and the Shareholders as
follows:
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3.1 Organization and Standing.
(a) Whitestone is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware and has all requisite
power, qualification and authority, corporate or otherwise, to own, lease and
operate its properties and assets and carry on its business as and in the places
where such properties and assets are now owned, leased or operated or where such
business is now being conducted. Whitestone is in good standing in each and
every jurisdiction where its failure to qualify or to be in good standing would
have an adverse effect on its financial condition, the conduct of its business
or the ownership of its assets. Annexed hereto as Schedule 3.1(a) are true,
complete and correct copies of Whitestone's certificate of incorporation (or
other charter document), by-laws and all amendments thereto as presently in
effect, all corporate minutes of Board and Shareholders Meetings for the last
three (3) years and the stock ledger and minute books of Whitestone.
3.2 Authorization. Whitestone has the requisite power and authority to
execute, deliver and perform this Agreement. All necessary corporate proceedings
of Whitestone have been duly taken to authorize the execution, delivery and
performance of this Agreement. This Agreement has been duly authorized, executed
and delivered by Whitestone, constitutes the legal valid and binding obligation
of Whitestone, and is enforceable as to Whitestone in accordance with the terms
hereof.
3.3 No Further Action Needed. There are no consents, authorizations,
approvals, orders, licenses, certificates, or permits of or from, or
declarations or filings with, any federal, state, local or other governmental
authority or any court or other tribunal required by Whitestone, for the
execution, delivery and/or performance of this Agreement. No consent of
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any party to any contract, agreement, instrument, lease, license, arrangement,
or understanding to which Whitestone is a party, or to which it or any of its
properties or assets are subject, is required for the execution, delivery and/or
performance of this Agreement (except as to any such consent of Whitestone's
Board of Directors, which consent will be delivered to Proformix and the
Shareholders on or prior to the Closing Date). The execution, delivery and
performance of this Agreement will not (i) violate, result in a breach of,
conflict with, or entitle any party to terminate or call a default under any
term of any contract, agreement, instrument, lease, license, arrangement, or
understanding whereby Whitestone is a party to, (ii) violate or result in a
breach of any term of the Certificate of Incorporation (or other charter
document) or by-laws of Whitestone; (iii) violate, result in a breach of, or
conflict with any law, rule, regulation, order, judgment, or decree binding on
Whitestone or to which any of its operations, business, properties or assets are
subject; and/or (iv) cause or give any person grounds to cause (with or without
notice, the passage of time, or both), the maturity of any liability or
obligation of Whitestone to be accelerated; nor will it increase any such
liability or obligation.
3.4 Capitalization.
The authorized capital stock of Whitestone consists of 30,000,000 shares
of Common Stock, $.0001 par value, of which 5,924,320 shares will be issued and
outstanding as of the Closing Date; and (ii) 3,000,000 shares of Preferred
Stock, $.001 par value, of which 500,000 shares have been designated Series A
Preferred Stock and 100,000 shares of which will be issued and outstanding as of
the Closing Date (the "Outstanding Stock"). Each Share of the Outstanding Stock
is validly authorized, validly issued and fully paid and non-assessable, has not
been issued and is not owned or held in violation of any preemptive rights of
any stockholder.
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There are no agreements, voting trusts and/or voting agreements among the
shareholders of Whitestone regarding the purchase, sale and/or voting rights of
any of Whitestone's securities.
3.5 Lack of Commitment to Issue Securities. There is not presently
outstanding (nor is there any commitment, plan, or arrangement to issue) any
options, warrants or other rights calling for the issuance of any shares of
common stock or other securities of Whitestone or any other security or other
instrument convertible into, exercisable for or exchangeable for securities of
Whitestone.
3.6 Financial Condition. Annexed hereto as Schedule 3.6 are true and
complete (i) audited consolidated balance sheets of Whitestone for each of the
last three fiscal years ended December 31, 1996, 1995 and 1994 and the related
audited consolidated statement of income and cash flows of Whitestone together
with all related notes thereto, accompanied by the report thereon of
Whitestone's auditors (collectively the "Financial Statements"); and (ii) the
unaudited balance sheet of Whitestone as of March 31, 1997 and the related
unaudited statements of income and cash flow, together with all related notes
thereto (collectively referred to herein as the "Interim Financial Statements").
The Financial Statements and the Interim Financial Statements (i) were prepared
in accordance with the books of account and other financial records of
Whitestone, (ii) present fairly the financial condition, results of operations
and cash flows of Whitestone as of the dates thereof and for the periods covered
thereby, (iii) have been prepared in accordance with United States general
accepted accounting principles ("GAAP") applied on a basis consistent with the
past practices of Whitestone and (iv) include all adjustments (consisting only
of normal recurring accruals) that are necessary for a fair presentation of the
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financial condition of Whitestone, the results of operations and cash flows of
Whitestone as of the dates thereof or for the periods covered thereby.
3.7 Lack of Material Changes. Except as set forth on Schedule 3.7 annexed
hereto, or as otherwise provided pursuant to this Agreement, since March 31,
1997 (the most recent financial statement date):
(a) There has not been any change having a "material adverse effect"
on Whitestone. The term "material adverse effect", as used in this
Agreement, means any circumstance, change, event, transaction, loss,
failure, effect or other occurrence that is, or is reasonably likely to be
materially adverse to the business, operations, properties (including any
intangible properties), condition (financial or otherwise), assets,
liabilities, results of operations or prospects of Whitestone.
(b) Whitestone has not (i) authorized, declared, paid, or effected
any dividend or liquidating or other distribution in respect of its
capital stock or any direct or indirect redemption, purchase, or other
acquisition of any such stock; (ii) declared or effected any split
(forward or reverse) of its securities; and/or (iii) amended its
Certificate of Incorporation or Bylaws, other than as contemplated here by
and necessary to effectuate the transactions contemplated hereby.
(c) The operations and business of Whitestone have been conducted in
all respects only in the ordinary course.
(d) Whitestone has not mortgaged, sold, agreed to sell, pledged or
subjected to lien or other encumbrance any of its respective assets.
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(e) Whitestone has not suffered an extraordinary loss (whether or
not covered by insurance) or waived any right of substantial value.
(f) There has not been any strike, lockout, labor trouble or any
similar event or condition of any character which would have a material
adverse effect on Whitestone.
(g) There has not been any increase in the compensation payable, or
to become payable by Whitestone to any of its respective officers,
employees or agents, or any known payment or arrangement made to or with
any of such persons.
(h) Whitestone has not made any change in its method of accounting
or accounting practice or policy, other than changes required by GAAP.
(i) Whitestone has not agreed, whether in writing or otherwise, to
take any of the actions specified in this Article 3.7, except for those
contemplated by this Agreement.
(b) There is no fact known to Whitestone which will have a material
adverse effect, or in the future (as far as Whitestone can foresee) may have a
material adverse effect on the assets, liabilities, or future prospects of
Whitestone which has not been disclosed in this Agreement; provided, however,
that Whitestone expresses no opinion as to political or economic matters of
general applicability.
3.8 Absence of Undisclosed Liabilities. As of the Closing Date, Whitestone
will have no liabilities or obligations of any nature (whether absolute,
accrued, contingent, or otherwise) including without limitation liabilities for
federal, state, local, or foreign taxes, liabilities to customers or suppliers,
direct or indirect, claims, losses, damages, deficiencies (including deferred
income tax and other net tax deficiencies), costs, expenses, obligations,
guarantees, or
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responsibilities, whether accrued, absolute, or contingent, known or unknown,
fixed or unfixed, liquidated or unliquidated, secured or unsecured.
3.9 Taxes. The term "Tax" or "Taxes" as used in this Agreement means all
income, gross receipts, sales, use, transfer, employment, franchise, profits.
property, excise or other similar taxes, estimated import duties, fees, stamp
taxes and duties, value added taxes, assessments or charges of any kind
whatsoever (whether payable directly or by withholding), together with any
interest and penalties, additions to tax or additional amounts imposed by any
taxing authority with respect thereto.
(a) (i) there is not pending nor, to the best knowledge of
Whitestone, is there any threatened actions or proceedings for the
assessment or collection of Taxes against Whitestone; (ii) there are no
Tax liens on any assets of Whitestone; (iii) there are no outstanding
waivers or agreements extending the statute of limitations with respect to
any Tax to which Whitestone may be subject; (iv) there are no outstanding
requests for information made by a taxing authority to Whitestone; (v)
Whitestone has not been advised by any taxing authority of any proposed
reassessments of the value (or other Tax base) of any property owned by
Whitestone that could increase the amount of a property Tax to which
Whitestone would be subject; (vi) Whitestone has made all payments of
estimated Taxes required to be made under the Code and all state or local
Tax provisions; and (vii) no power of attorney that is currently in force
has been granted with respect to any matter relating to Taxes that could
affect Whitestone.
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(b) Reserves and allowances have been provided on the Financial
Statements that are adequate to satisfy all material Liabilities for Taxes
relating to Whitestone for periods through the date of such financial
statements (without regard to the materiality thereof).
3.10 Litigation and Claims.
(a) There is no litigation, arbitration, claim, governmental,
administrative, regulatory or other proceeding or investigation (formal or
informal) pending, threatened, or in process (or any basis therefore known to
Whitestone) with respect to Whitestone, any transaction in Whitestone's
securities, the transactions contemplated by this Agreement, or any other matter
related to Whitestone other than as described in Schedule 3.7. Whitestone is not
in violation of, or in default with respect to, any law, rule, regulation,
order, judgment, or decree; nor is any action required to be taken in order to
avoid such violation or default. There are no judgments, citations, fines or
penalties heretofore asserted against Whitestone under any federal, state or
local laws which remain unpaid or which otherwise bind the assets of Whitestone.
(b) Whitestone has not received any correspondence, notices, requests for
Wells submissions and/or documents from the Securities and Exchange Commission
("SEC") alleging that (i) Whitestone is not in compliance with any of the
reporting obligations of the Securities Act of 1933, as amended (the "Act") or
the Securities and Exchange Act of 1934 (the "Exchange Act"); and/or that (ii)
Whitestone has or may have violated any provision of the Act and/or the Exchange
Act.
(c) All securities issued by Whitestone in 1997 and 1996 were in
compliance with the provisions of the Act.
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3.11 Lack of Restrictions. Whitestone does not presently maintain any
offices or business locations. Accordingly, no real property owned, leased,
licensed, or used by Whitestone lies in the area which is, or to the knowledge
of Whitestone will be, subject to zoning, use, or building code restriction
which would prohibit, and no state of facts relating to the actions of another
person or entity or its ownership, leasing, licensing, or use of any real or
personal property exists or will exist which would prevent, the continued
effective ownership, leasing, licensing, or use of such real property in the
business in which Whitestone is engaged or the business in which they
contemplate engaging.
3.12 Contracts and Shareholders Units.
(i) There are no outstanding contracts ("Contracts") to which Whitestone
is a party.
(ii) Annexed hereto as Schedule 3.12 is a certified copy of Whitestone's
Shareholders'
List as of June 9, 1997.
(iii) Whitestone is not a party to or bound by any contract, agreement,
instrument, lease, license, arrangement, or understanding, or subject to any
charter or other restriction.
3.13 Leases. Whitestone is not a party to any leases and/or subleases
("Leases").
3.14 Capital Projects. As of the date of this Agreement, Whitestone has
not undertaken any capital projects.
3.15 Environmental Laws
(i) (a) The Assets and all real property utilized by Whitestone have,
and continue to be, owned and operated by Whitestone in material
compliance with all applicable Evironmental Laws.
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(b) Whitestone has not received notice of any pending or threatened
claims, complaints or requests for information with respect to
any alleged violation of any Environmental Laws.
(c) there have been no material releases, as defined under any
Environmental Laws, of any Hazardous Substance with respect to
any properties owned and/or operated by Whitestone.
(d) Whitestone has been issued and is in material compliance with all
permits, certificates, approvals, licenses, registrations,
orders, administrative consent orders any other authorizations,
approvals or consents relating to Environmental Laws or Hazardous
Substances necessary for the operation of its businesses.
(e) Whitestone has not received notice that any of its respective
properties are listed or proposed for listing in the National
Priorities List created pursuant to CERCLA or on the CERCLIS, or
any similar state list of sites requiring investigation or
cleanup.
(f) There are no polychlorinated biphenyls (other than may be
contained in electrical transformers which are labeled, operated
and maintained in accordance with all Environmental Law) or
asbestos-containing materials present at any of the properties
owned and/or operated by Whitestone.
(g) Whitestone has not received notice of pending or threatened
claims with respect to any Properties owned and/or operated by
Whitestone, whether
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or not the subject of any indemnity, under any Environmental Law
or involving any Hazardous Substances.
(ii) As used in the preceding paragraph and elsewhere in this
Agreement the following terms shall have the following meanings:
(a) Environmental Laws means any federal, state or local statute,
code, ordinance, rule, regulation, permit, consent, approval,
license, judgment, order, writ, judicial decision, decree, agency
interpretation, injunction or other authorization or requirement
whenever promulgated, issued, or modified, relating to:
(A) emissions, discharges, spills, release or threatened
releases of pollutants, contaminants, Hazardous Substances,
materials containing Hazardous Substances, or hazardous or toxic
materials or wastes into ambient air, surface water, groundwater,
watercourses, publicly or privately owned treatment works,
drains, sewer systems, wetlands, septic systems or onto land;
(B) the use, treatment, storage, disposal, handling,
manufacturing, transportation, or shipment of Hazardous
Substances, materials containing Hazardous Substances or
hazardous and/or toxic wastes, material, products or by-products
(or of equipment or apparatus containing Hazardous Substances) as
defined in or regulated under the following statutes and their
implementing regulations: the Hazardous Materials Transportation
Act, 49 U.S.C. 1801 et seq, the Resource Conservation
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and Recovery Act, 42 U.S.C. 6901 _ seq., the Comprehensive
Environmental Response, Compensation and Liability Act, 42 U.S.C.
16 ss.ss. et seq. ("CERCLA"), The Clean Water Act, 33 U.S.C.
ss.ss.1251, The Clean Air Act, 42 U.S.C. ss.ss.7401 et seq,
and/or the Toxic Substances Control Act, 15 U.S.C. ss.ss.2601 et
seq., each as amended from time to time; or
(b) Hazardous Substances means (A) hazardous materials, hazardous
wastes and hazardous substances as defined or regulated under any
Environmental Laws, (B) any mixtures, blends, compounds or
liquids containing any hazardous substances in any proportions,
(C) petroleum and petroleum products including crude oil and any
fractions thereof, (D) asbestos and/or any material which
contains any hydrated mineral silicates, whether friable or
non-friable, (E) PCBs, or PCB-containing materials or fluids, (F)
any other hazardous radioactive, toxic or noxious substance,
material, pollutant, or solid, liquid or gaseous waste, and (G)
any substance with respect to which a federal, state or local
agency requires environmental investigation, monitoring or
remediation.
(c) CERCLA has the meaning specified in the definition of
"Environmental Laws"
(d) CERCLlS means the Comprehensive Environmental Responsive,
Compensation and Liability Information System, 42 U.S.C. 9616(a).
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3.16 Compliance with Laws. No permits, licenses, orders, certificates, and
approvals (collectively "Licenses") of all federal, state or local governmental
regulatory bodies are required for Whitestone to conduct its businesses as
presently conducted.
3.17 ERISA Matters and Employees. Whitestone has no employees and has not
contributed to any pension, profit sharing, option, other incentive plan, or any
other type of employee benefit plan (as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974), or any obligation to or customary
arrangement with employees for bonuses, incentive compensation, or severance
pay. Annexed hereto as Schedule 3.17 is a list detailing the name and current
salary (or rate of pay) and other compensation now paid by Whitestone to each
employee of Whitestone, if applicable, including a description of any increase
scheduled to be effective after the date of this Agreement.
3.18 Insurance. Whitestone has no outstanding insurance policies of any
kind.
3.19 Labor Disputes. Whitestone is not a party to any union representation
or labor contract. Whitestone has not received any notice from any labor union
or group of employees that such union or group represents or believes or claims
it represents or intends to represent any of their employees; no strike or work
interruption by any of their employees is planned, under consideration,
threatened or imminent; and Whitestone has not made any loan or given anything
of value, directly or indirectly, to any officer, official, agent or
representative of any labor union or group of employees. Whitestone is not
delinquent in payments to any of its employees for any wages, salaries,
commissions, bonuses or other direct compensation for any services performed by
them to the date hereof or amounts required to be reimbursed to such employees.
In the event of termination of the employment of any said employees, Whitestone
will not by reason of
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anything done prior to the Closing Date be liable to any of said employees for
"severance pay" or any other payments. Whitestone is in compliance with all
federal, state and local laws and regulations respecting labor, employment and
wages and hours; and there is no unfair labor practice complaint against them
pending before the National Labor Relations Board or any comparable state or
local agency.
3.20 Assets and Liabilities. As of the Closing Date, Whitestone shall have
no significant assets. As of the Closing Date, Whitestone shall have absolutely
no liabilities.
3.21 Validity of Contemplated Transactions. The execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated hereby (i) have been duly approved by the unanimous consent of the
Board of Directors of Whitestone; (ii) do not and will not contravene, violate
and/or result in a breach or default under any provision of the Certificate of
Incorporation or Bylaws of Whitestone which are in effect; (c) do not and will
not violate, are not in conflict with, and do not constitute a default under, or
cause the acceleration of any payments pursuant to, or otherwise impair the good
standing, validity, or effectiveness of any material agreement, contract,
license, indenture, instrument, lease, or mortgage, or subject Whitestone or any
of their assets to any indenture, mortgage, contract, commitment, or agreement,
other than this Agreement, to which they are a party or by which any of the
assets are bound; and (d) do not violate any material provision of law, rule,
regulation, order, permit, or license to which Whitestone is subject.
3.22 Questionable Payments. Neither Whitestone, any director, officer,
agent, employee, nor other person associated with or acting on behalf of such
entities or individuals has, directly or indirectly: (i) used any corporate
funds for unlawful contributions, gifts,
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entertainment, or other unlawful payment to foreign or domestic governmental
officials or employees or to foreign 19 or domestic political parties or
campaigns from corporate funds; (ii) violated any provision of the Foreign
Corrupt Practices Act of 1977; (iii) established or maintained any unlawful or
unrecorded fund of corporate monies or other assets; (iv) made any false or
fictitious entry on the books or records of Whitestone; (v) made any bribe,
rebate, payoff, influence payment, kickback, or other unlawful payment; (vi)
given any favor or gift which is not deductible for federal income tax purposes;
and/or (viii) made any bribe, kickback, or other payment of a similar or
comparable nature, whether lawful or not, to any person or entity, private or
public, regardless of form, whether in money, property, or services, to obtain
favorable treatment in securing business or to obtain special concessions, or to
pay for favorable treatment for business secured or for special concessions
already obtained.
3.23 Directors and Officers. A true and complete list as of the date of
this Agreement indicating Whitestone's directors and officers, each of whom has
been duly elected is as follows:
Name Title
---- -----
Donald R. Yu President, Secretary & Director
George Ehoo Director
Marianne Rossi Director
3.24 Patents. Trademarks. Intangibles. Whitestone does not own or license
or have pending any patents, patent applications, trademark, trademark
applications, trade name, service mark, copyright, franchise, or other
intangible property or asset.
3.25 Securities Filings. The Common Stock of Whitestone is registered with
the United States Securities and Exchange Commission ("SEC") pursuant to Section
12(g) of the Securities Exchange Act of 1934 ("Exchange Act"). The Company is
not current with respect
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to its filing obligations to the Commission as a reporting company. It has filed
all required reports but for Forms 10-QSB for the quarterly periods ended
September 30, 1996 and March 31, 1997, and Form 10-KSB for the year ended
December 31, 1996. Whitestone has not received notification from the SEC, the
National Association of Securities Dealers Inc. and/or any state securities
bureaus that any investigation (informal or formal), inquiry or claim is
pending, threatened or in process against Whitestone and/or relating to any of
Whitestone's securities
3.26 Veracity of Statements. Neither this Agreement nor the
representations and warranties by Whitestone contained herein or in any
documents, instruments, certificates or schedules furnished pursuant hereto or
in connection with the transactions contemplated hereby contains any untrue
statement of a material fact or omits to state a material fact necessary to make
the statements or facts contained herein and therein not misleading. There is no
fact which has a material adverse effect, or which in the future may have a
material adverse effect (to the knowledge of Whitestone) on the business,
operations, affairs, condition or prospects of Whitestone, its assets or its
business which has not been set forth in this Agreement, provided however that
Whitestone expresses no opinion as to political or economic matters of general
applicability.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF PROFORMIX
Proformix represents and warrants to Whitestone as follows:
4.1 Organization and Standing. Proformix is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware
and has all requisite
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power, qualification and authority, corporate or otherwise, to own, lease and
operate its properties and assets and carry on its business as and in the places
where such properties and assets are now owned, leased or operated. Proformix is
in good standing in each and every jurisdiction where its failure to qualify or
to be in good standing would have an adverse effect on its financial condition,
the conduct of its business or the ownership of its assets. Annexed hereto as
Schedule 4.1 are true, complete and correct copies of Proformix's certificate of
incorporation (or other charter document), by-laws and all amendments thereto as
presently in effect, all corporate minutes of Board and Shareholders Meetings
and the stock ledger and minute books of Proformix.
4.2 Authorization. Proformix possesses the requisite power and authority
to execute, deliver and perform this Agreement. All necessary corporate
proceedings of Proformix have been duly taken to authorize the execution,
delivery and performance of this Agreement. This Agreement has been duly
authorized, executed and delivered by Proformix, constitutes the legal valid and
binding obligation of Proformix, and is enforceable in accordance with the terms
hereof.
4.3 No Further Action Needed. No consent, authorization, approval, order,
license, certificate, or permit of or from, or declaration or filing with, any
federal, state, local or other governmental authority or any court or other
tribunal is required by Proformix, for the execution, delivery and/or
performance of this Agreement. No consent of any party to any contract,
agreement, instrument, lease, license, arrangement. or understanding to which
Proformix is a party, or to which it or any of its properties or assets are
subject, is required for the execution, delivery and/or performance of this
Agreement. The execution, delivery and
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performance of this Agreement will not (i) violate, result in a breach of,
conflict with, or entitle any party to terminate or call a default under any
term of any contract, agreement, instrument, lease, license, arrangement, or
understanding to which Proformix is a party to, or (ii) violate or result in a
breach of any term of the Certificate of Incorporation (or other charter
document) or by-laws of Proformix; (iii) violate, result in a breach of, or
conflict with any law, rule, regulation, order, judgment, or decree binding on
Proformix or to which any of its respective operations, business, properties or
assets are subject; and/or (iv) cause or give any person grounds to cause (with
or without notice, the passage of time, or both), the maturity of any liability
or obligation of Proformix to be accelerated or which will increase any such
liability or obligation.
4.4 Capitalization.
The authorized capital stock of Proformix consists of (i) 10,000,000
shares, $.001 par value, of Common Stock, of which 10,452,655 shares will be
issued and outstanding prior to the Exchange; (ii) 2,500 shares of Cumulative
Preferred Stock, $.001 par value, of which 10 shares will be issued and
outstanding prior to the Exchange; and (iii) 2,500 shares of Convertible
Preferred Stock (collectively the "Outstanding Stock") of which no shares are
outstanding. Each Share of the Outstanding Stock is or will be when exchanged
hereunder, validly authorized, validly issued and fully paid and non-assessable,
has or will not have been issued and is not owned or held in violation of any
preemptive rights of any stockholder. There are no agreements, voting trusts
and/or voting agreements among the Shareholders of Proformix regarding the
purchase, sale and/or voting of any of Proformix's securities.
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4.5 Lack of Commitment to Issue Securities. Other than as set forth in
Schedule 4.5, there is not presently outstanding (nor is there any commitment,
plan, or arrangement to issue) any options, warrants or other rights calling for
the issuance of any shares of common stock or securities of Proformix or any
other security or other instrument convertible into, exercisable for or
exchangeable for securities of Proformix.
4.6 Financial Condition. Annexed hereto as Schedule 4.6 are true and
complete (i) audited consolidated balance sheets of Proformix for each of the
last three fiscal years ended December 31, 1996, 1995 and 1994 and the related
audited consolidated statement of income and cash flows of Proformix together
with all related notes thereto, accompanied by the report thereon of Proformix's
auditors (collectively the "Financial Statements"); and (ii) the unaudited
balance sheet of Proformix as of April 30, 1997 and the related unaudited
statements of income and cash flow, together with all related notes thereto
(collectively referred to herein as the "Interim Financial Statements"). The
Financial Statements and the Interim Financial Statements (i) were prepared in
accordance with the books of account and other financial records of Proformix,
(ii) present fairly the financial condition, results of operations and cash
flows of Proformix as of the dates thereof and for the periods covered thereby,
(iii) have been prepared in accordance with United States general accepted
accounting principles ("GAAP") applied on a basis consistent with the past
practices of Proformix and (iv) include all adjustments (consisting only of
normal recurring accruals) that are necessary for a fair presentation of the
financial conditions of Proformix, the results of operations and cash flows of
Proformix as of the dates thereof or for the periods covered thereby.
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4.7 Lack of Material Changes. Except as set forth on Schedule 4.7 annexed
hereto, since April 30, 1997 (the most recent Interim Financial Statement date):
(a) There has not been any change having a "material adverse effect"
on Proformix. The term "material adverse effect", as used in this
Agreement, means any circumstance, change, event, transaction, loss,
failure, effect or other occurrence that is, or is reasonably likely to be
materially adverse to the business, operations, properties (including any
intangible properties), condition (financial or otherwise), assets,
liabilities, results of operations or prospects of Proformix.
(b) Proformix has not (i) authorized, declared, paid, or effected any
dividend or liquidating or other distribution in respect of its capital
stock or any direct or indirect redemption, purchase, or other acquisition
of any such stock; (ii) declared or effected any split (forward or reverse)
of its securities; and/or (iii) amended its Certificate of Incorporation or
Bylaws other than as required to consummate the Transactions contemplated
hereby.
(c) The operations and business of Proformix have been conducted in
all respects only in the ordinary course.
(d) Proformix has not mortgaged, sold, agreed to sell, pledged or
subjected to lien or other encumbrances, any of its material assets (as
hereinafter defined).
(e) Proformix has not suffered an extraordinary loss (whether or not
covered by insurance) or waived any right of substantial value.
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(f) Proformix has not sold or transferred any of its assets having a
book value of $5,000 or more or canceled any debts or claims, except, in
each case, in the ordinary course of business.
(g) Proformix has not issued any common stock, preferred stock,
capital stock, bonds, warrants, options, rights or any other form of
corporate securities, other than as necessary to effectuate the
Transactions contemplated hereby.
(h) There has not been any strike, lockout, labor trouble or any
similar event or condition of any character which,would have a material
adverse effect on Proformix.
(i) There has not been any increase in the compensation payable or to
become payable by Proformix to any of its respective officers, employees or
agents, or any known payment or arrangement made to or with any of such
persons.
(j) Proformix has not made any change in the method of accounting or
accounting practice or policy used by Proformix. other than changes
required by GAAP.
(k) Proformix has not made any material changes in the customary
methods of operations of Proformix, including practice and policies
relating to purchasing, inventory, marketing, selling or pricing.
(l) Proformix has not merged with, been merged with or entered into a
consolidation with or acquired (by purchase, merger, consolidation, stock
acquisition or otherwise) a substantial portion of the assets of any entity
or otherwise acquired assets other than in the ordinary costs and in
accordance with past practices.
(m) Proformix has not agreed, whether in writing or otherwise, to take
any of the acts specified in this Article 4.7, except for those
contemplated by this Agreement.
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(n) There is no fact known to Proformix, which will have a material
adverse effect or in the future (as far as Proformix can foresee) may have
a material adverse effect on the financial condition, results of
operations, business, properties, assets, liabilities, or future prospects
of Proformix which has not been disclosed to Whitestone and Royal in this
Agreement; provided, however that Proformix expresses no opinion as to
political or economic matters of general applicability.
4.8 Absence of Undisclosed Liabilities.
(a) Except as set forth on Schedule 4.8(a) annexed hereto, Proformix has
no liabilities or obligations of any nature (whether absolute, accrued,
contingent, or otherwise) including without limitation liabilities for federal,
state, local, or foreign taxes, judgments, liabilities to customers or
suppliers, direct or indirect, claims, losses, damages, deficiencies (including
deferred income tax and other net tax deficiencies), costs, expenses,
obligations, guarantees, or responsibilities, whether accrued, absolute, or
contingent, known or unknown, fixed or unfixed, liquidated or unliquidated,
secured or unsecured, (hereinafter collectively referred to as "Liabilities")
other than the following:
(i) Liabilities for which full provision and disclosure have been made on
the Interim Financial Statements dated April 30, 1997 and have been
incurred in the ordinary course of business and which are not
inconsistent with the representations and warranties of Proformix
contained in this Agreement or any other provisions of this Agreement,
or which do not individually exceed $5,000 and in the aggregate exceed
$10,000.
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4.9 Taxes. The term "Tax" or "Taxes" as used in this Agreement means all
income, gross receipts, sales, use, transfer, employment, franchise, profits,
property, excise or other similar taxes, estimated import duties, fees, stamp
taxes and duties, value added taxes, assessments or charges of any kind
whatsoever (whether payable directly or by withholding), together with any
interest and penalties, additions to tax or additional amounts imposed by any
taxing authority with respect thereto.
(a) (i)(A) All material returns and reports in respect of federal,
local, state and/or local Taxes ("Tax Returns" or "Return") required to be
filed with respect to Proformix (including the consolidated federal income
Tax Returns and state and local income or franchise Tax Returns that
include Proformix or any of its Subsidiaries (hereinafter collectively
referred to in this section as "Proformix") on a consolidated, combined, or
unitary ("combined" basis) have been timely filed; (B) all Taxes shown to
be payable on such Returns or otherwise due, and all assessments of Tax
made against Proformix with respect to such Returns, have been paid; (C)
all such Returns are true, correct, and complete in all material respects,
and (D) no adjustment relating to such Returns has been proposed formally
or informally by any Tax authority and, to the best knowledge of Proformix,
no basis exists for any such adjustment; (ii) there is not pending nor, to
the best knowledge of Proformix, are there any threatened actions or
proceedings for the assessment or collection of Taxes against Proformix;
(iii) there are no Tax liens on any assets of Proformix; (iv) there are no
outstanding waivers or agreements extending the statute of limitations with
respect to any Tax to which Proformix may be subject; (v) there are no
outstanding requests for information made by a taxing authority to
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Proformix; (vi) Proformix has not been advised by any taxing authority of
any proposed reassessments of the value (or other Tax base) of any property
owned by Proformix that could increase the amount of a property Tax to
which Proformix would be subject; (vii) Proformix has made all payments of
estimated Taxes required to be made under the Code and all state or local
Tax provisions; (viii) all Taxes required to be withheld, collected or
deposited by or with respect to Proformix have been timely withheld,
collected or deposited, as the case may be, and, to the extent required,
have been paid to the relevant taxing authority, and (iv) no power of
attorney that is currently in force has been granted with respect to any
matter relating to Taxes that could affect Proformix.
(b) Schedule 4.9(b) annexed hereto (i) lists by type all income,
franchise and other material Tax Returns (federal, state, local, and
foreign) filed with respect to Proformix for taxable periods ended on or
after Proformix's 1994 year end; (ii) indicates for which jurisdictions
Returns have been filed on a combined basis for taxable periods ended on or
after Proformix's 1993 year end, and the companies joining in such Returns;
(iii) indicates the most recent income, franchise, or other material Tax
Return for each relevant jurisdiction for which an audit has been completed
or the statute of limitations has lapsed, and (iv) indicates all Tax
Returns that currently are the subject of audit.
(c) Schedule 4.9(c) annexed hereto (i) lists the amount and expiration
dates of any net operating loss, net capital loss, unused business credit,
unused foreign tax credit, or excess charitable contribution allocable to
Proformix as of Proformix's most recently completed year end.
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(d) Reserves and allowances have been provided on the Financial
Statements and the Interim Financial Statements that are adequate to
satisfy all Liabilities for Taxes relating to Proformix for periods through
the date of such financial statements (without regard to the materiality
thereof).
(e) Proformix has delivered or made available to Whitestone correct
and complete copies of all federal, state and local Tax Returns of
Proformix for periods ending on or after Proformix's 1994 year end, and
correct and complete copies (or summaries) of all examination reports,
correspondence with taxing authorities, statements of deficiencies assessed
against or agreed to by Proformix since Proformix's 1994 year end and any
formal or informal tax sharing arrangements to which Proformix is a party.
4.9 Taxes. The term "Tax" or "Taxes" as used in this Agreement means all
income, gross receipts, sales, use, transfer, employment, franchise, profits.
property, excise or other similar taxes, estimated import duties, fees, stamp
taxes and duties, value added taxes, assessments or charges of any kind
whatsoever (whether payable directly or by withholding), together with any
interest and penalties, additions to tax or additional amounts imposed by any
taxing authority with respect thereto.
(a) (i) there is not pending nor, to the best knowledge of Proformix,
are there any threatened actions or proceedings for the assessment or
collection of Taxes against Proformix; (ii) there are no Tax liens on any
assets of Proformix; (iii) there are no outstanding waivers or agreements
extending the statute of limitations with respect to any Tax to which
Proformix may be subject; (iv) there are no outstanding requests for
information made by a taxing authority to Proformix; (v) Proformix has not
been advised
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by any taxing authority of any proposed reassessments of the value (or
other Tax base) of any property owned by Proformix that could increase the
amount of a property Tax to which Proformix would be subject; (vi)
Proformix has made all payments of estimated Taxes required to be made
under the Code and all state or local Tax provisions; and (vii) no power of
attorney that is currently in force has been granted with respect to any
matter relating to Taxes that could affect Proformix.
(b) Reserves and allowances have been provided on the Consolidated
Financial Statements that are adequate to satisfy all material Liabilities
for Taxes relating to Proformix for periods through the date of such
financial statements (without regard to the materiality thereof).
(c) To date, Proformix has duly filed any required federal, state or
local tax returns including Delaware Corporate Franchise Tax returns
through 1996.
4.10 Litigation and Claims.
(a) There is no litigation, arbitration, claim, governmental,
administrative, regulatory or other proceeding or investigation (formal or
informal) pending, threatened, or in process (or any basis therefore known
to Proformix with respect to Proformix, the transactions contemplated by
this Agreement, or any of Proformix's business, properties, or assets which
could result in either a material adverse effect on Proformix's financial
condition or a judgment against Proformix in excess of $5,000 other than as
disclosed in Schedule 4.10 hereto. Proformix is not in violation of, or in
default with respect to, any law, rule, regulation, order, judgment, or
decree; nor is any action required to be taken in order to avoid such
violation or default. There are no judgments, citations, fines
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or penalties heretofore asserted against Proformix under any federal, state
or local laws which remain unpaid or which otherwise bind the assets of
Proformix.
4.11 [Omitted].
4.12 Lack of Restrictions on Property. No real property owned, leased,
licensed, or used by Proformix lies in the area which is, or to the knowledge of
Proformix will be, subject to zoning, use, or building code restriction which
would prohibit, and no state of facts relating to the actions of another person
or entity or its ownership, leasing, licensing, or use of any real or personal
property exists or will exist which would prevent, the continued effective
ownership, leasing, licensing, or use of such real property in the business in
which Proformix is engaged or the business in which they contemplate engaging.
4.13 Contracts and Other Instruments.
(a) Schedule 4.13 accurately and completely details all contracts,
licenses, instruments, powers of attorney and agreements to which Proformix
is a party, including but not limited to, all distribution agreements,
purchase contracts, wholesale agreements, agency agreements; supply
agreements; manufacturer agreements; price protection agreements;
distributorship agreements; wholesale agreements; partnership agreements;
dealership agreements; fiduciary agreements; license agreements; marketing
agreements; commission agreements; sales agency agreements; bank credit
agreements; factoring agreements; loan agreements; indentures; promissory
notes; guarantees; undertakings; other evidences of indebtedness; letters
of credit; joint venture agreements; agreements for the acquisition of,
merger or combination with any other company, corporation or business
signed within the last three years; employment agreements; labor
agreements;
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salesmen commission agreements; independent contractor agreements; sales or
purchase agreements for a term in excess of one year which have an
aggregate sale or purchase price in excess of $5,000; contracts,
agreements, arrangements, or understandings with any stockholder, any
director, officer, or employee, any relatives or affiliate of any
stockholder or of any such director, officer, or employee, or any other
corporation or enterprise in which any stockholder, any such director,
officer. or employee, or any such relative or affiliate who then had or now
has a 5% or greater equity or voting or other substantial interest;
government contracts; franchise agreements; management agreements; advisory
agreements; consulting agreements; advertising agreements; construction
agreements; warehousing agreements; engineering agreements; design
agreements; major utility agreements and any other agreements which involve
the payment of in excess of $10,000 prior to the date it can be terminated
without penalty or premium; (all of which contracts, licenses, instruments,
power of attorneys and agreements are hereinafter referred to collectively
as the "Contracts").
(b) Proformix, to the best of its knowledge, is not now nor does it
expect to be in the future, in violation or breach of, or in default with
respect to complying with, any material provision of any such Contract and
each such Contract is in full force and effect and is the legal, valid, and
binding obligation of the parties thereto and is enforceable as to them in
accordance with their respective terms. Neither Proformix nor any other
party to any such Contract has given notice of termination or taken any
action inconsistent with the continuance thereof. The execution, delivery,
and performance of this Agreement will not prejudice any such Contract.
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4.14 Leases. Schedule 4.14 lists and describes all equipment or other
leases of whatever nature, to which Proformix is a party.
4.15 Capital Projects. As of the date of this Agreement, Proformix has not
undertaken any capital projects, the cost of completion of which would exceed
$5,000.
4.16 Environmental Laws.
(i) (a) The assets of Proformix and all real properties utilized by
Proformix have been, and continue to be owned and operated
by Proformix in material compliance with all applicable
Environmental Laws.
(b) Proformix has not received written notice of any pending or
threatened claims, complaints or requests for information with
respect to any alleged violation of any Environmental Laws.
(c) There have been no known material releases, as defined under any
Environmental Laws, of Hazardous Substances, by Proformix.
(d) Proformix is in material compliance with all permits,
certificates, approvals, licenses, registrations, orders,
administrative consent orders and any other authorizations,
approvals or consents relating to Environmental Laws or Hazardous
Substances necessary for the operation of its businesses.
(e) Proformix has not received notice that any of its respective
properties are listed or proposed for listing in the National
Priorities List created pursuant to CERCLA or on the CERCLIS, or
any similar state list of sites requiring investigation or
cleanup.
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(f) To the best of Proformix's knowledge there are no polychlorinated
biphenyls (other than may be contained in electrical transformers
which are labeled, operated and maintained in accordance with all
Environmental Law) or asbestos-containing materials present at
any of the properties owned and/or operated by Proformix.
(g) Proformix has not received notice of pending or threatened claims
with respect to any Properties owned and/or operated by
Proformix, whether or not the subject of any indemnity, under any
Environmental Law or involving any Hazardous Substances.
4.17 Compliance with Laws. Annexed hereto as Schedule 4.17 is a list of
all permits, licenses, orders, certificates, and approvals (collectively
"Licenses") of all federal, state or local governmental regulatory bodies
required for Proformix to conduct its businesses as presently conducted; all
such Licenses, are in full force and effect and no suspension or cancellation of
any of them is pending or threatened; and none of such Licenses, will be
adversely affected by the consummation of the transactions contemplated by this
Agreement.
4.18 ERISA Matters and Employees. Proformix has not contributed to any
pension, profit sharing, option, other incentive plan, or any other type of
employee benefit plan (as defined in Section 3(3) of the Employee Retirement
Income Security Act of 1974), or have any obligation to or customary arrangement
with employees for bonuses, incentive compensation, or severance pay. Proformix
presently has no employees. Annexed hereto as Schedule 4.18 are copies of all
proposed employment agreements with pending employees of Proformix.
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4.19 Insurance. Proformix presently has no insurance policies of any kind
except as listed in Schedule 4.19 hereto. Proformix is presently considering the
purchase of officer and director liability insurance policies.
4.20 Labor Disputes. Proformix is not a party to any union representation
or labor contract. Proformix has not received any notice from any labor union or
group of employees that such union or group represents or believes or claims it
represents or intends to represent any of their employees; no strike or work
interruption by any of their employees is planned, under consideration,
threatened or imminent; and Proformix has not made any loan or given anything of
value, directly or indirectly, to any officer, official, agent or representative
of any labor union or group of employees. Proformix is not delinquent in
payments to any of its employees for any wages, salaries, commissions, bonuses
or other direct compensation for any services performed by them to the date
hereof or amounts required to be reimbursed to such employees. To the best of
Proformix's knowledge, in the event of termination of the employment of any said
employees, Proformix will not by reason of anything done prior to the Closing
Date be liable to any of said employees for "severance pay" or any other
payments. Proformix is in compliance with all material federal, state and local
laws and regulations respecting labor, employment and wages and hours; and there
is no unfair labor practice complaint against them pending before the National
Labor Relations Board or any comparable state or local agency.
4.21 Validity of Contemplated Transactions. The execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated hereby (i) have been duly approved by the unanimous consent of the
Board of Directors of Proformix; (ii) do not and will not contravene, violate
and/or result in a breach or default under any provision of the
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Certificate of Incorporation or By-laws of Proformix which are in effect; (c) do
not violate, are not in conflict with, and do not constitute a default under, or
cause the acceleration of any payments pursuant to, or otherwise impair the good
standing, validity, or effectiveness of any material agreement, contract,
license, indenture, instrument, lease, or mortgage, or subject Proformix or any
of its assets to any indenture, mortgage, contract, commitment, or agreement,
other than this Agreement, to which it is a party or by which any of its assets
are bound; and (d) do not violate any material provision of law, rule,
regulation, order, permit, or license to which Proformix is subject.
4.22 Questionable Payments. Neither Proformix, any Proformix director,
officer, agent, employee, or other person associated with or acting on behalf of
such individuals has, directly or indirectly: (i) used any corporate funds for
unlawful contributions, gifts, entertainment, or other unlawful payment to
foreign or domestic governmental officials or employees or to foreign or
domestic governmental officials or employees or to foreign or domestic political
parties or campaigns from corporate funds; (ii) violated any provision of the
Foreign Corrupt Practices Act of 1977; (iii) established or maintained any
unlawful or unrecorded fund of corporate monies or other assets; (iv) made any
false or fictitious entry on the books or records of Proformix; (v) made any
bribe, rebate, payoff, influence payment, kickback, or other unlawful payment;
(vi) given any favor or gift which is not deductible for federal income tax
purposes; and/or (viii) made any bribe, kickback, or other payment of a similar
or comparable nature, whether lawful or not, to any person or entity, private or
public, regardless of form, whether in money, property, or services, to obtain
favorable treatment in
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securing business or to obtain special concessions, or to pay for favorable
treatment for business secured or for special concessions already obtained.
4.23 Directors and Officers. A true and complete list as of the date of
this Agreement indicating Proformix's directors and officers, each of whom has
been duly elected is as follows:
Name Title
---- -----
Michael G. Martin President and Director
Joerg H. Klaube Vice President
4.24 Patents, Trademarks, Intangibles. Schedule 4.24 accurately sets forth
all patents, patent applications, trademark, trademark applications, trade name,
service mark, copyright, franchise, or other intangible property or asset (all
of the foregoing being herein called "Intangibles"), owned by, licensed by
and/or pending on behalf of Proformix. All Intangibles are in good standing and
uncontested. Schedule 4.24 accurately sets forth with respect to Intangibles
owned by Proformix, where appropriate, a statement of cost, book value and
reserve for depreciation of each item for financial reporting purposes, and with
respect to Intangibles licensed by Proformix from or to a third party, a
description of such license. There is no known right under any Intangible
necessary to the business of Proformix as presently conducted or as it
contemplates conducting. Proformix has not infringed, is not infringing, or has
not received notice of infringement with asserted Intangibles of others. There
is no known infringement by others of Intangibles of Proformix. There is no
Intangible of others which may materially adversely effect the financial
condition, results of operations, business, properties, assets, liabilities, or
future prospects of Proformix.
4.25 Accounts and Notes Receivable. All accounts and notes receivable
reflected on the Proformix Annual Financial Statements, the Proformix Interim
Financial Statements and the
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Consolidated Interim Financial Statements annexed hereto as Schedule 4.6(a) and
(b), constitute valid and binding obligations, have been collected or are, to
the best of Proformix's knowledge, collectible in each case at the aggregate
recorded amounts thereof without right of recourse, defense, deduction, return
of goods, counterclaim, offset, or set off on the part of the obligor.
4.26 Supply Agreements. Annexed hereto as Schedule 4.26 are copies of all
agreements between Proformix and all suppliers ("Supply Agreements"). All Supply
Agreements are in full force and effect, no default exists under any of the
Supply Agreements, and the transactions contemplated by this Agreement will not
adversely effect any of Proformix's rights under any Supply Agreement or result
in any default, termination or other limitation of any such Supply Agreement.
4.27 Veracity of Statements. Neither this Agreement nor the
representations and warranties by Proformix contained herein or in any
documents, instruments, certificates or schedules furnished pursuant hereto or
in connection with the transactions contemplated hereby contains any untrue
statement of a material fact or omits to state a material fact necessary to make
the statements or facts contained herein and therein not misleading.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS
5. The Shareholders individually warrant to Whitestone as follows:
5.1 This Agreement constitutes the legal, valid and binding obligation of
the Shareholders and is enforceable against each of them in accordance with the
terms hereof.
5.2 The Shareholders own their respective shares of Proformix Common Stock
free and clear of all Encumbrances. Schedule 6.2 is an accurate and complete
list of the number of shares
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of Proformix Stock owned by each of the Shareholders. Upon the Closing of this
Agreement Whitestone will own all, or substantially all, of the issued and
outstanding shares of Proformix free and clear of all Encumbrances.
5.3 None of the Shareholders have issued any calls, puts, options and/or
any other rights in favor of any third party whatsoever with respect to their
Shares of Proformix Stock. None of the Shares are subject to any voting
agreements, voting trusts, stockholder agreements and/or any other agreements or
obligations.
ARTICLE 6
ADDITIONAL AGREEMENTS
6. Additional Agreements. The obligations of the parties are conditioned,
in addition to the delivery of the consideration described in Article 1 hereof
and compliance with the requirements of Article 11 hereof, upon consummation of
the following additional agreements and commitments:
6.1 Prior to the Closing Date, Proformix shall amend its Certificate of
Incorporation to increase its authorized shares of Common Stock from 10,000,000
to 15,000,000.
6.2 Prior to the Closing Date, Proformix shall issue 5,000,000 shares of
its Common Stock to Royal and shall issue an option ("Option") for the purchase
of an additional 1,000,000 shares of its Common Stock to Royal. Such shares of
Common Stock and the Option shall are issued pursuant to a Letter Agreement
between Royal and Proformix dated April 16, 1997 ("Letter Agreement") and shall
be held in escrow pending the satisfaction of certain conditions contained
therein.
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6.3 Prior to the Closing Date, Proformix shall enter into an employment
agreement with Michael G. Martin in the form attached hereto as Exhibit 6.3
6.4 Whitestone shall file all appropriate documents to effectuate (i) a
137:1 reverse split of its outstanding Common Stock; (ii) a name change to
Proformix Corp.; and (iii) shall designate a series of cumulative preferred
stock with the same terms and conditions of the Proformix Cumulative Preferred
Stock.
6.5 Upon the filing of all delinquent Exchange Act reports by Whitestone
as described in Article 3.25, the following individuals will be elected as
directors of Whitestone to replace Whitestone's present management group:
Name
----
Michael G. Martin
Anthony Schweiger
Paul Chernis
ARTICLE 7
COVENANTS OF WHITESTONE
7. Whitestone covenants as follows.
7.1 The representations and warranties of Whitestone contained in this
Agreement and in the schedules hereto shall be true and correct in all respects
as of the Closing Date. Whitestone shall give Proformix prompt notice of any
change in any of the information contained in the representations and warranties
of Whitestone, the schedules hereto or the documents furnished by Whitestone in
connection herewith which occurs prior to the Closing Date.
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7.2 Whitestone shall, prior to the Closing Date, deliver to Proformix the
unanimous consent of its Board of Directors, which consent evidences the
approval of this Agreement and the transactions contemplated hereby.
7.3 Whitestone will, prior to the Closing Date, comply with all laws
affecting operation of its business, will not operate the said business other
than in the ordinary course, and will give notice to Proformix of any event or
circumstance not in the ordinary course which materially affects the
Whitestone's business or the Assets.
7.4 Whitestone shall use its best efforts to take or cause to be taken all
action and do or cause to be done all things necessary, proper or advisable to
consummate the transactions contemplated by this Agreement, including, without
limitation, to obtain all consents, approvals and authorizations of third
parties, to make all filings with and give all notices to third parties which
may be necessary or required in order to effectuate the transactions
contemplated hereby and to provide all information necessary to enable
Whitestone to meet its disclosure responsibilities to the SEC, NASD and the
investment community.
ARTICLE 8
COVENANTS OF PROFORMIX AND SHAREHOLDERS
Proformix and the Shareholders covenant as follows:
8.1 The representations and warranties of Proformix and Shareholders
contained in this Agreement shall be true and correct in all material respects
as of the Closing Date, and Proformix and the Shareholders shall give Whitestone
prompt notice of any change in any of the information contained in the
representations and warranties of Proformix and the Shareholders
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hereunder or the documents furnished by Proformix in connection herewith which
occurs prior to the Closing Date.
8.2 Proformix will use its best efforts to, prior to the Closing Date,
comply with all laws affecting the operation of its business.
8.3 Proformix shall use its best efforts to take or cause to be taken all
action and do or cause to be done all things necessary, proper or advisable to
consummate the transactions contemplated by this Agreement, including, without
limitation, to obtain all consents, approvals and authorizations of third
parties and to make all filings with and give all notices to third parties which
may be necessary or required in order to effectuate the transactions
contemplated hereby.
ARTICLE 9
CONDITIONS OF CLOSING
9.1 The obligation of Whitestone to close hereunder shall be subject to
the fulfillment and satisfaction, prior to or at the Closing Date, of the
following conditions or the written waiver thereof by Whitestone:
(a) Representations and Warranties. The representation and warranties
of Proformix and the Shareholders in this Agreement shall be true and
correct in all material respects when made and shall be true and correct in
all material respects on and as of the Closing Date. A Good Standing
Certificate on behalf of Proformix will be delivered to Whitestone.
(b) Delivery of Officers' Certificate. A Certificate signed by the
president of Proformix shall be delivered to Whitestone certifying that all
of the warranties and representations by Proformix and the Shareholders set
forth in this Agreement are
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materially true and accurate as of the Closing Date and that no event or
occurrence has transpired as of the Closing Date which has or will have a
material adverse effect upon the business of Proformix.
(c) Compliance with Agreement. Proformix and the Shareholders shall
have performed and complied with all of its covenants and obligations under
this Agreement.
(d) Absence of Suit. No action, suit or proceedings before any court
or any governmental or regulatory authority shall have been commenced or
threatened against Proformix, which suit would have a material adverse
effect on Proformix, and no investigation by any governmental or regulatory
authority shall have been commenced seeking to restrain, prevent or change
the transactions contemplated hereby, or questioning the validity or
legality of any such transactions, or seeking damages in connection with
any of such transactions.
(e) Proceedings and Instruments Satisfactory. All proceedings,
corporate or otherwise, to be taken in connection with the transactions
contemplated by this Agreement shall have occurred and all appropriate
documents incident thereto as Whitestone may reasonably request shall have
been delivered to Whitestone; and
(f) Opinion of Counsel. The opinion of counsel to Proformix in
accordance with Article 13 hereof shall be delivered to Whitestone.
(g) Compliance with Article 7. All of the additional agreements and
conditions set forth in Article 6 and 8 of this Agreement shall have
occurred to the satisfaction of Whitestone.
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9.2 The obligation of Proformix and the Shareholders to close hereunder
shall be subject to the fulfillment and satisfaction, prior to or at the Closing
Date, of the following conditions by Whitestone, or the written waiver thereof
by Proformix:
(a) Representations and Warranties. The representations and warranties
of Whitestone in this Agreement shall be true and correct in all material
respects when made and shall be true and correct in all material respects
on and as of the Closing Date. A Good Standing Certificate on behalf of
Whitestone will be delivered to counsel to Proformix and to the
Shareholders.
(b) Delivery of Officers' Certificate. Whitestone shall deliver to the
Shareholders and to Proformix a certificate signed by its President and
Chief Financial Officer, certifying that each of the warranties and
representations regarding Whitestone set forth in this Agreement are
materially true and accurate as of the Closing Date and that no event or
occurrence has transpired as of the Closing Date which has or will have a
material adverse effect upon the business of Whitestone.
(c) Compliance with Agreement. Whitestone shall have performed and
complied with all of its obligations under this Agreement and delivered all
shares, securities and binding commitments required hereunder.
(d) Absence of Suit. No action or lawsuit shall have been commenced
seeking to restrain, prevent or change the transactions contemplated
hereby, or questioning the validity or legality of any such transactions,
or seeking damages in connection with any of such transactions.
42
<PAGE>
(e) Receipt of Approvals. Etc. All approvals, consents and/or waivers
for Whitestone that are (i) required under this Agreement; and (ii)
necessary to effect the transactions contemplated hereby, shall have been
received.
(f) Proceedings and Instruments Satisfactory. All proceedings,
corporate or otherwise, to be taken in connection with the transactions
contemplated by this Agreement shall have occurred and all appropriate
documents incident thereto such as Proformix may reasonably request shall
have been delivered.
(g) Opinion of Counsel. The opinion of counsel to Whitestone in
accordance with Article 13 hereof shall be delivered to the Shareholders
and Proformix.
(i) Compliance with Article 7. All of the additional agreements and
conditions set forth in Articles 6 and 7 of this Agreement shall have been
satisfied.
ARTICLE 10
INDEMNIFICATION
10.1 By Whitestone. Whitestone shall defend and promptly indemnify and
save Proformix and the Shareholders harmless from, against, for and in respect
of and shall pay any and all damages, losses, obligations, liabilities, claims,
encumbrances, deficiencies, costs and expenses, including, without limitation,
reasonable attorneys' fees and other costs and expenses incident to any action,
investigation, claim or proceeding suffered, sustained, incurred or required to
be paid by Proformix and the Shareholders by reason of (i) the existence of any
and all obligations and/or liabilities of Whitestone which were not disclosed in
this Agreement; (ii) any breach or failure of observance or performance of any
representation, warranty, covenant,
43
<PAGE>
agreement or commitment made by Whitestone hereunder or relating hereto or as a
result of any such representation, warranty, covenant, agreement or commitment
being untrue or incorrect in any respect, or (iii) any and all actions, suits,
investigations, proceedings, demands, assessments, audits, judgments and claims
arising out of any of the foregoing or from any misrepresentation or omission
from any schedule to this Agreement, certificates, financial statements or from
any document furnished or required to be furnished hereunder.
10.2 By Proformix. Proformix shall defend and promptly indemnify
Whitestone, and its officers and directors, and save and hold them harmless
from, against, for and in respect of and shall pay any and all damages, losses,
obligations, liabilities, claims, encumbrances, deficiencies, costs and
expenses, including without limitation, reasonable attorneys' fees for costs and
expenses incident to any suit, action, investigation, claim or proceeding
suffered, sustained, incurred or required to be paid by Whitestone by reason of
(i) the existence of any and all obligations and/or liabilities of Proformix
which were not disclosed to Whitestone in this Agreement; (ii) any breach or
failure of observance or performance of any representation, warranty, covenant,
agreement or commitment made by Proformix hereunder or relating hereto or as a
result of any such representation, warranty, covenant, agreement or commitment
being untrue or incorrect in any respect, or (iii) any and all actions, suits,
investigations, proceedings, demands, assessments, audits, judgments and claims
arising out of any of the foregoing or from any misrepresentation or omission
from any schedule to this Agreement, certificates, financial statements or from
any document furnished or required to be furnished hereunder.
44
<PAGE>
ARTICLE 11
REPRESENTATIONS, WARRANTIES
AND COVENANTS OF ROYAL
11.1 Organization and Standing. Royal is a corporation duly organized,
validly existing and in good standing under the laws of New Jersey.
11.2 Authorization. Royal has the requisite power and authority to
execute, deliver and perform this Agreement. All necessary corporate proceedings
of Royal have been duly taken to authorize the execution, delivery and
performance of this Agreement. This Agreement has been duly authorized, executed
and delivered by Royal, constitutes the legal valid and binding obligation of
royal and is enforceable as to Royal in accordance with the terms hereof.
11.3 No Further Action Needed. There are no consents, authorizations,
approvals, orders, licenses, certificates, or permits from any governmental
authority required by Royal for the performance of this Agreement. Nor will the
execution, delivery and performance of this Agreement violate, breach or
conflict with any instrument or contractual obligation to which Royal is a
party.
11.4 Royal Owns its Whitestone Shares Free and Clear. Royal owns the
shares of Whitestone Common Stock to be assigned to Proformix hereunder, free
and clear of all encumbrances.
11.5 No Outstanding Claims Against Shares. Royal has not issued any calls,
puts, options and/or any other rights in favor of any third party with respect
to its Shares of Whitestone Common Stock. None of said shares are subject to any
voting agreements, voting trusts, stockholder agreements and/or other agreements
or obligations.
45
<PAGE>
ARTICLE 12
BROKERAGE; EXPENSES
12. The parties agree to each bear their expenses of any character
incurred by them in connection with this Agreement or the transactions
contemplated hereby. No broker has been instrumental in bringing about the
transactions contemplated hereby, nor is any individual or entity entitled to
compensation as broker, finder, agent or other representative of any party
hereto.
ARTICLE 13
OPINIONS OF COUNSEL
13.1 Counsel to Proformix. Proformix shall deliver a written opinion of
counsel as of the Closing Date addressed to Whitestone, satisfactory in form and
substance to Whitestone.
13.2 Counsel to Whitestone. At the Closing Date, Whitestone shall deliver
a written opinion of its counsel as of the Closing Date addressed to Proformix
and the Shareholders in satisfactory form and substance to Proformix and the
Shareholders.
ARTICLE 14
SECURITIES ACT PROVISIONS
14.1 Restrictions on Disposition of Shares. The Shares of Whitestone
Common Stock issued in accordance with this Agreement will contain a legend to
the effect that such Shares may not lawfully be disposed of except (i) pursuant
to an effective registration statement under the Securities Act of 1933, as
amended (the "Act"), or (ii) in any other transaction which, in the
46
<PAGE>
opinion of Whitestone's counsel, is exempt from registration under the Act or
the rules and regulations of the SEC thereunder.
ARTICLE 15
MISCELLANEOUS PROVISIONS
15.1 Entire Agreement. This Agreement constitutes the entire agreement of
the parties with respect to the subject matter hereof. The representations,
warranties, covenants and agreements set forth in this Agreement and in any
financial statements, schedules or exhibits required to be annexed hereto
constitute the only representations, warranties, covenants and agreements of the
parties hereto and upon which the parties have relied, except as may be
specifically provided herein. No change, modification, amendment, addition or
termination of this Agreement or any part thereof shall be valid unless in
writing and signed by or on behalf of the party to be charged therewith.
16.2 Survival of Covenants, etc. All warranties, representations and
covenants set forth herein shall survive the Closing Date of this Agreement.
16.3 Notices. Any and all notices or other communications or deliveries
required or permitted to be given or made pursuant to any of the provisions of
this Agreement shall be deemed to have been duly given or made for all purposes
if sent by Federal Express delivery or by certified or registered mail, return
receipt requested and postage prepaid or hand delivered as follows:
For Proformix:
Silverman, Collura, Chernis & Balzano, P.C.
318 Park Avenue South
New York, New York 10016
47
<PAGE>
For the Shareholders:
At their respective addresses as
set forth in this Agreement
For Whitestone:
Royal Capital Incorporated
75 Claremont Road
Bernardsville, N.J. 07924
16.4 Waiver. No waiver of the provisions hereof shall be effective unless
in writing and signed by the party to be charged with such waiver. No waiver
shall be deemed a continuing waiver or waiver in respect of any subsequent
breach or default, either of a similar or different nature, unless expressly so
stated in writing.
16.5 Governing Law. This Agreement shall be governed, interpreted and
construed in accordance with the laws of the State of New York applicable to
contracts to be performed entirely within that State. Any dispute in any way
related to the subject matter of this Agreement shall be litigated exclusively
within the State of New York and all parties hereto consent to the jurisdiction
of the State and/or United States Federal District Courts of New York.
16.6 Severability. Should any clause, section or part of this Agreement be
held or declared to be void or illegal for any reason, all other clauses,
sections or parts of this Agreement which can be affected without such illegal
clause, section or part shall nevertheless continue in full force and effect.
16.7 Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns or heirs and personal
48
<PAGE>
representatives; provided, however, that no party may assign any of its rights
or delegate any of its duties under this Agreement without the prior written
consent of the other parties hereto.
16.8 Captions. The headings, captions or titles of paragraphs under
sections or subsections of this Agreement are for convenience and reference only
and do not in any way modify, interpret or construe the intent of the parties or
effect any of the provisions of this Agreement.
16.9 Time Periods. Any time period provided for herein which shall end or
expire on a Saturday, Sunday, or legal holiday shall be deemed extended to the
next full business day thereafter.
16.10 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same Agreement.
16.11 Joint Draftsmanship. The preparation of this Agreement has been a
joint effort between and among Proformix, Royal and Whitestone and this
Agreement shall not, solely as a matter of judicial construction, be construed
more severely against one of the parties than the other.
49
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed on the date and year first above written.
WHITESTONE INDUSTRIES, INC.
By:__________________________________________
PROFORMIX, INC.
By:__________________________________________
ROYAL CAPITAL INCORPORATED
By:__________________________________________
PROFORM\AGMTS\STK-EXCH.AGR.RW
50
PROFORMIX SYSTEMS, INC. AND SUBSIDIARIES
EXHIBIT 11
<PAGE>
EXHIBIT 11
COMPUTATION OF NET (LOSS) PER COMMON SHARE
YEAR ENDED
DECEMBER 31,
------------
1997 1996
----------- -----------
Net (Loss) Per Common Share
(Loss from Operations $(1,507,745) $(1,376,093)
(A) Dividends on Preferred Stock (90,000) (90,000)
----------- -----------
(Loss) from Operations
applicable to Common Stock (1,597,745) (1,466,093)
(Loss) from Extrodinary Item -- --
----------- -----------
(Loss) applicable to Common Stock $(1,597,745) $(2,135,806)
=========== ===========
Shares
Weighted Average of Common
Shares Outstanding 2,094,724 1,160,864
=========== ===========
Net (Loss) Per Common Share:
Operations $ (0.76) $ (1.26)
Extraordinary Item -- (0.58)
----------- -----------
Net (Loss) $ (0.76) $ (1.84)
=========== ===========
Net (Loss) Per Common Share -
Assuming Dilution (see "NOTE")
(Loss) from Operations $(1,507,745) $(1,376,093)
(A) Dividends on Preferred Stock (90,000) (90,000)
----------- -----------
(Loss) from Operations as adjusted (1,597,745) (1,466,093)
(Loss) from Extrodinary Item -- (669,713)
----------- -----------
Net (Loss) as adjusted $(1,597,745) $(2,045,806)
=========== ===========
Shares
Weighted Average of Common
Shares Outstanding 4,197,875 4,181,500
(B) Assuming Exercise of Stock Options 684,378 --
(C) Assuming Exercise of Warrants 30,242 --
----------- -----------
Weighted Average of Common Shares
Outstanding, as adjusted 4,912,495 4,181,500
=========== ===========
Net (Loss) per Common Share-Assuming Dilution:
Operations $ (0.33) $ (1.26)
Extraordinay Item -- (0.58)
----------- -----------
Net (Loss) $ (0.33) $ (1.84)
=========== ===========
<PAGE>
EXHIBIT 11
COMPUTATION OF NET (LOSS) PER COMMON SHARE, continued
NOTE: The calculation for Net (Loss) Per Common Share - Assuming Dilution is
submitted in accordance with Securities Exchange Act of 1934 Release No. 9083
although not required by Financial Accounting Standards Board No. 128 "Earnings
Per Share" (FASB 128) since the results are anti-dilutive.
(A) - Convertible Preferred Stock has no shares issued an outstanding at
12/31/97 and 12/31/96 and therefore is not a common stock equivalent. Cumulative
Preferred Stock is not convertible into common shares even though 10 shares are
outstanding at 12/31/97 and 12/31/96 and is also not considered a common stock
equivalent.
(B) - The dilutive options (i.e. the average yearly market price is greater than
the exercise price) assume that the 1,086,010 shares exercised resulting in
proceeds of $3,818,828 are reacquired using the treasury stock method at the
yearly average market price of $5.58 per share. Thus, $3,818,828/$5.58=684,378
shares are assumed to be reacquired and are included as such in common shares
outstanding at the beginning of the year.
(C) - The dilutive warrants (i.e. the average yearly market price is greater
than the exercise price) assume that the 38,611 shares exercised resulting in
proceeds of $168,750 are reacquired using the treasury stock method at the
yearly average market price of $5.58 per share. Thus, $168,750/$5.58=30,242
shares are assumed to be reacquired and are included as such in common shares
outstanding at the beginning of the year.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1997 FINANCIAL STATEMENTS OF PROFORMIX SYSTEMS, INC. AND SUBSIDIARIES AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,546
<SECURITIES> 0
<RECEIVABLES> 341,550
<ALLOWANCES> 27,058
<INVENTORY> 256,501
<CURRENT-ASSETS> 623,143
<PP&E> 830,917
<DEPRECIATION> 407,792
<TOTAL-ASSETS> 1,152,250
<CURRENT-LIABILITIES> 3,429,825
<BONDS> 1,719,435
0
0
<COMMON> 290
<OTHER-SE> (3,997,300)
<TOTAL-LIABILITY-AND-EQUITY> (3,997,010)
<SALES> 3,125,009
<TOTAL-REVENUES> 3,125,009
<CGS> 1,451,204
<TOTAL-COSTS> 1,451,204
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 370
<INTEREST-EXPENSE> 338,038
<INCOME-PRETAX> (1,507,745)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,507,745)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,507,745)
<EPS-PRIMARY> (0.72)
<EPS-DILUTED> (0.72)
</TABLE>
