FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT O SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _______ to _______
Commission file number 33-20432
PROFORMIX SYSTEMS, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 75-2228828
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
50 Tannery Road, Branchburg, New Jersey 08876
(Address of Principal Executive Office) (Zip Code)
(908) 534-6400
(Registrant's telephone number including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes _x_ No ___
The number of shares of Registrant's Common Stock, $0.0001 par value,
outstanding as of September 30, 1998, was 5,081,613 shares.
<PAGE>
PROFORMIX SYSTEMS, INC. AND SUBSIDIARIES
INDEX
Page
Number
------
PART 1 - FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited)
Consolidated Balance Sheet
- September 30, 1998 3
Consolidated Statements of Operations
- Three and nine months ended September 30, 1998 and 1997 4
Consolidated Statements of Cash Flows
- Nine months ended September 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6-11
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 12-13
PART II - OTHER INFORMATION 14
SIGNATURES 15
2
<PAGE>
PART I - Item 1
PROFORMIX SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited)
September 30, 1998
------------------
ASSETS
Current Assets
Cash ...................................................... $ 63,490
Accounts receivable, net of allowance for
doubtful accounts of 30,533 ............................... 411,935
Inventories ............................................... 313,982
Prepaid advertising ....................................... 759,084
Other prepaid expenses .................................... 31,860
-----------
Total Current Assets ................................... 1,580,351
Property, plant and equipment ............................. 488,208
Acquired software assets .................................. 2,275,282
Other assets .............................................. 146,681
-----------
TOTAL ASSETS ................................................ $ 4,490,522
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable and accrued expenses ..................... $ 1,636,486
Dividends payable ......................................... 9,000
Loans and notes payable ................................... 1,306,579
Current maturities long-term debt ......................... 387,180
Current maturities lease obligations ...................... 8,589
-----------
Total Current Liabilities .............................. 3,347,834
Long-term debt, less current portion ...................... 1,498,888
Lease obligations, less current portion ................... 17,975
-----------
TOTAL LIABILITIES ........................................... 4,864,697
STOCKHOLDERS' EQUITY
Preferred Stock Ser.A, $0.01 par value, 3,000,000
shares authorized, 0 and 100,000 shares issued and
outstanding ............................................... --
Cumulative Preferred Stock, $0.001 par value, 2,500
shares authorized, 10 shares issued and outstanding ....... 0
Common Stock, $0.0001 par value, 30,000,000 shares
authorized, 5,081,613 issued and outstanding .............. 508
Contributed capital ....................................... 81,000
Additional paid-in capital ................................ 7,785,520
Accumulated deficit ....................................... (8,241,203)
-----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) ........................ (374,175)
-----------
TOTAL LIABILITIES AND EQUITY ................................ $ 4,490,522
===========
See notes to consolidated financial statements
3
<PAGE>
PROFORMIX SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues ............................................... $ 334,876 $ 744,177 $ 2,776,369 $ 2,389,763
Cost of Goods Sold ................................... 251,807 329,697 1,446,935 1,026,393
Disposition obsolete inventories ..................... 120,343 0 120,343 0
----------- ----------- ----------- -----------
Gross Profit ........................................... (37,274) 414,480 1,209,091 1,363,370
Selling expenses ..................................... 266,623 251,909 1,118,232 879,179
General & administrative expenses .................... 569,737 550,708 1,693,656 1,226,616
----------- ----------- ----------- -----------
Operating Income (Loss) ................................ (873,634) (388,137) (1,602,797) (742,425)
Miscellaneous income ................................. 103 79,653 436 79,653
Interest expense (net) ............................... (41,782) (83,035) (221,139) (252,358)
Miscellaneous expenses ............................... (32,547) (47,670) (42,547) (52,670)
----------- ----------- ----------- -----------
Non-Operating Income (Expenses) ........................ (74,226) (51,052) (263,250) (225,375)
----------- ----------- ----------- -----------
Total Net Loss ......................................... $ (947,860) $ (439,189) $(1,866,047) $ (967,800)
=========== =========== =========== ===========
Net Loss per Common Share .............................. $ (0.19) $ (0.17) $ (0.41) $ (0.53)
=========== =========== =========== ===========
Weighted-Average Number of
Common Shares Outstanding ............................ 5,061,977 2,569,750 4,539,511 1,843,129
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
PROFORMIX SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
------------------------
1998 1997
----------- ---------
Cash Flows from Operating Activities
Net income (loss) ............................... $(1,866,047) $(967,800)
Adjustments to net income (loss)
Depreciation and Amortization ................ 235,414 76,741
Loss on disposal of certain assets ........... 7,776 25,341
Decreases (increases) in Assets
Accounts receivable .......................... (97,443) 232,249
Inventories .................................. (57,481) (52,399)
Prepaid advertising .......................... (763,275) 0
Prepaid expenses ............................. 19,935 15,513
Other assets ................................. 450 (156)
Increases (decreases) in Liabilities
Accounts payable and accrued expenses ........ 227,912 (39,738)
----------- ---------
Net Cash Provided (Used) by Operating Activities ... (2,292,759) (710,249)
Cash Flows from Investing Activities
Rolina & Vanity acquisitions .................... (2,404,280) 0
Investment Input Technologies ................... (60,000) 0
Capital expenditures ............................ (160,425) (49,653)
----------- ---------
Net Cash Provided (Used) by Investing Activities ... (2,624,705) (49,653)
Cash Flows from Financing Activities
Proceeds from notes payable ..................... 225,000 487,599
Conversion of equity subscriptions .............. (275,000) 0
Repayment of notes .............................. (295,000) (100,000)
Repayment of long-term debt ..................... (149,474) (53,751)
Change in subordinated debenture ................ 0 (101,849)
Issuance of common stock ........................ 5,470,882 544,870
----------- ---------
Net Cash Provided (Used) by Financing Activities ... 4,976,408 776,869
Net Increase (Decrease) in Cash .................... 58,944 16,967
Cash at Beginning of Period ........................ 4,546 1,507
----------- ---------
Cash at End of Period .............................. $ 63,490 $ 18,474
=========== =========
See notes to consolidated financial statements
5
<PAGE>
PROFORMIX SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
BACKGROUND
Proformix Systems, Inc. (the "Company" or "Proformix") was incorporated as a
Delaware corporation on April 19, 1988 under the name "Fortunistics, Inc.",
subsequently changed to "Whitestone Industries, Inc."(Whitestone).
On July 2, 1997, the Company submitted a stock exchange offer to the
shareholders of Proformix, Inc., a Delaware corporation. Prior to this stock
exchange, the Company spun off the shares of its wholly owned subsidiary
Golden Bear Entertainment Corporation to its then current shareholders in
the form of a stock dividend. This distribution effectively eliminated all
assets and liabilities from the books of the Company prior to the
acquisition of Proformix, Inc.
The exchange offer to the Proformix, Inc. shareholders called for the
exchange of the common stock in Proformix, Inc. into newly to be issued
common stock of Whitestone at the rate of 3.4676 shares of Proformix, Inc.
common stock to 1 share of Whitestone common stock, and to holders of
Proformix Cumulative Preferred Stock, to exchange their shares into newly to
be issued Cumulative Preferred Stock of Whitestone at the rate of 1 to 1.
Holders of approximately 97% of Proformix, Inc. common stock have agreed to
the stock exchange and tendered their common shares in exchange for
Whitestone common shares. The remaining 3% of Proformix, Inc. stockholders
hold a minority interest which is valued at $0.
For accounting purposes, the acquisition has been treated as an acquisition
of Whitestone by Proformix, Inc. and a recapitalization of Proformix, Inc.
The historical financial statements prior to July 2, 1997 are those of
Proformix, Inc. Proforma information is not presented since the combination
is considered a recapitalization. Subsequent to the exchange, the Company
and Proformix, Inc. remain as two separate legal entities whereby Proformix,
Inc. operates as a subsidiary of the Company, however, the operations of the
newly combined entity are currently comprised solely of the operations of
Proformix, Inc. Concurrent with the stock exchange offer, the Company
changed its name to Proformix Systems, Inc.
Proformix develops, manufactures and markets ergonomically designed computer
keyboard trays, peripheral items and accessories (together, a "Keyboarding
System") designed to alleviate and prevent certain health problems believed
to be related to the use of computers. Proformix also markets a unique
proprietary software suite under the name EMS(TM) which represents a
comprehensive ergonomic-based productivity solution developed to train
people working on computers, monitor computer-use related activities and
evaluate a user's risk exposure and propensity towards injury or loss of
effectiveness in connection with his/her day-to-day work.
Proformix Inc.'s wholly owned subsidiary, Corporate Ergonomic Solutions,
Inc. (Ergonomics) was incorporated in the State of New Jersey during October
1992. Ergonomics, which commenced operations in September 1997, was formed
primarily to market Proformix's products. To date, its operations have not
been significant.
6
<PAGE>
Proformix Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Proformix
Systems, Inc. and its subsidiaries, Proformix, Inc. and Corporate
Ergonomic Solutions, Inc. All significant intercompany balances and
transactions have been eliminated.
Inventories
Inventory consists of product components and finished goods which are
stated at the lower of cost (determined by the first-in, first out
method) or market.
Depreciation and Amortization
Property, plant and equipment are recorded at cost. Certain molds were
being depreciated using the units of production method based upon an
estimated useful life of 300,000 units. Depreciation on equipment,
furniture and fixtures and leasehold improvements is computed on the
straight line method over the estimated useful lives of such assets
between 5-10 years. Maintenance and repairs are charged to operations as
incurred.
System design costs are amortized on a straight-line basis over an
estimated useful life of 10 years. Organization costs and deferred
finance charges are amortized using the straight line method over a
period of 4-5 years.
Capitalized acquired software assets are depreciated on a straight-line
basis over an estimated useful life of 10 years (see "Acquisition of
Vanity Software Publishing Corporation").
Securities Issued for Services
The Company accounts for stock and options issued for services by
reference to the fair market value of the Company's stock on the date of
stock issuance or option grant. Compensation expense is recorded for the
fair market value of the stock issued, or in the case of options, for
the difference between the stock's fair market value on the date of
grant and the option exercise price.
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standard (SFAS) No. 123, "Accounting for Stock-based
Compensation". The statement generally suggests, but does not require,
employee stock-based compensation transactions be accounted for based on
the fair value of the consideration received or the fair value of the
equity instruments issued, whichever is more reliably measurable. As
permitted by the statement, the Company has elected to continue to
follow the requirements of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", which does not require
compensation to be recorded if the consideration to be received is at
least equal to the fair value at the measurement date. The adoption of
SFAS No. 123 does not have a material impact on the financial
statements.
Income Taxes
The Company provides for income taxes based on enacted tax law and
statutory tax rates at which items of income and expenses are expected
to be settled in the Company's income tax return. Certain items of
revenue and expense are reported for Federal income tax purposes in
different periods than for financial reporting purposes, thereby
resulting in deferred income taxes. Deferred taxes are also recognized
for operating losses that are available to offset future
7
<PAGE>
Proformix Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized. The
Company has incurred net operating losses for financial-reporting and
tax-reporting purposes. The benefit for income taxes has been offset
entirely by a valuation allowance against the related deferred tax
asset.
Net Loss Per Share
Net loss per share, in accordance with the provisions of Financial
Accounting Standards Board No. 128, "Earnings Per Share", is computed by
dividing net loss by the weighted-average number of shares of Common
Stock outstanding during the period. Common Stock equivalents have not
been included in this computation since the effect would be
anti-dilutive.
Revenue Recognition
Revenue from product sales is recognized at the time of shipment
provided that the resulting receivable is deemed probable of collection.
PREPAID EXPENSES
Prepaid expenses include a position of $750,000 resulting from an
agreement in February 1998 with BNN Business News Network Inc., a
nationwide media advertising and radio network company , whereby the
Company purchased advertising time on the Business News Network's
broadcasts , usable over a period of three years and aggregating
$900,000 in retail value, against issuance of 150,000 new and restricted
common shares. The services purchased were capitalized at the then fair
market value of the stock issued, for a total of $750,000. The resulting
asset will be amortized as utilized, over the timeframe of the next
three years. As per the date of this report, no portion of this asset
has been utilized. The Company is currently analyzing the utility of
this advertising credit in light of current business strategies. If
management deems that it may not be able to economically utilize the
entire amount during the time allotted, it may elect to effect an
accelerated amortization or write-down of this asset position.
INVESTMENT IN INPUT TECHNOLOGIES L.L.C.
During the quarter, the Company completed its investment for a 20%
equity interest in Input Technologies LLC, a privately held Colorado
Limited Liability Company, against delivery of products in the aggregate
of $60,000 at wholesale prices. In addition to being the Company's
premier supplier of touch-pads for its Intellitray(TM) keyboard
platforms, Input Technologies LLC acts as a stocking master distributor
for the Company's products for certain areas of the western United
States.
CHANGES IN KEY PERSONNEL
None
8
<PAGE>
Proformix Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
SUBSEQUENT EVENTS
CONVERSION OF NOTE PAYABLE
In October 1998, a creditor in possession of a past-due $316,849.05 demand
note issued by the Company, with such note bearing a conversion option,
elected to convert the note including accrued interest of approximately
$24,000 , into 342,000 shares of the Company's common stock.
ASSET PURCHASE AGREEMENT WITH 1320236 ONTARIO INC. D/B/A OFFICE SPECIALTY
On November 18, 1998, the Company and its wholly owned subsidiary Proformix,
Inc. entered into an Asset Purchase Agreement and several related agreements
with 1320236 Ontario Inc.("OS"), a publicly traded Canadian designer.
manufacturer and distributor of office furniture based in Holland Landing,
Ontario, Canada, pursuant to which OS acquires Proformix Inc.'s hardware
product line comprised of the Company's ergonomic keyboard platform products
and accessories, and all related inventory and production tooling and
warehousing assets, and all intellectual property rights including the
Proformix name, against a cash consideration and an ongoing contingent
stream of royalty payments on OS' sales of the Proformix products. The
Company will continue to market its proprietary software under the Proformix
label. The Agreement with OS also provides for the retirement of the
Company's existing bank debt, out of the proceeds of the transaction.
Further details regarding this transaction may be obtained from the
Company's related filing on Form 8-K (See: "Management's Discussion and
Analysis").
9
<PAGE>
Proformix Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
LOANS AND NOTES PAYABLE
Proformix, Inc. had borrowings under short term loan agreements with the
following terms and conditions at June 30, 1998:
On April 17, 1997, Proformix, Inc. issued a $316,849 one-year
5% promissory note to a private investor in exchange for
retiring other promissory notes and the repayment of a past
due subordinated debenture, with the face value of all such
obligations to third parties equaling the 5% note to that
investor. Such note had subsequently been changed into a
convertible note in the same amount, with the holder having
the option of converting it into common stock of the Company
at a rate mutually to be agreed upon. In November 1998, the
holder of this note served notice that he intends to exercise
the conversion option (see "Subsequent Events"). $ 316,849
Pursuant to three promissory notes signed throughout 1995 and
1996, an investor advanced Proformix, Inc. a total of $90,000
payable upon demand with interest at 12% per annum. 90,000
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.
No demand for payment has been made through the date of this
submission. 75,000
Pursuant to a promissory note dated January 22, 1996, an
officer of the Company advanced 64,730, of which $40,000 have
been repaid as per September 30, 1998. The balance of $24,730
is due upon demand and accrues interest at the rate of 12%
per annum. 24,730
Line of credit extended by Carnegie Bank on March 4, 1996
amounting to $250,000 due to be repaid March 4, 1997, unless
demanded earlier, accruing interest at the prime rate plus 2%
per annum with the prime rate defined by the Wall Street
Journal. The agreement requires that the line shall be
completely out of debt for at least one thirty consecutive
day period annually and is collateralized by all the
inventory, accounts receivable, equipment, and financial
instruments of Proformix, Inc. This obligation was repaid
after September 30, 1998 (see "Subsequent Events"). 250,000
-----------
Total $ 756,579
===========
LOANS AND NOTES PAYABLE (Proformix Systems, Inc.)
Pursuant to the Acquisition Agreement with Rolina
Corporation, a portion of the cash payments are to be made on
a deferred payment schedule, between June and September 1998.
At present, the outstanding balance under this arrangement is $ 100,000
===========
NOTES PAYABLE FROM PRIVATE PLACEMENT OFFERING
During February through June 1995, an underwriter acting as
placement agent offered on behalf of Proformix, Inc. in a
private placement offering a minimum of five (5) and a
maximum of twenty (20) units, resulting in the placement of
$1,600,000 in promissory notes, all of which are outstanding
as of September 30, 1998, and 160,000 shares of Proformix,
Inc. common stock. In May 1997 a restructuring agreement
caused the reclassification of $1,150,000 of these notes to
long-term debt. These notes were extended and modified to (i)
mature by April 30, 2000, (ii) change from 12% to 8%, (iii)
convert all interest accrued until April 30, 1997 into shares
of common stock of Proformix, Inc. and (iv) pay future
interest in cash an a quarterly basis. One such note for
$25,000 is shown under current liabilities. The remaining
$425,000 of non-restructured notes are shown in current
liabilities pending finalization of ongoing negotiations. $ 1,600,000
===========
10
<PAGE>
Proformix Systems, Inc. and Subsidiaries
Notes to the Financial Statements
LONG-TERM DEBT
Long-term debt as of September 30, 1998 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. O On March 4, 1996, Proformix, Inc. refinanced the
repayment of its long-term debt. The balance is payable with
fixed principal payments of $15,000 per month 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. 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
1997, Proformix, Inc. requested and obtained cumulative 6
months deferments on principal payments. The bank retained
the right to demand 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. No
demand for payment has been made by the time of this
submission. The Company continues to repay the principal
balance at $15,000 per month and as of September 30, 1998, a
total $528,888 remained unpaid. The entire remaining
principal balance was repaid after September 30, 1998 (see
"Subsequent Events"). $ 528,888
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. No demand for payment has been made. 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. 31,818
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. 64,355
-----------
Total 736,068
Less current maturities 387,180
-----------
Long-term debt, net of current maturities $ 348,888
===========
11
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations:
As already indicated in the quarterly report for the period ended June 30, 1998,
the Company has been experiencing a working capital shortage which imposed
considerable constraints on its liquidity. Management was not able to overcome
this cash shortage during the third quarter through additional capital funding.
At the same time, the continuing build-up of the Company's new software division
created additional demands on available resources. As a consequence, cash
available to support the traditional keyboard platform business was insufficient
to maintain and support activities at the level of the previous quarters. The
quarter therefore saw a significant decrease in revenues derived from sales of
the traditional hardware products, while revenues from the new software division
were not yet material.
To cope with these developments and at the same time safeguard an economic base
for its emerging software business which is considered by management to be most
important for the Company's success in the future, management decided to seek a
strategic partnership with another entity which could provide needed funding,
promote the Company's patented keyboarding system products, and permit the
Company to continue developing its software business and enhancing the
underlying products, primarily its suite of ergonomic software programs marketed
under the Proformix EMS(TM) label. This search lead to negotiations with Office
Specialty, a leading Canada-based manufacturer of office furniture, to form a
strategic alliance which, at the time of this submission, culminated in an
agreement by the Company to sell its hardware product line and related assets
and intellectual property rights to Office Specialty in exchange for a
combination of $1.25 million up front payment plus ongoing participation in the
success of the national and international distribution effort by Office
Specialty as related to the Proformix keyboard platform products, in form of a
royalty stream on such sales by Office Specialty. The duration of this royalty
stream is governed by the sales volume achieved for these products as it relates
to certain benchmarks, however, in no case will be less than 17 months.
As a result of the above mentioned factors revenues during the quarter ended
September 30, 1998, decreased significantly, to $334,876 from 744,177 during the
same period a year ago. Revenues for the first nine months totaled $2,776,369
which equates to an increase of 16% over the corresponding figure for last year.
Efforts by management to curtail expenses in light decreasing revenues were
largely successful. Selling and general and administrative expenses which
included expenditures related to the new software division totaled $836,360
during the quarter, compared to $802,617 for the same period last year and
$1,227,828 during the second quarter this year. The net result for the quarter
ended September 30, 1998, was a loss of $947,860 or $0.19 per share, which
compares to a net loss of $439,189 or $0.17 per share for the same quarter a
year ago. The nine month' result is a loss of $1,866,047 or $0.41 per share,
compared to a loss of $967,800 or $0.53 per share last year.
Management's plans with regard to the upcoming periods are centered around
aggressive efforts to promote its software products which the Company deems very
promising in terms of both profitability and growth potential. A significant
step in establishing a basis for this growth was a marketing agreement reached
in September 1998 between the Company and one of the largest insurance and risk
management companies in the world, whereby this leader in the insurance industry
will market and sell the Proformix Ergonomic Management System (EMS) to its own
subsidiaries, business units, and clientele. In addition, the recent agreement
with Office Specialty not only provides for needed cash but also enables
management to streamline the Company's operations by divesting itself of
presently unneeded overhead, and permits management to focus all resources on
what it considers its most attractive growth opportunities. Management realizes
that the Company's software business is just emerging, and that due to long
sales cycles in this business profitability may not yet be achieved until the
upcoming fiscal year, however, is confident that the Company is positioned
extremely well to capitalize on the growing awareness in industry of the
financial and legal risk associated with repetitive stress injuries caused by
computer use.
12
<PAGE>
Liquidity and Capital Resources
As stated above, during the quarter the Company's liquidity was under increasing
pressure due to a shortage of working capital which hampered operations and
affected sales. Slower sales in turn worsened the shortage of working capital.
The working capital deficit increased from $819,132 at the beginning of the
quarter to $1,767,483 at September 30, 1998.
As a consequence, management decided on drastic steps to stabilize the Company's
financial situation and bolster capital resources, with the objective being to
(i) stabilize debt, (ii) obtain additional funding, (iii) shed portions of its
operations which constitute a cash drain and are not as promising in terms of
future expected return on investment, and (iv) permit the Company to channel all
available resources into the most attractive growth segment of its operations -
its ergonomic software business.
These efforts lead to negotiations with Office Specialty, a leading Canada-based
manufacturer of office furniture, and culminated in the above described
arrangement with that company. Management believes that as a result, it made
significant progress towards achieving the four above objectives. In addition,
the conversion of approximately $340,000 in current debt into equity, as
described in section "Subsequent Events", further improved working capital.
Management is of the opinion that the new liquidity obtained as a result of
these events, together with the royalty stream on sales of its traditional
hardware products, will be sufficient to finance the Company's planned
operations during the upcoming quarters, and bridge the time until its software
business generates cash flow on its own. Nevertheless, management will continue
its efforts to obtain additional capital funding, to increase available
resources.
13
<PAGE>
PART II - OTHER INFORMATION
Item 1 LEGAL PROCEEDINGS
In response to this item, reference is made to the Company's reports on
Form 10-QSB for the quarters ended March 31, 1998, and June 30, 1998, as
previously submitted.
Item 2 CHANGES IN SECURITIES
During the time from the Company's last report on Form 10-QSB and through
October 31, 1998, the Company issued the following unregistered securities:
(i) 272,000 shares of Common Stock to a creditor of the Company pursuant
to that party's exercise of an option to convert debt into common stock (see
"Subsequent Events" in the "Notes to Consolidated Financial Statements" in Part
I).
(ii) 14,419 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;
(iii) 10,000 shares of Common Stock to an outside consultant as
compensation for services rendered, and an aggregate 5,035 shares of Common
Stock to independent sales representatives and clients as awards for outstanding
sales performance for the Company's products.
Item 3 DEFAULTS ON SENIOR SECURITIES - None
Item 4 SUBMISSION OF MATTERS TO A VOTE OF
SECURITIES' HOLDERS
- None
Item 5 OTHER INFORMATION - None
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 - Financial Data Schedule - is attached hereto.
(b) Reports on Form 8-K: - None
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PROFORMIX SYSTEMS, INC.
Date: November 20, 1998 By: /s/ Jerry Swon
--------------------------------------
Jerry Swon
President and Chief Executive Officer
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 30, 1998 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 63,490
<SECURITIES> 0
<RECEIVABLES> 442,467
<ALLOWANCES> 30,533
<INVENTORY> 313,982
<CURRENT-ASSETS> 1,580,351
<PP&E> 979,642
<DEPRECIATION> 491,434
<TOTAL-ASSETS> 4,490,522
<CURRENT-LIABILITIES> 3,347,834
<BONDS> 1,886,068
0
0
<COMMON> 508
<OTHER-SE> (374,683)
<TOTAL-LIABILITY-AND-EQUITY> 4,490,522
<SALES> 334,876
<TOTAL-REVENUES> 334,876
<CGS> 251,807
<TOTAL-COSTS> 638,773
<OTHER-EXPENSES> 643,963
<LOSS-PROVISION> 1,542
<INTEREST-EXPENSE> 41,782
<INCOME-PRETAX> (947,860)
<INCOME-TAX> 0
<INCOME-CONTINUING> (947,860)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (947,860)
<EPS-PRIMARY> (0.19)
<EPS-DILUTED> (0.19)
</TABLE>
