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 June 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 June 30, 1998, was 4,971,982 shares.
<PAGE>
PROFORMIX SYSTEMS, INC. AND SUBSIDIARIES
INDEX
Page
Number
------
PART 1 - FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited)
Consolidated Balance Sheet
- June 30, 1998 3
Consolidated Statements of Operations
- Three and six months ended June 30, 1998 and 1997 4
Consolidated Statements of Cash Flows
- Six months ended June 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6-12
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 13-14
PART II - OTHER INFORMATION 15-16
SIGNATURES 17
2
<PAGE>
PART I - Item 1
PROFORMIX SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited)
June 30, 1998
ASSETS
Current Assets
Cash ..................................................... $ 3,016
Accounts receivable, net of allowance for
doubtful accounts of 32,315 .............................. 1,251,054
Inventories .............................................. 288,670
Prepaid advertising ...................................... 776,550
Other prepaid expenses ................................... 13,669
-----------
Total Current Assets .................................. 2,332,959
Property, plant and equipment ............................ 507,038
Acquired software assets ................................. 2,335,389
Other assets ............................................. 118,740
-----------
TOTAL ASSETS .................................................. 5,294,126
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable and accrued expenses .................... 1,411,342
Dividends payable ........................................ 31,500
Loans and notes payable .................................. 1,306,579
Current maturities long-term debt ........................ 394,081
Current maturities lease obligations ..................... 8,589
-----------
Total Current Liabilities ............................. 3,152,091
Long-term debt, less current portion ..................... 1,572,876
Lease obligations, less current portion .................. 17,975
-----------
TOTAL LIABILITIES ............................................. 4,742,942
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, 4,971,982 issued and outstanding ............. 497
Contributed capital ...................................... 283,500
Additional paid-in capital ............................... 7,785,531
Accumulated deficit ...................................... (7,518,344)
-----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) .......................... 551,184
-----------
TOTAL LIABILITIES AND EQUITY .................................. $ 5,294,126
===========
See notes to consolidated financial statements
3
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PROFORMIX SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues ................................ $ 1,429,075 $ 1,063,323 $ 2,441,493 $ 1,645,586
Cost of Goods Sold ................. 703,391 432,756 1,195,128 696,696
----------- ----------- ----------- -----------
Gross Profit ............................ 725,684 630,567 1,246,365 948,890
Selling expenses ................... 552,412 342,616 851,609 627,270
General & administrative expenses .. 675,416 326,129 1,123,919 675,908
----------- ----------- ----------- -----------
Operating Income (Loss) ................. (502,144) (38,178) (729,163) (354,288)
Miscellaneous income ............... 333 0 333 0
Interest expense (net) ............. (98,640) (82,131) (179,357) (169,323)
Miscellaneous expenses ............. (10,000) (5,000) (10,000) (5,000)
----------- ----------- ----------- -----------
Non-Operating Income (Expenses) ......... (108,307) (87,131) (189,024) (174,323)
Total Net Loss .......................... $ (610,451) $ (125,309) $ (918,187) $ (528,611)
=========== =========== =========== ===========
Net Loss per Common Share ............... $ (0.12) $ (0.08) $ (0.22) $ (0.40)
=========== =========== =========== ===========
Weighted-Average Number of
Common Shares Outstanding .......... 4,960,143 1,549,184 4,203,492 1,317,857
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
PROFORMIX SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
1998 1997
----------- -----------
Cash Flows from Operating Activities
Net income (loss) ........................... $ (918,187) $ (528,611)
Adjustments to net income (loss)
Depreciation and Amortization ............ 144,891 53.076
Decreases (increases) in Assets
Accounts receivable ...................... (936,562) 55,659
Inventories .............................. (232,169) 20,900
Prepaid advertising ...................... (776,550) 0
Prepaid expenses ......................... 33,935 8,369
Other assets ............................. 450 474
Increases (decreases) in Liabilities
Accounts payable and accrued expenses .... 202,765 (32,973)
----------- -----------
Net Cash Provided (Used) by Operating Activities . (2,481,427) (423,106)
Cash Flows from Investing Activities
Rolina & Vanity acquisitions ................ (2,404,280) 0
Investment Input Technologies ............... (25,776) 0
Capital expenditures ........................ (147,345) (41,655)
----------- -----------
Net Cash Provided (Used) by Investing Activities . (2,577,401) (41,655)
Cash Flows from Financing Activities
Proceeds from notes payable ................. 225,000 101,849
Conversion of equity subscriptions .......... (275,000) 0
Repayment of notes .......................... (235,000) (50,000)
Repayment of long-term debt ................. (128,584) (30,000)
Change in subordinated debenture ............ 0 (101,849)
Issuance of common stock .................... 5,470,882 544,870
----------- -----------
Net Cash Provided (Used) by Financing Activities . 5,057,298 464,870
Net Increase (Decrease) in Cash .................. (1,530) 109
Cash at Beginning of Period ...................... 4,546 1,507
----------- -----------
Cash at End of Period ............................ $ 3,016 $ 1,616
=========== ===========
See notes to consolidated financial statements
5
<PAGE>
PROFORMIX SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 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.
ACQUISITION OF VANITY SOFTWARE PUBLISHING CORPORATION
On April 30, 1998, the Company signed an agreement to acquire all of
the assets, subject to the assumption of certain liabilities, of
Vanity Software Publishing Corporation, in exchange for 224,000 shares
of the common stock of the Company and warrants to purchase an
additional 224,000 shares at a price of $5.00 per share. The
liabilities assumed by the Company, net of certain other assets,
totaled $131,500 and have been paid at time of closing during the
first week of May, 1998.
The major asset of Vanity Software Publishing Corporation is a
proprietary ergonomic software package sold under the name
ErgoBreak(TM) which the Company is integrating into its own software
products suite marketed under the EMS(TM) label. This asset was
capitalized at a value equal to the net amounts paid in cash -
together $131,500 - plus the fair market value at the time of the
transaction of 224,000 new and restricted shares of the common stock
of the Company issued to Vanity Software Publishing Corporation, for a
total amount of $1,251,500. While management believes this amount to
be fair value for the assets thus acquired, it will move to obtain an
independent appraisal of the value of such assets. Should this
appraisal result in an assessment lower than the currently capitalized
value, a portion thereof will be reclassified in the books of the
Company as goodwill.
PREPAID EXPENSES
Prepaid expenses include a position of $750,000 resulting from an
agreement in February 1998 with BNN Business News Network Inc., a
nationwide media advertising and radio network company , whereby the
Company purchased advertising time on the Business News Network's
broadcasts , usable over a period of three years and aggregating
$900,000 in retail value, against issuance of 150,000 new and
restricted common shares. The services purchased were capitalized at
the fair market value of the stock issued, for a total of $750,000.
The resulting asset will be amortized as utilized, over the timeframe
of the next three years.
8
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Proformix Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
INVESTMENT IN INPUT TECHNOLOGIES L.L.C.
Pursuant to verbal agreement-in-principle and subject to negotiation
and execution of a final agreement the Company will acquire a 20%
equity interest in Input Technologies LLC, a privately held Colorado
Limited Liability Company, against payment of an aggregate $60,000 or
delivery of product at wholesale prices in the same amount, or a
combination thereof. At the time of this submission, the investment
has substantially been completed. In accordance with a Distributor
Agreement which is being negotiated in parallel, Input Technologies
LLC will act as a stocking master distributor for the Company's
products, in certain areas of the western United States.
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. No demand for payment has been made through the date of
this submission. $ 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 June 30, 1998. The balance of $24,730 is due upon demand
and accruing interest at the rate of 12% per annum. The balance
of $64,730 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 remains outstanding as of June 30, 1998. No demand
for payment has been made through the date of this submission. 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 June 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
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Proformix Systems, Inc. and Subsidiaries
Notes to the Financial Statements
LONG-TERM DEBT
Long-term debt as of June 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. 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 a 6 months deferment on
principal payments. The bank retained the right to demand
repayment of the remaining principal at the earlier of (a) the
receipt by Proformix, Inc. of new equity in an amount no less
than $1,500,000 or (b) June 30, 1998. 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
June 30, 1998, a total $588,888 remain unpaid. $ 588,888
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. 34,734
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. 82,328
--------
Total 816,957
Less current maturities 394,081
--------
Long-term debt, net of current maturities $422,876
========
11
<PAGE>
Proformix Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
COMMITMENTS AND CONTINGENCIES
Employment Agreements
During the Quarterly Meeting of the Board of Directors of Proformix
Systems, Inc. on May 14, 1998, the Board by unanimous vote - with
Michael Martin abstaining - approved certain changes in the July 18,
1997, employment agreement of Mr. Martin, which include the
cancellation of previously stipulated conditional stock awards of an
aggregate 600,000 shares and instead decreed: (i) a base compensation
of $150,000 /year, (ii) fully vested stock options with a term of ten
years for the purchase of 750,000 shares at a price of $4.00/share,
and (iii) participation in an executive incentive plan effective 1998
under which he will receive 4% of the Company's pre-tax profits,
providing the net operating profits - after interest and after such
bonus - pursuant to GAAP are at least $500,000.
During the same meeting, the Board approved by unanimous vote - with
Mr. Swon abstaining - a proposed two-year employment agreement for J.
Swon whereby (i) his base compensation for 1998 would be $1.00, and
(ii) he will be awarded fully vested stock options with a term of ten
years for the purchase of 900,000 shares at a price of $4.00/share,
and (iii) he would participate in an executive incentive plan starting
with the year 1998 under which he will receive 4% of the Company's
pre-tax profits, providing the net operating profits - after interest
and after such bonus - pursuant to GAAP are at least $500,000.
RELATED PARTY TRANSACTIONS
During the Quarterly Meeting of the Board of Directors of Proformix
Systems, Inc. on May 14, 1998, the Board by unanimous vote approved a
request of Royal Capital Inc., holder of certain stock options, to assign
its previously granted outstanding and unexercised options totaling 499,866
shares to Jerry Swon, President and CEO of the Company.
MAJOR CUSTOMERS
For the quarter ended June 30, 1998, the Company had a major customer,
sales to which represented approximately 35% of the Company's revenues. The
loss of this customer would have a materially adverse effect on the
Company, at least in the short term.
12
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations:
During the first six months of the current fiscal year and in particular during
the quarter ended June 30, 1998, Proformix has completed a series of
acquisitions and transactions that have resulted in the first integrated suite
of software products in the market which provides a complete compliance system
for evaluation and management of ergonomic risk factors associated with the
computerized workplace. In the process, the Company has been transformed from a
manufacturer of specialized keyboard platforms to a technology company that is
currently believed to be the only supplier who can offer to industry a
comprehensive horizontally integrated solution that addresses existing or
potentially developing ergonomic-based problem complexes in today's office
environment. The new software products which are marketed under the EMS(TM)
("Ergonomic Management Systems") label additionally provide a user with a unique
and effective productivity measurement tool that can make a verifiable
difference in a company's bottom line. . In marketing the new product line, the
Company directs its primary sales focus towards medium to large national
companies which are believed to be more cognizant of the increasing health risks
to office personnel, and of the potential financial liabilities to their
companies in a rapidly solidifying regulatory environment that seeks to define
ergonomic standards and enforce compliance, with the goal of decreasing the
health risks associated with repetitive stress injuries arising out of the use
of computers. The timing of the Company's entry into this market therefore must
be considered optimal.
During the last several months the Company has started implementing software
pilot programs with a number of Fortune 500 companies. Proformix also moved
aggressively to expand its advertising and exhibition program and participated
with enhanced presence in several national trade shows which provided valuable
exposure in the market and generated considerable interest from both potential
enduser clients and leading consulting organizations. Simultaneously, the
Company embarked on an ambitious program of establishing the infrastructure and
a comprehensive support organization for customer service and ongoing product
development in the software sector, and completely revamped its sales tools and
literature as well as other promotional activities relating to the new products.
New products in the hardware sector include the revolutionary Power
ErgoRanger(TM) which is rapidly becoming a leading product in the Company's
keyboard platform product line. All of these efforts resulted in increased
expenditures - outlays that must be considered necessary up-front expense and
not unusual in situations where a new market is being entered. While these
additional expenses depressed the period operating result, they also created the
basis for future growth and are already starting to generate higher sales.
Revenues during the quarter ended June 30, 1998, totaled $1,429,075, a 34%
increase from the same period a year ago (1).. Revenues for the first six months
totaled $2,441,493 which equates to an increase of 48% over the corresponding
figure for last year. The above described restructuring caused selling and
general and administrative expenses to sharply increase, from $668,745 during
the quarter last year to $1,227,828 during the second quarter this year. The net
result for the quarter ended June 30, 1998, was a loss of $610,451 or $0.12 per
share, which compares to a net loss of $125,309 or $0.08 per share for the same
quarter a year ago. The six month' result is a loss of $918,187 or $0.22 per
share, compared to a loss of $528,611 or $0.40 per share last year.
- -------------
(1) Comparisons herein are based on the Company versus Proformix, Inc.
13
<PAGE>
Liquidity and Capital Resources
During the second quarter in 1998 the Company received a total of $1,550,000 in
new equity capital from the private placement of its common equity. These cash
infusions permitted the Company to finance both a considerable expansion of
overall business activity and the resultant increase in receivables as well as
the acquisition of certain proprietary software assets. As described earlier,
the Company made considerable investments in establishing a presence in a new
market segment. However, the software business involves relatively long sales
cycles, and in view of the Company's limited financial resources and until a
return on these investments in form of increased revenues will be realized,
liquidity will remain tight. The working capital deficit which stood at
$1,684,513 at March 31, 1998, decreased to $819,132 at June 30, 1998. While this
constitutes a modest relative improvement, management is seeking to obtain
additional capital funding in the months ahead in order to strengthen the
Company's working capital position.
14
<PAGE>
PART II - OTHER INFORMATION
Item 1 LEGAL PROCEEDINGS
In response to this item, reference is made to the Company's report on Form
10-QSB for the quarter ended March 31, 1998, as previously submitted.
Item 2 CHANGES IN SECURITIES
During the time from the Company's last report on Form 10-QSB and through July
31, 1998, the Company issued the following unregistered securities:
(i) 224,000 shares of Common Stock to Vanity Software Publishing
Corporation (see "Acquisition of Vanity Software Publishing Corporation" in the
Notes to Financial Statements included herein). The issuance of the aforesaid
shares was made pursuant to Section 4(2) of the Securities Act;
(ii) 22,000 shares of Common Stock and warrants to purchase 22,000 shares
at a price of $4.50 per share, to one of the Company's board members in return
for an investment of $100,000 under Rule 506 of Regulation D promulgated under
the Securities Act of 1933, as amended;
(iii) 70,972 shares of Common Stock to Proformix, Inc. shareholders
pursuant to the Company's acquisition of Proformix, Inc. and its subsequent
exchange offer to Proformix, Inc. shareholders. The Company issued these shares
pursuant to Section 4(2) of the Securities Act;
(iv) 15,000 shares of Common Stock to an outside consultant as compensation
for services rendered, with an agreement that the Company register such shares
through a Registration Statement on Form S-8.
Item 3 DEFAULTS ON SENIOR SECURITIES - None
Item 4 SUBMISSION OF MATTERS TO A VOTE OF
SECURITIES' HOLDERS
On Thursday, June 18, 1998, the Company held its Annual Meeting of Shareholders.
Two maters were submitted to a vote, by proxy or in person at the Meeting, of
the shareholders:
(1) Election of Directors
Four directors, constituting the entire Board of Directors, were to be
elected at the Meeting, to hold office for a term until the next annual meeting
of shareholders and until their respective successors have been duly qualified.
The persons named below were nominated for the Board of Directors and all,
except for Jerry Swon, were also incumbent directors of the Company.
Peter B. Buscetto
Paul Chernis
Michael G. Martin
Jerry Swon
15
<PAGE>
Total shares voted were 3,238,263 representing 68.72% of the shares
eligible to vote. Of the votes cast, 3,116,571 or 96.24% voted in favor of all
nominees, 121,691 or 3.76% voted against, and 1 vote abstained. All four
nominees accepted the appointment.
(2) Ratification of Appointment of Independent Certified Public Accountants
The Board of Directors has appointed the firm of Rosenberg, Rich, Baker,
Berman and Company as the Company's independent Certified Public Accountants and
auditors for the fiscal year ending December 31, 1998.
Total shares voted were 3,238,263 representing 68.72% of the shares
eligible to vote. Of the votes cast, 3,116,572 or 96.24% voted in favor of the
appointment, 121,691 or 3.76% voted against, and no vote abstained.
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
16
<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: August 18, 1998 By:/s/ Jerry Swon
------------------------------------
Jerry Swon
President and Chief Executive Officer
17
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 3,016
<SECURITIES> 0
<RECEIVABLES> 1,283,369
<ALLOWANCES> 32,315
<INVENTORY> 288,670
<CURRENT-ASSETS> 2,332,959
<PP&E> 978,263
<DEPRECIATION> 471,225
<TOTAL-ASSETS> 5,294,126
<CURRENT-LIABILITIES> 3,152,091
<BONDS> 1,966,957
0
0
<COMMON> 497
<OTHER-SE> 550,687
<TOTAL-LIABILITY-AND-EQUITY> 5,294,126
<SALES> 1,396,408
<TOTAL-REVENUES> 1,429,075
<CGS> 489,216
<TOTAL-COSTS> 703,391
<OTHER-EXPENSES> 1,227,828
<LOSS-PROVISION> 7,152
<INTEREST-EXPENSE> 98,640
<INCOME-PRETAX> (610,451)
<INCOME-TAX> 0
<INCOME-CONTINUING> (610,451)
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (610,451)
<EPS-PRIMARY> (0.12)
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