UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1996
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ______ to __________.
Commission file number: 0-26328
VICTORMAXX TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Illinois 36-3971950
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1202N 75th Street, Suite 243, Downers Grove, Illinois 60516
(Address of principal executive offices) (Zip code)
(630) 654-4398
(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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
stock, as of the latest practicable date.
Common stock, $.001 Par Value, 5,726,442 as of November 18, 1996
<PAGE>
VictorMaxx Technologies, Inc.
Index to Quarterly Report on Form 10-Q
Filed with the Securities and Exchange Commission
for the Three and Nine Month Periods Ended September 30, 1996 and 1995
Page
Number
PART I. Financial Information
Item 1: Financial Statements (unaudited)
Balance sheets as of September 30, 1996 and December 31, 1995 3
Statements of operations for the three and nine month periods
ended September 30, 1996 and 1995 4
Statements of cash flows for the nine months ended
September 30, 1996 and 1995 5
Notes to Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II Other Information 13
SIGNATURES 14
2
<PAGE>
Part I. Financial Information
Item 1: Financial Statements
VictorMaxx Technologies, Inc.
Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1996 1995
-------------- --------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ -- $ 8,674
Available-for-sale securities -- 3,303,462
Accounts receivable, net of allowance of $25,000 17,146 12,536
Interest receivable -- 64,350
Inventories -- 602,406
Prepaid expenses 3,230 186,830
-------------- --------------
Total current assets 20,376 4,178,258
Property and equipment, net of accumulated depreciation
and amortization 219,164 275,560
Other assets 12,752 74,341
-------------- --------------
Total assets $ 252,292 $ 4,528,159
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 171,993 $ 817,619
Cash overdrafts 2,247 345,214
Accrued liabilities 477,812 1,188,723
-------------- --------------
Total current liabilites 652,052 2,351,556
Legal settlements payable, non-current portion 10,000 100,000
Deferred rent 28,367 36,731
-------------- --------------
Total liabilities 690,419 2,488,287
-------------- --------------
Stockholders' equity:
Preferred stock, par value $.001; 1,000,000 shares authorized,
none issued
Common stock, par value $.001; 20,000,000 shares authorized;
5,726,442 shares issued and outstanding 5,726 5,541
Additional paid-in capital 19,647,981 19,480,232
Accumulated deficit (20,091,834) (17,445,901)
-------------- --------------
Total stockholders' equity (deficit) (438,127) 2,039,872
-------------- --------------
Total liabilities and stockholders' equity $ 252,292 $ 4,528,159
============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements
3
<PAGE>
VictorMaxx Technologies, Inc.
Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1996 1995 1996 1995
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 23,632 $ 249,596 $ 746,963 $ 476,146
Cost of goods sold 5,019 202,593 1,175,416 440,080
---------- ----------- ----------- -----------
Gross profit (deficiency) 18,613 47,003 (428,453) 36,066
Operating expenses:
Research and development 176,109 253,920 738,737 619,696
Selling, general and administrative 478,099 972,168 1,505,656 2,817,932
Impairment of goodwill 0 0 0 1,649,765
---------- ----------- ----------- -----------
Total operating expenses 654,208 1,226,088 2,244,393 5,087,393
Loss from operations (635,595) (1,179,085) (2,672,846) (5,051,327)
Other income (expenses):
Interest expense 0 (1,278,061) (2,630) (2,360,454)
Interest income 0 0 29,543 0
Other 0 (138,747) 0 (319,954)
---------- ----------- ----------- -----------
Net loss $ (635,595) $(2,595,893) $(2,645,933) $(7,731,735)
========== =========== =========== ===========
Per-share data:
Net loss per share $ (0.11) $ (0.59) $ (0.47) $ (2.55)
========== =========== =========== ===========
Weighted average common and
common equivalent shares
outstanding 5,807,161 4,364,852 5,683,623 3,033,365
========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
4
<PAGE>
VictorMaxx Technologies, Inc.
Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
1996 1995
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,645,933) $ 7,731,735)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization of property and equipment 89,793 108,004
Amortization of goodwill -- 209,157
Amortization of deferred financing costs and original issue discount -- 1,967,672
Impairment of goodwill -- 1,649,765
Provision for doubtful accounts -- 35,000
Issuance of common stock in exchange for professional services 167,934 5,108
Compensation expense relating to stock options and warrants -- 444,316
Change in operating assets and liabilities:
Accounts receivable (4,610) 250,326
Interest receivable 64,350 --
Inventories 602,406 (234,789)
Prepaid expenses 183,600 (292,499)
Other assets 61,589 --
Accounts payable (645,626) (2,471,576)
Accrued liabilities (710,911) (126,431)
Accrued legal settlement (90,000) --
Deferred rent (8,364) (2,691)
------------- ------------
Net cash used in operating activities (2,935,772) (6,190,373)
------------- ------------
Cash flows from investing activities:
Purchases of property and equipment (33,397) (79,331)
Purchases of dies and molds -- (198,086)
Proceeds from sale of available-for-sale securities 3,303,462 --
------------- ------------
Net cash provided by (used in) investing activities 3,270,065 (277,417)
------------- ------------
Cash flows from financing activities:
Proceeds from issuance of notes payable -- 1,871,613
Repayments of notes payable -- (5,309,044)
Proceeds from issuance of common stock -- 14,927,099
Decrease in cash overdrafts (342,967) (254,544)
------------- ------------
Net cash (used for) provided by financing activities (342,967) 11,235,124
------------- ------------
Net increase (decrease) in cash (8,674) 4,767,334
Cash, beginning of period 8,674 --
------------- ------------
Cash, end of period $ -- $ 4,767,334
============= ============
Supplemental cash flow information:
Interest paid $ 2,630 $368,415
============= ============
</TABLE>
The accompanying notes are an integral part of the financial statements
5
<PAGE>
VICTORMAXX TECHNOLOGIES, INC.
Notes to Condensed Financial Statements
1. Basis Of Preparation
The accompanying condensed financial statements of VictorMaxx Technologies, Inc.
(the "Company") for the three and nine month periods ended September 30, 1996
and 1995 have been prepared without audit pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in the financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that the
disclosures made are adequate to make the information presented not misleading.
These condensed financial statements should be read in conjunction with the
financial statements and notes thereto, together with management's discussion
and analysis of financial condition and operations, contained in the Company's
Annual Report on Form 10-K for the year ended December 31, 1995. In the opinion
of management, all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial position and operating results for the
interim periods, have been included. The results of operations for the three and
nine month periods ended September 30, 1996 are not necessarily indicative of
the results to be expected for the entire year ending December 31, 1996.
2. Net Loss Per Common Share
The computation of net loss per share is based on the weighted average number of
common and common equivalent shares outstanding (adjusted for a 20.2225 to one
split completed in July 1995) during the period. Common stock equivalents
represent outstanding stock options and warrants which are included in the
weighted average shares pursuant to the treasury stock method. Common share
equivalents attributable to stock options issued within 12 months prior to the
initial public offering have been included in the calculation of net loss per
share as if they were outstanding for the period presented.
3. Loss of Quotation of Securities
On October 23, 1996, the Company received notification from the Nasdaq Listing
Qualifications Panel that because the Company does not currently meet the
maintenance criteria for continued listing of its Securities on The Nasdaq
Small-Cap Market ("Nasdaq"), that its Securities would be delisted from Nasdaq
effective at the close of business on October 24, 1996. Subsequent to that date,
the Securities of the Company have been quoted on the OTC Bulletin Board.
6
<PAGE>
4. Subsequent Events
On October 31, 1996, the Company vacated its office facilities and was released
from future obligations under an operating lease which extended through May 31,
1998. Since that date, the management and employees of the Company have been
conducting the business of the Company from a variety of personal residences.
Additionally, the Company has depleted its cash reserves and has been unable to
pay its employees subsequent to the payroll period ending October 15, 1996.
Management of the Company is currently pursuing various forms of financing. If
these efforts are unsuccessful, the Company will have to cease operations.
7
<PAGE>
Item 2 --- Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview
The Company is engaged in the design, development and distribution of
interactive multimedia computer software for the entertainment segment of the
computer software market. If the Company is able to secure additional financing,
it expects to release its first game, Autoduel Online, as an Internet-based,
multi-player game during 1997. Subsequent to the introduction of the online
game, the Company hopes to release a "home" version of the game incorporating
artificial intelligence to allow a participant to play the game without being
online.
The game will be the first application to run on the Company's virtual reality
engine ("Engine"), which allows for the programming of multi-user virtual
reality applications. Development of the Engine, which is the foundation for the
game, began in September 1995. While other entities have developed virtual
reality engines, the Company believes that its Engine has certain
characteristics that make it rare. Not only can it be accessed remotely, but it
has one of the largest set of features for a PC based engine working in an
integrated fashion. The Engine has been constructed in a modular fashion, which
means that functional blocks of code such as the graphics modules, the sound
modules, networking module, input and output modules, etc. not only work
independently of one another but can be easily upgraded without requiring a
complete rewrite of the Engine. Therefore, once Autoduel Online has been
completed, new versions of Autoduel Online or other games and applications using
the same technologies but with different content and features can be developed
and introduced easily and quickly. While most other engines emphasize one
particular strength and add on other capabilities, the structure of the
Company's engine, with its emphasis on creating strong fully integrated
independent modules, gives it the ability to process large amounts of data
quickly.
Autoduel Online is based on characters and other materials derived from a
strategic board game called Car Wars, which the Company has licensed from Steve
Jackson Games Incorporated ("SJ Games"), a publisher of simulation and
role-playing games. SJ Games has sold over 300,000 copies of Car Wars in sixteen
countries and in six different languages since its introduction in 1981.
Supplementary products, including expansion sets, bring total unit sales to over
2,000,000. Origin Systems sold over 65,000 copies of their original Autoduel
computer game for the Apple II computer in the early 1980's and the Car Wars
fiction has been the subject of a series of novels and comic books published by
Tor Books and Marvel Comics, respectively. SJ Games also runs the AADA (American
Autoduel Association), a Car Wars fan club and coordinates an annual national
tournament whose players qualify through local and regional tournaments
conducted during the year. In addition to Car Wars, SJ Games has published such
games as the Generic Universal Role Playing System ("GURPS") and Illuminati.
8
<PAGE>
Previously, the Company designed, developed, marketed and sold virtual reality
products for home use. The Company believes that it was the first to sell
virtual reality head-mounted displays ("HMDs" or "headsets") intended for home
use with a suggested retail price of less than $1,000. The Company's first
product, the CyberMaxx 120 model, was introduced in November 1994. The Company
began shipping the more advanced CyberMaxx model 2.0 in August 1995. In December
1995, the Company began distribution of the VIR one, a cordless, baseless game
controller with a suggested retail price of $99.
In early 1996, the management of the Company concluded that its headset was not
likely to gain widespread consumer acceptance in the immediate future at a
suggested retail price of $889. In February 1996, the Company suspended
production of the CyberMaxx model 2.0 and in March 1996 lowered the price on the
CyberMaxx model 2.0 for the purpose of stimulating sales at a suggested retail
price of $499. In connection with this price reduction, the Company charged
$1,769,987 to its 1995 results for write downs of its remaining CyberMaxx model
2.0 inventory, including component parts, and the tools and dies associated with
the production of the CyberMaxx.
During the second quarter of 1996, it became apparent that the reduced price of
the CyberMaxx model 2.0 was not going to stimulate sales and the management of
the Company made the decision to cease marketing virtual reality hardware
products. The Company has liquidated most of its remaining CyberMaxx and VIR one
inventory and recorded a second quarter charge of $443,033 related to the
liquidation of this inventory.
In January 1996, the Company transferred its product engineering service to its
contract manufacturer and deferred development activities on the next generation
of the CyberMaxx headset.
The Company expects that a significant portion of its future revenues, if any,
will be dependent upon the successful development, introduction and distribution
of Autoduel Online and other games and applications that may utilize the
Company's Engine.
9
<PAGE>
Results of Operations
Comparison of the three month period ending September 30, 1996 with the three
month period ending September 30, 1995
Net sales. Net sales decreased to $23,632 for the three months ending September
30, 1996 from $249,596 for the three months ending September 30, 1995. The
Company derived all of its revenues in 1996 from the liquidation of CyberMaxx
and VIR one inventory. For the three month period ending September 30, 1995, the
Company derived all of its revenues from the sale of the CyberMaxx model 2.0 and
from the sale of its first product, the CyberMaxx 120.
Gross profit. The Company had a gross profit of $18,613 for the three months
ending September 30, 1996 compared to a gross profit of $47,003 for the three
months ending September 30, 1995. Cost of sales in 1995 consists primarily of
product costs and the amortization of tool and die costs associated with the
production of the CyberMaxx 120. The remainder of the tool and die costs were
completely written off during the fourth quarter of 1995.
Selling, general and administrative. Selling, general and administrative
expenses totaled $478,099 for the three months ending September 30, 1996
compared to $972,168 for the three months ending September 30, 1995. Included in
the 1996 balance are sales and promotional expenses of $29,489, non sales
compensation expense of $117,304, net occupancy expenses of $17,692 and legal
expenses of $23,576. Additionally, the Company incurred a non-cash compensation
expense of $167,934 during the third quarter of 1996 related to the issuance of
185,307 shares of restricted Common Stock to certain employees, directors and
consultants to the Company. Included in the 1995 balance are sales and
promotional expenses of $104,298, occupancy expenses of $52,191 and legal
expenses of $263,454.
Research and development. Research and development expenses totaled $176,109 for
the three months ending September 30, 1996 compared to $253,920 for the three
months ending September 30, 1995. Included in the 1996 balance are expenses
totaling $130,129 related to the development of its virtual reality engine and
the application software for Autoduel Online. The remaining expense for both
1996 and 1995 consists primarily of the costs of the Company's design, quality
assurance, engineering support activities and the cost of providing support to
the entities developing software for the CyberMaxx.
Interest expense. The Company incurred interest expense of $1,278,061 for the
three months ending September 30, 1995. Included in the 1995 expense are charges
of $1,246,058 related to various bridge financings, including the amortization
of deferred financing costs and original issue discount and the accrual of
interest. The bridge financings were repaid from the net proceeds of the
Company's initial public offering which was completed in August 1995.
Miscellaneous interest charges totaled $32,003.
10
<PAGE>
Other expense. The Company recorded an expense of $138,747 for the three month
period ended September 30, 1995 to settle legal claims that had been asserted
against it.
Comparison of the nine month period ending September 30, 1996 with the nine
month period ending September 30, 1995
Net sales. Net sales increased $270,817 to $746,963 for the nine months ending
September 30, 1996 from $476,146 for the nine months ending September 30, 1995.
The 1996 results include liquidation sales totaling $393,382. The company
derived revenues of $594,806, including liquidation sales of $290,125, for the
nine months ending September 30, 1996 from the sale of the CyberMaxx model 2.0
and revenues of $152,157, including liquidation sales of $103,257, from the sale
of the VIR one. The Company sold $295,508 of the CyberMaxx model 2.0 during the
nine months ending September 30, 1996 and derived the remainder of its revenues
from the sale of its first product, the CyberMaxx 120.
Gross profit (deficiency). The Company had a negative gross profit of $428,453
for the nine months ending September 30, 1996 compared to a positive gross
profit of $36,066 for the nine months ending September 30, 1995. The 1996
results include a net charge of $568,743 to account for the Company's decision
to cease marketing virtual reality hardware products. Included in this charge
are writedowns of $443,033 associated with the sale of liquidated product and a
charge of $344,926 to cover cancellation costs and the cost of excess component
parts held by the Company's contract manufacturer. These charges were partially
offset by the reversal of $219,216 in charges recorded in prior periods to
reserve for the return of obsolete inventory. The 1995 cost of sales included a
charge of $64,638 to provide for the accelerated amortization of certain tool
and die costs associated with the CyberMaxx 120. The remainder of the tool and
die costs were completely written off during the fourth quarter of 1995.
Selling, general and administrative. Selling, general and administrative
expenses totaled $1,505,656 for the nine months ending September 30, 1996
compared to $2,817,932 for the nine months ending September 30, 1995. Included
in the 1996 balance are sales and promotional expenses of $309,229, non sales
compensation expense of $460,364, occupancy expenses of $60,188 and legal
expenses of $81,898. Additionally, the Company incurred non-cash compensation
expense of $167,934 during the third quarter of 1996 related to the issuance of
185,307 shares of restricted Common Stock to certain employees, directors and
consultants to the Company. Included in the 1995 balance, are sales and
promotional expenses of $475,998, occupancy expenses of $153,955, legal expenses
of $342,159, goodwill amortization of $209,157 and a charge of $443,368 related
to the issuance of 139,424 shares of restricted stock to the President and Chief
Executive Officer of the Company.
Research and development. Research and development expenses totaled $738,737 for
the nine months ending September 30, 1996 compared to $619,696 for the nine
months
11
<PAGE>
ending September 30, 1995. Included in the 1996 balance are expenses totaling
$427,779 related to the development of its virtual reality engine and the
application software for Autoduel Online. The remaining expense for both 1996
and 1995 consists primarily of the costs of the Company's design, quality
assurance, engineering support activities and the cost of providing support to
the entities developing software for the CyberMaxx.
Impairment of Goodwill. Effective March 31, 1995 the Company wrote off the
remaining unamortized balance of goodwill related to the acquisition from
Bankers by recording a charge to operations of $1,649,765. The charge was
recorded as a result of the Company's evaluation of its existing products,
customer base and core technologies, all of which have undergone significant
change since the date of acquisition, the Company's inability to achieve sales
backlogs and the continuing and expected future losses. After consideration of
these factors and the expectation that the Company would continue to operate at
a loss in, the Company concluded that the recorded goodwill was impaired.
Interest expense. The Company incurred interest expense of $2,630 for the nine
months ending September 30, 1996 compared to $2,360,454 for the nine months
ending September 30, 1995. Included in the 1995 expense are charges of
$2,179,689 related to various bridge financings, including the amortization of
deferred financing costs and original issue discount and the accrual of
interest. The bridge financings were repaid from the net proceeds of the
Company's initial public offering which was completed in August 1995.
Miscellaneous interest charges totaled $180,765.
Other expense. During the nine month period ending September 30, 1995, the
Company recorded a $100,000 charge related to a settlement agreement with its
former President and Chief Executive Officer and incurred $203,747 of expenses
to settle legal claims that had been asserted against it.
Liquidity and Capital Resources
At September 30, 1996, the Company had cash overdrafts of $2,247. During the
nine months ended September 30, 1996, operating activities used $2,935,772 of
net cash and equivalents and investing activities provided $3,270,065 of net
cash and equivalents.
The Company incurred non-cash compensation expense of $167,934 during the third
quarter of 1996 related to the issuance of 185,307 shares of restricted Common
Stock to certain employees, directors and consultants to the Company.
The Company's independent accountants have included an explanatory paragraph in
their report for the year ended December 31, 1995 making reference to the
Company's note to financial statements (Note 1), which discusses the fact that
the Company's financial statements for the year ended December 31, 1995 have
been prepared assuming that the Company will continue as a going concern and
that the substantial losses from operations suffered by the Company and its
significant reliance on obtaining continued financing to
12
<PAGE>
satisfy its liquidity requirements raise substantial doubt about the Company's
ability to continue as a going concern. Management of the Company is currently
pursuing various forms of financing but there can be no assurances that the
Company has the ability to raise the necessary financing to enable it to conduct
its on-going business activities. If the Company is unsuccessful in its efforts
to secure additional financing, it will have to cease operations.
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during
the quarter ended September 30, 1996.
13
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Deerfield
and State of Illinois on the 18th day of November, 1996.
VictorMaxx Technologies, Inc.
By: /s/ Richard H. Currie
-------------------------------------
Richard H. Currie
President and Chief Executive Officer
By: /s/ Glenn Petersen
-------------------------------------
Glenn Petersen
Vice President and Chief Financial
Officer (Principal Financial and
Accounting Officer)
14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 42,145
<ALLOWANCES> 25,000
<INVENTORY> 0
<CURRENT-ASSETS> 20,376
<PP&E> 367,246
<DEPRECIATION> 148,082
<TOTAL-ASSETS> 252,292
<CURRENT-LIABILITIES> 652,052
<BONDS> 0
0
0
<COMMON> 5,726
<OTHER-SE> (443,853)
<TOTAL-LIABILITY-AND-EQUITY> 252,292
<SALES> 746,963
<TOTAL-REVENUES> 746,963
<CGS> 1,175,416
<TOTAL-COSTS> 309,229
<OTHER-EXPENSES> 1,935,164
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,645,933)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,645,933)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,645,933)
<EPS-PRIMARY> (.47)
<EPS-DILUTED> (.47)
</TABLE>
