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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(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, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-27102
ROMTECH, INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2694937
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
2000 Cabot Boulevard West, Suite 110
Langhorne, PA 19047-1833
(address of Principal executive offices)
Issuer's Telephone Number, Including Area Code: 215-750-6606
Not Applicable
(Former name, former address and former
fiscal year, if changed since last report.)
Check whether the issuer (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 ( )
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes ( ) No ( )
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date: 8,960,673 shares
of common stock, no par value per share, as of November 7, 1997.
Transitional Small Business Disclosure Format (check one):
Yes ( ) No ( X )
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INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
Part I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheet as of September 30, 1997................. 3
Consolidated Statements of Operations for the three months ended
September 30, 1997 and 1996......................................... 4
Consolidated Statements of Cash Flows for the three months ended
September 30, 1997 and 1996 ........................................ 5
Notes to Consolidated Financial Statements.......................... 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................ 8-9
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K.................................... 10
Signatures .................................................................... 11
Exhibit Index .................................................................... 12
Financial Data
Schedule .................................................................... 13
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Page 2
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Romtech, Inc.
Item 1. Financial Statements
Consolidated Balance Sheet
(Unaudited)
September 30,
1997
ASSETS ------------
Current assets:
Cash and cash equivalents $ 373,885
Restricted cash 24,788
Accounts receivable, net of allowance for doubtful
accounts of $68,624 1,274,486
Inventory 426,263
Prepaid expenses 233,644
-----------
Total current assets 2,333,066
Furniture and equipment, net 211,140
Intangibles and other assets 311,420
-----------
Total assets $ 2,855,626
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 40,767
Accounts payable 720,268
Accrued expenses 383,489
Capital lease obligations 26,915
-----------
Total current liabilities 1,171,439
Capital lease obligations net of current portion 41,110
Notes payable-long term portion 258,940
Convertible subordinated debt 150,000
-----------
Total liabilities 1,621,489
Stockholders' equity:
Preferred stock, no par value, 10,000,000 shares authorized:
Class One Convertible Preferred Stock, 1,000,000
Issued and outstanding 1,000,000
Class Two Convertible Preferred Stock, 540,340
Issued and outstanding 387,535
Accretion of beneficial conversion feature on Preferred Stock 140,255
Common stock, no par value (40,000,000 shares authorized:
8,545,294 issued and outstanding) 6,362,286
Additional paid in capital 1,148,550
Accumulated deficit (7,804,489)
-----------
Total stockholders' equity 1,234,137
-----------
Total liabilities and stockholders' equity $ 2,855,626
===========
See accompanying notes to the consolidated financial statements.
Page 3
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Romtech, Inc.
Consolidated Statements of Operations
(Unaudited)
Three months ended
September 30,
1997 1996
---- ----
Net sales $ 1,535,558 $ 1,071,017
Cost of sales 613,796 317,457
----------- -----------
Gross profit 921,762 753,560
Operating expenses:
Product development 86,571 121,992
Selling, general and administrative 656,285 1,025,633
----------- -----------
Total operating expenses 742,856 1,147,625
----------- -----------
Operating income (loss) 178,906 (394,065)
Interest expense, net 11,426 13,513
----------- -----------
Income (loss) before taxes 167,480 (407,578)
Provision for income taxes 1,165 -0-
----------- -----------
Net income (loss) 166,315 (407,578)
Accretion of beneficial conversion feature
on preferred stocks 105,441 - 0 -
----------- -----------
Net income (loss) attributable to common stock $ 60,874 ($ 407,578)
=========== ===========
Net income (loss) per common share $ 0.01 ($ 0.06)
=========== ===========
Weighted average common shares outstanding 7,354,887 6,285,128
See accompanying notes to the consolidated financial statements.
Page 4
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Romtech, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
September 30,
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 166,315 ($407,578)
Adjustment to reconcile net loss to net cash
from operating activities:
Depreciation and amortization 40,000 62,299
Loss on disposal of equipment - 0 - 4,683
Interest expense incurred but not paid - 0 - 4,350
Changes in items affecting operations net of effect from
acquired businesses:
Restricted cash - 0 - (14,788)
Accounts receivable (241,014) (152,060)
Prepaid expenses (8,127) (48,542)
Inventory (56,681) (75,708)
Accounts payable 82,826 222,617
Accrued expenses 90,434 (82,650)
--------- ---------
Net cash provided by (used in) operating activities 73,753 (487,377)
--------- ---------
Cash flows from investing activities:
Sales and maturities of short term investments - 0 - 398,952
Purchase of furniture and equipment (41,633) (27,023)
Purchase of software rights and other assets (87,533) (58,654)
Loan to related parties 750 500
--------- ---------
Net cash provided by (used in) investing activities (128,416) 313,775
--------- ---------
Cash flows from financing activities:
Repayment of note payable (9,427) (7,483)
Repayment of lease obligations (7,499) (14,982)
--------- ---------
Net cash used in financing activities (16,926) (22,465)
--------- ---------
Net decrease in cash and cash equivalents (71,589) (196,067)
Cash and cash equivalents:
Beginning of period 445,474 954,663
--------- ---------
End of period $ 373,885 $ 758,596
========= =========
Supplemental cash flow information:
Cash paid for interest $ 14,561 $ 22,194
========= =========
Non cash investing activities:
Capital lease additions $ - 0 - $ 38,388
========= =========
</TABLE>
See accompanying notes to the consolidated financial statements.
Page 5
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Romtech, Inc.
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited interim consolidated financial statements
were prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. The Notes to Consolidated Financial
Statements included in the Form 10-KSB for the fiscal year ended June 30, 1997
should be read in conjunction with the accompanying statements. These
statements include all adjustments the Company believes are necessary for a
fair presentation of the statements. The interim operating results are not
necessarily indicative of the results for a full year.
Description of Business
RomTech, Inc. (the "Company") develops, publishes, markets and
resells a diversified line of personal computer ("PC") software primarily for
consumer and business applications. The Company promotes the Galaxy of
Games(TM), Galaxy of Home Office Help(TM) and Galaxy Deluxe(TM) brand names
(the "Galaxy Series") in order to generate customer loyalty, encourage repeat
purchases and differentiate the Galaxy Series products to retailers and
consumers. The Company targets the market of home and small business personal
computer users. The Company's sales are primarily made through a large
national distributor that sells to large national retail chain stores. The
Company also sells it products via the Internet and at computer trade shows.
The Company is a Pennsylvania Corporation which was incorporated in
July 1992 and completed its initial public offering in 1995, and trades on the
Nasdaq SmallCap Market under the symbol ROMT.
Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, Virtual Reality Laboratories, Inc.
All intercompany balances and transactions have been eliminated.
2. New Accounting Pronouncements
The Company will be required to adopt Statement of Financial
Accounting Standards No. 128, "Earnings Per Share", which will become
effective in the second quarter of fiscal 1998. Management believes that the
adoption of this statement will not have a material financial impact on the
Company.
The Company will be required to adopt Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income", which will
become effective for fiscal year 1999. The Company believes that the adoption
of this statement will not have a material financial impact.
The Company will be required to adopt Statement of Financial
Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and
Related Information", which will become effective for fiscal year 1999. The
Company believes that the adoption of this statement will not have a material
financial impact.
Page 6
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Romtech, Inc.
Notes to Consolidated Financial Statements (continued)
3. Preferred Stock
On October 18, 1997 all of the 1,000,000 shares of Class One
Convertible Preferred Stock was converted into 303,030 shares of Common Stock.
As of November 7, 1997, 740,340 shares of the Class Two Preferred have been
converted into 522,173 shares of Common Stock and all of the 1,250,000 shares
of Class Three Preferred have been converted into 1,487,508 shares of Common
Stock. The remaining 531,000 shares of the Class Two Preferred may be
convertible into 379,286 shares of Common Stock at the conversion price of
$1.40 upon notice of conversion to the Company by the remaining Class Two
Preferred Stockholders.
4. Terminated Acquisition
The Company has terminated an Asset Acquisition Agreement (the
"Agreement") entered into with FileABC(TM) L.P. ("FileABC") in October 1996,
and will not consummate the acquisition of certain assets of FileABC pursuant
to the Agreement. The completion of the transaction had been subject to
certain conditions, including the condition that FileABC continue to have a
distribution relationship with Franklin Covey Company ("Franklin Covey") for
the distribution of software products. Franklin Covey terminated its
distribution relationship with FileABC, which was among the reasons for the
Company's termination of the Agreement.
The Company had advanced FileABC $175,000 in connection with the
terms of the Agreement. This amount is recorded in prepaid assets as an
advance payment. Although management currently believes this amount is
recoverable and is actively pursuing recovery, there can be no assurance
collection will ultimately occur, in which case the advances would be written
off.
Page 7
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Romtech, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The accompanying consolidated financial statements as of September
30, 1997 include the accounts of RomTech, Inc., ("RomTech"), which
successfully completed an initial public offering and a merger with Applied
Optical Media Corporation ("AOMC"), on October 18, 1995, and Virtual Reality
Laboratories, Inc. ("VRLI"), its wholly owned subsidiary, which was acquired
on April 5, 1996 in a transaction accounted for using the pooling of interests
method of accounting.
Results of Operations
Three Months Ended September 30, 1997 and 1996
Net sales for the three months ended September 30, 1997 were
$1,536,000 compared to $1,071,000 for the three months ended September 30,
1996, representing an increase of $465,000 or 43.4%. This increase resulted
primarily from increases in the sales of the Company's Galaxy of Games, Galaxy
of Home Office Help and Galaxy Deluxe brand name products (the "Galaxy Series
Products") which were partially offset by decreases in sales of certain
discontinued products.
Cost of sales for the three months ended September 30, 1997 were
$614,000 compared to $317,000 for the three months ended September 30, 1996,
representing an increase of $297,000 or 93.7%. This increase resulted
primarily from the increase in sales and certain express delivery costs
incurred due to greater than expected demand for the Galaxy Series Products.
The discontinuance of direct mail sales in the quarter ended September 30,
1997 also increased cost of sales because direct mail sales had yielded a
higher gross profit but incurred significantly higher marketing costs. The
Company's gross profit margin decreased to 60.0% in the three months ended
September 30, 1997 from 70.4% for the three months ended September 30, 1996.
The primary causes of this decrease were the express delivery costs in
delivering the Galaxy Series Products and the discontinuance of the direct
mail marketing efforts.
Product development expenses for the three months ended September 30,
1997 were $87,000 compared to $122,000 for the three months ended September
30, 1996, a decrease of $35,000 or 28.7%. The decrease was primarily due to a
$33,000 decrease in outside contractor costs resulting from increased
utilization of internal resources.
Selling, general and administrative expenses for the three months
ended September 30, 1997 were $656,000 compared to $1,026,000 for the three
months ended September 30, 1996, representing a decrease of $370,000 or 36.1%.
The decrease was primarily due to decreases in direct mail marketing costs of
$175,000, advertising costs of $134,000 and commissions costs of $48,000.
Net interest expense for the three months ended September 30, 1997
was $11,000 compared to $14,000 for the three months ended September 30, 1996,
a decrease of $3,000 or 21.4%. This decrease was due to the reduction of long
term debt related to the conversion of $200,000 of debt to equity and the
$100,000 principal payment made against a note payable on May 1, 1997.
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Romtech, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Liquidity and Capital Resources
The financial information presented reflects the Company's financial position
at September 30, 1997.
The quarter ended September 30, 1997 was the Company's first
profitable quarter since its Initial Public Offering in October 1995. As of
September 30, 1997, the Company's cash and working capital balances were
$373,885 and $1,161,627, respectively.
The Company's ability to sustain continued revenue growth,
profitability and a positive cash flow depends upon a variety of factors,
including: the timeliness and success of developing and selling its products;
the costs of developing, producing and marketing such products; consumer's
continuing demand for value priced software; competition; and various other
factors, many of which may be beyond the Company's control. In the future, the
Company's capital requirements will be affected by each of these factors. The
Company believes that its cash and working capital balances will be sufficient
to fund the Company's operations for the foreseeable future. However, the
Company may need to raise additional capital to satisfy the new Nasdaq Stock
Market requirements for continued listing on the Nasdaq SmallCap Market, which
became effective August 22, 1997. Companies failing to satisfy the new
continued listing requirement have until February 23, 1998 to meet the new
requirements. The Company currently does not satisfy the new net tangible
assets requirement of $2,000,000. At September 30, 1997 the Company's net
tangible assets were $1,234,137. Although management of the Company will seek
to be in compliance with this requirement on or before February 23, 1998,
there can be no assurance that this will occur.
On October 1, 1997, in an effort to comply with the new requirements
and provide additional working capital for the Company as its business
expands, the Company adjusted the exercise price of certain warrants for the
Company's Common Stock totaling 332,988 warrants to $2.00 per share, the fair
market value on October 1, 1997, until December 12, 1997. Of the 332,988
warrants, 155,000 were originally granted at $3.60 per share and 177,988 were
granted at $6.00 per share. The exercise of these warrants would contribute
approximately $665,000 to equity, which in addition to projected earnings,
should enable the Company to comply with the new net tangible assets
requirement of $2,000,000 on or before February 23, 1998. However, there can
be no assurance that the warrants will be exercised and that the Company will
realize projected earnings sufficient to comply with the new net tangible
assets requirement. The Company may then find it necessary to seek additional
capital to increase its stockholders' equity to at least the new minimum level
required. There can be no assurance that the Company will be able to raise
such additional capital or if it is able to raise additional capital that it
will be on terms satisfactory to the Company. The Company currently has no
significant capital expenditure commitments.
Forward-looking Statements
This quarterly report on Form 10-QSB contains forward-looking
statements regarding future events or the future financial performance of the
company that involve certain risks and uncertainties. Actual events or the
actual future results of the Company may differ materially from the results
discussed in the forward-looking statements due to various factors, including,
but not limited to, the timeliness and success of developing and selling
products; the costs of developing, producing and marketing such products;
consumers' continuing demand for value-priced software; competition; and
various other factors, many of which may be beyond the Company's control.
Page 9
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Romtech, Inc.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description of Exhibit
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27.1 Financial Data Schedule
(b) Reports on Form 8-K
On September 19, 1997, the Company filed a report on Form 8-K regarding the
termination of the Asset Acquisition Agreement entered into with FileABC(TM),
L.P. ("FileABC") in October 1996 and it has filed suit against FileABC in
federal court, alleging fraud, deceit and misrepresentation, breach of the
covenant of good faith and fair dealing, breach of contract and conspiracy on
the part of FileABC and certain of its principals and agents.
Page 10
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Romtech, Inc.
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ROMTECH, INC.
(Registrant)
Date: November 12, 1997 /s/ Joseph A. Falsetti
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Joseph A. Falsetti
Chief Executive Officer
Principal Financial Officer
Date: November 12, 1997 /s/ Gerald W. Klein
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Gerald W. Klein
Vice President and
Chief Financial Officer
Page 11
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Romtech, Inc.
Exhibit Index
Exhibit No. Description of Exhibit Page Number
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27.1 Financial Data Schedule 13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> SEP-30-1997
<CASH> 373,885
<SECURITIES> 0
<RECEIVABLES> 1,274,486
<ALLOWANCES> 68,624
<INVENTORY> 426,263
<CURRENT-ASSETS> 2,333,066
<PP&E> 211,140
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,855,626
<CURRENT-LIABILITIES> 1,171,439
<BONDS> 0
0
1,527,790
<COMMON> 6,362,286
<OTHER-SE> 1,148,550
<TOTAL-LIABILITY-AND-EQUITY> 2,855,626
<SALES> 1,535,558
<TOTAL-REVENUES> 1,535,558
<CGS> 613,796
<TOTAL-COSTS> 613,796
<OTHER-EXPENSES> 742,856
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,426
<INCOME-PRETAX> 167,480
<INCOME-TAX> 1,165
<INCOME-CONTINUING> 166,315
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 166,315
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
