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U.S. SECURITES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-27102
ROMTECH, INC.
(Exact name of registrant as specified in its charter)
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Pennsylvania 23-2694937
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification Number)
2000 Cabot Boulevard, Suite 110, Langhorne, PA 19047-1833
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code 215-750-6606
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of each exchange on which registered
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Common stock, no par value NASDAQ
Indicate by check mark 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 ( )
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year: $4,382,693
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was sold, or the average bid and asked price of such common equity, as
of a specified date within the past 60 days. $10,493,629 as of September 24,
1997.
ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes ( ) No ( )
APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 8,545,295 shares of common stock, no
par value per share, as of September 24, 1997. Transitional Small Business
Disclosure Format (check one): Yes ( ) No (X)
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive proxy statement for its 1997 Annual
Meeting are incorporated by reference into Part III as set forth herein. With
the exception of those portions which are expressly incorporated by reference,
said proxy statement is not deemed filed as a part hereof.
Exhibit Index located on page 39 Page 1 of 41
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RomTech, Inc.
Form 10-KSB
For the Fiscal Year Ended June 30, 1997
INDEX
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Page
PART I
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Item 1. Business..................................................................................... 3
Item 2. Properties................................................................................... 13
Item 3. Legal Proceedings............................................................................ 13
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 13
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters.................... 14
Item 6. Management's Discussion and Analysis of Results of Operations
and Financial Condition..................................................................... 15
Item 7. Financial Statements ....................................................................... 18
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................................................... 37
PART III
Item 9. Directors and Executive Officers of the Registrant.......................................... 38
Item 10. Executive Compensation...................................................................... 38
Item 11. Security Ownership of Certain Beneficial Owners and Management.............................. 38
Item 12. Certain Relationships and Related Transactions.............................................. 38
PART IV
Item 13. Exhibits and Reports on Form 8-K............................................................ 39
Index of Exhibits....................................................................................... 39
Signatures.............................................................................................. 41
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PART I
This annual report on Form 10-KSB 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, those discussed in "Factors Affecting Future Performance" below at
pages 8 to 13.
Item 1. Business
GENERAL
RomTech, Inc. (the "Company") a Pennsylvania corporation incorporated in July
1992, develops, publishes, markets and resells a diversified line of personal
computer software for consumer, educational and business applications. In
October 1995, the Company completed its initial public offering coincident
with its acquisition of Applied Optical Media Corporation ("AOMC"), a
developer of educational and reference software titles. In April 1996, the
Company acquired Virtual Reality Laboratories, Inc. ("VRLI"), a software
developer of landscape generation, space exploration, scheduling and business
forms manipulation programs. As a result of these acquisitions, the Company
offers software titles and personal productivity application products in the
game, personal/business productivity, education/edutainment, reference and
lifestyle markets for use at home and in the office. The Company's product
line enables it to serve customers who are seeking a broad range of
high-quality, value priced software.
The Company believes that consumers base their software purchase decisions on
the same criteria as other consumer product purchases, relying on recognized
brands for consistent quality, value and ease of use. 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 growing market of home
personal computer ("PC") users who value fully-featured and easy-to-use
software. The Company's Galaxy of Games and Galaxy of Home Office Help
products generally sell for under $15, a price point intended to generate
impulse purchases in mass market shopping environments. The Company's Galaxy
Deluxe products generally sell for $19.95 but feature packaging and content
usually found in $50 software titles.
BUSINESS STRATEGY
The worldwide market of personal computer users in the home and small office
represents the primary market for the Company's products. A March 1996 study
estimated the total United States installed base for home personal computers
at forty-seven million units during 1996 and projected the installed base to
grow to sixty-nine million units by 1999. The Company believes that brand name
recognition of its products, developing new brands and capitalizing upon the
success of top selling titles in existing brands is critical to its success as
a software publisher. The Company's business strategy is to be a leading
publisher of high-quality, value-priced consumer software by offering products
in the game, Galaxy of Games, and productivity, Galaxy of Home Office Help,
segments of the market for under $15 and the education/reference and
lifestyle, Galaxy Deluxe, segments of the market for $19.95. To implement its
business strategy, the Company intends to execute the following tactics.
Rely On Consumer Research and Marketplace Data. The Company utilizes consumer
research and marketplace sales data to determine which products are achieving
favorable sales results in the consumer software categories that the Company
serves. The Company then focuses on its top selling products that have a
sustainable product life and which also appeal to the broadest age group of
consumers regardless of gender. The Company then either develops or procures
similar products that meet these criteria while complementing and supporting
the Company's branding strategy.
Deliver Products To Market Quickly To Maximize Sales Opportunities. The
Company believes that one of its significant competitive strengths, primarily
as a result of its direct selling activity at weekend computer trade shows, is
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its ability to identify products that consumers are buying and which they will
continue to buy. The Company leverages this competitive strength by quickly
developing or procuring a product offering that the Company believes will
achieve favorable sales results in its category when the product is combined
with the Company's attractive, distinctive and informative packaging that is
designed to encourage impulse purchases in retail stores. The Company's
development efforts focus primarily on product design, features, consistent
and user friendly interfaces, ease of use, product quality and consistency.
The Company's internal product development activities are supplemented by
utilizing existing technologies and externally developed programming and
content. The Company maintains control over the creative and market-driven
aspects of its product development activities while utilizing outside
resources to reduce its development costs and minimize risks.
Develop Products That Are Simple To Use. Based on information from
registration cards returned by buyers of the Company's products, a large
portion of the Company's customers are new computer owners and so the
installation and use of the Company's products must require only a minimum of
technical expertise. The Company provides technical support for all of the
products that it sells and revises or upgrades products in response to
consumer feedback gained from consumers' registration of products they have
purchased.
Develop Efficient Distribution Relationships. The Company intends to rely on
larger, well established, merchandising and distribution organizations to
distribute its products to retailers in the U.S. and international markets.
Developing a direct sales force and a distribution organization to serve
today's U.S. retailers and retailers worldwide requires a commitment of
considerable financial and managerial resources and entails significant
competitive risk. In order to reduce the resources required for effective
distribution, the Company intends to incorporate Internet capabilities into
many of its new products. Customers or prospective customers can then review
the Company's products at its website, (http: www.romt.com.), and download
trial versions of selected software.
Market Brand Names That Deliver Consistent Quality. The Company is currently
focusing its marketing resources on developing brands that represent
consistency, quality and value to the consumer. The Company believes that to
the consumer, brands offer a safe and secure choice in an otherwise confusing,
fast changing and often intimidating software marketplace. Consumers view
successful brand logos as friendly marks of quality assurance. Once a consumer
becomes highly satisfied with a brand in any given product category, that
consumer will typically tend to actively seek out that brand versus competing
brands. The Company believes that successful brands can often command premium
prices relative to other competitive products and one of the Company's goals
is to achieve such success with its branding strategy.
Achieve and Maintain Profitable Operations. Since its inception the Company
has not achieved profitability. During the second half of fiscal 1997 the
Company undertook changes in its operations and business strategy to focus on
the value priced segment of the consumer software market while structuring the
Company to achieve profitability. The value priced segment is currently the
largest and most rapidly growing category of the consumer software market.
This trend is expected to continue for the foreseeable future as consumers
demand lower prices for software. In order to achieve and maintain profitable
operations the Company has developed plans and systems that will focus on:
delivering top selling branded titles with predictable, controllable
development costs and risks; outsourcing production and warehousing while
achieving high quality, low product costs, timely and efficient deliveries and
predictable overhead costs during periods of rapid and high sales volume
growth; and controlling operating expenses.
SALES AND MARKETING
The Company relies primarily on three basic sales channels for most of its
sales: distributors, direct mail and computer trade shows. The Company intends
to continue to explore opportunities using the Internet to market and
distribute software. Internet sales currently account for an insignificant
portion of the Company's sales. The Company presently has an exclusive
distribution agreement with Slash Corporation ("Slash") a division of GT
Interactive Software Corp., ("GTIS") covering distribution of the Company's
products to retailers in North America. Slash accounted for approximately 35%
of the Company's net sales during fiscal 1997. The Company believes that for
the year ending June 30, 1998, Slash could account for more than 70% of the
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Company's net sales (see Customer Concentration and Credit Risk on page 8 of
this report). GTIS is currently the largest distributor of consumer software
to mass merchants in the United States. The Company believes that GTIS is the
primary supplier of its own and third party consumer software to approximately
2,320 Wal-Mart(TM) stores and approximately 760 Target(TM) stores and supplies
value-priced software under specially designed programs to approximately 2,150
Kmart(TM) stores. Retailers that purchase the Company's products through
distributors include Wal-Mart, Target, Kmart, Best Buy(TM), CompUSA(TM),
Staples(TM), Office Depot(TM), OfficeMax(TM), Computer City(TM), Electronic
Boutique(TM), Zainy Brainy(TM), Babbages(TM), Software Etc. (TM) and
Fry's(TM). The Company also sells to international distributors primarily in
the United Kingdom and Japan and is currently negotiating distribution
relationships in Australia, Germany, Belgium, France, Singapore and South
Africa. The Company maintains a database of its registered customers and from
time to time uses direct mail to sell upgrade versions and new products. Sales
of software titles in jewel case packaging at computer trade shows are made
through the Company's Multimedia Warehouse(TM) Product Group.
The Company's product line is based on branded content focused in the game,
productivity, education/reference and lifestyle markets. By maintaining a
branded product category focus, the Company believes that its advertising,
promotion, merchandising and packaging expenditures will accrue long-term
benefits for all the products in each category.
The Company uses a small internal staff to work with a distributor's sales
personnel in order to maximize the business potential with retail accounts.
The Company's salespeople work closely with its distributors and retail buyers
to determine that appropriate Company products are inventoried for each retail
outlet, that stocking levels are adequate, that promotions and advertising are
coordinated with product releases and that in-store merchandising plans are
properly implemented.
The Company's marketing department is responsible for creating and marketing
programs to generate product sell-in (sales to retailers) and sell-through
(sales to end user customers). These programs generally are based on
established consumer product marketing techniques that the Company believes
are becoming more important as software becomes more of a consumer product.
The Company uses consumer product graphic designers and copywriters to attempt
to create effective package designs, catalogs, brochures, advertisements and
related materials. The Company's marketing and sales personnel and outside
contractors work together to coordinate retail and publicity programs so that
those programs are in place when products are initially shipped to retailers
and consumers. Public relation campaigns, in-store advertising, catalog
mailings and advertisements are designed in advance of product availability.
The Company has limited exposure to returns by distributors and retailers
because its distribution agreements generally do not provide for returns
unless there are defects in a product related to workmanship. The Company does
have some limited exposure to returns by consumers. Reserves for these returns
are established at levels that the Company believes are adequate based on
product sell-through, inventory levels and historic return rates (See Note 1,
Summary of Significant Accounting Policies, Revenue Recognition, page 26). The
Company typically accepts returns from customers, even when not legally
required to do so, in order to maintain good customer relations which the
Company believes enhances repeat purchasing by consumers. The Company sells to
its distributors and retailers on credit, with varying discounts and credit
terms.
COMPETITION
The market for software in the categories in which the Company competes is
intensely competitive. The Company believes that the principal competitive
factors generally include content quality, brand name recognition, ease of
use, merchandising, product features, quality, reliability, on-line
technology, distribution channels and price. Based on its current and
anticipated future product offerings, the Company believes that it competes or
will compete effectively in these areas, particularly in brand name
recognition, quality, ease of use, and product features.
The Company competes primarily with other software publishers, although
certain book publishers, magazine publishers, entertainment companies and
media companies may expand their product lines to compete with the Company's
products. The Company's competitors vary in size from very small companies
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with limited resources to very large corporations with greater financial,
marketing, distribution, technical and other resources. Although there are a
variety of consumer and business software publishers, based on product lines
and price points, GT Interactive, The Learning Company, CUC Software, IMSI,
Expert Software, Nova Development Corporation, Cosmi, Electronic Arts,
Mindscape, Hasbro Interactive, Virgin, Interplay and Media Graphics are the
Company's primary competitors. In addition, it is possible that certain large
software companies, hardware companies and media companies may increasingly
target the value line segment of the software market resulting in additional
competition.
The Company believes that increasing competition in the consumer software
market may result in lower selling prices, which could adversely affect the
Company's business, operating results and financial condition. To the extent
that competitors achieve performance, price or other selling advantages, the
Company could be adversely affected. In addition, commercial acceptance of new
technologies such as the Internet may reduce demand for the Company's existing
products. Extensive price competition, reduced demand or distribution channel
changes may have a material adverse effect on the Company's business,
financial condition and operating results. There can be no assurance that the
Company will have the resources required to respond to market forces,
technological change or compete successfully against current or future
competitors or that the competitive pressures faced by the Company will not
materially and adversely affect its business, operating results and financial
condition.
PRODUCT DEVELOPMENT
The Company seeks to develop a broad line of branded products in rapidly
growing and sustainable market categories. The Company utilizes consumer
research and marketplace sales data, (reported industry sales data, computer
trade show sales data and retail sell-through data), to determine which
products are achieving top ranked sales results in the consumer software
categories that the Company serves. New product ideas are evaluated based upon
market research in the subject area, the type and demographics of the target
consumer, and the existence and characteristics of competitive products. The
Company then either develops or procures similar or like-kind products that
meet these criteria while complementing and supporting the Company's branding
strategy. The Company believes that its development process has certain
material advantages over other software companies, including consistent
product quality, reliable delivery schedules and predictable cost estimates.
The Company has also acquired products through the acquisition of other
software companies or the acquisition or licensing of software products or
technologies and will most likely continue to do so in the future.
The Company's product or marketing manager ("project manager") oversee the
development of a product from conception through completion, and controls the
scope, design, content, and management of the project. The Company seeks to
design new products that incorporate all of the important functions and
features of the leading competitive products and to add innovative, helpful
concepts and upgrades. Once a product is approved for development, a design
specification is created that includes the product's features, estimated
development time and cost, projected delivery availability date and projected
selling price. Whenever possible, the software is designed to incorporate
technology used in the Company's current products in an effort to shorten the
development cycle and improve quality and consistency. The overall product,
including packaging and documentation, is designed to comply with a
manufacturing specification that will meet the Company's margin requirements
at consumer price points.
The project manager executes the project with a project team that typically
may include programmers, designers, artists, writers and testers. The project
team members may be employees of the Company or independent contractors
depending on the scheduling of and skills required for each project. The
Company's internal development efforts focus primarily on product design and
features, consistent user interfaces, and product quality and consistency. The
Company supplements its internal product development resources by utilizing
existing technologies and externally developed programming and content when
such utilization results in a more efficient method of creating a higher
quality product. Using this method, the Company maintains internal control
over the creative and market-driven aspects of product development while using
external resources to shorten development time and lower development costs and
risks. Development costs associated with externally up front licensed
technology are generally paid through royalties based on actual sales which
reduces the Company's investment risk in a product.
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Developed products are tested for quality assurance before being released for
production. Products are typically tested for bugs, compatibility with the
numerous popular PC configurations, typical installation issues,
functionality, and ease-of-use. Marketing managers, or marketing employees
under a manager's supervision, are responsible for reviewing customer
feedback, competitive products, product performance and market positioning in
order to introduce upgrades that keep abreast of consumer tastes and trends
while satisfying the Company's business strategy.
BACKLOG
The Company typically ships its products within a short period of time after
accepting a customer's order, which is common in the computer software
industry. Consequently, the Company does not generate a significant backlog of
orders which would be a significant or important indicator of future revenues
or earnings.
CUSTOMER AND TECHNICAL SUPPORT
Customer and technical support standards are very high in the computer
software market. The Company provides telephone and Internet technical support
to its customers at no additional charge. In order to remain competitive, the
Company currently provides customer support. However, costs associated with
these activities are not significant. The Company believes that high-quality,
user-friendly support will aid in the product development process and,
therefore, the Company's growth, by providing valuable feedback to its
marketing and software development personnel.
OPERATIONS
The Company's accounting, purchasing, inventory control, scheduling, order
processing, warehousing and shipping, operations and development activities
are conducted at its headquarters location in Langhorne, PA. Production and
most shipments to major vendors are performed by independent contractors
working under the Company's direction. The Company's management information
system handles order entry, order processing, picking, billing, accounts
receivable, accounts payable, general ledger, inventory control, and mailing
list management. Subject to credit terms and product availability, orders are
typically shipped from the Company's facilities within 24 hours of receiving
an order. Third party contractors replicate the software and assemble manuals,
catalog inserts and boxes in which the Company's products are shipped. The
Company has multiple sources for all components of its products, and has not
experienced any material delays in production or assembly.
EMPLOYEES
As of June 30, 1997, the Company had 33 full-time employees of which 9 were
employed in software development; 10 in sales, marketing and customer support;
and 14 in operations, finance and administration. In addition, the Company
utilizes approximately 6 independent contractors in connection with its
product development activities. No employees are represented by labor unions,
and the Company has never experienced a work stoppage.
INTELLECTUAL PROPERTY RIGHTS
The Company generally sells a portion of its published software under licenses
from independent developers and, in such cases, does not acquire the
copyrights for the underlying work. The Company relies primarily on a
combination of trademark, copyright, trade secret and other proprietary rights
laws, license agreements, employee and third-party nondisclosure agreements
and other methods to protect its proprietary rights and the rights of its
developers. United States copyright law, international conventions and
international treaties, however, may not provide meaningful protection against
unauthorized duplication or infringement of the Company's software.
Policing unauthorized use of an easily duplicated and broadly disseminated
product such as computer software is very difficult, time consuming and
costly. Software piracy is expected to be a persistent problem for the
software industry. These problems are particularly acute in certain
international markets such as South America, the Middle East, the Pacific Rim
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and the Far East. If a significant amount of unauthorized copying of the
Company's products were to occur, the Company's business, operating results
and financial condition could be adversely affected.
Software developers and publishers are subject to infringement claims. There
can be no assurance that third parties will not assert infringement claims
against the Company in the future with respect to current or future products.
There has been substantial litigation in the industry regarding copyright,
trademark and other intellectual property rights. Any such claims or
litigation, with or without merit, would be costly and result in a diversion
of management's attention, which could have a material adverse effect on the
Company's business, operating results and financial condition. Adverse
determinations with respect to such claims or litigation would have a material
adverse effect on the Company's business, operating results and financial
condition.
FACTORS AFFECTING FUTURE PERFORMANCE
This report and the Company's Annual Report to Stockholders for the year ended
June 30, 1997 contain certain forward-looking statements that involve risks
and uncertainties that could cause actual results to differ materially from
those anticipated, including, but without limitation, economic and competitive
conditions in the software business affecting the demand for the Company's
products, the Company's need for additional funds, the ability to hire key
management personnel to manage anticipated growth, the development, market
acceptance and timing of new products, access to distribution channels and the
renewal of licenses for key software products. Those factors and the factors
discussed below and elsewhere in this report, should be considered by
investors in the Company.
Early Stage Company; Consumer Software Business; Losses. The Company commenced
operations in July 1992. The Company has experienced losses since inception.
The accumulated deficit for the Company through June 30, 1997 is approximately
$7,865,000. The Company's operations to date have been funded primarily
through proceeds from the Company's initial public offering of common stock in
October 1995 and through the sale in private offerings of preferred stock and
common stock warrants in November 1996 and in January and April 1997. The
Company's operations are subject to all of the risks inherent in the
development of an early stage business, particularly in a highly competitive
industry, including, but not limited to, development, production and marketing
difficulties, competition and unanticipated costs and expenses. The Company's
future success will depend upon its ability to increase revenues from the
development and marketing of its current and future software products. The
development of multimedia software products, which combine text, sound, high
quality graphics, images and video, is difficult and time consuming, requiring
the coordinated participation of various technical and marketing personnel.
Other factors affecting the Company's future success include, but are not
limited to, the ability of the Company to overcome problems and delays in
product development, market acceptance of products and successful
implementation of sales and marketing programs. There can be no assurance the
Company will successfully develop a sustainable game or personal productivity
software business and achieve profitability.
Customer Concentration and Credit Risk. The Company presently has an exclusive
distribution agreement with Slash Corporation ("Slash"), a division of GT
Interactive Software Corp. ("GTIS") covering distribution of the Company's
products to retailers in North America. GTIS is currently the largest
distributor of consumer software to mass merchants in the United States.
During the year ended June 30, 1997, Slash accounted for approximately 35% of
the Company's net sales. The Company believes that for the year ending June
30, 1998, Slash could account for 70% or more of the Company's net sales. The
Company's agreement with Slash does not specify minimum purchase requirements
and could be terminated at any time by Slash. There can be no assurance that
Slash will continue to distribute the Company's consumer software. The loss of
Slash as a distributor or an inability to collect receivables from Slash or
any other adverse change in the Company's relationship with Slash would have a
material adverse effect on the Company's business, operating results and
financial condition.
Potential Inability to Manage Growth. The Company's ability to manage growth
effectively will depend on its ability to improve and expand its operations,
including its financial and management information systems, and to recruit,
train and manage additional marketing, sales, software development, operations
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and administrative personnel. There can be no assurance that management will
be able to manage growth effectively, or that it will be able to recruit and
retain personnel. The failure to do either will have a material adverse effect
on the Company.
Need for Additional Funds. The Company's future capital requirements will
depend on many factors, including cash flow from operations, continued
progress in its software development program, competing technological and
market developments and the Company's ability to market its products
successfully. If the Company is not able to increase cash flow from operations
to a level sufficient to support continued growth of its business, the Company
may require additional funds to sustain and expand its product development,
marketing and sales activities. Adequate funds for these purposes may not be
available or may be available only on terms that would result in significant
dilution or otherwise be unfavorable to existing stockholders. If the Company
is unable to secure additional funding, or if the Company is unable to obtain
adequate funds from operations or external sources when required, the
Company's inability to do so would have a material adverse effect on the
long-term viability of the Company. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources" in Part II, Item 6 of this document.
Shares Eligible for Future Sale. Shares of a substantial number of the
Company's Common Stock in the public market could adversely affect the market
price for the Common Stock. Of the 6,535,614 shares of Common Stock
outstanding on June 30, 1997, approximately 4,637,271 shares are "restricted
securities" which may be sold publicly pursuant to an effective registration
statement under the Securities Act or in reliance upon an applicable exemption
from the registration requirements of the Securities Act. Of the 4,637,271
shares of restricted securities, 634,667 shares have been registered pursuant
to a registration statement on Form S-3, 7,000 shares are subject to piggyback
registration rights and 4,043,461 shares are presently eligible for sale under
Rule 144 promulgated under the Securities Act. As of June 30, 1997, options
and warrants to purchase 1,685,859 shares of Common Stock were outstanding of
which 1,507,109 were immediately exercisable, and 1,000,000 shares of Class
One Convertible Preferred Stock ("Class One Preferred Stock") will be
convertible into 303,030 shares of Common Stock beginning on October 17, 1997.
Shares issuable upon the exercise of these options and warrants and upon
conversion of the Class One Preferred Stock will be eligible for sale pursuant
to an effective registration statement or in reliance upon an applicable
exemption from the registration requirements of the Securities Act.
Recent Sales of Securities. On January 30, 1997, the Company completed a
private placement to accredited investors of 1,271,340 shares of Class Two
Convertible Preferred Stock (the "Class Two Preferred") and 355,975 Common
Stock Warrants (the "Warrants") which entitle the holders to purchase 355,975
shares of the Company's Common Stock. The Class Two Preferred is currently
convertible into shares of Common Stock equal to the number of shares of Class
Two Preferred surrendered for conversion divided by $1.40. (See Note 10,
Preferred Stock, page 31).
On April 22, 1997, the Company completed a private placement to accredited
investors of 1,250,000 shares of Class Three Convertible Preferred Stock (the
"Class Three Preferred") and 62,500 Common Stock Warrants (the "Class Three
Warrants") to purchase 62,500 shares of the Company's Common Stock. The
conversion price per share (the "Conversion Price") for the Class Three
Preferred Stock ranges from a high of 80% of the average closing bid price of
the Company's Common Stock (the "Average Quoted Price") for the five (5)
trading days immediately preceding the date of conversion to a low of 70% of
the Average Quoted Price for the five (5) trading days immediately preceding
the date of conversion; provided that the Conversion Price will not exceed
$5.95 or be less than $.66. All of the Class Three Preferred has been
converted into Common Stock.
The issuance of the Class Two Preferred and the Class Three Preferred may
result in significant dilution to the current holders of Common Stock. In
addition, due to specific accounting guidance promulgated by the SEC, the
Company's loss per share will be negatively impacted since the Class Two
Preferred and the Class Three Preferred contain beneficial conversion features
that are accounted for in a manner similar to a preferred stock dividend.
Rapid Technological Change; Product Development. The market for the Company's
products is characterized by rapid technological developments, evolving
industry standards, swift changes in customer requirements and frequent new
product introductions and enhancements. The Company's continued success will
be dependent upon its ability to continue to enhance its existing products,
develop and introduce in a timely manner new products incorporating
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technological advances and respond to customer requirements. To the extent one
or more of the Company's competitors introduce products that more fully
address customer requirements, the Company's business could be adversely
affected. There can be no assurance that the Company will be successful in
developing and marketing enhancements to its existing products or new products
on a timely basis or that any new or enhanced products will adequately address
the changing needs of the marketplace. If the Company is unable to develop and
introduce new products or enhancements to existing products in a timely manner
in response to changing market conditions or customer requirements, the
Company's business and operating results could be adversely affected. From
time to time, the Company or its competitors may announce new products,
capabilities or technologies that have the potential to replace or shorten the
life cycles of the Company's existing products. There can be no assurance that
announcements of currently planned or other new products will not cause
customers to delay their purchasing decisions in anticipation of such
products, which could have a material adverse effect on the Company's business
and operating results.
Uncertainty of Future Operating Results; Fluctuations in Quarterly Operating
Results. Historical results of the Company's revenue and operating results
should not necessarily be considered indicative of future growth, or of future
operating results. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" in
Part II, Item 6 of this document for a discussion of the Company's historical
operating results. Future operating results will depend upon many factors,
including the demand for the Company's products, the level of product and
price competition, the length of the Company's sales cycle, seasonality of
individual customer buying patterns, the size and timing of new product
introductions and product enhancements by the Company and its competitors, the
mix of sales by products, services and distribution channels, levels of
international sales, acquisitions by competitors, changes in foreign currency
exchange rates, the ability of the Company to develop and market new products
and control costs, and general domestic and international economic and
political conditions. As a result of these factors, revenues and operating
results for any quarter are subject to variation and the Company believes that
period-to-period comparisons of its results of operations are not necessarily
meaningful until a representative historical time period is established and
should not be relied upon as indications of future performance.
Highly Competitive Market; Pricing Concerns; Rapidly Changing Marketing
Environment. The markets for personal computer software for games,
productivity or education/reference and lifestyle applications are highly
competitive particularly at the retail shelf level where a rapidly increasing
number of software titles are competing for the same amount of shelf space.
There are certain competitors of the Company with substantially greater sales,
marketing, development and financial resources. The Company believes that the
competitive factors affecting the market for its products and services include
the traditional attributes used in determining a products value such as:
vendor and product reputation; product quality, performance and price; the
availability of products on multiple platforms; product functionality and
features; product ease-of-use; and the quality of customer support services
and training. The relative importance of each of these factors depends upon
the specific customer involved and while the Company believes it competes
favorably in each of these areas, there can be no assurance that it will
continue to do so. Moreover, the Company's present or future competitors may
be able to develop products comparable or superior to those offered by the
Company, offer lower price products or adapt more quickly than the Company to
new technologies or evolving customer requirements. Competition is expected to
intensify. In order to be successful in the future, the Company must respond
to technological change, customer requirements and competitors current
products and innovations. There can be no assurance that it will be able to
continue to compete effectively in its market or that future competition will
not have a material adverse effect on its business operating results and
financial condition.
Possible Inadequacy of Protection of Software Technology; Tradenames and Other
Proprietary Rights. The Company's success depends in part on its ability to
protect its proprietary rights to the technologies and concepts used in its
principal products. The Company relies on a combination of copyrights,
trademarks, trade secrets, confidentiality procedures and contractual
provisions to protect its proprietary rights. There can be no assurance that
the Company's existing or future copyrights, trademarks, trade secrets or
other intellectual property rights will be of sufficient scope or strength to
provide meaningful protection or commercial advantage to the Company. The
Company has applied for one software patent. Also, in selling certain of its
products, the Company relies on "shrink wrap" licenses that are not signed by
licensees and, therefore, may be unenforceable under the laws of certain
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jurisdictions. In addition, the laws of some foreign countries do not protect
the Company's proprietary rights to the same extent as do the laws of the
United States. There can be no assurance that such factors would not have a
material adverse effect on the Company's business or operating results. The
Company may from time to time be notified that it is infringing certain patent
or intellectual property rights of others. Combinations of technology acquired
through past or future acquisitions and the Company's technology will create
new products and technology that may give rise to claims of infringement.
While no actions are currently pending against the Company for infringement of
patent or other proprietary rights of third parties, there can be no assurance
that third parties will not initiate infringement actions against the Company
in the future. Any such action could result in substantial cost to and
diversion of resources of the Company. If the Company were found to infringe
upon the rights of others, no assurance can be given that licenses would be
obtainable on acceptable terms or at all, that significant damages for past
infringement would not be assessed or that further litigation relative to any
such licenses or usage would not occur. The failure to obtain necessary
licenses or other rights, or the advent of litigation arising out of any such
claims, could have a material adverse effect on the Company's operating
results.
Dependence on Key Management and Technical Personnel. The Company's success
depends to a significant degree upon the continued contributions of its key
management, marketing, technical and operational personnel, including members
of senior management and technical personnel of acquired companies. The
Company has agreements providing for the continued employment of its key
employees for a period of one or two years. Notwithstanding the agreements,
the employees may voluntarily terminate their employment with the Company at
any time. The loss of the services of one or more key employees, including key
employees of acquired companies, could have a material adverse effect on the
Company's operating results. The Company also believes its future success will
depend in large part upon its ability to attract and retain additional highly
skilled management, technical, marketing, product development and operational
personnel. Competition for such personnel is intense, and there can be no
assurance that the Company will be successful in attracting and retaining such
personnel.
International Sales. In fiscal 1997, the Company derived approximately 4% of
its total revenues from international sales versus 14% in 1996. International
business is subject to certain risks including varying technical standards,
tariffs and trade barriers, political and economic instability, reduced
protection for intellectual property rights in certain countries, difficulties
in supporting foreign customers, difficulties in managing foreign
distributors, potentially adverse tax consequences, the burden of complying
with a wide variety of complex operations, customs, foreign laws, regulations
and treaties and the possibility of difficulties in collecting accounts
receivable.
Acquisition-Related Risks. Since its initial public offering the Company has
acquired AOMC and VRLI and other acquisitions may be contemplated from
time-to-time. The process of integrating the business operations of the
acquired companies into the Company's operations may result in unforeseen
operating difficulties and expenditures and may absorb significant management
attention that would otherwise be available for the ongoing development of the
Company's business. If the Company's management does not respond to these
challenges effectively, the Company's results of operations could be adversely
affected. Moreover, there can be no assurance that the anticipated benefits of
the acquisitions will be realized. The Company and the acquired companies
could experience difficulties or delays in integrating their respective
technologies or developing and introducing new products. Delays in, or the
non-completion of, the development of these new products, or lack of market
acceptance of such products, could have an adverse impact on the Company's
future results of operations and result in a failure to the realize
anticipated benefits of the acquisitions.
Potential Failure of Product Liability Limitations. The Company's license
agreements with customers typically contain provisions designed to limit their
exposure to potential product liability claims. However, it is possible that
such limitation of liability provisions may not be effective under the laws of
certain jurisdictions. Although the Company has not experienced any product
liability claims to date, the sale and support of products may entail the risk
of such claims, and there can be no assurance that the Company will not be
subject to such claims in the future. A successful product liability claim
brought against the Company could have a material adverse effect upon the
Company's business, operating results and financial condition.
Stock Price Volatility. The Company believes that a variety of factors could
cause the price of its Common Stock to fluctuate, perhaps substantially,
including quarter to quarter variations in operating results; announcements of
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developments related to its business; fluctuations in its order levels;
general conditions in the technology sector or the worldwide economy;
announcements of technological innovations , new products or product
enhancements by the Company or its competitors; key management changes;
changes in joint marketing and development programs; developments relating to
patents or other intellectual property rights or disputes; and developments in
the Company's relationships with its customers, distributors and suppliers. In
addition, in recent years the stock market in general, and the market for
shares of software and high technology stocks in particular, has experienced
extreme price fluctuations which have often been unrelated to the operating
performance of affected companies. Such fluctuations could adversely affect
the market price of the Company's Common Stock.
Possible Delisting of Securities; New Nasdaq Listing Requirements; Risk of Low
Priced Stocks. The Common Stock is listed for trading on the Nasdaq SmallCap
Market under the symbol ROMT. A listed company may be delisted if it fails to
maintain minimum levels of stockholders' equity, shares publicly held, number
of stockholders or aggregate market value, or if it violates other aspects of
its listing agreement. At June 30, 1997 the Company satisfied the minimum
level of stockholders' equity required to be listed ($1,000,000) and all other
aspects of its listing agreement.
The Nasdaq Stock Market announced new listing requirements for continued
listing on the Nasdaq SmallCap Market effective August 22, 1997. Companies
failing to satisfy the new continued listing requirements will have until
February 23, 1998 to meet the new requirements. The Company would not satisfy
the new requirements at June 30, 1997, but management of the Company will seek
to be in compliance on or before February 23, 1998.
To comply with the new requirements, the Company may seek additional capital
to, among other things, increase its stockholders' equity to at least the new
minimum level required, ($2,000,000). 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, it will be on terms satisfactory to the Company (See
Item 6 - Management's Discussion and Analysis of Results of Operations and
Financial Condition, Liquidity and Capital Resources contained in this report,
incorporated herein by reference, for additional information concerning the
Company's financial position). If the Company fails to satisfy the criteria
for the new requirements, its Common Stock may be delisted. Public trading, if
any, would thereafter be conducted in the over-the-counter market in the
so-called "pink sheets," or on the NASD's "Electronic Bulletin Board." If the
Common Stock were delisted, it may be more difficult to dispose of, or even to
obtain quotations as to the price of, the Common Stock and the price, if any,
offered for the Common Stock may be substantially reduced.
In addition, if the Common Stock is delisted from trading on the Nasdaq
SmallCap Market, and the trading price of the Common Stock is less than $5.00
per share, or the Company has less than $2 million in net tangible assets,
trading in the Common Stock would be subject to the requirements of Rule 15g-9
promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Under this rule, broker/dealers who recommend such securities
to persons other than established customers and accredited investors
(generally institutions with assets in excess of $5 million or individuals
with a net worth in excess of $1 million or an annual income exceeding
$200,000 or $300,000 jointly with their spouses) must make a special written
suitability determination for the purchaser and receive the purchaser's
written agreement to a transaction prior to sale. The requirements of Rule
15g-9, if applicable, may affect the ability of broker/dealers to sell the
Company's securities and may also affect the ability of purchasers to sell
their shares in the secondary market. The Securities Enforcement Remedies and
Penny Stock Reform Act of 1990 (the "Penny Stock Rule") also requires
additional disclosure in connection with any trades involving a stock defined
as penny stock (any non-Nasdaq equity security that has a market price or
exercise price of less than $5.00 per share and less than $2 million in net
tangible assets, subject to certain exceptions). Unless exempt, the rules
require the delivery, prior to any transaction involving a penny stock, of a
disclosure schedule prepared by the SEC explaining important concepts
involving the penny stock market, the nature of such market, terms used in
such market, the broker/dealer's duties to the customer, a toll-free telephone
number for inquiries about the broker/dealer's disciplinary history and the
customer's rights and remedies in case of fraud or abuse in the sale.
Disclosure must also be made about commissions payable to both the
broker/dealer and the registered representative, and current quotations for
the securities. Finally, monthly statements must be sent disclosing recent
price information for the penny stock held in the account and information on
the limited market in penny stocks.
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Item 2. Properties
The Company leases 11,000 square feet of office, development and warehouse
space in Langhorne, PA. The Company closed its San Luis Obispo, CA facility on
September 19, 1997 and the space has been leased to a third party. The Company
has been released from its lease obligation pertaining to the San Luis Obispo
facility and the closure of the facility had no material financial impact on
the Company. The Company believes that its current facilities will be adequate
for the Company's anticipated needs through fiscal 1998. (See Note 7 on page
30 to Notes to Consolidated Financial Statements in Item 7 contained in this
report incorporated herein by reference for additional information concerning
properties leased by the Company). The Company anticipates that it may require
additional space as its business grows but anticipates no difficulty in
obtaining such space in the vicinity of its current facilities on terms
substantially similar to those of the Company's current lease.
Item 3. Legal Proceedings
The Company terminated the 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.
On July 8, 1997, Company filed suit against FileABC and certain of its
principals and agents in the United States Federal Court for the Eastern
District of Pennsylvania, 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.
The Company is seeking to rescind the Agreement, to recover damages in the
amount of $175,000 plus interest and other expenses and a declaratory judgment
that the Agreement is void and unenforceable.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The Company's Common Stock is traded on the Nasdaq SmallCap Market System
("Nasdaq") under the symbol ROMT. The following are the high and low closing
prices from October 18, 1995 (the date of the Company's initial public
offering) through June 30, 1997, as reported by Nasdaq:
High Low
---- ---
Fiscal 1996
-----------
October 18, 1995 (commenced trading) $4.250 $3.750
Second quarter $5.250 $3.500
Third quarter $9.625 $3.000
Fourth quarter $5.375 $3.500
Fiscal 1997
-----------
First quarter $6.000 $3.625
Second quarter $5.875 $5.000
Third quarter $5.500 $3.625
Fourth quarter $5.000 $1.250
The closing price of the Company's Common Stock on June 30, 1997 was $1.4375.
On September 18, 1997, the approximate number of stockholders of record was
687 and the closing price of the Company's Common Stock was $1.375.
The Company has not paid any dividends on its Common Stock. The Company
currently intends to retain earnings, if any, for use in its business and does
not anticipate paying cash dividends in the foreseeable future.
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Item 6. Management's Discussion and Analysis of Results of Operations
and Financial Condition
Basis of Presentation
The accompanying consolidated financial statements as of June 30, 1997 include
the accounts of RomTech, Inc., ("RomTech"), which successfully completed an
initial public offering on October 18, 1995 and a merger with Applied Optical
Media Corporation ("AOMC"), which merged with RomTech concurrent with the
completion of RomTech's public offering, 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. As further described in Note 2 to the consolidated financial
statements, the AOMC merger was accounted for as a reverse acquisition whereby
AOMC was deemed to be the acquiring entity for accounting purposes.
Accordingly, the consolidated statements of operations include the activities
of the following entities for the following periods:
o July 1, 1995 to October 17, 1995 - AOMC and VRLI
o October 18, 1995 to June 30, 1996 - RomTech, AOMC and VRLI
o July 1, 1996 to June 30, 1997 - RomTech, AOMC and VRLI
Results of Operations
The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto for the Company contained elsewhere
herein.
Year Ended June 30, 1997 Compared to the Year Ended June 30, 1996
Net Sales and Cost of Sales
Revenues for the year ended June 30, 1997 were $4,383,000 compared to
$3,121,000 for the year ended June 30, 1996, representing an increase of
$1,262,000 or 40.4%. This increase resulted from a $1,368,000 increase in
revenues derived from the products within the "Galaxy Series".
The cost of revenues for the year ended June 30, 1997 were $1,571,000
compared to $1,136,000 for the year ended June 30, 1996, representing an
increase of $435,000 or 38.3%. The reasons for this increase are attributable
to increased volume, as well as increases in product costs related to the
additional revenues of $585,000, freight expense of $33,000 and provision for
obsolescence costs of $27,000, which were partially offset by a reduction in
royalty expense of $247,000. The increase in gross profit margin from 63.6% to
64.2% was caused primarily by the reduction in royalty expense, which was
partially offset by an increase in freight costs.
Operating Expenses
Product development expenses for the year ended June 30, 1997 were
$415,000 compared to $728,000 for the year ended June 30, 1996, a decrease of
$313,000 or 43.0%. This decrease was caused primarily by a $179,000 decrease
in salary for employees engaged in development activities and a $90,000
reimbursement for a development contract.
Selling, general and administrative expenses for the year ended June 30,
1997 were $3,998,000 compared to $3,208,000 for the year ended June 30, 1996,
an increase of $790,000 or 24.6%. This increase was caused primarily by an
increase in direct mail marketing costs of $630,000 and amortization costs of
$122,000 related to software rights to clip art images.
The Company closed its San Luis Obispo, CA facility on September 19, 1997
and the space has been leased to a third party. The Company has been released
from its lease obligation pertaining to the San Luis Obispo facility and the
closure of the facility had no material financial impact on the Company.
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<PAGE>
Non-recurring charges of $971,000 for the year ended June 30, 1996 were
comprised of $213,000 in costs relating to the closing of the AOMC facility
and $758,000 in merger related expenses associated with the acquisition of
VRLI. The AOMC facility was closed because the Company determined that it
possessed neither the product offerings nor the financial and human resources
to compete effectively for market share in the highly competitive market for
direct, educational and reference software, which were AOMC's core products
and market. The Company redirected its strategy to focus on software titles
and personal productivity application products in the game, personal/business
productivity, education/edutainment, reference and lifestyle markets for use
at home and in the office. The Company's current product line enables it to
serve customers who are seeking a broad range of high-quality, value priced
software. Any AOMC business functions or activities were consolidated in the
Langhorne, PA office.
Net interest expense for the year ended June 30, 1997 was $48,000
compared to $74,000 for the year ended June 30, 1996, a decrease of $26,000 or
35.1%. The primary reason for this decrease was the reduction of long term
debt related to the conversion of $200,000 of debt to equity and $134,000 of
principal repayments made on existing notes payable during the year ended June
30, 1997.
The weighted average common shares outstanding increased 1,125,965 for
the year ended June 30, 1997 as a result of the full year's effect from the
initial public offering. Also, during the year ended June 30, 1997, 243,887
warrants representing 239,571 shares and options representing 5,000 shares
were exercised and 7,000 shares of common stock were issued in connection with
the Company's private offering of Class Three Convertible Preferred Stock. In
addition, due to the $559,000 accretion of the beneficial conversion feature
of the Class Two and Class Three Preferred Stock, the net loss per common
share increased $0.09 for the year ended June 30, 1997.
Subsequent to June 30, 1997, 731,000 shares of the Class Two Convertible
Preferred Stock have been converted into 522,173 shares of Common Stock and
all of the 1,250,000 shares of Class Three Convertible Preferred Stock have
been converted into 1,487,508 shares of Common Stock. The remaining 540,340
shares of the Class Two Convertible Preferred Stock will be converted into
385,957 shares of Common Stock at the conversion price of $1.40 upon notice of
conversion to the Company by the Class Two Convertible Preferred Stockholders
(See Note 10, Preferred Stock, in the Notes to the Consolidated Financial
Statements on page 31 of this report).
Liquidity and Capital Resources
The financial information presented reflects the Company's financial position
as of June 30, 1997.
As of June 30, 1997, the Company's cash and working capital balances were
$445,474 and $1,099,982, respectively. During the year ended June 30, 1997,
the Company successfully completed the private placement of the Class Two
Convertible Preferred Stock resulting in approximately $1,115,000 in cash
proceeds and the private placement of the Class Three Convertible Preferred
Stock resulting in approximately $1,064,000 in net proceeds. Additionally,
Odyssey Capital Group L. P. ("Odyssey"), a shareholder of the Company,
purchased $200,000 of notes payable previously owed to Ballyshannon Partners
L. P., another shareholder of the Company, and exchanged $100,000 of the debt
for 100,000 shares of Class Two Convertible Preferred Stock, bringing the
Class Two Convertible Preferred Stock net proceeds up to $1,215,000, Odyssey
then exchanged the remaining $100,000 of the debt to pay the exercise price of
warrants to purchase 198,687 shares of Common Stock. After accounting for the
above transactions, total stockholders' equity at June 30, 1997 was $1,067,822
(See Note 10, Preferred Stock, in the Notes to the Consolidated Financial
Statements on page 31 of this report).
As indicated in the accompanying financial statements, the Company's net
loss was $1,650,925 and $2,998,480 in fiscal 1997 and 1996, respectively. In
addition, cash used by operating activities totaled $2,556,976 and $2,046,297
in fiscal 1997 and 1996, respectively. The Company's ability to achieve
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 and various other factors, some 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. Although, the Company
believes cash and working capital balances will be sufficient to fund the
Company's operations for the foreseeable future, the Company may seek to raise
additional capital. However, there can be no assurances that the Company will
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<PAGE>
achieve a positive cash flow or that additional financing will be available if
and when required or, if available, will be on terms satisfactory to the
Company. At June 30, 1997 the Company satisfied the minimum level of
stockholders' equity required to be listed ($1,000,000) and all other aspects
of its listing agreement for the Nasdaq Smallcap Market. The Nasdaq Stock Market
announced new listing requirements for continued listing on the Nasdaq SmallCap
Market effective August 22, 1997. Companies failing to satisfy the new continued
listing requirements will 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. 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.
To comply with the new requirements the Company may seek additional
capital to, among other things, 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 it will be on terms satisfactory to the Company
Accounting for Stock-based Compensation
The Company has adopted Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which became
effective for the year ended June 30, 1997. The Company continues to apply
APB25 and related interpretations in accounting for its stock options to
employees and directors. See footnote 12 for pro forma disclosures.
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.
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Item 7. Financial Statements
RomTech, Inc.
Index to Consolidated Financial Statements
Page
----
Independent Auditors' Report................................................. 19
Consolidated Balance Sheet June 30, 1997..................................... 20
Consolidated Statements of Operations for the years
ended June 30, 1997 and 1996................................................. 21
Consolidated Statements of Stockholders' Equity for the years
ended June 30, 1997 and 1996................................................. 22
Consolidated Statements of Cash Flows for the years
ended June 30, 1997 and 1996................................................. 23
Notes to Consolidated Financial Statements................................... 25
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Independent Auditors' Report
The Board of Directors and Stockholders
RomTech, Inc.:
We have audited the accompanying consolidated balance sheet of RomTech, Inc.
and subsidiary as of June 30, 1997, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the years in the
two-year period ended June 30, 1997. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and the significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of RomTech,
Inc. and subsidiary as of June 30, 1997 and the results of their operations
and their cash flows for each of the years in the two-year period ended June
30, 1997, in conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
- -------------------------
Philadelphia, Pennsylvania
September 17, 1997
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<PAGE>
RomTech, Inc.
Consolidated Balance Sheet
June 30, 1997
1997
----
ASSETS
Current assets:
Cash and cash equivalents $ 445,474
Restricted cash 24,788
Accounts receivable, net of allowance for
doubtful accounts of $69,209 1,033,472
Inventory 369,582
Prepaid expenses 225,517
-----------
Total current assets 2,098,833
Furniture and equipment, net 187,507
Intangibles and other assets 246,637
-----------
Total assets $ 2,532,977
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 39,650
Accounts payable 637,442
Accrued expenses 293,055
Capital lease obligations 28,704
-----------
Total current liabilities 998,851
Capital lease obligations net of current portion 46,820
Notes payable-long term portion 269,484
Convertible subordinated debt 150,000
-----------
Total liabilities 1,465,155
Commitments and contingencies - Notes 7, 13, 17 and 18
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, 1,271,340
issued and outstanding 941,340
Class Three Convertible Preferred Stock, 1,250,000
issued and outstanding 937,000
Accretion of beneficial conversion feature on Preferred Stock 537,559
Common stock, no par value (40,000,000 shares authorized;
6,535,614 issued and outstanding) 4,368,736
Additional paid in capital 1,148,550
Accumulated deficit (7,865,363)
-----------
Total stockholders' equity 1,067,822
-----------
Total liabilities and stockholders' equity $ 2,532,977
===========
See accompanying notes to consolidated financial statements.
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RomTech, Inc.
Consolidated Statements of Operations
Years ended June 30, 1997 and 1996
1997 1996
---- ----
Net sales $ 4,382,693 $ 3,120,651
Cost of sales 1,571,064 1,135,792
----------- -----------
Gross profit 2,811,629 1,984,859
Operating expenses:
Product development 414,973 728,391
Selling, general and administrative 3,997,747 3,208,386
Non-recurring facility closure expenses - 0 - 212,782
Non-recurring merger expenses - 0 - 757,804
----------- -----------
Total operating expenses 4,412,720 4,907,363
----------- -----------
Operating loss (1,601,091) (2,922,504)
Interest expense, net 48,104 73,706
Provision for income taxes 1,730 2,270
----------- -----------
Net loss (1,650,925) (2,998,480)
Accretion of beneficial conversion feature
on preferred stocks, including dividend
payable in the form of common stock 559,434 - 0 -
----------- -----------
Net loss attributable to common stock ($2,210,359) ($2,998,480)
Net loss per common share ($ 0.35) ($0.57)
======= ======
Weighted average common shares outstanding 6,380,517 5,254,552
See accompanying notes to consolidated financial statements.
Page 21
<PAGE>
RomTech, Inc.
Consolidated Statements of Stockholders' Equity
Years ended June 30, 1997 and 1996
<TABLE>
<CAPTION>
Additional
Preferred Stock Common Stock Paid-in Accumulated Stockholders'
--------------- ------------
Shares Amount Shares Amount Capital Deficit Equity
------ ------ ------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of June 30, 1995 1,286,517 $381,000 $161,131 ($2,656,524) ($2,114,393)
Net loss (2,998,480) (2,998,480)
Adjustment to reflect RomTech's
outstanding shares as a
recapitalization of AOMC and the
shares issued in connection with
the merger with AOMC accounted
for as a reverse acquisition
(Note 2) 3,175,664 (92,219) (92,219)
Shares issued in connection with
the initial public offering 1,550,000 3,623,796 3,623,796
Shares issued in exchange for debt
and related forgiveness in
connection with AOMC merger
(Note 2) 1,000,000 $1,000,000 586,607 1,586,607
Shares issued in connection with
exercise of warrants 221,862 100,600 100,600
Shares issued in connection with
VRLI merger related expenses 51,085 204,340 204,340
--------- ---------- --------- ---------- -------- ----------- --------
Balance as of June 30, 1996 1,000,000 $1,000,000 6,285,128 $4,217,517 $747,738 ($5,655,004) $310,251
========= ========== ========= ========== ======== ============ ========
Net loss (1,650,925) (1,650,925)
Shares issued in connection with
exercise of warrants and options 244,571 109,344 656 110,000
Shares issued in connection with
Class Two Preferred, net of
beneficial conversion feature 1,271,340 941,340 330,000 1,271,340
Shares issued in connection with
Class Three Preferred, net of
beneficial conversion feature 1,250,000 937,000 313,000 1,250,000
Effects from the beneficial
conversion feature of Class
Two Preferred 326,284 (326,284) - 0 -
Effects from the beneficial
conversion feature of Class
Three Preferred 211,275 (211,275) - 0 -
Costs incurred with Class Two and
Class Three Preferred (242,844) (242,844)
Stock dividend accrued
on Class Three Preferred 21,875 (21,875) - 0 -
Other equity transactions 5,915 20,000 20,000
--------- ---------- --------- ---------- -------- ----------- --------
Balance as of June 30, 1997 3,521,340 $3,415,899 6,535,614 $4,368,736 $1,148,550 ($7,865,363) $1,067,822
========= ========== ========= ========== ========== ============ ==========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 22
<PAGE>
RomTech, Inc.
Consolidated Statements of Cash Flows
Years ended June 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss ($1,650,925) ($2,998,480)
Adjustments to reconcile net loss to net cash
from operating activities:
Common stock issued as a finder fee in connection
with the VRLI acquisition - 0 - 204,340
Depreciation and amortization 220,455 143,382
Loss on disposal of equipment 4,683 - 0 -
Interest expense incurred but not paid - 0 - 55,000
Changes in items affecting operations, net of effect
from acquired business:
Restricted cash (24,788) 34,627
Accounts receivable (608,174) (27,469)
Prepaid expenses (184,107) 15,002
Inventory (164,361) (85,214)
Accounts payable 261,275 197,091
Accrued expenses (411,034) 415,424
---------- ----------
Net cash used in operating activities (2,556,976) (2,046,297)
Cash flows from investing activities:
Purchase of short term investments - 0 - (1,192,404)
Sales and maturities of short term investments 398,952 793,452
Purchase of furniture and equipment (80,175) (123,901)
Purchase of software rights and other assets (294,656) (89,930)
Loan to related party 2,750 (4,750)
---------- ----------
Net cash provided by (used in) investing activities 26,871 (617,533)
Cash flows from financing activities:
Net proceeds of initial public offering of common stock - 0 - 3,623,796
Net proceeds from issuance of convertible preferred stock 2,178,496 - 0 -
Net repayments of factored accounts receivable - 0 - (279,411)
Repayments of notes payable (133,834) (44,872)
Proceeds from convertible subordinated debt - 0 - 300,000
Proceeds from exercise of warrants and options 10,000 100,600
Repayments of advances to officers - 0 - (127,776)
Repayments of lease obligations (33,746) (39,017)
---------- ----------
Net cash provided by financing activities 2,020,916 3,533,320
Net increase (decrease) in cash and cash equivalents (509,189) 869,490
Cash and cash equivalents:
Beginning of period 954,663 85,173
---------- ----------
End of period $ 445,474 $ 954,663
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 23
<PAGE>
RomTech, Inc.
Consolidated Statements of Cash Flows
Years ended June 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Supplemental cash flow information:
Cash paid for interest $80,638 $129,897
======= ========
Noncash investing and financing activities:
Settlement of long term debt and officer's notes payable through
issuance of preferred stock, notes payable and debt
forgiveness, net of $50,000 cash payment, (see Note 2). $ - 0 - $1,886,451
======== ==========
Net liabilities assumed in reverse acquisition by issuance
of common stock $ - 0 - $ 92,219
======= ========
Capital lease additions $81,643 $ - 0 -
======= =======
Conversion of debt for $100,000 of convertible preferred
stock and $100,000 exercise of common stock warrants $200,000 $ - 0 -
======== =======
Conversion of debt for common stock $20,000 $68,555
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
Page 24
<PAGE>
RomTech, Inc.
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements as of June 30, 1997 include
the accounts of RomTech, Inc., ("RomTech"), which successfully completed an
initial public offering on October 18, 1995 combined with Applied Optical
Media Corporation ("AOMC"), which merged with RomTech concurrent with the
completion of RomTech's public offering, 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. As further described in Note 2, the AOMC merger was accounted for
as a reverse acquisition whereby AOMC was deemed to be the acquiring entity
for accounting purposes. In addition, the fiscal 1995 financial statements
have been restated to reflect VRLI's operations on a pooled basis.
Accordingly, the consolidated statements of operations include the activities
of the following entities for the following periods:
o July 1, 1995 to October 17, 1995 - AOMC and VRLI
o October 18, 1995 to June 30, 1997 - RomTech, AOMC and VRLI
Description of Business
RomTech, Inc. (the "Company") a Pennsylvania corporation incorporated in
July 1992, develops, publishes, markets and resells a diversified line of
personal computer software for consumer, educational and business
applications. The Company believes it operates in a single business segment.
The Company's product line enables it to serve customers who are seeking a
broad range of high-quality, value priced software. The Company sales are
primarily made through distributors, direct mail and direct sales at weekend
PC shows. The Company intends to continue to explore opportunities using the
Internet to market and distribute software but Internet sales currently
account for an insignificant portion of the Company's sales.
Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, VRLI. All inter-company balances and
transactions have been eliminated.
Fair Value of Financial Instruments
The recorded amounts of cash and short term investments, accounts
receivable, and accounts payable at June 30, 1997 approximate fair value in
accordance with Statement of Financial Accounting Standards No. 107,
"Disclosures About Fair Value of Financial Instruments" due to the relatively
short period of time between origination of the instruments and their expected
realization. The Company's debt is carried at cost, which approximates fair
value, as the debt bears interest at rates approximating current market rates
for similar instruments.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid instruments purchased with an original maturity of three months
or less to be cash equivalents.
Inventory
Inventory is valued at the lower of cost or market. Cost is determined by
the first-in, first-out method (FIFO).
Page 25
<PAGE>
Furniture and Equipment
Furniture and equipment are stated at cost. Depreciation is calculated on
the straight-line method over the estimated useful lives of the assets ranging
from three to five years.
Leasehold improvements are amortized on the straight-line method over the
shorter of the lease term or estimated useful life of the assets. Maintenance
and repair costs are expensed as incurred.
Intangible Assets
The Company has intangible assets resulting from the purchase of the
software rights to clip art images. Accumulated amortization at June 30, 1997
was $144,626. The Company amortizes these intangible assets over three years.
Revenue Recognition
Product sales:
Revenue from the sale of products is recognized when the product has been
shipped, the Company has the right to invoice the customer, collection of the
receivable is probable and there are no significant obligations remaining.
While the Company has no other obligations to perform future services
subsequent to shipment, the Company provides telephone customer support as an
accommodation to purchasers of its products for a limited time and as a means
of fostering customer loyalty. Costs associated with this effort are
insignificant and, accordingly, are expensed as incurred.
Allowance for product returns:
The Company maintains a return policy that allows distributors and
retailers to return products according to negotiated terms relating to
overstocking or defective products. The Company records an allowance for
returns as a reduction of gross sales at the time of product shipment. The
allowance, which is included in accrued liabilities, is estimated based
primarily upon historic experience, analysis of distributor and retailer
inventories of the Company's products and analysis of market conditions. Gross
product revenues subject to returns were approximately $4,354,000 and
$2,790,000 for the years ended June 30, 1997 and 1996, respectively, and
returns during the same periods were $270,000 and $280,000, respectively.
Software licenses and royalties:
Software license revenue and royalties are recognized as revenue at the
time the Company has completed all significant performance obligations under
the terms of the license agreement and when any amounts advanced or received
are non-refundable. Revenues from licenses and royalties were approximately
$319,000 and $612,000 for the years ended June 30, 1997 and 1996,
respectively.
Software Development Costs
Software development costs are expensed as incurred until technological
feasibility has been established. After technological feasibility has been
established, any additional costs are capitalized in accordance with Statement
of Financial Accounting Standards (SFAS) No. 86. To date, amounts qualifying
for capitalization, net of valuation allowances, have not been material.
Page 26
<PAGE>
Advertising
Advertising cost is charged to expense as incurred. Advertising expense
was approximately $981,000 and $624,000 for the years ended June 30, 1997 and
1996, respectively. The primary cause for the current year's increase was the
direct mail advertising costs of $630,000 incurred during the year ended June
30, 1997.
Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax rates in effect for
the year in which those temporary differences are expected to be recovered or
settled.
Computation of Net Loss Per Share
For the year ended June 30, 1996, net loss per common share was computed
using the weighted average number of common shares outstanding during the
period for AOMC retroactively adjusted for the shares and warrants received in
connection with the reverse acquisition, reflected as a recapitialization of
the previously outstanding common stock of AOMC, and retroactively adjusted
for the acquisition of VRLI (see Note 2).
For the year ended June 30, 1997, net loss per common share is computed
using the weighted average number of common shares outstanding and common
stock equivalents were excluded from the calculation since they were
anti-dilutive.
Accounting for Stock-based Compensation
The Company has adopted Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which became
effective for the year ended June 30, 1997. The Company continues to apply
APB25 and related interpretations in accounting for its stock options to
employees and directors. See footnote 12 for pro forma disclosures.
Management's Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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. 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. 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 27
<PAGE>
2. Mergers/Completion of Public Offering
Applied Optical Media Corporation ("AOMC")
On October 18, 1995, the Company merged with AOMC, whereby the
stockholders of AOMC exchanged all their outstanding shares for 1,575,000
common shares of the Company and 425,000 warrants to purchase common shares at
$.50 per share. In addition, concurrently with the Merger, certain
stockholders of AOMC exchanged debt with a carrying value of $1,936,452 for
1,000,000 shares of convertible preferred stock, a $300,000, 8.75% note
payable, a $50,000 cash payment and forgiveness of $586,607 of debt. The
preferred stock has a face value of $1,000,000 and is convertible into common
stock of the Company beginning two years after October 18, 1995 at a price of
$3.30 per share. The Company has the right to redeem the preferred stock for
an aggregate redemption price of $1,000,000.
As a result of the AOMC merger, the former stockholders of AOMC had a
majority of the voting rights of the combined enterprise on a fully diluted,
if converted basis. Therefore, for accounting purposes, AOMC was considered
the acquirer (reverse acquisition). The cost of acquiring the Company was
based on the fair market value of the Company's net assets which approximated
their recorded value.
In connection with the reverse acquisition, the outstanding shares of the
Company and the shares of the Company issued to AOMC stockholders have been
reflected as a recapitalization of the previously outstanding AOMC common
stock.
Prior to completion of the Merger, the Company's authorized capital was
increased to 40,000,000 shares of common stock, no par value, and 10,000,000
shares of preferred stock, no par value. Also, on October 18, 1995, the
Company consummated an initial public offering of 1,550,000 shares of common
stock at a price of $3.00 per share resulting in net proceeds of $4,070,500
before deducting offering costs of $446,704.
In connection with the Company's initial public offering the Company's
Chief Executive Officer ("CEO") and a vice president each agreed to transfer
200,000 shares of the Company's common stock owned by them to PJM Trading
Company ("PJM") in connection with certain services provided to the Company by
PJM related to the Company's capital raising activity at the time of the
initial public offering. Such shares have been transferred as of June 30,
1997. For accounting purposes, the transfer of shares by these principal
shareholders is presumed to benefit the Company and should be recognized in
the financial statements of the Company. Therefore, the shares transferred
would result in a contribution of stock to the Company by the principal
shareholders and the issuance of shares to PJM for the same value. These
transactions have not been separately recognized in the Company's financial
statements since they had no net effect on the results of operations or
shareholders' equity.
Virtual Reality Laboratories, Inc. ("VRLI")
On April 5, 1996, the Company acquired VRLI, a California corporation, in
a transaction structured as a merger of VRLI with a newly formed subsidiary of
the Company ("RomTech subsidiary"), with the RomTech subsidiary as the
surviving corporation. VRLI, which is located in San Luis Obispo, California,
publishes software for use on desktop computers. Its products include business
forms and imaging processing software targeted for the small-office,
home-office market, three-dimensional landscape rendering software and
astronomy software for special interest users and the education market. In
connection with the acquisition, the Company issued a total of 1,284,440
shares of its common stock, in exchange for all of the equity interests of
Virtual Reality, which included common stock, stock options, convertible
subordinated debt and a $100,000 promissory note to an officer and stockholder
of VRLI. In addition, the Company incurred acquisition-related expenses of
approximately $757,804, including $204,340 in the form of the Company's Common
Stock, related to investment banking, consulting, accounting and legal costs
which were charged to operations. This acquisition was accounted for using the
pooling-of-interests method, and accordingly the Company's historical
financial statements presented have been restated to include the accounts and
results of operations of VRLI.
Page 28
<PAGE>
The following supplemental unaudited pro forma information summarizes the
combined results of operations of the Company as if the merger with AOMC
occurred at the beginning of fiscal 1996.
1996
----
Net sales $3,378,360
Net loss ($3,310,745)
Net loss per share ($.57)
Weighted average common shares 5,786,378
3. Inventory
Inventory consists of the following:
Raw materials $ 80,020
Finished goods 289,562
---------
$369,582
=========
4. Furniture and Equipment
Furniture and equipment consists of the following:
Equipment $280,297
Furniture 155,021
Leasehold improvements 3,915
---------
439,233
Accumulated depreciation (251,726)
---------
Net book value $187,507
=========
5. Accrued Expenses
Accrued expenses consist of the following:
Accrued royalties $ 44,190
Accrued payroll 66,829
Accrued professional fees 71,000
Accrued inventory receipts 34,035
Other accrued expenses 77,001
---------
$293,055
=========
6. Notes Payable
Notes payable consist of the following:
Note payable to bank, bearing interest at the prime rate
plus 2.75% (11.25%). Matures on March 24, 2003, principal
and interest of $6,035.37 payable monthly. The note is
guaranteed by an officer of the Company and the Small
Business Administration. $309,134
Less current portion 39,650
--------
Long term portion $269,484
========
Page 29
<PAGE>
7. Lease Obligations
The Company leases its operating facility under an operating lease
expiring in September 2002. Rent expense was $128,000 and $68,000 for the
years ended June 30, 1997 and 1996, respectively.
The Company has financed the purchase of office equipment through capital
lease agreements. The obligations are collaterallized by the leased equipment,
which had a net book value of approximately $71,000 and $27,000 at June 30,
1997 and 1996, respectively.
Future payments of leases are as follows:
Operating Capital
Leases Leases Total
--------- -------- ---------
Year ending June 30, 1998 $ 108,671 $ 37,910 $ 146,581
Year ending June 30, 1999 96,279 29,640 125,919
Year ending June 30, 2000 81,282 14,721 96,003
Year ending June 30, 2001 82,859 5,952 88,811
Year ending June 30, 2002 106,539 992 107,531
--------- -------- ---------
$ 475,630 89,215 $ 564,845
========= -------- =========
Less interest (13,691)
--------
Present value of future lease payments 75,524
Less current portion (28,704)
--------
Long term portion $ 46,820
========
8. Convertible Subordinated Debt
In connection with the merger of VRLI on April 5, 1996 (see Note 2,) the
Company assumed $150,000 of 10% convertible subordinated debt, maturing in
November 2000. The notes are convertible into 46,685 shares of common stock at
a price of $3.213 per share, (the conversion price established at the time of
the merger of the Company and VRLI, see Note 2), at anytime by the holder.
Interest is payable quarterly. The convertible debt is subordinated to the
note payable ($309,134 at June 30, 1997) guaranteed by the Small Business
Administration.
9. Income Taxes
No federal income tax expense or benefit was recorded for the periods
presented. However, any deferred tax asset created was offset by a valuation
allowance of equal amount in accordance with SFAS No. 109.
As of June 30, 1997, the Company has approximately $6,700,000 of net
operating loss carryforwards ("NOL's") for tax purposes (expiring in years
2004 through 2012), which may be available to offset future federal taxable
income. The Company's NOL's may be subject to the provisions of IRC Section
382, as established by the Tax Reform Act of 1986, related to changes in stock
ownership. Presently no determination has been made to evaluate what effect
the application of these regulations may have on the utilization of the NOL's.
Should these regulations apply, the amount of the NOL's that can be utilized
to offset taxable income in future periods may be subject to an annual
limitation and it is possible that some portion of the NOL's may never be
utilized.
10. Preferred Stock
Class One Convertible Preferred Stock
The Company issued 1,000,000 shares of Class One Convertible Preferred
Stock (the "Class One Preferred") in connection with the merger of AOMC (see
Note 2). The Class One Preferred is convertible into common stock at a price
of $3.30 per share and has a redemption value of $1.00 per share. The Class
One Preferred can be redeemed by the Company after giving 90 days written
notice to the preferred stockholder, provided that, beginning two years from
Page 30
<PAGE>
October 18, 1995, the preferred stockholder has the right to convert the Class
One Preferred into common stock during such 90 day period. The Class One
Preferred entitles the holder to a liquidation payment of $1,000,000 upon the
dissolution of the Company before any liquidation distributions are made with
respect to the common stock. The Class One Preferred does not provide for the
payment of any dividends thereon.
Class Two Convertible Preferred Stock
On January 30, 1997, the Company completed a private placement to
accredited investors of 1,271,340 shares of Class Two Convertible Preferred
Stock (the "Class Two Preferred") and 355,975 Common Stock Warrants (the
"Warrants") for the purchase of 355,975 shares of the Company's Common Stock.
The offer and sale of the Class Two Preferred and the Warrants was exempt from
the registration requirements of the Securities Act of 1933, as amended (the
"Act"), pursuant to Section 4(2) of the Act and Rule 506 of Regulation D
promulgated thereunder. There was no public offering of the Class Two
Preferred or the Warrants, and all sales were made in private transactions
with accredited investors, as such term is defined in Rule 501 of Regulation
D. Each Warrant entitles the holder to purchase one share of Common Stock at
any time during the period beginning six months after the date of issuance of
the Warrant until five years after the date of issuance at an exercise price
equal to $6.25. The Class Two Preferred is convertible beginning six months
following the date of issuance into shares of Common Stock equal to the number
of shares of Class Two Preferred surrendered for conversion divided by $1.40.
Of the 1,271,340 shares of Class Two Preferred sold, 1,171,340 shares were
issued as of November 15, 1996, and therefore became convertible into Common
Stock on May 15, 1997. The remaining 100,000 shares of Class Two Preferred
Stock became convertible on July 30, 1997. (See also, the last paragraph of
Note 10).
The Company incurred expenses of approximately $57,000 in connection with
the private placement of the Class Two Preferred and realized net proceeds of
approximately $1,215,000.
The aforementioned sales of securities will result in significant
dilution to the current holders of Common Stock. In addition, due to specific
accounting guidance recently promulgated by the SEC, the Company's loss per
share will be negatively impacted since the Class Two Preferred and the Class
Three Preferred Stock (as hereinafter defined) contain beneficial conversion
features that will be accounted for in a manner similar to a preferred stock
dividend. The intrinsic value of the beneficial conversion feature of the
Class Two Preferred was $330,000. This amount will be amortized to accumulated
deficit over approximately six months, which represents the initial conversion
period. The amount amortized, which is analogous to a preferred stock
dividend, increases the net loss attributable to common stockholders. For the
year ended June 30, 1997, $326,000 was amortized to the accumulated deficit.
The Company also issued 177,988 Warrants to purchase 177,988 shares of
the Company's Common Stock to the investment advisor ("Advisor Warrants")
engaged by the Company to assist in the private placement of the Class Two
Preferred. The terms and conditions of the Adviser Warrants are identical to
the Warrants described above, except that the Advisor Warrants are exercisable
at an exercise price of $6.00.
Class Three Convertible Preferred Stock
On April 22, 1997, the Company completed a private placement to
accredited investors of 1,250,000 shares of Class Three Convertible Preferred
Stock (the "Class Three Preferred ") and 62,500 Common Stock Warrants (the
"Class Three Warrants") for the purchase of 62,500 shares of the Company's
Common Stock. Each Class Three Warrant entitles the holder to purchase one
share of Common Stock at an exercise price of $3.94 per share subject to the
condition that the Class Three Warrants will not be exercisable until the
closing bid price of the Company's Common Stock exceeds $5.66 per share after
October 9, 1997. The Class Three Warrants are exercisable at any time
beginning six months after the date of issuance until three years and six
months after the date of issuance. The offer and sale of the Class Three
Preferred and the Class Three Warrants was exempt from the registration
requirements of the Securities Act of 1933, as amended (the "Act"), pursuant
to Section 4(2) of the Act and Rule 506 of Regulation D promulgated
thereunder. There was no public offering of the Class Three Preferred or the
Class Three Warrants, and all sales were made in private transactions with
accredited investors, as such term is defined in Rule 501 of Regulation D. The
conversion price per share (the "Conversion Price") for the Class Three
Page 31
<PAGE>
Preferred Stock ranged from a high of 80% of the average closing bid price of
the Company's Common Stock (the "Average Quoted Price") for the five (5)
trading days immediately preceding the date of conversion to a low of 70% of
the Average Quoted Price for the five trading days immediately preceding the
date of conversion; provided that the Conversion Price will not exceed $5.95
or be less than $.66. All of the Class Three Preferred has been converted into
Common Stock
The Company incurred expenses of approximately $186,000 in connection
with the private placement of the Class Three Preferred and realized net
proceeds of approximately $1,064,000.
The aforementioned sales of securities will result in significant
dilution to the current holders of Common Stock. In addition, due to specific
accounting guidance recently promulgated by the SEC, the Company's loss per
share will be negatively impacted since the Class Three Preferred contains
beneficial conversion features that will be accounted for in a manner similar
to a preferred stock dividend. The estimated intrinsic value of the beneficial
conversion feature of the Class Three Preferred was $313,000. This amount will
be amortized to accumulated deficit over approximately six months, which
represents the initial conversion period. The amount amortized, which is
analogous to a preferred stock dividend, increases the net loss attributable
to common stockholders. For the year ended June 30, 1997, $211,000 was
amortized to the accumulated deficit.
The Company paid to H.J. Meyers & Co., Inc. ("H.J. Meyers"), as placement
agent of the Class Three Preferred and the Class Three Warrants, commissions
and expenses in an amount equal to $80,000. Additionally, the Company paid a
finder's fee of $20,000 to VMH, Ltd. in connection with the sale of $250,000
of the Class Three Preferred. H.J. Meyers was also granted 7,000 shares of
Common Stock (the "Agent Shares") which the Company has registered for resale.
On May 1, 1997, the Company filed a registration statement on Form S-3
registering for resale the Common Stock issuable upon conversion of the Class
Two Preferred, the Class Three Preferred, and the Common Stock issuable upon
exercise of the Warrants, the Adviser Warrants, and the Class Three Warrants.
This registration statement was declared effective on July 3, 1997.
The adjustments that were recorded to reflect the effect of the private
placement of the Class Three Preferred in the Balance Sheet at June 30, 1997
reflect the $1,250,000 of Class Three Preferred issued net of offering costs
of $186,000 and the estimated value of the beneficial conversion feature of
$313,000. Also, there was a 7% dividend payable in the form of the Company's
Common Stock accrued on the Class Three Preferred, which totaled $21,875. This
amount was charged to accumulated deficit and credited to Common Stock.
Subsequent to June 30, 1997, 731,000 shares of the Class Two Preferred
have been converted into 522,173 shares of Common Stock and all of the
1,250,000 Class Three Preferred have been converted into 1,487,508 shares of
Common Stock. The remaining 540,340 shares of the Class Two Preferred may be
convertible into 385,957 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.
11. Common Stock
During 1995, the Company completed a 10,000-for-1 common stock split and
increased its authorized common stock to 2,000,000 shares. Subsequently, on
June 30, 1995, the Company amended its articles of incorporation to authorize
the issuance of 40,000,000 shares of common stock, without par value, and
10,000,000 shares of preferred stock, without par value, and effected a 1.5
for 1 stock split. All common shares in the accompanying financial statements
are presented on a post-split basis.
Page 32
<PAGE>
12. Stock Options and Warrants
Stock Option Plans:
On August 31, 1994 the Company adopted the 1994 Stock Option Plan (the
"1994 Plan") under which options to purchase an aggregate of 132,000 shares of
the Company's common stock were granted to officers, directors or employees at
an exercise price of $2.00 and with an expiration date of August 31, 1999.
None of the options granted under the 1994 Plan have been exercised. The 1994
Plan has been terminated and no additional options will be granted thereunder.
During 1995, the Company adopted, amended and restated the 1995 Stock
Option Plan (the 1995 Plan). At the 1996 Annual Meeting, the stockholder's of
the Company approved an amendment to increase the number of shares available
for issuance under the 1995 Plan to a total of 950,000 shares. The 1995 Plan
is administered by the Board of Directors and provides for the grant of
incentive stock options and non-qualified stock options to employees and
eligible independent contractors; and non-qualified stock options to
non-employee directors at prices not less than the fair market value of a
share of common stock on the date of grant. The 1995 Plan also provides for
automatic grants of options to non-employee directors of the Company.
Non-employee directors will receive options for 10,000 shares of common stock
upon appointment or election to the board and, in addition, each director
receives options for 5,000 shares of common stock on January 1 of each year
that they are a director.
The expiration of an option and the vesting period will be determined by
the Board of Directors at the time of the grant, but in no event will an
option be exercisable after 10 years from the date of grant or in the case of
non-employee directors after 5 years from the date of grant. In most cases,
upon termination of employment, vested options must be exercised by the
optionee within 30 days after the termination of the optionee's employment
with the Company.
On April 28, 1995, the Company issued 30,000 non qualified options under
the 1995 Plan. These options have an exercise price of $2.00 per share and
expire on April 28, 2000.
Information regarding the stock option plans is as follows:
Weighted
Number of Average
shares Exercise Price
------- --------------
Balances, June 30, 1995 162,000 $2.00
Granted 276,793 4.04
Canceled -- --
Exercised -- --
------- -----
Balances, June 30, 1996 438,793 $3.29
Granted 580,000 3.54
Canceled 283,821 4.30
Exercised 5,000 2.00
------- -----
Balances, June 30, 1997 729,972 $3.10
======= =====
At June 30, 1997, 551,222 options outstanding under the 1994 and 1995
Plans were vested and 347,028 options were available for issuance under these
plans. The following summarizes information about the Company's stock options
outstanding at June 30, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------ ------------------------------
Weighted Avg. Weighted Weighted
Range of Number Remaining Avg. Number Avg.
Exercises Outstanding at Contractual Life Exercise Exercisable at Exercise
Prices June 30, 1997 (in years) Price June 30, 1997 Price
------ ------------- ---------- ----- ------------- -----
<S> <C> <C> <C> <C> <C>
$1.83-$2.00 182,472 2.22 $1.98 182,472 $1.98
$3.00-$3.50 547,500 4.53 $3.48 368,750 $3.47
------- ----- ------- -----
$1.83-$3.50 729,972 3.95 $3.10 551,222 $2.98
======= ===== ======= =====
</TABLE>
Page 33
<PAGE>
In the year ended June 30, 1997, the Company adopted the disclosure
requirements of Financial Accounting Standard No. 123, " Accounting for
Stock-Based Compensation" (Statement No. 123). As allowed by Statement No.
123, the Company has chosen to continue to account for stock based
compensation using Accounting Principles Board No. 25, "Accounting for Stock
Issued to Employees", and related interpretations. Accordingly, compensation
cost for stock options is measured as the excess, if any, of the quoted market
price of the Company's stock at the grant date over the amount an employee
must pay to acquire the stock. Accordingly, no compensation cost has been
recognized. Had compensation cost for the Company's Plans been determined
under Statement No. 123, the Company's net loss and net loss per share would
have been increased to the pro forma amounts indicated below:
Years ended June 30,
1997 1996
---- ----
Net loss attributable
to Common Stock As reported ($2,210,359) ($2,998,480)
Pro forma ($2,619,463) ($3,128,536)
Net loss per share As reported ($0.35) ($0.57)
Pro forma ($0.41) ($0.60)
The per share weighted-average fair values of stock options granted
during the years ended June 30, 1997 and 1996 were $2.41 and $2.35,
respectively, on the date of grant using the Black-Scholes option-pricing
model with the following assumptions:
Years ended June 30,
1997 1996
---- ----
Dividend yield 0% 0%
Volatility factor 82.01% 86.27%
Risk-free interest rate 6.05% - 6.45% 5.32% - 6.52%
Average expected option life 5 Years 5 Years
The fair value of stock options included in the pro forma amounts for the
years ended June 30, 1997 and 1996 is not necessarily indicative of future
effects on net income/(loss) and net income/(loss) per share. The pro forma
net loss reflects only options granted in the years ended June 30, 1997 and
1996. Therefore, the full impact of calculating compensation cost for stock
options under Statement No. 123 is not reflected in the pro forma net loss
amounts presented above, because compensation cost is reflected over an
option's vesting period and compensation cost for options granted prior to
July 1, 1995 is not considered.
On May 22, 1997 the Company repriced the options outstanding under the 1995
Plan, that were in excess of the market price of the Company's common stock on
May 22, 1997, to an exercise price of $3.50
Common Stock Warrants:
In April of 1995, the Company received $100,000 in connection with the
sale of a warrant to acquire 220,662 shares of the Company's common stock at
any time on or before April 27, 2002 at an exercise price of $.45 per share.
The warrant holder was also granted certain registration rights for a
seven-year period, however, those rights did not extend to the Company's
initial public offering of common stock. In April 1995, the Company issued
15,000 warrants to a group of private investors. These warrants are
exercisable at any time on or before May 1, 2000 at an exercise price equal to
the greater of $3.00 per share or 120% of the offering price of the Company's
common stock pursuant to the first registration statement filed by the Company
pursuant to the Securities Act of 1933. No value was assigned to these
warrants. On October 18, 1995, in connection with the Company's initial public
offering of common stock, the underwriter was granted 155,000 warrants. These
warrants are exercisable at anytime on or before October 13, 2000 at an
exercise price of $3.60 per share. Registration rights were granted in
connection with the underwriter's warrants. In addition, 425,000 warrants were
Page 34
<PAGE>
issued to the former owners of AOMC. These warrants are exercisable at any
time on or before October 16, 2002 at an exercise price of $.50 per share.
Information regarding the warrants is as follows:
Number of Exercise
Warrants Price
-------- -----
Balances, June 30, 1995 235,662 $0.45-$3.00
Warrants granted 580,000 0.50- 3.60
Warrants canceled -- --
Warrants exercised (221,862) 0.45- 0.50
------- -----------
Balances, June 30, 1996 593,800 $0.50-$3.60
===========
Warrants granted 605,974 5.50- 6.25
Warrants canceled -- --
Warrants exercised (243,887) 0.50
------- -----------
Balances, June 30, 1997 955,887 $0.50-$6.25
======= ===========
13. Commitments and Contingencies
Under various licensing agreements, the Company is required to pay
royalties on the sales of certain products that incorporate licensed content.
Royalty expense under such agreements, which is recorded in cost of sales, was
approximately $73,000 and $320,000 for the twelve months ended June 30, 1997
and 1996, respectively.
14. Non-recurring Facility Closure Expenses
In June 1996, the Company closed the former AOMC facility. In connection
with the closure $212,782 was charged to operations for the year ended June
30, 1996. The total charged to operations related to severance. At June 30,
1996, $15,775 of the total charged to operations had been paid and the
remaining $197,007 amount was paid during the year ended June 30, 1997.
15. Related Party Transactions
During the years ended June 30, 1997 and 1996 the Company engaged in
certain related party transactions with a company owned and operated by an
individual who also performs the buyer function for the Company as a part time
employee. The Company recorded $896,000 in revenues and $332,000 in commission
expense with this related party during the year ended June 30, 1997. The
Company recorded $769,000 in revenues and $272,000 in commission expense with
this related party during the year ended June 30, 1996. At June 30, 1997 the
Company had a trade accounts receivable of approximately $20,000 and a note
receivable of $2,000 with this related party.
Odyssey Capital Group L. P., a shareholder of the Company, purchased
$200,000 of notes payable previously owed to Ballyshannon Partners L. P.,
another shareholder of the Company, and exchanged $100,000 of the debt for
100,000 shares of Class Two Convertible Preferred Stock and then exchanged the
remaining $100,000 of the debt to pay the exercise price of warrants to
purchase 198,687 shares of Common Stock (See Note 10).
16. Major Customers and Export Sales
During the year ended June 30, 1997 the Company had two customers, which
accounted for approximately 35% and 20% of net revenues, respectively. The
Company presently has an exclusive distribution agreement with Slash
Corporation ("Slash"), (a division of GT Interactive Software Corp. "GTIS")
covering distribution of the Company's products to retailers in North America.
GTIS is currently the largest distributor of consumer software to mass
merchants in the United States. During the year ended June 30, 1997, Slash
accounted for approximately 35% of the Company's net sales. The Company
believes that for the year ending June 30, 1998 Slash could account for 70% or
more of the Company's net sales. The Company's agreement with Slash does not
specify minimum purchase requirements and could be terminated at any time by
Slash. During the year ended June 30, 1996 the Company had four customers
which accounted for approximately 25%, 9%, 7% and 5% of net revenues,
Page 35
<PAGE>
respectively. The amount of export sales included in net revenues was
approximately $169,000 and $429,000 for the years ended June 30, 1997 and
1996, respectively.
17. Liquidity
As indicated in the accompanying financial statements, the Company's
net loss was $1,650,925 and $2,998,480 in fiscal 1997 and 1996, respectively.
In addition, cash used by operating activities totaled $2,556,976 and
$2,046,297 in fiscal 1997 and 1996, respectively. The Company's ability to
achieve 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 and various other factors,
some 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.
Although, the Company believes cash and working capital balances will be
sufficient to fund the Company's operations for the foreseeable future, the
Company may seek to raise additional capital however, there can be no
assurances that the Company will achieve a positive cash flow or that
additional financing will be available if and when required or, if available,
will be on terms satisfactory to the Company. As of June 30, 1997 the
Company's cash and working capital balances were $445,474 and $1,099,982,
respectively. At June 30, 1997 the Company satisfied the minimum level of
stockholders' equity required to be listed ($1,000,000) and all other aspects
of its listing agreement. The Nasdaq Stock Market announced new listing
requirements for continued listing on the Nasdaq SmallCap Market effective
August 22, 1997. Companies failing to satisfy the new continued listing
requirements will 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. 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.
To comply with the new requirements the Company may seek additional
capital to, among other things, 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 it will be on terms satisfactory to the Company (see Item
6. Management's Discussion and Analysis of Results of Operations and Financial
Condition, Liquidity and Capital Resources contained in this report
incorporated herein by reference for additional information concerning the
Company's financial position).
18. 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.
On July 8, 1997, the Company 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. The Company is seeking to
rescind the Agreement and, to recover damages, and a declaratory judgment that
the Agreement is void and unenforceable.
Page 36
<PAGE>
19. Fourth Quarter Adjustments
In connection with its year end closing, the Company recorded certain
adjustments primarily related to direct mail marketing costs, the beneficial
conversion feature of convertible preferred stocks and a development contract,
which affected the previously reported quarterly financial results during
fiscal 1997. The following table presents a condensed summary of fiscal 1997
unaudited quarterly financial information as previously disclosed and restated:
<TABLE>
<CAPTION>
Three months ended Three months ended Three months ended Three months ended
9/30/96 12/31/96 3/31/97 6/30/97
----------------------- ----------------------- ---------------------- ----------------------
Previously As Previously As Previously As Previously As
reported restated reported restated reported restated disclosed* restated
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $1,071,017 $1,071,017 $1,283,466 $1,058,466 $746,235 $746,235 $1,396,975 $1,506,975
Gross profit $753,560 $753,560 $918,427 $ 693,427 $438,025 $438,025 $816,617 $926,617
Operating expenses $973,551 $1,147,625 $1,261,592 $1,327,426 $1,151,046 $1,051,077 $988,609 $886,592
Net (loss) income $(233,504) $(407,578) $(358,132) $(648,966) $(731,055) $(631,086) $(171,992) $36,705
Accretion of beneficial
conversion feature of
preferred stock -- -- -- $86,858 $141,429 $141,429 $331,147 $331,147
Net loss attributable
to common stock $(233,504) $(407,578) $(358,132) $(735,824) $(872,484) $(772,515) $(503,139) $(294,442)
Net loss per
common share $(0.04) $(0.06) $(0.06) $(0.12) $(0.14) $(0.12) $(0.08) $(0.05)
</TABLE>
* As disclosed in a press release dated August 26, 1997.
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
Page 37
<PAGE>
PART III
Item 9. Directors and Executive Officers of the Registrant
There is hereby incorporated herein by reference the information appearing
under the caption "Election of Directors", under the caption "Executive
Officers of the Company", and under the caption "Compliance with Securities
Laws" of the Registrant's definitive Proxy Statement for its 1997 Annual
Meeting to be filed with the Securities and Exchange Commission.
Item 10. Executive Compensation
There is hereby incorporated herein by reference the information appearing
under the caption "Executive Compensation" and under the caption "Election of
Directors" of the Registrant's definitive Proxy Statement for its 1997 Annual
Meeting to be filed with the Securities and Exchange Commission.
Item 11. Security Ownership of Certain Beneficial Owners and Management
There is hereby incorporated herein by reference the information appearing
under the caption "Voting Securities and Principal Holders Thereof" of the
Registrant's definitive Proxy Statement for its 1997 Annual Meeting to be
filed with the Securities and Exchange Commission.
Item 12. Certain Relationships and Related Transactions
There is hereby incorporated by reference herein the information appearing
under the caption "Certain Transactions" of the Registrant's definitive Proxy
Statement for its 1997 Annual Meeting to be filed with the Securities and
Exchange Commission.
Page 38
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
The following is a list of exhibits filed as part of this
annual report on Form 10-KSB. Where so indicated, exhibits
which were previously filed are incorporated by reference.
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit Page Number
----------- ---------------------- -----------
<S> <C> <C>
(1)2.1 Form of Amended and Restated Agreement and Plan of Merger
between and among Applied Optical Media Corporation and the
Registrant ("AOMC Merger Agreement").
(2)2.2 Agreement and Plan of Reorganization dated April 4, 1996 by
and among the Registrant, the Registrant's wholly-owned
subsidiary and Virtual Reality Laboratories, Inc.
(2)2.3 Agreement and Plan of Merger dated April 4, 1996 by and
among the Registrant, the Registrant's wholly-owned
subsidiary and Virtual Reality Laboratories, Inc.
(3)3.1 Amended and Restated Articles of Incorporation of the
Registrant
(4)3.2 Amended and Restated By-Laws of the Registrant
(4)4.1 Promissory Note in the amount of $350,000 from Virtual
Reality Laboratories, Inc. to Heller First Capital
Corporation dated March 25, 1996; Commercial Security
Agreement dated March 25, 1996 between Virtual Reality
Laboratories, Inc. and Heller First Capital Corporation; and
U.S. Small Business Administration Guaranty dated March 25,
1996.
(3)10.1 Form of Redeemable Warrant for the Purchase of the
Registrant's Common Shares (Exhibit A to AOMC Merger
Agreement).
(3)10.2 Form of Underwriter's Warrant Agreement.
(3)10.3 Form of Certificate of Designation, Powers, Rights,
Preferences and Number of Shares of Class One Preferred
Stock (Exhibit B to AOMC Merger Agreement).
(3)10.4 1994 Stock Option Plan.
10.5 Amended and Restated 1995 Stock Option Plan.
(3)10.6 Form of Employment Agreement by and between the Registrant
and John E. Bauer.
(3)10.7 Form of Employment Agreement by and between the Registrant
and Joseph A. Falsetti.
(4)10.8 Registration Rights Agreement dated April 4, 1996 by and
among the Registrant, the former stockholders of Virtual
Reality Laboratories, Inc. and the former holders of
convertible subordinated debt of Virtual Reality
Laboratories, Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit Page Number
----------- ---------------------- -----------
<S> <C> <C>
(5)10.9 Certificate of Designation, Preferences, Powers, Rights and
Number of Shares of Class Two Convertible Preferred Stock
(5)10.10 Form of Purchase Agreement for the Class Two Convertible
Preferred Stock (the "Class Two Preferred") dated as of
November 15, 1996
(5)10.11 Form of Warrant Agreement for the Warrants (the "Warrants")
issued to the holders of the Class Two Preferred dated as of
November 15, 1996
(5)10.12 Form of Registration Rights Agreement for the Common Stock
underlying the Class Two Preferred and the Warrants dated as
of November 15, 1996
(5)10.13 Form of Agreement amending certain terms of the Class Two
Preferred Certificate of Designation, Warrants and
Registration Rights Agreement dated as of November 15, 1996
(6)10.14 Purchase Agreement dated January 30, 1997 between RomTech,
Inc. and Odyssey Capital Group, L.P.
(6)10.15 Agreement dated January 30, 1997 between RomTech, Inc. and
Odyssey Capital Group, L.P.
(6)10.16 Registration Rights Agreement dated January 30, 1997 between
RomTech, Inc. and Odyssey Capital Group, L.P.
(7)10.17 Certificate of Designation, Preferences, Powers, Rights and
Number of Shares of Class Three Convertible Preferred Stock
(7)10.18 Form of Securities Purchase Agreement for the Class Three
Convertible Preferred Stock (the "Class Three Preferred")
(7)10.19 Form of Warrant Agreement for the Warrants (the "Class Three
Warrants") issued to the holders of the Class Three
Preferred
(7)10.20 Form of Registration Rights Agreement for the Common Stock
underlying the Class Three Preferred and the Class Three
Warrants
(8)10.21 Asset Acquisition Agreement between RomTech, Inc. and
FileABC, LP
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit Page Number
----------- ---------------------- -----------
<S> <C> <C>
10.23 Warrant Agreement dated January 30, 1997 by and between the
Registrant and PJM Trading Company, Inc.
10.24 Distribution Agreement dated May 1, 1997 between the
Registrant and GT Interactive Software.
11.1 Computation of Loss Per Share
21.1 Subsidiaries.
23.1 Consent of KPMG Peat Marwick LLP
(9) 24.1 Power of Attorney
27.1 Financial Data Schedule
(1) Incorporated by reference herein from Amendment No. 3 of the
Registrant's Form SB-2 as filed with the Securities and Exchange
Commission on October 4, 1995.
(2) Incorporated by reference herein from the Registrant's Form 8-K as
filed with the Securities and Exchange Commission on April 19, 1996.
(3) Incorporated by reference herein from the Registrant's Form SB-2 as
filed with the Securities and Exchange Commission on July 28, 1995.
(4) Incorporated by reference herein from the Registrant's Form 10-QSB
for the quarter ended March 31, 1996 as filed with the Securities
and Exchange Commission on May 14, 1996.
(5) Incorporated by reference herein from the Registrant's Form 8-K as
filed with the Securities and Exchange Commission on November 27,
1996.
(6) Incorporated by reference herein from the Registrant's Form 8-K as
filed with the Securities and Exchange Commission on February 4,
1997.
(7) Incorporated by reference herein from the Registrant's Form 8-K as
filed with the Securities and Exchange Commission on April 9, 1997.
(8) Incorporated by reference herein from the Registrant's Form 10-QSB
as filed with the Securities and Exchange Commission on November 14,
1996.
(9) See signature page.
</TABLE>
Page 39
<PAGE>
(b) Reports on Form 8-K
On November 27, 1996, the Company filed a report on Form 8-K in regard to the
private placement of Class Two Convertible Preferred Stock (See Part I, Item
7, Notes to the financial statements, Note 10).
On February 4, 1997, the Company filed a report on Form 8-K in regard to the
private placement of Class Two Convertible Preferred Stock (See Part I, Item
7, Notes to the financial statements, Note 10).
On April 9, 1997, the Company filed a report on Form 8-K in regard to the
private placement of Class Three Convertible Preferred Stock (See Part I, Item
7, Notes to the financial statements, Note 10).
On September 19, 1997, the Company filed a report on Form 8-K in regard to the
termination of the Asset Acquisition Agreement entered into with FileABC(TM) ,
L.P. ("FileABC") in October 1996 and its 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 (See Part I, Items 3).
Page 40
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
RomTech, Inc.
By: /s/ Joseph A. Falsetti
--------------------------------------------------------
Joseph A. Falsetti, Chairman and Chief Executive Officer
Date September 29, 1997
--------------------------------------------------------
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Date: September 29, 1997 /s/ Joseph A. Falsetti
------------------- -----------------------
Joseph A. Falsetti
Chairman, Chief Executive Officer and Director
Date: September 29, 1997 /s/ Gerald W. Klein
------------------- --------------------
Gerald W. Klein
Vice President, Chief Financial and Accounting
Officer and Director
Each person in so signing also makes, constitutes and appoints Joseph
A. Falsetti, Chairman and Chief Executive Officer and Gerald W. Klein, Vice
President and Chief Financial Officer, and each of them severally, his true
and lawful attorney-in-fact, in his name, place and stead to execute and cause
to be filed with the Securities and Exchange Commission any or all amendments
to this report.
Date: September 29, 1997 /s/ Lance H. Woeltjen
------------------- ----------------------
Lance H. Woeltjen
President of Virtual Reality Laboratories, Inc.
and Director
Date: September 29, 1997 /s/ Thomas D. Parente
------------------ ----------------------
Thomas D. Parente
Director
Date: September 29, 1997 /s/ John P. Kirwin, III
------------------ ------------------------
John P. Kirwin, III
Director
Page 41
<PAGE>
AMENDED AND RESTATED 1995 STOCK OPTION PLAN
PART I
DEFINITIONS AND ADMINISTRATIVE MATTERS
SECTION
1. Purpose; Definitions
The purpose of the Rom Tech, Inc. Amended and Restated 1995 Stock
Option Plan (the "Plan") is to enable employees, officers, directors and
independent contractors of Rom Tech, Inc. ("the Company") to (i) own shares of
stock in the Company, (ii) participate in the stockholder value which has been
created, (iii) have a mutuality of interest with other stockholders and (iv)
enable the Company to attract, retain and motivate employees, officers,
directors and independent contractors of particular merit.
For the purposes of the Plan, the following terms shall be defined as
set forth below:
(a) "Board" means the Board of Directors of the Company.
(b) "Code" means the Internal Revenue Code of 1986, as amended from
time to time, and any successor thereto.
(c) "Company" means Rom Tech, Inc., its Subsidiaries or any successor
organization.
(d) "Disability" means permanent and total disability within the
meaning of Section 22(e)(3) of the Code.
(e) "Disinterested Person" shall have the meaning set forth in the
Rules.
(f) "Eligible Independent Contractor" means an independent contractor
hired by the Company who is neither an Employee of the Company nor a
Non-Employee Director.
(g) "Employee" means any person, including a director, who is
employed by the Company and is compensated for such employment by a regular
salary.
(h) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(i) "Fair Market Value" means the per share value of the Stock as of
any given date, as determined by reference to the price of the last traded
share of Stock on the over-the-counter market, as reported by the National
Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") System
for such date or the next preceding date that Stock was traded on such market,
or, in the event the Stock is listed on a stock exchange, the closing price
per share of Stock as reported on such exchange for such date.
<PAGE>
(j) "Incentive Stock Option" means any Stock Option intended to be
and designated as an "Incentive Stock Option" within the meaning of Section
422 of the Code.
(k) "Insider" means a Participant who is subject to Section 16 of the
Exchange Act.
(l) "Non-Employee Director" means any member of the Board who is not
an Employee of the Company and is not compensated for employment by a regular
salary.
(m) "Non-Qualified Stock Option" means any Stock Option that is not
an Incentive Stock Option.
(n) "Parent means any corporation which owns stock entitling such
corporation to fifty percent (50%) or more of the voting power of the Company.
(o) "Participant" means an Employee, officer, Non-Employee Director
or Eligible Independent Contractor to whom an award is granted pursuant to the
Plan.
(p) "Plan" means the Rom Tech, Inc. Amended and Restated 1995 Stock
Option Plan, as hereinafter amended from time to time.
(q) "Rules" means Rule 16(b)(3) and any successor provisions
promulgated by the Securities and Exchange Commission under Section 16 of the
Exchange Act.
(r) "Securities Act" shall mean the Securities Act of 1933, as
amended.
(s) "Securities Broker" means the registered securities broker
acceptable to the Company who agrees to effect the cashless exercise of an
Option pursuant to Section 5(d) hereof.
(t) "Stock" means the Common Stock of the Company, without par value.
(u) "Stock Option" or "Option" means any option to purchase shares of
Stock (including Restricted Stock, if the Board so determines) granted
pursuant to Section 5 below.
(v) "Subsidiary" means any corporation owned, in whole or in part, by
the Company.
SECTION 2. Administration
2.1 The portion of the Plan with respect to the grant of Options
pursuant to Part II shall be administered bythe Board, provided, however, that
the Board reserves the right to delegate such administration to a committee of
the Board comprised of such directors as the Board may determine, and who
shall serve at the pleasure of the Board.
The Board shall have the authority to grant pursuant to the terms of
the Plan: Stock Options to Employees (including directors who are Employees)
and officers of the Company, and Eligible Independent Contractors. In
particular, the Board shall, subject to the limitations and terms of the Plan,
have the authority:
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(i) to select the officers, directors (who are Employees)
and other Employees of the Company, and the Eligible Independent Contractors
to whom Stock Options may from time to time be granted hereunder;
(ii) to determine whether and to what extent incentive Stock
Options are to be granted hereunder;
(iii) to determine the number of shares to be covered by
each such award granted hereunder;
(iv) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted hereunder, including the
option or exercise price and any restrictions or limitations, based upon such
factors as the Board shall determine, in its sole discretion;
(v) to determine whether and under what circumstances a
Stock Option may be exercised and settled in cash or Stock or without a
payment of cash;
(vi) to determine whether, to what extent and under what
circumstances Stock and other amounts payable with respect to an award under
this Plan shall be deferred either automatically or at the election of the
Participant; and
(vii) to amend the terms of any outstanding award (with the
consent of the Participant) to reflect terms not otherwise inconsistent with
the Plan, including amendments concerning exercise price changes, vesting
acceleration or forfeiture waiver regarding any award or the extension of a
Participant's right with respect to awards granted under the Plan, as a result
of termination of employment or service or otherwise, based on such factors as
the Board shall determine, in its sole discretion.
The Board shall have the authority to adopt, alter and repeal such
administrative rules, guidelines and practices governing the Plan as it shall,
from time to time deem advisable; to interpret the terms and provisions of the
Plan and any award issued under the Plan (and any agreements relating
thereto); and to otherwise supervise the administration of the Plan, provided
that the Board may delegate to the Chief Executive Officer of the Company, or
such other officer as may be designated by the Board, the authority, subject
to guidelines prescribed by the Board, to grant Options to Employees and
Eligible Independent Contractors who are not then subject to the provisions of
Section 16 of the Exchange Act, and to determine the number of shares to be
covered by any such Option, and the Board may authorize any one or more of
such persons to execute and deliver documents on behalf of the Board, provided
that no such delegation may be made that would cause grants of Options to
persons subject to Section 16 of the Exchange Act to fail to comply with all
applicable conditions of Rule 16b-3 or its successors under the Exchange Act.
Determinations, interpretations or other actions made or taken by the Board
pursuant to the provisions of the Plan shall be final and binding and
conclusive for all purposes and upon all persons.
No member of the Board or any committee designated by the Board to
administer the Plan shall be liable for any action or determination made in
good faith with respect to the Plan or any Stock Option granted under it.
Nothing herein shall be deemed to expand the personal liability of a member of
the Board or any such committee beyond that which may arise under any
applicable standards set forth in the Company's by-laws and Pennsylvania law,
nor shall anything herein limit any rights to indemnification or advancement
of expenses to which any member of the Board or such committee may be entitled
under any
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by-law, agreement, vote of the stockholders or directors, or otherwise.
2.2 The portion of the Plan with respect to the grant of Options
pursuant to Part III shall be administered by the Board. Grants of Stock
Options under Part III of the Plan and the amount, price and timing of the
awards to be granted will be automatic, as described in Part III hereof. All
questions of interpretation of the Plan with respect to the grant of Options
pursuant to Part III will be determined by the Board, and such determination
shall, unless otherwise determined by the Board, be final and conclusive on
all persons having any interest hereunder.
SECTION 3. Stock Subject to the Plan
3.1 The aggregate number of shares of Stock that may be issued or
transferred under the Plan is 950,000, subject to adjustment pursuant to
Section 3.2 below. Such shares may be authorized but unissued shares or
reacquired shares. If the number of shares of Stock issued under the Plan and
the number of shares of Stock subject to outstanding awards (taking into
account the share counting requirements established under the Rules) equals
the maximum number of shares of Stock authorized under the Plan, no further
awards shall be made unless the Plan is amended in accordance with the Rules
or additional shares of Stock become available for further awards under the
Plan. If and to the extent that Options granted under the Plan terminate,
expire or are canceled without having been exercised, such shares shall again
be available for subsequent awards under the Plan.
3.2 If any change is made to the Stock (whether by reason of merger,
consolidation, reorganization, recapitalization, stock dividend, stock split,
combination of shares, or exchange of shares or any other change in capital
structure made without receipt of consideration), then unless such event or
change results in the termination of all outstanding awards under the Plan,
the Board shall preserve the value of the outstanding awards by adjusting the
maximum number and class of shares issuable under the Plan to reflect the
effect of such event or change in the Company's capital structure, and by
making appropriate adjustments to the number and class of shares subject to an
outstanding award and/or the option price of each outstanding Option, except
that any fractional shares resulting from such adjustments shall be eliminated
by rounding any portion of a share equal to .500 or greater up, and any
portion of a share equal to less than .500 down, in each case to the nearest
whole number.
3.3 In any fiscal year of the Company, the maximum number of shares
of Common Stock with respect to which Options may be granted to any optionee
shall not exceed 5% of the Common Stock outstanding, as adjusted for stock
splits, stock dividends or other similar changes affecting the Common Stock.
SECTION 4. Designation of Optionees
4.1 Optionees under Part II of the Plan shall be selected,
from time to time, by the Board from among those Employees and Eligible
Independent Contractors who, in the opinion of the Board, occupy responsible
positions and who have the capacity to contribute materially to the continued
growth, development and long-term success of the Company and its Subsidiaries.
4.2 All Non-Employee Directors on the date of grant shall be
eligible to receive Options under Part III of the Plan.
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PART II
GRANTS TO EMPLOYEES AND ELIGIBLE INDEPENDENT CONTRACTORS
SECTION 5. Stock Options
Any Stock Option granted under Part II of the Plan shall be in such
form as the Board may from time to time approve. Stock Options granted under
Part II of the Plan may be of two types: (i) Incentive Stock Options and (ii)
Non-Qualified Stock Options.
The Board shall have the authority to grant Incentive Stock Options,
Non-Qualified Stock Options or both types of Stock Options. To the extent that
any Stock Option does not qualify as an Incentive Stock Option, it shall
constitute a Non-Qualified Stock Option.
Anything in the Plan to the contrary notwithstanding, no term of this
Plan relating to Incentive Stock Options shall be interpreted, amended or
altered, nor shall any discretion or authority granted under the Plan be so
exercised, so as to disqualify the Plan under Section 422 of the Code, or,
without the consent of the optionee(s) affected, to disqualify any Incentive
Stock Option under Section 422.
Options granted hereunder shall be subject to the following terms and
conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of the Plan, as the Board shall deem appropriate:
5.1 Option Price. The option price per share of Stock purchasable
under a Stock Option shall be determined by the Board at the time of grant;
provided, however, that the option price per share for any Stock Option shall
be not less than 100% of the Fair Market Value of the Stock on the date of
grant.
Any Incentive Stock Option granted to any optionee who, at
the time the Option is granted, owns more than 10% of the voting power of all
classes of stock of the Company or of a Parent or Subsidiary corporation
(within the meaning of Section 424 of the Code), shall have an exercise price
no less than 110% of Fair Market Value per share on the date of the grant.
5.2 Option Term. The term of each Stock Option shall be fixed by the
Board, but no Stock Option shall be exercisable more than ten years after the
date the Stock Option is granted. However, any Incentive Stock Option granted
to any optionee who, at the time the Option is granted, owns more than 10% of
the voting power of all classes of stock of the Company or of a Parent or
Subsidiary corporation may not have a term of more than five years. No Option
may be exercised by any person after expiration of the term of the Option.
5.3 Exercisability. Stock Options shall be exercisable at such time
or times and subject to such terms and conditions as shall be determined by
the Board at or after grant. If the Board provides, in its discretion, that
any Stock Option is exercisable only in installments, the Board may waive such
installment exercise provisions at any time at or after grant in whole or in
part, based on such factors as the Board shall determine, in its sole
discretion.
5.4 Method of Exercise. Subject to whatever installment exercise
provisions apply under Section 5.3, Stock Options may be exercised in whole or
in part at any time and from time to time during the Option period, by giving
written notice of exercise to the Company specifying the number of shares to
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be purchased. Such notice shall be accompanied by payment in full of the
purchase price, either by cash, check, or such other instrument as the Board
may accept. As determined by the Board, in its sole discretion, at or after
grant, payment in full or in part may also be made in the form of unrestricted
Stock already owned by the optionee (based upon the Fair Market Value of a
share of Stock on the business date preceding tender if received prior to the
close of the stock market and at the Fair Market Value on the date of tender
if received after the stock market closes); provided, however, that, (i) in
the case of an Incentive Stock Option, the right to make a payment in the form
of unrestricted Stock already owned by the optionee may be authorized only at
the time the Option is granted and (ii) the Company may require that the Stock
has been owned by the Participant for a minimum period of time specified by
the Board. In addition, if such unrestricted Stock was acquired through
exercise of an Incentive Stock Option, such Stock shall have been held by the
optionee for a period of not less than the holding period described in Section
422(a)(1) of the Code on the date of exercise, or if such Stock was acquired
through exercise of a Non-Qualified Stock Option or of an option under a
similar plan of the Company, such Stock shall have been held by the optionee
for a period of more than one year on the date of exercise, and further
provided that the optionee shall not have tendered Stock in payment of the
exercise price of any other Option under the Plan or any other stock option
plan of the Company within six calendar months of the date of exercise.
To the extent permitted under the applicable laws and
regulations, at the request of the Participant, and with the consent of the
Board, the Company shall permit payment to be made by means of a "cashless
exercise" of an Option. Payment by means of a cashless exercise shall be
effected by the Participant delivering to the Securities Broker irrevocable
instructions to sell a sufficient number of shares of Stock to cover the cost
and expenses associated therewith and to deliver such amount to the Company.
No shares of Stock shall be issued until full payment
therefor has been made. An optionee shall not have any right to dividends or
other rights of a stockholder with respect to shares subject to the Option
until such time as Stock is issued in the name of the optionee following
exercise of the Option in accordance with the Plan.
5.5 Stock Option Agreement. Each Option granted under this Plan shall
be evidenced by an appropriate Stock Option agreement, which agreement shall
expressly specify whether such Option is an Incentive Stock Option or a
Non-Qualified Stock Option and shall be executed by the Company and the
optionee. The agreement shall contain such terms and provisions, not
inconsistent with the Plan, as shall be determined by the Board. Such terms
and provisions may vary between optionees or as to the same optionee to whom
more than one Option may be granted.
5.6 Replacement Options. If an Option granted pursuant to the Plan
may be exercised by an optionee by means of a stock-for-stock swap method of
exercise as provided in 5.4 above, then the Board may, in its sole discretion
and at the time of the original Option grant, authorize the Participant to
automatically receive a replacement Option pursuant to this part of the Plan.
This replacement Option shall cover a number of shares determined by the
Board, but in no event more than the number of shares equal to the difference
between the number of shares of the original Option exercised and the net
shares received by the Participant from such exercise. The per share exercise
price of the replacement Option shall equal the then current Fair Market Value
of a share of Stock, and shall have a term extending to the expiration date of
the original Option.
The Board shall have the right, in its sole discretion and
at any time, to discontinue the automatic grant of replacement Options if it
determines the continuance of such grants to no longer be in
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the best interests of the Company.
5.7 Non-transferability of Options. No Stock Option shall be
transferable by the optionee other than by will, by the laws of descent and
distribution, pursuant to a qualified domestic relations order, or as
permitted under the Rules, and all Stock Options shall be exercisable, during
the optionee's lifetime, only by the optionee. Notwithstanding the foregoing,
the Board may grant non-qualified Options that are transferable, without
payment of consideration, to immediate family members (i.e., spouses, children
and grandchildren) of the Optionee or to trusts for, or partnerships whose
only partners are, such family members. The Board may also amend outstanding
non-qualified Options to provide for such transferability.
5.8 Termination of Employment by Reason of Death. Unless otherwise
determined by the Board at or after grant, if any optionee dies during the
optionee's period of employment by the Company, or during the periods referred
to in Sections 5.9, 5.10 or 5.11, any Stock Option held by such optionee may
thereafter be exercised, to the extent then exercisable or on such accelerated
basis as the Board may determine at or after grant, by the legal
representative of the estate or by the legatee of the optionee under the will
of the optionee, for a period of one year (or such shorter period as the Board
may specify at grant) from the date of such death or until the expiration of
the stated term of such Stock Option, whichever period is shorter.
5.9 Termination of Employment by Reason of Disability. Unless
otherwise determined by the Board at or after grant, if an optionee's
employment by the Company terminates by reason of Disability, any Stock Option
held by such optionee may thereafter be exercised by the optionee, to the
extent it was exercisable at the time of termination, or on such accelerated
basis as the Board may determine at or after grant, for a period of one year
(or such shorter period as the Board may specify at grant) from the date of
such termination of employment or until the expiration of the stated term of
such Stock Option, whichever period is shorter. In the event of termination of
employment by reason of Disability, if an Incentive Stock Option is exercised
after the expiration of the exercise periods that apply for purposes of
Section 422 of the Code, such Stock Option will thereafter be treated as a
Non-Qualified Stock Option.
5.10 Termination of Employment Upon Retirement. Unless otherwise
determined by the Board at or after grant, if an optionee's employment
terminates due to retirement (as hereinafter defined), any Stock Option held
by such optionee may thereafter be exercised by the optionee, to the extent it
was exercisable at the date of retirement, or on such accelerated basis as the
Board may specify at grant, for a period of one-year (or such shorter period
as the Board may specify at grant) from the date of such retirement or until
the expiration of the stated term of such Stock Option, whichever period is
shorter. For purposes of this Section 5.10, "Retirement" shall mean any
Employee retirement under the Company's retirement policy.
5.11 Other Termination of Employment. Unless otherwise determined by
the Board at or after grant, in the event of termination of employment
(voluntary or involuntary) for any reason other than death, Disability or
retirement, or if an Employee is terminated for cause, any Stock Option held
by such optionee may thereafter be exercised by the optionee, to the extent it
was exercisable at the time of such termination or on such accelerated basis
as the Board may determine at or after grant, for a period of three months (or
such shorter period as the Board may specify at grant) from the date of such
termination of
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employment or the expiration of the stated term of such Stock Option,
whichever period is shorter. If an Employee is terminated for cause, any Stock
Option held by such Optionee shall terminate immediately.
5.12 Incentive Stock Option Limitation. The aggregate Fair Market
Value (determined as of the time of grant) of the Stock with respect to which
Incentive Stock Options are exercisable for the first time by the optionee
during any calendar year under the Plan and/or any other stock option plan of
the Company shall not exceed $100,000.
5.13 Termination of Eligible Independent Contractors Options. The
termination provisions of Options granted to Eligible Independent Contractors
shall be determined by the Board in its sole discretion.
5.14 Withholding and Use of Shares to Satisfy Tax Obligations. The
obligation of the Company to deliver Stock upon the exercise of any Option
shall be subject to applicable federal, state and local tax withholding
requirements.
If the exercise of any Option is subject to the withholding
requirements of applicable federal tax laws, the Board, in its discretion (and
subject to such withholding rules ("Withholding Rules") as shall be adopted by
the Board), may permit the optionee to satisfy the federal withholding tax, in
whole or in part, by electing to have the Company withhold (or by delivering
to the Company) shares of Stock, which Stock shall be valued, for this
purpose, at their Fair Market Value on the date the amount of tax required to
be withheld is determined (the "Determination Date"). Such election must be
made in compliance with and subject to the Withholding Rules, and the Board
may not withhold shares of Stock in excess of the number necessary to satisfy
the minimum federal income tax withholding requirements. If Stock acquired
upon the exercise of an Incentive Stock Option is used to satisfy such
withholding requirement, such Stock must have been held by the optionee for a
period of not less than the holding period described in Section 422(a)(1) of
the Code on the Determination Date. If Stock acquired through the exercise of
a Non-Qualified Stock Option or of an option under a similar plan is delivered
by the optionee to the Company to satisfy such withholding requirement, such
Stock must have been held by the optionee for a period of more than one year
on the Determination Date. For Optionees subject to Section 16 of the Exchange
Act, to the extent required by Section 16, the election to have Stock withheld
by the Company hereunder must be either (a) an irrevocable election made six
months before the Determination Date; or (b) an irrevocable election where
both the election and the Determination Date occur during one of the ten-day
periods beginning on the third business day following the date of release of
the Company's quarterly or annual summary financial data and ending on the
twelfth business day following such release.
5.15 Issuance of Shares and Compliance with Securities Acts. Within a
reasonable time after exercise of an Option, the Company shall cause to be
delivered to the optionee a certificate for the Stock purchased pursuant to
the exercise of the Option. At the time of any exercise of any Option, the
Company may, if it shall deem it necessary and desirable for any reason
connected with any law or regulation of any governmental authority relative to
the regulation of securities, require the optionee to represent in writing to
the Company that it is his or her then intention to acquire the Stock for
investment and not with a view to distribution thereof and that such optionee
will not dispose of such Stock in any manner that would involve a violation of
applicable securities laws. In such event, no Stock shall be issued to such
holder unless and until the Company is satisfied with such representation.
Certificates for shares of Stock issued pursuant to the exercise of Options
may bear an appropriate securities law legend.
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PART III
GRANTS TO NON-EMPLOYEE DIRECTORS
SECTION 6. Grant of Options
Options to purchase 10,000 shares of Common Stock, subject to
adjustment as provided in Section 3.2 (the "Initial Options") and options to
purchase 5,000 shares, subject to adjustments as provided in Section 3.2 (the
"Annual Options"), shall be granted to Non-Employee Directors as follows:
(a) Each Non-Employee Director on the 30th day after the
stockholders of the Company have approved the Plan shall be granted an Initial
Option.
(b) Each Non-Employee Director who is not granted an Initial
Option pursuant to Section 6(a), shall be granted an Initial Option on the
first business day immediately following the date that such person is first
elected or appointed to serve as a Non-Employee Director.
(c) Each year on January 1, each Non-Employee Director on
such date shall be granted an Annual Option.
SECTION 7. Types of Options
All options granted under Part III of the Plan shall be non-qualified
Stock Options for purposes of the Code.
SECTION 8. Option Price
The purchase price of each share of Stock issuable upon exercise of
an Option will be equal to the Fair Market Value of the Stock on the date of
grant.
SECTION 9. Option Term and Rights to Exercise
9.1 Period of Option and Rights to Exercise. Except as set forth
herein, each Non-Employee Director who receives options under this Plan must
continue to hold office as a Non-Employee Director of the Company for six
months from the date that the Initial Option is granted and six months from
the date each Annual Option is granted before he can exercise any part
thereof. Thereafter, subject to the provisions of the Plan, options will vest
and be exercisable as follows:
(a) Initial Options.
(i) Each Initial Option will vest and be
exercisable in full six months from the date of grant.
(ii) The right to exercise an Initial Option will
expire on the fifth anniversary of the date on which the option was
granted.
(iii) Once an Initial Option has become
exercisable, such option may be exercised in whole at any time or in
part from time to time until the expiration of the
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option, whether or not any option granted previously to the optionee
remains outstanding at the time of such exercise.
(b) Annual Options.
(i) Each Annual Option will vest and be exercisable
on a cumulative basis as to 2,500 shares beginning six months from
the date of grant and 2,500 additional shares beginning on the first
anniversary of the date of grant.
(ii) The right to exercise an Annual Option will
expire on the fifth anniversary of the date on which the option was
granted.
(iii) Once each installment of an Annual Option has
become exercisable, it may be exercised in whole at any time or in
part from time to time until the expiration of the option, whether or
not an option granted previously to the optionee remains outstanding
at the time of such exercise.
SECTION 10. Payment of Option Price
Payment or provision for payment of the purchase price shall be made
as follows: (i) in cash or check; (ii) by exchange of Stock valued at its Fair
Market Value on the date of exercise; (iii) by means of a cashless exercise
procedure by the delivery to the Company of an exercise notice and irrevocable
instructions to the Securities Broker to sell a sufficient number of shares of
Stock to pay the purchase price of the shares of Common Stock as to which such
exercise relates and to deliver promptly such amount to the Company; or (iv)
by any combination of the foregoing.
Where payment of the purchase price is to be made with shares of Stock
acquired through exercise of a non-qualified Stock Option or of an option
under a similar plan of the Company, such Stock shall have been held by the
optionee for a period of more than one year on the date of exercise, and
further provided that the optionee shall not have tendered Stock in payment of
the exercise price of any other Option under the Plan or any other stock
option plan of the Company within six calendar months of the date of exercise.
SECTION 11. Termination of Service
Upon cessation of service as a Non-Employee Director (for reasons
other than retirement or death), including cessation of service due to
physical or mental disability that prevents such person from rendering further
services as a Non-Employee Director, only those options exercisable at the
date of cessation of service shall be exercisable by the Non-Employee
Director. Such options shall be exercisable for a period of three months from
cessation of service of the Non-Employee Director or until the expiration of
the Option, whichever period is shorter.
Upon the retirement or death of a Non-Employee Director, options
shall be exercisable as follows:
(a) Retirement. Upon retirement as a Non-Employee Director
after the Non-Employee Director has served for at least six consecutive years
as a director, all Options shall continue to be exercisable during their terms
as if such person had remained a Non-Employee Director.
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(b) Death. In the event of the death of a Non-Employee
Director while a member of the Board, or within the period after termination
of service referred to in the first paragraph of Section 11, the Options
granted to him shall be exercisable, to the extent then exercisable, for a
period of one year from the date of the Non-Employee Director's death, or
until the expiration of the Option, whichever period is shorter.
SECTION 12. No Guaranteed Term of Office
Nothing in this Plan or any modification thereof, and no grant of an
option, or any term thereof, shall be deemed an agreement or condition
guaranteeing to any Non-Employee Director any particular term of office or
limiting the right of the Company, the Board or the stockholders to terminate
the term of office of any Non-Employee Director under the circumstances set
forth in the Company's Certificate of Incorporation or Bylaws, or as otherwise
provided by law.
SECTION 13. Other Restrictions
Sections 5.5, 5.7 and 5.15 of the Plan shall apply to options granted
pursuant to Part III of the Plan.
PART IV
MISCELLANEOUS
SECTION 14. Change in Control
A "Change in Control" for purposes of this Plan shall mean any one of
the events described below:
14.1 at any time during a period of two (2) consecutive
years, at least a majority of the Board shall not consist of Continuing
Directors. "Continuing Directors" shall mean directors of the Company at the
beginning of such two-year period and directors who subsequently became such
and whose selection or nomination for election by the Company's shareholders
was approved by a majority of the then Continuing Directors; or
14.2 any person or "group" (as determined for purposes of
Regulation 13D-G promulgated by the Commission under the Exchange Act or under
any successor regulation), but excluding any majority-owned subsidiary or any
employee benefit plan sponsored by the Company or any subsidiary or any trust
or investment manager for the account of such a plan, shall have acquired
"beneficial ownership" (as determined for purposes of such regulation) of the
Company's securities representing fifty percent (50%) or more of the combined
voting power of the Company's then outstanding securities unless such
acquisition is approved in advance by a majority of the directors of the
Company who were in office immediately preceding such acquisition and any
individual selected to fill any vacancy created by reason of the death or
disability of any such director; or
14.3 the Company becomes a party to a merger, consolidation
or share exchange in which either (i) the Company will not be the surviving
corporation or (ii) the Company will be the surviving corporation and any
outstanding shares of Common Stock will be converted into shares of any other
company (other than a reincorporation or the establishment of a holding
company involving no change in ownership of the Company or other securities or
cash or other property (excluding payments made solely
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for fractional shares); or
14.4 the Company's shareholders (i) approve any plan or
proposal for the disposition or other transfer of all, or substantially all,
of the assets of the Company, whether by means of a merger, reorganization,
liquidation or dissolution or otherwise or (ii) dispose of, or become
obligated to dispose of, 50% or more of the outstanding capital stock of the
Company by tender offer or otherwise.
If a Change in Control has occurred, all outstanding options
granted under the Plan shall be immediately exercisable by the holders of the
options for the total remaining number of Shares covered by the options and
shall survive any such event.
SECTION 15. Amendments and Termination
The Board may amend, alter or discontinue the Plan at any time and
from time to time, but no amendment, alteration or discontinuation shall be
made which would impair the rights of an optionee or Participant under a Stock
Option award theretofore granted, without the optionee's or Participant's
consent, or which, without the approval of the Company's stockholders, would
require stockholder approval under the Rules.
Except for awards made pursuant to Part III, the Board may amend the
terms of any Stock Option theretofore granted, prospectively or retroactively,
but no such amendment shall impair the rights of any holder without the
holder's consent. Except for awards made to Non-Employee Directors pursuant to
Part III, the Board may also substitute new Stock Options for previously
granted Stock Options, including previously granted Stock Options having
higher option prices. Subject to the above provisions, the Board shall have
broad authority to amend the Plan to take into account changes in applicable
tax laws, securities laws and accounting rules, as well as other developments.
SECTION 16. Unfunded Status of Plan
The Plan is intended to constitute an "unfunded" plan of incentive
and deferred compensation. With respect to any payments not yet made to a
Participant or optionee by the Company, nothing contained herein shall give
any such Participant or optionee any rights that are greater than those of a
general creditor of the Company. In its sole discretion, the Board may
authorize the creation of trusts or other arrangements to meet the obligations
created under the Plan to deliver Stock or payments in lieu of or with respect
to awards hereunder; provided, however, that, unless the Board otherwise
determines with the consent of the affected Participant, the existence of such
trusts or other arrangements is consistent with the "unfunded" status of the
Plan.
SECTION 17. General Provisions
17.1 All certificates for shares of Stock or other securities
delivered under the Plan shall be subject to such stop-transfer orders and
other restrictions as the Board may deem advisable under the rules,
regulations and other requirements of the Securities Act, the Exchange Act,
any stock exchange or over-the-counter market upon which the Stock is then
listed, and any applicable federal or state securities law, and the Board may
cause a legend or legends to be put on any such certificates to make
appropriate reference to such restrictions.
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17.2 Nothing contained in this Plan shall prevent the Board from
adopting other or additional compensation arrangements, subject to stockholder
approval if such approval is required, and such arrangements may be either
generally applicable or applicable only in specific cases.
17.3 The adoption of the Plan shall not confer upon any Participant
any right to continued employment with the Company nor shall it interfere in
any way with the right of the Company to terminate its relationship with any
of its Employees, directors or Independent Contractors at any time.
17.4 No later than the date as of which an amount first becomes
includable in the gross income of the Participant for federal income tax
purposes with respect to any award under the Plan, the Participant who is an
Employee of the Company shall pay to the Company, or make arrangements
satisfactory to the Board regarding the payment of, any federal, state, or
local taxes of any kind required by law to be withheld with respect to such
amount. To the extent permitted by the Board, in its sole discretion, the
minimum required withholding obligations may be settled with Stock, including
Stock that is part of the award that gives rise to the withholding
requirement. The obligations of the Company under the Plan shall be
conditional on such payment or arrangements and the Company shall, to the
extent permitted by law, have the right to deduct any such taxes from any
payment of any kind otherwise due to the Participant.
17.5 The Board shall establish such procedures as it deems
appropriate for a Participant to designate a beneficiary to whom any amounts
payable in the event of the Participant's death are to be paid.
17.6 The Plan shall be governed by and subject to all applicable laws
and to such approvals by any governmental or regulatory agency as may be
required.
SECTION 18. Effective Date and Term of Plan
The Plan shall be effective as of the effective date the Plan is
adopted by the Board of Directors and Shareholders of the Company, (the
"Effective Date"), subject to the consent or approval of the Company's
stockholders as provided below. No Stock Option award shall be granted
pursuant to the Plan on or after ten years from the Effective Date, but Stock
Options granted prior to such tenth anniversary may be exercised after such
date. If the Plan is not approved by a majority of the votes cast at a duly
held meeting at which a quorum representing a majority of all outstanding
voting stock of the Company is, either in person or by proxy, present and
voting on the Plan, within 12 months after such effective date, any Incentive
Stock Options that have been granted shall automatically become Non-Qualified
Stock Options.
SECTION 19. Interpretation
A determination of the Board as to any question which may arise with
respect to the interpretation of the provisions of this Plan or any Options
shall be final and conclusive, and nothing in this Plan, or in any regulation
hereunder, shall be deemed to give any Participant, his legal representatives,
assigns or any other person any right to participate herein except to such
extent, if any, as the Board may have determined or approved pursuant to this
Plan. The Board may consult with legal counsel who may be counsel to the
Company and shall not incur any liability for any action taken in good faith
in reliance upon the advice of such counsel.
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SECTION 20. Governing Law
With respect to any Incentive Stock Options granted pursuant to the
Plan and the agreements thereunder, the Plan, such agreements and any
Incentive Stock Options granted pursuant thereto shall be governed by the
applicable Code provisions to the maximum extent possible. Otherwise, the laws
of the Commonwealth of Pennsylvania shall govern the operation of, and the
rights of Participants under, the Plan, the agreements and any Options granted
thereunder.
SECTION 21. Compliance With The Rules
21.1 Unless an Insider could otherwise transfer shares of Stock
issued hereunder without incurring liability under Section 16(b) of the
Exchange Act, at least six months must elapse from the date of grant of an
Option to the date of disposition of the Stock issued upon exercise of such
Option.
21.2 It is the intent of the Company that this Plan comply in all
respects with the Rules in connection with any grant of Options to, or other
transaction by, an Insider. Accordingly, if any provision of this Plan or any
agreement relating to an Option does not comply with the Rules as then
applicable to any such Insider, such provision will be construed or deemed
amended to the extent necessary to conform to such requirements with respect
to such person. In addition, the Board shall have no authority to make any
amendment, alteration, suspension, discontinuation, or termination of the Plan
or any agreement hereunder, or take other action if such authority would cause
an Insider's transactions under the Plan not to be exempt under the Rules.
21.3 Certain restrictive provisions of the Plan have been implemented
to facilitate the Company's and Insiders' compliance with the Rules. The
Board, in its discretion, may waive certain of these restrictions, provided
the waiver does not relate in any way to an Insider and, provided further,
such waiver or amendment is carried out in accordance with Section 15 hereof.
SECTION 22. Substitution of Options in a Merger, Consolidation or Share Exchange
In the event that the Company becomes a party to a merger,
consolidation or share exchange (a "Business Combination") and in connection
therewith substitutes options under the Plan for options of another party to
such Business Combination, notwithstanding the provisions of the Plan, the
terms of such substituted options may have the same terms and conditions
(provided that the number of shares issuable and the exercise prices are
adjusted in accordance with the terms of the Business Combination) as the
former options of such other party to the Business Combination, provided,
however, that the exercise price of the Options to be granted under the Plan
shall be lawful consideration as determined by the Board.
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WARRANT AGREEMENT
WARRANT AGREEMENT, dated as of this 30th day of January
1997, between ROM TECH, INC., corporation (the "Company"), and PJM Trading
Company (the "Holder").
W I T N E S S E T H:
WHEREAS, the Company desires to provide for the
issuance of a Warrant to the Holder upon the terms and conditions provided
herein.
NOW, THEREFORE, in consideration of the premises
and the mutual agreements hereinafter set forth, the parties hereto agree as
follows:
SECTION 1. Definitions. As used herein, the
following terms shall have the following meanings, unless the context shall
otherwise require:
(a) "Affiliate" shall mean any person or
entity who controls, is controlled by or is under common control with, the
Company. For purposes of this definition, "control" means the power to direct
the management and policies of any person or entity, directly or indirectly,
whether through the ownership of securities, by contract or otherwise.
(b) "Average Quoted Price" of a share of
Common Stock is the average of the closing bid price for the period in
question of the Common Stock as reported on the Nasdaq SmallCap Market, or the
primary securities exchange on which the Common Stock is then quoted;
provided, however, that if the Common Stock is neither traded on the Nasdaq
SmallCap Market nor on any other securities exchange, the price referred to
above shall be the closing bid price reflected in the over-the-counter market
as reported by the National Quotation Bureau, Inc. or any organization
performing a similar function.
(c) "Common Stock" shall mean the common
stock of the Company, without par value.
(d) "Exercise Date" shall mean the date on
which the Company shall have received both (i) the Warrant Certificate
representing this Warrant, with the exercise form thereon duly executed by the
Holder hereof or his attorney duly authorized in writing, and (ii) payment in
cash or by check made payable to the Company, of the amount in lawful money of
the United States of America equal to the applicable Purchase Price or payment
as provided in Section 4 hereof.
(e) "Initial Warrant Exercise Date" shall
mean July 30, 1997.
<PAGE>
(f) "Market Price" per share of Common
Stock on any date means the Average Quoted Price of a share of Common Stock
for the thirty consecutive trading days commencing forty-five (45) trading
days before the date in question . In the absence of one or more such
quotations, the Company shall determine the Market Price in good faith, based
on the best information available to it.
(g) "Purchase Price" shall mean, subject
to modification and adjustment as provided in Section 8, $6.00 and further
subject to the Company's right, in its sole discretion, to decrease the
Purchase Price for a period of not less than 30 days on not less than 30 days'
prior written notice to the Registered Holder.
(h) "Registered Holder" shall mean the
person in whose name any certificate representing the Warrants shall be
registered on the books maintained by the Company pursuant to Section 6.
(i) "Subsidiary" or Subsidiaries" shall
mean any corporation or corporations, as the case may be, of which stock
having ordinary power to elect a majority of the Board of Directors of such
corporation (regardless of whether or not at the time stock of any other class
or classes of such corporation shall have or may have voting power by reason
of the happening of any contingency) is at the time directly or indirectly
owned by the Company or by one or more Subsidiaries, or by the Company and one
or more Subsidiaries.
(j) "Warrant Certificate" shall mean a
certificate representing each of the Warrants substantially in the form
annexed hereto as Exhibit A.
(k) "Warrant Expiration Date" shall mean
5:00 p.m. (Eastern Standard Time) on January 30, 2002 or, if such date shown
in the Commonwealth of Pennsylvania be a holiday or a day on which banks are
authorized to close, then 5:00 p.m. (Eastern Standard Time) on the next
following day which in the Commonwealth of Pennsylvania is not a holiday or a
day on which banks are authorized to close, subject to the Company's right,
prior to the Warrant Expiration Date, in its sole discretion, to extend such
Warrant Expiration Date on five business days prior written notice to the
Registered Holders.
SECTION 2. Warrants and Issuance of Warrant
Certificates.
(a) One Warrant shall initially entitle
the Registered Holder of the Warrant Certificate representing such Warrant to
purchase at the Purchase Price therefor, beginning on the Initial Warrant
Exercise Date until the Warrant Expiration Date, one share of Common Stock
upon the exercise thereof, subject to modification and adjustment as provided
in Section 8.
(b) Upon execution of this Agreement,
Warrant Certificates representing 177,988 Warrants to purchase up to an
aggregate of 177,988 shares of Common Stock
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(subject to modification and adjustment as provided in Section 8 shall be
executed by the Company and delivered to the Holder.
(c) From time to time, up to the Warrant
Expiration Date, as the case may be, the Company shall countersign and deliver
Warrant Certificates in required denominations of one or whole number
multiples thereof to the person entitled thereto in connection with any
transfer or exchange permitted under this Agreement. Except as provided in
Section 7 hereof, no Warrant Certificates shall be issued except (i) Warrant
Certificates initially issued pursuant to Section 2(b) hereof, (ii) Warrant
Certificates issued upon any transfer or exchange of Warrants, (iii) Warrant
Certificates issued in replacement of lost, stolen, destroyed or mutilated
Warrant Certificates pursuant to Section 7, and (iv) at the option of the
Company, Warrant Certificates in such form as may be approved by its Board of
Directors, to reflect any adjustment or change in the Purchase Price, the
number of shares of Common Stock purchasable upon exercise of the Warrants
therefor made pursuant to Section 8 hereof.
SECTION 3. Form and Execution of Warrant Certificates.
(a) The Warrant Certificates shall be
substantially in the form annexed hereto as Exhibit A (the provisions of which
are hereby incorporated herein) and may have such letters, numbers or other
marks of identification or designation and such legends, summaries or
endorsements printed, lithographed or engraved thereon as the Company may deem
appropriate and as are not inconsistent with the provisions of this Agreement,
or as may be required to comply with any law or with any rule or regulation
made pursuant thereto or to conform to usage. The Warrant Certificates shall
be dated the date of issuance thereof (whether upon initial issuance,
transfer, exchange or in lieu of mutilated, lost, stolen or destroyed Warrant
Certificates).
(b) Warrant Certificates shall be executed
on behalf of the Company by its Chairman of the Board, President or any Vice
President and by its Treasurer or an Assistant Treasurer or its Secretary or
an Assistant Secretary, by manual signatures or by facsimile signatures
printed thereon, and shall have imprinted thereon a manual or a facsimile of
the Company's seal.
SECTION 4. Exercise.
(a) (1) Warrants in denominations of one
or whole number multiples thereof may be exercised commencing at any time on
or after the Initial Warrant Exercise Date, but not after the Warrant
Expiration Date, upon the terms and subject to the conditions set forth herein
(including the provisions set forth in Section 5 hereof) and in the applicable
Warrant Certificate. A Warrant shall be deemed to have been exercised
immediately prior to the close of business on the Exercise Date, provided that
the Warrant Certificate representing such Warrant, with the exercise form
thereon duly executed by the Registered Holder thereof or his attorney duly
authorized in writing, together with payment in cash or by check made payable
to the Company, of an amount in lawful money of the United States of America
equal to the applicable Purchase Price
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<PAGE>
has been received in good funds by the Company. The person entitled to receive
the securities deliverable upon such exercise shall be treated for all
purposes as the holder of such securities as of the close of business on the
Exercise Date. If more than one Warrant Certificate shall be exercised at one
time by the same Registered Holder, the number of full shares of Common Stock
which shall be issuable upon exercise thereof shall be computed on the basis
of the aggregate number of full shares of Common Stock issuable upon such
exercise. As soon as practicable on or after the Exercise Date and in any
event with ten business days after such date, the Company shall cause to be
issued to the person or persons entitled to receive the same a Common Stock
certificate or certificates for the shares of Common Stock deliverable upon
such exercise, and the Company shall deliver the same to the person or persons
entitled thereto.
(b) The Company shall be not obligated to
issue any fractional share interests or fractional Warrant interests upon the
exercise of any Warrant or Warrants, nor shall it be obligated to issue scrip
or pay cash in lieu of fractional interests. Any fraction equal to or greater
than one-half shall be rounded up to the next full share or Warrant, as the
case may be, any fraction less than one-half shall be eliminated.
SECTION 5. Reservation of Shares: Listing of
Taxes; etc.
(a) The Company covenants that it will at
all times reserve and keep available out of its authorized Common Stock,
solely for the purpose of issue upon exercise of Warrants, such number of
shares of Common Stock as shall then be issuable upon the exercise of all
outstanding Warrants. The Company covenants that all shares of Common Stock
which shall be issuable upon exercise of the Warrants shall, at the time of
delivery thereof and upon payment of the Purchase Price with respect thereto,
be duly and validly issued and fully paid and nonassessable and free from all
preemptive or similar rights, taxes, liens and charges with respect to the
issue, thereof except for taxes and other charges payable by the holder as
provided in Section 5(b), and that upon issuance such shares shall be listed
on each securities exchange, if any, on which the other shares of outstanding
Common Stock of the Company are then listed.
(b) The Company shall pay all documentary,
stamp or similar taxes and other governmental charges that may be imposed with
respect to the issuance of Warrants, or the issuance or delivery of any shares
of Common Stock upon exercise of the Warrants; provided, however, that if
shares of Common Stock are to be delivered in a name other than the name of
the Registered Holder of the Warrant Certificate representing any Warrant
being exercised, (provided that such issuance is permitted under any
applicable federal or state securities laws) then no such delivery shall be
made unless the person requesting the same has paid to the Company the amount
of transfer taxes or charges incident thereto, if any.
SECTION 6. Exchange and Registration of Transfer
(a) Warrant Certificates may be exchanged
for other Warrant Certificates representing an equal aggregate number of
Warrants, or, subject to the limitations set
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forth in Section 6 (g) hereof, may be transferred in whole or in part. Warrant
Certificates to be so exchanged shall be surrendered to the Company at 2000
Cabot Boulevard West, Suite 110, Langhorne, Pennsylvania 19047, to the
attention of Gerald W. Klein, and the Company shall execute, issue and deliver
in exchange therefor to the Registered Holder a new Warrant Certificate or
Certificates representing an equal aggregate number of Warrants.
(b) The Company shall keep, at such
office, books in which, subject to such reasonable regulations as it may
prescribe, it shall register Warrant Certificates, and the transfer thereof.
Upon due presentment for registration of transfer of any Warrant Certificate
at such office, the Company shall execute and shall issue and deliver to the
Registered Holder a new Warrant Certificate or Certificates representing an
equal aggregate number of Warrants.
(c) With respect to any Warrant
Certificates presented for registration or transfer, or for exchange or
exercise, the subscription or assignment form accompanying the Warrant
Certificate(s), as the case may be, attached thereto shall be duly endorsed or
be accompanied by a written instrument or instruments of transfer or
subscription, in form satisfactory to the Company and the Warrant Agent, duly
executed by the Registered Holder thereof or his attorney duly authorized in
writing.
(d) No service charge shall be made for
any exchange of registration or transfer of Warrant Certificates. However, the
Company may require payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in connection therewith.
(e) All Warrant Certificates surrendered
for exercise or for exchange shall be promptly canceled by the Company.
(f) Prior to due presentment for
registration or transfer thereof, the Company may deem and treat the
Registered Holder of any Warrant Certificate as the absolute owner thereof of
each Warrant represented thereby (notwithstanding any notations of ownership
or writing thereon made by anyone other than the Company) for all purposes and
shall be affected by any notice to the contrary.
(g) The Warrants represented by the
Warrant Certificates may not be exercised nor may any interest in the Warrants
represented by the Warrant Certificates be sold, assigned, pledged,
hypothecated, encumbered or in any other manner transferred or disposed of, in
whole or in part, except in compliance with applicable United States federal
and state securities or Blue Sky laws and the terms and conditions hereof.
Each Warrant Certificate shall bear the legend set forth in Section 14 hereof.
Each share of Common Stock issued upon exercise of the Warrants shall bear a
legend substantially in the form set forth in Section 14 hereof. Any Warrant
Certificate issued at any time in exchange or substitution for any Warrant
Certificate bearing such legend shall also bear such legend unless, in the
opinion of legal counsel for the Company, the Warrants
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<PAGE>
represented thereby need no longer be subject to the restriction contained
herein. The provisions of this Section 6 (g) shall be binding upon all
subsequent holders of Warrant Certificates.
SECTION 7. Loss or Mutilation. Upon receipt by the
Company of evidence satisfactory to it to the ownership of the loss, theft,
destruction or mutilation of any Warrant Certificate and (in the case of loss,
theft or destruction) of indemnity satisfactory to them, and (in case of
mutilation) upon surrender and cancellation thereof, the Company shall execute
and deliver in lieu thereof a new Warrant Certificate to the Registered Holder
thereof representing an equal aggregate number of Warrants. Applicants for a
substitute Warrant Certificate shall also comply with such other reasonable
regulations and pay such other charges as the Company may prescribe.
SECTION 8. Adjustment of Purchase Price and NumbeR
of Shares of Common Stock Deliverable.
(a) (i) Except as hereinafter provided, in
the event the Company shall, at any time or from time to time after the date
hereof, sell any shares of Common Stock for a consideration per share less
than the Purchase Price or issue any shares of Common Stock as a stock
dividend to the holders of Common Stock, or subdivide or combine the
outstanding shares of Common Stock into a greater or lesser number of shares
(any such sale, issuance, subdivision or combination being herein called a
"Change of Shares"), then, and thereafter upon each further Change of Shares,
the Purchase Price for the Warrants (whether or not the same shall be issued
and outstanding) in effect immediately prior to such Change of Shares shall be
changed to a price (including any applicable fraction of a cent to the nearest
cent) equal to the following:
NPP = (OB x OPP) + (NS x NSP)
-------------------------------
OA
where:
NPP = the New Purchase Price
OPP = the existing Purchase Price immediately before the new issue
OB = the total outstanding shares of Common Stock immediately before
Change of Shares
NS = number of shares sold or issued pursuant to the Change of Shares
NSP = price per share of new issue
OA = the total outstanding shares of Common Stock immediately after
the Change of Shares
provided, however, that in no event shall the Purchase Price be adjusted
pursuant to this computation to an amount in excess of the Purchase Price in
effect immediately prior to such computation, except in the case of a
combination of outstanding shares of Common Stock.
For the purposes of any adjustment to be made in
accordance with this Section 8 (a) the following provisions shall be
applicable:
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(A) In case of the issuance or
sale of shares of Common Stock (or of other securities deemed hereunder to
involve the issuance or sale of shares of Common Stock) for a consideration
part or all of which shall be cash, the amount of the cash portion of the
consideration therefor deemed to have been received by the Company shall be
(i) the subscription price, if shares of Common Stock are offered by the
Company for subscription, or (ii) the public offering price (before deducting
therefrom any compensation paid or discount allowed in the sale, underwriting
or purchase thereof by underwriters or dealers or others performing similar
services), if such securities are sold to underwriters or dealers for public
offering without a subscription offering, or (iii) the gross amount of cash
actually received by the Company for such securities in any other case, in
each case, without deduction for any expenses incurred by the Company in
connection with such transaction.
(B) In case of the issuance or
sale (otherwise than as a dividend or other distribution on any stock of the
Company) of shares of Common Stock (or of other securities deemed hereunder to
involve the issuance or sale of shares of Common Stock) for a consideration
part or all of which shall be other than cash, the amount of the consideration
therefor other than cash deemed to have been received by the Company shall be
the value of such consideration as determined in good faith by the Board of
Directors of the Company.
(C) Shares of Common Stock
issuable by way of dividend or other distribution on any stock of the Company
shall be deemed to have been issued immediately after the opening of business
on the day following the record date for the determination of shareholders
entitled to receive such dividend or other distribution and shall be deemed to
have been issued without consideration.
(D) The reclassification of
securities of the Company other than shares of Common Stock into securities
including shares of Common Stock shall be deemed to involve the issuance of
such shares of Common Stock for a consideration other than cash immediately
prior to the close of business on the date fixed for the determination of
security holders entitled to receive such shares, and the value of the
consideration allocable to such shares of Common Stock shall be determined as
provided in subsection (B) of this Section 8(a).
(E) The number of shares of
Common Stock at any one time outstanding shall be deemed to include the
aggregate maximum number of shares issuable (subject to readjustment upon the
actual issuance thereof) upon the exercise of options, rights or warrants and
upon the conversion or exchange of convertible or exchangeable securities.
(ii) Upon each adjustment of the Purchase
Price pursuant to this Section 8, the number of shares of Common Stock
purchasable upon the exercise of each Warrant shall be the number derived by
multiplying the number of shares of Common Stock purchasable immediately prior
to such adjustment by the Purchase Price in effect prior to such adjustment
and dividing the product so obtained by the applicable adjusted Purchase
Price.
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<PAGE>
(b) Except as hereinafter provided, in
case the Company shall at any time after the date hereof issue options, rights
or warrants to subscribe for shares of Common Stock (whether as part of a
package of securities such as units, or otherwise, herein "Units"), or issue
any securities convertible into or exchangeable for shares of Common Stock,
for a consideration per share (determined as provided in Section 8(a) and as
provided below) less than the Purchase Price in effect immediately prior to
the earlier of the issuance of such options, rights or warrants, or such
convertible or exchangeable securities or the record date therefor, or without
consideration (including the issuance of any such securities by way of
dividend or other distribution), the Purchase Price for the Warrants (whether
or not the same shall be issued and outstanding) in effect immediately prior
to the issuance of such options, Units, rights or warrants, or other such
convertible or exchangeable securities, as the case may be, shall be reduced
to a price determined by making the computation in accordance with the
provisions of Section 8(a) hereof, provided that:
(A) The aggregate maximum number
of shares of Common Stock, as the case may be, issuable or that may become
issuable under such options, rights, Units or warrants (assuming exercise in
full even if not then currently exercisable or currently exercisable to full)
shall be deemed to be issued and outstanding at the time such options, rights,
Units, or warrants were issued, for a consideration equal to the minimum
purchase or exercise price per share provided for in such options, rights or
warrants at the time of issuance, plus the consideration, if any, received by
the Company upon the issuance of such options, rights, Units or warrants
(without deduction for expenses incurred or amounts paid to any underwriter by
the Company in connection with such issuance); provided, however, that upon
the expiration or other termination of such options, rights or warrants, if
any thereof shall not have been exercised, the number of shares of Common
Stock deemed to be issued and outstanding pursuant to this subsection (A) (and
for the purposes of subsection (E) of Section 8(a) hereof) shall be reduced by
the number of shares as to which options, warrants and/or rights outstanding,
and the Purchase Price then in effect shall forthwith be readjusted and
thereafter be the price that it would have been had adjustment been made on
the basis of the issuance only of the shares actually issued plus the shares
remaining issuable upon the exercise of those options, rights or warrants as
to which the exercise rights shall not have expired or terminated unexercised.
(B) The aggregate maximum number
of shares of Common Stock issuable or that may become issuable upon conversion
or exchange of any convertible or exchangeable securities (assuming conversion
or exchange in full even if not then currently convertible or exchangeable in
full) shall be deemed to be issued and outstanding at the time of issuance of
such securities, for a consideration equal to the consideration received by
the Company upon the issuance of such securities (without deduction for
expenses incurred or amounts paid to any underwriter in connection with such
issuance), plus the minimum consideration, if any, receivable by the Company
upon the conversion or exchange thereof; provided, however, that upon the
termination of the right to convert to or exchange such convertible or
exchangeable securities (whether by reason or redemption or otherwise), the
number of shares of Common Stock deemed to be issued and outstanding pursuant
to this subsection (B) (and for the purposes of subsection (E) of Section 8(a)
hereof) shall be reduced by the number of shares as to which the conversion or
exchange rights shall
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have expired or terminated unexercised, and such number of shares shall no
longer be deemed to be issued only of the shares actually issued plus the
shares remaining issuable upon conversion or exchange rights shall not have
expired or terminated unexercised.
(C) If any change shall occur in
the price per share provided for in any of the options, rights or warrants
referred to in subsection (A) of this Section 8(b), or in the price per share
or ratio at which the securities referred to in subsection (A) of this Section
8(b) are convertible or exchangeable (in either case, other than changes in
such prices or ratios arising pursuant to antidilution adjustments in such
options, rights, Units, warrants or convertible or exchangeable securities or
the instruments pursuant to which they were issued, provided that such
options, rights, warrants, convertible or exchangeable securities or
instruments pursuant to which they were issued do not contain antidilution
provisions any more favorable to the holder thereof than those contained
herein) such options, rights, Units, or warrants or conversion or exchange
rights, as the case may be, to the extent not theretofore exercised, shall be
deemed to have expired or terminated on the date when such price change became
effective in respect of shares not theretofore issued pursuant to the exercise
or conversion or exchange thereof, and the Company shall be deemed to have
issued upon such date new options, rights, Units or warrants or convertible or
exchangeable securities.
(c) In case of any reclassification or
change of outstanding shares of Common Stock issuable upon exercise of the
Warrants (other than a change in par value, or from par value to no par value,
or from no par value to par value or as a result of subdivision or
combination), or in case of any consolidation or merger of the Company with or
into another corporation (other than a merger in which the Company is the
continuing corporation and which does not result in any reclassification or
change of the then outstanding shares of Common Stock or other capital stock
issuable upon exercise of the Warrants (other than a change in par value or
from par value or to no par value, or from no par value to par value or as a
result of subdivision or combination)) or in case of any sale or conveyance to
another corporation of the property of the Company as an entirety or
substantially as an entirety, then, as a condition of such reclassification,
change, consolidation, merger, sale or conveyance, the Company, or such
successor or purchasing corporation, as the case may be, shall make lawful and
adequate provision whereby the Registered Holder of each Warrant shall have
the right thereafter to receive on exercise of such Warrant the kind and
amount of securities and property receivable upon such reclassification,
change, consolidation, merger, sale or conveyance by a holder of the number of
securities issuable upon exercise of such Warrant immediately prior to such
reclassification, change, consolidation, merger, sale or conveyance. Such
provisions shall include provision for adjustments which shall be as nearly
equivalent as may be practicable to the adjustments provided for in Sections
8(a) and (b). The above provisions of this Section 8(c) shall similarly apply
to successive reclassification and changes of shares of Common Stock and to
successive consolidations, mergers, sales or conveyances.
(d) Irrespective of any adjustments or
changes in the Purchase Price or the number of shares of Common Stock
purchasable upon exercise of the Warrants, the Warrant Certificates
theretofore and thereafter issued shall, unless the Company shall exercise its
option to
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issue new Warrant Certificates pursuant to Section 2(e) hereof, continue to
express the Purchase Price per share and the number of shares purchasable
thereunder as the Purchase Price per share and the number of shares
purchasable thereunder were expressed in the Warrant Certificates when the
same were originally issued.
(e) After each adjustment of the Purchase
Price pursuant to this Section 8, the Company will promptly prepare a
certificate signed by the Chairman or President, and by the Treasurer or an
Assistant Treasurer or the Secretary or an Assistant Secretary, of the Company
setting forth: (i) the Purchase price as so adjusted, (ii) the number of
shares of Common Stock purchasable upon exercise of each Warrant, after such
adjustment, and (ii) a brief statement of the facts accounting for such
adjustment. The Company will cause a brief summary thereof to be sent by
ordinary first class mail to each Registered Holder at his last address as it
shall appear on the books of the Company. No failure to mail such notice nor
any defect therein or in the mailing thereof shall affect the validity thereof
except as to the holder to whom the Company failed to mail such notice, or
except as to the holder whose notice was defective. The affidavit of the
Secretary or an Assistant Secretary of the Company that such notice has been
mailed shall, in the absence of fraud, be prima facie evidence of the facts
stated therein.
(f) No adjustment of the Purchase Price or
in the number of shares of Common Stock issuable upon exercise of the Warrants
shall be made as a result of or in connection with (A) the issuance or sale of
shares of Common Stock pursuant to options, warrants and convertible or
exchangeable securities outstanding or in effect or provided for on the date
hereof, (B) the issuance or sale of shares of Common Stock upon the exercise
of options referred to in clause (A) above, (C) the issuance or sale of shares
of Common Stock if the amount of said adjustment shall be less than $.05,
provided, however, that in such case, any adjustment that would otherwise be
required then to be made shall be carried forward and shall be made at the
time of and together with the next subsequent adjustment that shall amount,
together with any adjustment so carried forward, to at least $.05. In
addition, Registered Holders shall not be entitled to cash dividends paid by
the Company prior to the exercise of any Warrant or Warrants held by them.
SECTION 9. Modification of Agreement. This
Agreement may not be modified, supplemented or altered in any respect except
with the consent in writing of the Registered Holder and the Company;
provided, further, that no change in the number or nature of the securities
purchasable upon the exercise of any Warrant, or the Purchase Price therefor
shall be made without the consent in writing of the Registered Holder of
affected Warrant, other than such changes as are specifically prescribed by
this Agreement as originally executed.
SECTION 10. Notices. All notices, requests,
consents and other communications hereunder shall be in writing and shall be
deemed to have been made when delivered or mailed first-class postage
pre-paid, or delivered to a telegraph office for transmission if the
Registered Holder of a Warrant Certificate, at the address of such holder as
shown on the registry books maintained by the Company; if to the Company at
2000 Cabot Boulevard West, Suite 110,
10
<PAGE>
Langhorne, Pennsylvania 19047, Attention: Gerald W. Klein, or at such other
address as may have been furnished to the Registered Holder in writing by the
Company.
SECTION 11. Governing Law. This Agreement shall be
governed by and construed in accordance with the laws of the Commonwealth of
Pennsylvania without giving effect to conflicts of laws.
SECTION 12. Binding Effect. This Agreement shall be
binding upon and inure to the benefit of the Company and the holders from time
to time of Warrant Certificates or any of them. Except as hereinafter stated,
nothing in this Agreement is intended or shall be construed to confer upon any
other person any right, remedy or claim or to impose upon any other person any
duty, liability or obligation.
SECTION 13. Counterparts. This Agreement may be
executed in one or more counterparts, which taken together shall constitute a
single document.
Section 14. Legend. The Warrants and the shares of
Common Stock issuable upon exercise of the Warrants have not been registered
under the Act. Upon exercise, in part or in whole, of the Warrants,
certificates representing the shares of Common Stock underlying the Warrants
and any of the other securities issuable upon exercise of the Warrants
(collectively, the "Warrant Securities") shall bear the following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED ("THE ACT"), OR ANY STATE
SECURITIES LAWS AND MAY NOT BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID
ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR,
UNLESS, IN THE OPINION OF COUNSEL, IN FORM AND
SUBSTANCE SATISFACTORY TO THE ISSUER, SUCH OFFER,
SALE, OR TRANSFER IS EXEMPT FROM REGISTRATION OR IS
OTHERWISE IN COMPLIANCE WITH THE ACT AND SUCH LAWS.
Section 15. Registration Rights. The Company and
the Registered Holder and its permitted transferees acknowledge and agree that
this Warrant and the shares of Common Stock underlying this Warrant are
subject to a Registration Rights Agreement between the Registered Holder and
the Company dated the date hereof.
11
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused
this Agreement to be duly executed as of the first date above written.
ROM TECH, INC.
By:___________________________________________
Name:_________________________________________
Title:________________________________________
PJM TRADING COMPANY, INC.
By:___________________________________________
Name:_________________________________________
Title:________________________________________
12
<PAGE>
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE
SECURITIES LAWS AND NEITHER THE SECURITIES NOR ANY INTEREST
THEREIN MAY BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR
OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER SUCH ACT OR SUCH LAWS OR AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND SUCH LAWS,
WHICH, IN THE OPINION OF COUNSEL, I N FORM AND SUBSTANCE
SATISFACTORY TO THE ISSUER, IS AVAILABLE.
NO. W-17 VOID AFTER JANUARY 30, 2002
WARRANT CERTIFICATE TO PURCHASE 177,988 SHARES OF COMMON STOCK
of
ROM TECH, INC.
THIS CERTIFIES THAT, FOR VALUE RECEIVED
PJM Trading Company or registered assigns (the "Registered Holder") is the
owner of the number of Common Stock Purchase Warrants (the "Warrants")
specified above. Each Warrant initially entitles the Registered Holder to
purchase, subject to the terms and conditions set forth in this Certificate
and the Warrant Agreement (as hereinafter defined), one fully paid and
nonassessable share of Common Stock, without par value, of Rom Tech, Inc., a
Pennsylvania corporation (the "Company"), at any time beginning on July 30,
1997, and prior to the Expiration Date (as hereinafter defined) upon the
presentation and surrender of this Warrant Certificate with the Subscription
Form on the reverse hereof duly executed, at the corporate office of the
Company, accompanied by payment of $6.00, subject to adjustment (the "Purchase
Price"), in lawful money of the United States of America in cash or by check
made payable to the Company.
This Warrant Certificate and each Warrant represented hereby
are issued pursuant to and are subject in all respects to the terms and
conditions set forth in the Warrant Agreement (the
13
<PAGE>
"Warrant Agreement"), dated as of January 30, 1997, by and between the Company
and the holder thereof.
In the event of certain contingencies provided for in the
Warrant Agreement, the Purchase Price and the number of shares of Common Stock
subject to purchase upon the exercise of each Warrant represented hereby are
subject to modification or adjustment.
Each Warrant represented hereby is exercisable at the option
of the Registered Holder, but no fractional interests will be issued. In the
case of the exercise of less than all the Warrants represented hereby, the
Company shall cancel this Warrant Certificate upon the surrender hereof and
shall execute and deliver a new Warrant Certificate or Warrant Certificates of
like tenor for the balance of such Warrants.
The term "Expiration Date" shall mean 5:00 p.m. (Eastern
Standard Time) on January 30, 2002. If each such date shall in the
Commonwealth of Pennsylvania be a holiday or a day on which the banks are
authorized to close, then the Expiration Date shall mean 5:00 p.m. (Eastern
Standard Time) the next following day which in the Commonwealth of
Pennsylvania is not a holiday or a day on which banks are authorized to close.
This Warrant shall not br exercisable by a Registered Holder
in any state where such exercise would be unlawful.
The Warrant Certificate is exchangeable, upon the surrender
hereof by the Registered Holder at the corporate office of the Company, for a
new Warrant Certificate or Warrant Certificates of like tenor representing an
equal aggregate number of Warrants, each of such new Warrant Certificates to
represent such number of Warrants as shall be designated by such Registered
Holder at the time of such surrender. Upon due presentment and payment of any
tax or other charge imposed in connection therewith or incident thereto, for
registration of transfer of this Warrant Certificate at such office, a new
Warrant Certificate representing an equal aggregate number of Warrants will be
issued to the transferee in exchange therefor, subject to the limitations
provided in the Warrant Agreement.
Prior to the exercise of any Warrant represented hereby, the
Registered Holder shall not be entitled to any rights of a stockholder of the
Company, including, without limitation, the right to vote or to receive
dividends or other distributions, and shall not be entitled to receive any
notice of any proceedings of the Company, except as provided in the Warrant
Agreement.
Prior to due presentment for registration of transfer
hereof, the Company may deem and treat the Registered Holder as the absolute
owner hereof and of each Warrant represented hereby (notwithstanding any
notations of ownership or writing hereon made by anyone other than a duly
authorized officer of the Company) for all purposes and shall not be affected
by any notice to the contrary, except as provided in the Warrant Agreement.
14
<PAGE>
This Warrant Certificate shall be governed by and construed
in accordance with the laws of the Commonwealth of Pennsylvania without giving
effect to conflicts of law.
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed as of the date hereof.
Dated: January 30, 1997
ROM TECH, INC.
By:____________________________________
Name:__________________________________
Title:_________________________________
15
<PAGE>
SUBSCRIPTION FORM
-----------------
To Be Executed by the Registered Holder
in Order to Exercise Warrant
The undersigned Registered Holder hereby
irrevocably elects to exercise Warrants represented by this Warrant
Certificate, and to purchase the securities issuable upon the exercise of such
Warrants, and requests that certificates for such securities shall be issued
in name of
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
_______________________________________
_______________________________________
_______________________________________
(please print or type name and address)
and be delivered to
_______________________________________
_______________________________________
_______________________________________
(please print or type name and address)
and if such number of Warrants shall not be all the Warrants
evidenced by this Warrant Certificate, that a new Warrant Certificate for the
balance of such Warrants be registered in the name of, and delivered to, the
Registered Holder at the address stated below.
Dated:______________ _________________________________
Signature
_________________________________
Print Name
_________________________________
Address
_________________________________
Social Security or Taxpayer
Identification Number
_________________________________
Signature Guaranteed
16
<PAGE>
ASSIGNMENT
To Be Executed by the Registered Holder
In Order to Assign Warrants
FOR VALUE RECEIVED, _______________, hereby sells, assigns and
transfers unto
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
_______________________________________
_______________________________________
_______________________________________
(please print or type name and address)
_______________________________________
____________________________________ of the Warrants represented by this Warrant
Certificate, and hereby irrevocably constitutes and appoints Attorney to
transfer this Warrant Certificate on the books of the Company, with full power
of substitution in the premises.
Dated:________________ x________________________________
Signature Guaranteed
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST
CORRESPOND TO THE NAME AS WRITTEN UPON THE FACE OF THIS WARRANT
CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATSOEVER AND MUST BE GUARANTEED BY A COMMERCIAL BANK OR
TRUST COMPANY OR A MEMBER FIRM OF THE AMERICAN STOCK EXCHANGE, NEW
YORK STOCK EXCHANGE, PACIFIC STOCK EXCHANGE, MIDWEST STOCK EXCHANGE
OR BOSTON STOCK EXCHANGE.
17
<PAGE>
Distribution Agreement
This Agreement (the "Agreement") is made as of the 1st day of May 1997 by and
between, RomTech, Inc., a Pennsylvania Corporation, (the "Manufacturer") with
it's principal place of business located at 2000 Cabot Boulevard, Suite 100,
Langhorne, Pensylvania 19047, Contact: John Baer and GT Interactive Software,
a Delaware Corporation (the "Distributor"), Value Products Division, with it's
principal place of business located at 2300 Berkshire Lane North, Plymouth,
Minnesota 55441, Contact: Timothy Stahl. In consideration of the promises and
covenants set forth below, the parties agree as follows:
For the purposes of this Agreement, the following terms shall have the
respective meanings indicated:
1. The term "Product(s)" shall mean all computer software in the
Addendum of this Agreement.
2. The term "Reseller" shall mean any third party or entity to which
Distributor markets any Products for re-marketing.
3. Manufacturer grants to the Distributor and Distributor accepts from
Manufacturer the right to exclusively distribute the Products and to
market the Products to Resellers located in North America excluding
Micro Center and Frank Kasper and Associates.
4. The initial term of this Agreement shall commence upon the date set
forth above and shall continue for twelve months, unless earlier
terminated as provided herein. The initial term of this Agreement
shall be automatically renewed for successive one (1) year periods
following expiration of the initial or any subsequent term of the
Agreement.
5. Distributor and Manufacturer will set quarterly objectives to be
mutually agreed upon. Objectives will include, but not limited to,
merchandising mechanisms, volumes, and specific retail distribution
goals. Distributor agrees to support all new, mutually agreed upon
products, with an initial order of 5000 units per title. Distributor
and Manufacturer agree to conduct monthly forecast for uninterrupted
supply of Products to Distributor's customers.
6. Delivery of the Products shall be F.O.B. Distributor's warehouse.
Transportation and handling charges for any of the Products shall be
paid by the Manufacturer. Manufacturer will clearly ship products
according to Distributors written instructions.
7. On or after date of shipment, Manufacturer shall invoice Distributor
for the purchase of any of the products sold to the Distributor. All
amounts specified in any net invoice shall be paid by Distributor to
the Manufacturer within (30) days from the date of receipt of the
Products by the Distributor.
8. It is understood by the Manufacturer and Distributor that only
defective Product can he returned upon Manufacturer's authorization.
1
<PAGE>
9. The Manufacturer hereby represents and warrants that it has not
entered into any agreements or commitments which are inconsistent
with or in conflict with the rights granted to Distributor herein;
the Products shall be free and clear of all liens and encumbrances,
and the Products conform in all respects to the Product warranties.
Manufacturer agrees that Distributor shall be entitled to pass
through all warranties granted by Manufacturer under this Agreement.
Manufacturer shall extend to Distributor the same warranties and
indemnification with respect to Products purchased, as Manufacturer
extends to its end-user customers. Neither party shall, under any
circumstances, be liable to the other for consequential, incidental,
indirect or special damages arising out of or related to this
Agreement or the transactions contemplated herein, even if such party
has been apprised of the likelihood of such damages occurring.
10. Distributor shall have the right to utilize Manufacturer's trade name
and any trademarks, service marks and advertising literature
associated with the Products to identify the Products in advertising
and promotional materials.
11. Either party may terminate this Agreement not less than thirty (30)
days after written notice.
12. Wherever one party is required or permitted to give notice to the
other pursuant to this Agreement, such notice shall be deemed given
when delivered in hand, by facsimile, or when mailed by registered or
certified mail, return receipt requested, postage paid, and addressed
as follows:
Manufacturer: Distributor:
RomTech, Inc. GT Interactive Software
2000 Cabot Boulevard, Suite 110 2300 Berkshire Lane North
Langhorne, Pa, 19047 Plymouth, MN 55441
Attn: John Baer Attn: Timothy Stahl
In Witness Thereof, the parties hereto have executed this Agreement by their
duly authorized representatives as of the respective dates indicated below.
MANUFACTURER DISTRIBUTOR
RomTech. Inc, GT Interactive Software
John Baer Timothy Stahl
By_________/s/________ By________/s/________
Authorized Signature Authorized Signature
Title ________________ Title _______________
Date _________________ Date ________________
2
<PAGE>
RomTech, Inc. Exhibit 11.1
Computation of Loss Per Share
<TABLE>
<CAPTION>
Years ended June 30,
-----------------------------
1997 1996
---- ----
<S> <C> <C>
Net loss attributable to common stock ($2,210,359) ($2,998,480)
============ ============
Weighted average common shares outstanding, unadjusted 6,380,517 - 0 -
Adjustments to common and common equivalent shares outstanding:
Weighted average common shares outstanding represented by the shares
received by the stockholders of AOMC in connection with the reverse
acquisition, and recorded as a recapitalization of the previously
outstanding common stock of AOMC. Such shares have been retroactively
restated to reflect the effect of the recapitalization for all periods
presented. - 0 - 1,575,000
Weighted average common shares outstanding represented by the shares
received by the stockholders and holders of convertible subordinated
debt of VRLI in connection with the merger. Such shares have been
retroactively restated to reflect the effect of the
recapitalization for all periods presented. - 0 - 1,284,440
Weighted average common shares outstanding of the Company at the time of
the merger with AOMC and shares issued in connection with the IPO and
the exercise of warrants. - 0 - 2,395,112
--------- ---------
6,380,517 5,254,552
--------- ---------
Net loss per common and common equivalent share ($0.35) ($0.57)
======= =======
</TABLE>
<PAGE>
Exhibit 21
Subsidiaries
Name State of Incorporation
---- ----------------------
Virtual Reality Laboratories, Inc. Pennsylvania
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
RomTech, Inc.
We consent to incorporation by reference in the registration
statements (No.'s 333-23709 and 333-26305) on Form S-3 of RomTech, Inc. of our
report dated September 17, 1997, relating to the consolidated balance sheet of
RomTech, Inc. and subsidiary as of June 30, 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
years in the two-year period ended June 30, 1997, which report appears in the
June 30, 1997 Annual Report on Form 10-KSB of RomTech, Inc.
/s/ KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
September 24, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 445,474
<SECURITIES> 0
<RECEIVABLES> 1,033,472
<ALLOWANCES> 69,209
<INVENTORY> 369,582
<CURRENT-ASSETS> 2,098,833
<PP&E> 187,507
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,532,977
<CURRENT-LIABILITIES> 988,851
<BONDS> 0
<COMMON> 4,368,736
0
3,415,899
<OTHER-SE> 1,148,550
<TOTAL-LIABILITY-AND-EQUITY> 2,532,977
<SALES> 4,382,693
<TOTAL-REVENUES> 4,382,693
<CGS> 1,571,064
<TOTAL-COSTS> 1,571,064
<OTHER-EXPENSES> 4,412,720
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 48,104
<INCOME-PRETAX> (1,649,195)
<INCOME-TAX> 1,730
<INCOME-CONTINUING> (1,650,925)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,650,925)
<EPS-PRIMARY> (.35)
<EPS-DILUTED> (.35)
</TABLE>
