<PAGE>
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-QSB
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-27102
ROMTECH, INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2694937
------------------------------ ----------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
2000 Cabot Boulevard West, Suite 110
Langhorne, PA 19047-1833
(address of Principal executive offices)
Issuer's Telephone Number, Including Area Code: 215-750-6606
Not Applicable
(Former name, former address and former
fiscal year, if changed since last report.)
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes ( X ) No ( )
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes ( ) No ( )
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 6,482,730 shares of common
stock, no par value per share, as of May 8, 1997. Transitional Small Business
Disclosure Format (check one):
Yes ( ) No ( X )
- --------------------------------------------------------------------------------
<PAGE>
RomTech, Inc.
INDEX
Page
----
Part I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheet as of March 31,1997, with Pro Forma
information.................................................... 3
Consolidated Statements of Operations for the three and nine months
ended March 31, 1997 and 1996................................... 4
Consolidated Statements of Cash Flows for the nine months ended
March 31, 1997 and 1996 ....................................... 5-6
Notes to Consolidated Financial Statements ......................7-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................12-14
Part II. Other Information
Item 2. Changes in Securities............................................
Exhibit Index.................................................... 15
Financial Data Schedule.......................................... 16
Signatures....................................................... 17
2
<PAGE>
RomTech, Inc.
Consolidated Balance Sheet
(Unaudited)
Pro Forma
March 31,
March 31, 1997
ASSETS 1997 (Note 4)
---- --------
Current assets:
Cash and cash equivalents $ 111,333 $ 1,192,961
Restricted cash 14,788 14,788
Accounts receivable, net of allowance
for doubtful accounts of $76,807 804,777 804,777
Inventory 441,333 441,333
Prepaid expenses 424,696 424,696
----------- -----------
Total current assets 1,796,927 2,878,555
Furniture and equipment, net 186,284 186,284
Other assets 262,490 262,490
----------- -----------
Total assets $ 2,245,701 $ 3,327,329
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 128,440 $ 128,440
Accounts payable 896,613 896,613
Accrued expenses 389,156 389,156
Capital lease obligations 28,210 28,210
----------- -----------
Total current liabilities 1,442,419 1,442,419
Capital lease obligations net of
current portion 53,918 53,918
Notes payable-long term portion 305,992 305,992
Convertible subordinated debt 150,000 150,000
----------- -----------
Total liabilities 1,952,329 1,952,329
Stockholders' equity:
Convertible preferred stock 2,169,627 3,106,627
Common stock, no par value (40,000,000
shares authorized; 6,482,730 issued
and outstanding) 4,316,861 4,316,861
Additional paid in capital 1,012,866 1,157,494
Accumulated deficit (7,205,982) (7,205,982)
----------- -----------
Total stockholders' equity 293,372 1,375,000
----------- -----------
Total liabilities and
stockholders' equity $ 2,245,701 $ 3,327,329
=========== ===========
See accompanying notes to the consolidated financial statements.
3
<PAGE>
RomTech, Inc.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
------------------ -----------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenues $ 746,235 $ 798,229 $ 3,100,718 $ 2,102,461
Cost of revenues 308,210 374,003 990,706 807,070
----------- ----------- ----------- -----------
Gross profit 438,025 424,226 2,110,012 1,295,391
Operating expenses:
Product development 126,162 181,858 405,441 484,040
Selling, general and
administrative 1,024,884 1,019,942 2,980,748 2,119,585
----------- ----------- ----------- -----------
Total operating expenses 1,151,046 1,201,800 3,386,189 2,603,625
Operating loss (713,021) (777,574) (1,276,177) (1,308,234)
Interest (expense) income, net (16,304) 19,396 (44,784) (59,493)
----------- ----------- ----------- -----------
Loss before taxes (729,325) (758,178) (1,320,961) (1,367,727)
Provision for income tax 1,730 -- 1,730 800
----------- ----------- ----------- -----------
Net loss (731,055) (758,178) (1,322,691) (1,368,527)
Accretion of Preferred Stock dividend (141,429) -- (228,287) --
----------- ----------- ----------- -----------
Net loss attributable to common stock $ (872,484) $ (758,178) $(1,550,978) $(1,368,527)
=========== =========== =========== ===========
Net loss per common share $ (0.14) $ (0.12) $ (0.25) $ (0.28)
=========== =========== =========== ===========
Weighted average common
shares outstanding 6,416,863 6,233,243 6,329,040 4,921,097
</TABLE>
See accompanying notes to the consolidated financial statements.
4
<PAGE>
RomTech, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
March 31,
-----------------
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,322,691) $(1,368,527)
Adjustment to reconcile net loss to net
cash from operating activities:
Depreciation and amortization 102,015 112,093
Loss on disposal of equipment 3,921 --
Interest expense incurred but not paid -- 55,000
Changes in items affecting operations
net of effect from acquired businesses:
Restricted cash (14,788) 1,683
Accounts receivable (379,479) 172,992
Prepaid expenses (383,286) (32,650)
Inventory (236,112) (110,784)
Accounts payable 520,446 220,215
Accrued expenses (314,933) (24,674)
----------- -----------
Net cash used in operating activities (2,024,907) (974,652)
Cash flows from (used in) investing activities:
Sales and maturities of short term investments 398,952 399,764
Purchase of short term investments -- (1,192,404)
Purchase of furniture and equipment (53,136) (112,124)
Purchase of software rights and other assets (216,857) (43,663)
Loan to (repayments from) related party 2,000 (5,500)
----------- -----------
Net cash provided by (used in) investing activities 130,959 (953,927)
Cash flows from financing activities:
Net proceeds of initial public offering of
common stock 3,623,796
Net proceeds from issuance of convertible
preferred stock 1,105,812 --
Proceeds from exercise of warrants -- 100,000
Proceeds from convertible subordinated debt -- 300,000
Net (repayments) advances of factored receivable -- (192,776)
Net (repayments) advances to officers -- (26,366)
Repayment of note payable (27,368) (36,672)
Repayment of lease obligations (27,826) (35,388)
----------- -----------
Net cash provided by financing activities 1,050,618 3,732,594
Net increase (decrease) in cash and cash
equivalents (843,330) 1,804,015
Cash and cash equivalents:
Beginning of period 954,663 85,173
----------- -----------
End of period $ 111,333 $ 1,889,188
=========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
5
<PAGE>
RomTech, Inc.
Consolidated Statements of Cash Flows (continued)
(Unaudited)
Nine months ended
March 31,
---------------------------
1997 1996
Supplemental cash flow information:
Cash paid for interest $ 65,051 $ 55,291
============= ==========
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 $ -- $1,886,452
============= ==========
Net liabilities assumed in reverse acquisition
by issuance of common stock $ -- $ 92,219
============= ==========
Capital lease additions $ 81,643 $ --
============= ==========
Conversion of debt for $100,000 of convertible
preferred stock and $100,000 exercise
of common stock warrants $ 200,000 $ --
============= ==========
Conversion of debt for common stock $ -- $ 68,555
============= ==========
See accompanying notes to the consolidated financial statements.
6
<PAGE>
RomTech, Inc.
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited interim consolidated financial statements
were prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. The Notes to Consolidated Financial
Statements included in the Form 10-KSB for the fiscal year ended June 30, 1996
should be read in conjunction with the accompanying statements. These statements
include all adjustments (consisting only of normal recurring adjustments) which
the Company believes are necessary for a fair presentation of the statements.
The interim operating results are not necessarily indicative of the results for
a full year.
The accompanying consolidated financial statements as of March 31, 1997
include the accounts of RomTech, Inc., ("RomTech"), which successfully completed
an initial public offering on October 18, 1995 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 1996 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 March 31, 1996 - RomTech, AOMC and VRLI
o July 1, 1996 to March 31, 1997 - RomTech, AOMC and VRLI
Description of Business
RomTech, Inc. (the "Company") is a Pennsylvania Corporation which was
incorporated in July 1992. The Company develops, publishes, markets and is a
reseller of a diversified line of personal computer software for consumer,
educational and business applications. The Company's sales are primarily made to
a large national distributor that sells through retail stores. The Company also
sells its products by direct mail, via the internet and in jewel case packaging
at computer trade shows.
Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, Virtual Reality Laboratories, Inc. All
intercompany balances and transactions have been eliminated.
2. Completion of Pubic Offering/ Merger
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
7
<PAGE>
RomTech, Inc.
Notes to Consolidated Financial Statements
2. Completion of Pubic Offering/ Merger (continued)
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.
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.
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.
3. Liquidity
As of March 31, 1997, the Company's cash and working capital balances
were $111,000 and $355,000, respectively. At March 31, 1997 the Company did not
satisfy the minimum level of stockholders' equity required to be listed
($1,000,000) for trading on the Nasdaq SmallCap Market(tm) and thorugh March 31,
1997 the Company continued to operate at a loss. During the nine months ended
March 31, 1997, the Company successfully completed the private placement of
Class Two Convertible Preferred Stock resulting in $1,128,000 in net proceeds.
As of April 22, 1997, the Company completed the private placement of Class Three
Convertible Preferred Stock resulting in $1,060,000 in net proceeds.
Additionally, Odyssey Capital Group L. P., a shareholder of the Company,
purchased $200,000 of notes payable previously due Ballyshannon Partners L. P.,
another shareholder of the Company, and converted $100,000 of the debt to
acquire a portion of the Class Two Convertible Preferred Stock and then
converted the remaining $100,000 of the debt to exercise warrants to purchase
198,687 shares of Common Stock. The loss of $1,323,000 for the nine months ended
March 31, 1997 offset the net equity proceeds from the aforementioned
transactions. Total stockholders' equity was $1,375,000 at March 31, 1997 on a
pro forma basis (see the pro forma balance sheet included with this report). The
Company continues to seek additional capital to, among other things, maintain
its stockholders' equity at least at the minimum level required by the Nasdaq
SmallCap Market. At May 15, 1997 the Company is in compliance with the minimum
level of stockholders' equity for listing on the Nasdaq SmallCap Market.
8
<PAGE>
RomTech, Inc.
Notes to Consolidated Financial Statements
3. Liquidity (continued)
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 plans to raise additional capital and it will seek such
funding through additional public or private financings. 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. Currently, the Company has no significant
capital expenditure commitments.
4. Private Placements
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 Stock") 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 Stock 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
Stock 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 a price equal to the lesser of
(i) $6.25 or (ii) the average of the closing bid price of the Company's Common
Stock on the Nasdaq SmallCap Market, or the primary securities exchange on which
the Common Stock is then quoted, plus $1.25, for the ten business days
immediately preceding the date on which the Securities and Exchange Commission
declares effective the registration statement filed by the Company pursuant to
the Registration Rights Agreement between the Company and the purchasers of the
Class Two Preferred Stock. The Class Two Preferred Stock 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 Stock surrendered for
conversion divided by the conversion price, which will be the lower of (i) $3.97
or (ii) ninety percent (90%) of the average of the closing bid price of the
Company's Common Stock for the ten (10) business days immediately preceding the
date on which the Securities and Exchange Commission declares effective the
registration statement registering the shares for resale. Of the 1,271,340
shares of Class Two Preferred Stock sold, 1,171,340 shares were issued as of
November 15, 1996, and therefore become convertible into Common Stock on May 15,
1997. The remaining 100,000 shares of Class Two Preferred Stock become
convertible on July 30, 1997.
The aforementioned sales of securities may 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 Stock and the Class Three
Preferred Stock (as hereinafter defined) contain "in the money" conversion
features that will be accounted for in a manner similar to a preferred stock
dividend. The intrinsic value of the "in the money" conversion feature of the
Class Two Preferred Stock is estimated to be $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.
9
<PAGE>
RomTech, Inc.
Notes to Consolidated Financial Statements
4. Private Placements (continued)
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 Stock. The terms and conditions of the Adviser Warrants are identical
to the Warrants, 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 Stock") 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 Stock 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 Stock 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. One-half of the Class Three Preferred Stock is
convertible at the option of the holders beginning five days following the date
that the SEC declares effective the registration statement registering the
shares of Common Stock issuable upon conversion of the Class Three Preferred
Stock for resale (the "First Conversion Date"). The remaining one-half of the
Class Three Preferred Stock will become convertible thirty days after the First
Conversion Date. The conversion price per share (the "Conversion Price") for the
Class Three Preferred Stock will range 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.
The Company incurred expenses of approximately $168,000 in connection
with the private placement of the Class Three Preferred Stock and realized net
proceeds of approximately $1,082,000 (see the Consolidated Pro Forma Balance
Sheet on page 3 of this report).
The issuance of the Class Three Preferred Stock has resulted in
anti-dilution adjustments to the Company's Class Two Preferred Stock in
accordance with the terms of the Class Two Preferred Stock.
The aforementioned sales of securities may 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 certain securities issued by the Company
contain "in the money" conversion features that will be accounted for in a
manner similar to a preferred stock dividend. The estimated intrinsic value of
the "in the money" conversion feature is $313,000 (see the Consolidated Pro
Forma Balance Sheet on page 3 of this report).
The Company paid to H.J. Meyers & Co., Inc. ("H.J. Meyers"), as
placement agent of the Class Three Convertible Preferred Stock and the 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 Stock. H.J. Meyers was also granted
7,000 shares of Common Stock (the "Agent Shares") which the Company has agreed
to register 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 Stock, the Class Three Preferred Stock, and the Common Stock
issuable upon exercise of the Warrants, the Advisor Warrants, and the Class
Three Warrants.
10
<PAGE>
RomTech, Inc.
Notes to Consolidated Financial Statements
4. Private Placements (continued)
The adjustments that were recorded to reflect the effect of the private
placement of the Class Three Preferred Stock in the Pro Forma Balance Sheet at
March 31, 1997 reflect the $1,250,00 of Class Three Preferred Stock issued net
of offering costs of $168,872 and the estimated value of the "in the money"
conversion feature of $313,000.
5. Other Matters
Acquisition
On September 27, 1996, the Company entered into an agreement in
principle to acquire FileABC(tm), a Nevada Limited Partnership, ("FileABC"). The
terms of the agreement were amended on October 18, 1996 whereby the Company
would acquire FileABC in exchange for $325,000 in cash in addition to the
interim payments of $50,000 on July 17, 1996 and $125,000 on October 30, 1996.
Additionally, a maximum of 1,200,000 shares were to be paid to FileABC for each
$1,000,000 of revenues generated from the sale of FileABC's current software
product and any enhancements or derivative products on or before March 31, 2000.
FileABC develops, publishes and markets document imaging, management and
archiving software for the Windows(tm) operating systems. The completion of the
acquisition of FileABC was subject to certain conditions, including the
condition that FileABC continue to have a distribution relationship with
Franklin Quest Company ("Franklin Quest") for the distribution of software
products.
On March 27, 1997 the Company was informed that Franklin Quest had
provided ninety days notice to FileABC of its intent to cancel its distribution
relationship with FileABC. If Franklin Quest does terminate its distribution
relationship with FileABC, the Company, in all likelihood, will not complete the
acquisition of FileABC. The Company will continue to evaluate the recoverability
of the amounts previously provided to FileABC as the situation develops.
11
<PAGE>
RomTech, Inc.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
The accompanying consolidated financial statements as of March 31, 1997 include
the accounts of RomTech, Inc. ("RomTech"), which successfully completed an
initial public offering on October 18, 1995 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 1996 consolidated 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:
July 1, 1995 to October 17, 1995 - AOMC and VRLI
October 18, 1995 to March 31, 1996 - RomTech, AOMC and VRLI
July 1, 1996 to March 31, 1997 - RomTech, AOMC and VRLI
Management believes that the results of operations for the three months and nine
months ended March 31, 1997 may not be indicative of anticipated future results
because of significant changes to be made in the combined businesses of AOMC,
Rom Tech and Virtual Reality (see note 2 to the financial statements). The
acquisition of Virtual Reality was accounted for using the pooling-of-interests
method of accounting, and accordingly the Company's historical consolidated
financial statements have been restated to include the accounts and results of
operations of Virtual Reality.
Results of Operations
Three Months Ended March 31, 1997 and 1996
Net revenues for the three months ended March 31, 1997 were $746,000 compared to
$798,000 for the three months ended March 31, 1996, representing a decrease of
$52,000 or 6.5%. This decrease resulted primarily from decreases in the
distribution of the Company's products through the retail channel.
Cost of revenues consist primarily of packaging costs (boxes and jewel cases),
CD-ROM replication activities through third party vendors, freight and royalty
expenses. The cost of revenues for the three months ended March 31, 1997 was
$308,000 compared to $374,000 for the three months ended March 31, 1996,
representing a decrease of $66,000 or 17.6% due from the decrease in revenues
and the improvement in the gross profit percentage. The Company's gross profit
margin increased to 58.7% for the three months ended March 31, 1997 from 53.1%
for the three months ended March 31, 1996.
Product development expenses consist primarily of personnel costs, supplies and
product testing. Product development expenses for the three months ended March
31, 1997 were $126,000 compared to $182,000 for the three months ended March 31,
1996, a decrease of $56,000 or 30.8%. This decrease was caused primarily by a
reduction in third party software contractor expenses of $70,000, which was
partially offset by an increase in salary-related costs of $20,000.
Selling, general and administrative expenses for the three months ended March
31, 1997 were $1,025,000 compared to $1,020,000 for the three months ended March
31, 1996 representing an increase of $5,000 or 0.5%. The increase was caused
primarily by increases in salary-related costs of $60,000, advertising costs of
$34,000 and occupancy costs of $12,000, which were partially offset by decreases
in professional fees of $31,000, depreciation expense of $39,000 and bad debt
expense of $31,000.
Net interest expense for the three months ended March 31, 1997 was $16,000
compared to net interest income of $19,000 for the three months ended March 31,
1996, an increase of $35,000 net interest expense. This increase was caused
primarily by a $33,000 reduction in interest income due to the significant
reduction in cash available for investment at March 31, 1997 compared to March
31, 1996.
12
<PAGE>
RomTech, Inc.
Management's Discussion and Analysis of Financial Condition and
Results of Operations (cont.)
Nine months Ended March 31, 1997 and 1996
Net revenues for the nine months ended March 31, 1997 were $3,101,000 compared
to $2,102,000 for the nine months ended March 31, 1996, representing an increase
of $999,000 or 47.5%. This increase resulted primarily from increases of
approximately $700,000 in sales relating to the distribution of the Company's
consumer products series, (Galaxy of Games series) through retail channels and
the distribution of approximately $250,000 of the Company's office productivity
products mainly through direct mail.
Cost of revenues, consists primarily of packaging costs (boxes and jewel cases),
CD-ROM replication activities through third party vendors, freight and royalty
expenses. The cost of revenues for the nine months ended March 31, 1997 was
$991,000 compared to $807,000 for the nine months ended March 31, 1996,
representing an increase of $184,000 or 22.8% due mainly from the increase in
revenues. The Company's gross profit margin increased to 68.0% in the nine
months ended March 31, 1997 from 61.6% for the nine months ended March 31, 1996.
Product development expenses consist primarily of personnel costs, supplies and
product testing. Product development expenses for the nine months ended March
31, 1997 were $405,000 compared to $484,000 for the nine months ended March 31,
1996, a decrease of $79,000 or 16.3%. This decrease was caused primarily by a
reduction in contractor expenses of $77,000.
Selling, general and administrative expenses for the nine months ended March 31,
1997 were $2,981,000 compared to $2,120,000 for the nine months ended March 31,
1996 representing an increase of $861,000 or 40.6%. The increase was due
primarily from increases in salary-related costs of $349,000, occupancy costs of
$54,000, professional fees of $238,000, advertising costs of $195,000,
amortization costs of $36,000 and promotional expenses of $20,000, which were
partially offset by a decrease in bad debt expense of $39,000.
Net interest expense for the nine months ended March 31, 1997 was $45,000
compared to $59,000 for the nine months ended March 31, 1996, a decrease of
$14,000 or 23.7%. This decrease was due primarily from the reduction of long
term debt related to the Merger between RomTech, Inc. and AOMC and the
investment of the proceeds from the IPO.
Liquidity and Capital Resources
The financial information presented reflects the Company's financial position at
March 31, 1997.
As of March 31, 1997, the Company's cash and working capital balances were
$111,000 and $355,000, respectively. At March 31, 1997 the Company did not
satisfy the minimum level of stockholders' equity required to be listed
($1,000,000) for trading on the Nasdaq SmallCap Market(tm) and thorugh March 31,
1997 the Company continued to operate at a loss. During the nine months ended
March 31, 1997, the Company successfully completed the private placement of
Class Two Convertible Preferred Stock resulting in $1,128,000 in net proceeds.
As of April 22, 1997, the Company completed the private placement of Class Three
Convertible Preferred Stock resulting in $1,060,000 in net proceeds.
Additionally, Odyssey Capital Group L. P., a shareholder of the Company,
purchased $200,000 of notes payable previously due Ballyshannon Partners L. P.,
another shareholder of the Company, and converted $100,000 of the debt to
acquire a portion of the Class Two Convertible Preferred Stock and then
converted the remaining $100,000 of the debt to exercise warrants to purchase
198,687 shares of Common Stock. The loss of $1,323,000 for the nine months ended
March 31, 1997 offset the net equity proceeds from the aforementioned
transactions. Total stockholders' equity was $1,375,000 at March 31, 1997 on a
pro forma basis (see the pro forma balance sheet included with this report). The
Company
13
<PAGE>
RomTech, Inc.
Management's Discussion and Analysis of Financial Condition and
Results of Operations (cont.)
will continue to seek additional capital to, among other things, maintain its
stockholders' equity at least at the minimum level required by the Nasdaq
SmallCap Market. At May 15, 1997 the Company is in compliance with the minimum
level of stockholders' equity for listing on the Nasdaq SmallCap Market.
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 plans to raise additional capital and it will seek such funding through
additional public or private financings. 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. Currently, the Company has no significant capital expenditure
commitments.
On September 27, 1996, the Company entered into an agreement in principle to
acquire FileABC(TM), a Nevada Limited Partnership, ("FileABC"). The terms of the
agreement were amended on October 18, 1996 whereby the Company would acquire
FileABC in exchange for $325,000 in cash in addition to the interim payments of
$50,000 on July 17, 1996 and $125,000 on October 30, 1996. Additionally, a
maximum of 1,200,000 shares were to be paid to FileABC for each $1,000,000 of
revenues generated from the sale of FileABC's current software product and any
enhancements or derivative products on or before March 31, 2000. FileABC
develops, publishes and markets document imaging, management and archiving
software for the Windows(TM) operating systems. The completion of the
acquisition of FileABC was subject to certain conditions, including the
condition that FileABC continue to have a distribution relationship with
Franklin Quest Company ("Franklin Quest") for the distribution of software
products.
On March 27, 1997 the Company was informed that Franklin Quest had provided
ninety days notice to FileABC of its intent to cancel its distribution
relationship with FileABC. If Franklin Quest does terminate its distribution
relationship with FileABC, the Company, in all likelihood, will not complete the
acquisition of FileABC. The Company will continue to evaluate the recoverability
of the amounts previously provided to FileABC as the situation develops.
Part II. Other Information
Item 2(c). Recent Sales of Unregistered Securities.
The information contained in Note 4 to the Company's Consolidated
Financial Statements, as set forth in Item 1 of Part I, regarding the private
placement of unregistered securities of the Company is hereby incorporated by
reference.
14
<PAGE>
RomTech, Inc.
Exhibit Index
Exhibit No. Description of Exhibit Page Number
- ----------- ---------------------- -----------
*4.1 Certificate of Designation, Preferences, Powers, Rights
and Number of Shares of Class Two Convertible Preferred
Stock
*4.2 Form of Purchase Agreement for the Class Two
Convertible Preferred Stock (the "Class Two Preferred")
dated as of November 15, 1996
*4.3 Form of Warrant Agreement for the Warrants (the
"Warrants") issued to the holders of the Class Two
Preferred dated as of November 15, 1996
*4.4 Form of Registration Rights Agreement for the Common
Stock underlying the Class Two Preferred and the
Warrants dated as of November 15, 1996
*4.5 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
**4.6 Purchase Agreement dated January 30, 1997 between
RomTech, Inc. and Odyssey Capital Group, L.P.
**4.7 Agreement dated January 30, 1997 between RomTech, Inc.
and Odyssey Capital Group, L.P.
**4.8 Registration Rights Agreement dated January 30, 1997
between RomTech, Inc. and Odyssey Capital Group, L.P.
***4.9 Certificate of Designation, Preferences, Powers, Rights
and Number of Shares of Class Three Convertible
Preferred Stock
***4.10 Form of Securities Purchase Agreement for the Class
Three Convertible Preferred Stock (the "Class Three
Preferred")
***4.11 Form of Warrant Agreement for the Warrants (the "Class
Three Warrants") issued to he holders of the Class
Three Preferred
***4.12 Form of Registration Rights Agreement for the Common
Stock underlying the Class Three Preferred and the
Class Three Warrants
****10.1 Asset Acquisition Agreement Between RomTech, Inc. and
FileABC, LP
27.1 Financial Data Schedule 16
- --------------------
* Incorporated by reference herein from the Registrant's Form 8-K
as filed with the Securities and Exchange Commission on November
27,1996.
** Incorporated by reference herein from the Registrant's Form 8-K
as filed with the Securities and Exchange Commission on February
4, 1997.
*** Incorporated by reference herein from the Registrant's Form 8-K
as filed with the Securities and Exchange Commission on April 9,
1997.
**** Incorporated by reference herein from the Registrant's Form 10-Q
as filed with the Securities and Exchange Commission on November
14, 1996.
15
<PAGE>
RomTech, Inc.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ROMTECH, INC.
(Registrant)
Date: May 15, 1997 /s/ Joseph A. Falsetti
------------ -------------------------
Joseph A. Falsetti
Chief Executive Officer
Principal Financial Officer
Date: May 15, 1997 /s/ Gerald W. Klein
------------ -------------------------
Gerald W. Klein
Vice President and
Chief Financial Officer
16
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> MAR-31-1997
<CASH> 111,333
<SECURITIES> 0
<RECEIVABLES> 804,777
<ALLOWANCES> 76,807
<INVENTORY> 441,333
<CURRENT-ASSETS> 1,796,927
<PP&E> 186,284
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,245,701
<CURRENT-LIABILITIES> 1,442,419
<BONDS> 0
0
2,169,627
<COMMON> 4,316,861
<OTHER-SE> 1,012,866
<TOTAL-LIABILITY-AND-EQUITY> 2,245,701
<SALES> 3,100,718
<TOTAL-REVENUES> 3,100,718
<CGS> 990,706
<TOTAL-COSTS> 990,706
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 44,784
<INCOME-PRETAX> (1,320,961)
<INCOME-TAX> 1,730
<INCOME-CONTINUING> (1,322,691)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,322,691)
<EPS-PRIMARY> (.25)
<EPS-DILUTED> (.25)
</TABLE>
