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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, 1998
[ ] 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:
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Title of each class Name of each exchange on which registered
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COMMON STOCK, NO PAR VALUE NASDAQ
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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: $9,276,000
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. $9,168,000 as of August 26, 1998.
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: 9,371,200 shares of common
stock, no par value per share, as of August 26, 1998. Transitional Small
Business Disclosure Format (check one): Yes ( ) No ( X )
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive proxy statement for its 1998 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.
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ROMTECH, INC.
FORM 10-KSB
FOR THE FISCAL YEAR ENDED JUNE 30, 1998
INDEX
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Page
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PART I
Item 1. Business..................................................................... 3
Item 2. Properties................................................................... 14
Item 3. Legal Proceedings............................................................ 14
Item 4. Submission of Matters to a Vote of Security Holders.......................... 14
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters..... 15
Item 6. Management's Discussion and Analysis of Results of Operations
and Financial Condition...................................................... 16
Item 7. Financial Statements ........................................................ 20
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..................................................... 36
PART III
Item 9. Directors and Executive Officers of the Registrant........................... 37
Item 10. Executive Compensation....................................................... 37
Item 11. Security Ownership of Certain Beneficial Owners and Management............... 37
Item 12. Certain Relationships and Related Transactions............................... 37
PART IV
Item 13. Exhibits and Reports on Form 8-K............................................. 38
Index of Exhibits....................................................................... 38
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 9
to 13.
ITEM 1. BUSINESS
GENERAL
RomTech, Inc. (the "Company") a Pennsylvania corporation incorporated in July
1992, develops, publishes, markets and sells a diversified line of personal
computer software primarily for consumer entertainment and small office/home
office 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 and other smaller
acquisitions together with the Company's own internal development efforts, the
Company offers software titles in the game, personal/business productivity,
education, 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), Galaxy of Arcade(TM), and
Game Master (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. All Galaxy Series titles are "Family Friendly", which
means they are easy-to-use, non-violent, appeal to all ages and are
differentiated with the distinctive Family Friendly(TM) logo. The Company's
Galaxy of Games, Galaxy of Home Office Help and Galaxy of Arcade products
generally sell for under $15, a price point intended to generate impulse
purchases in mass market shopping environments. The Company's Game Master
products generally sell for $19.95 but feature packaging and content usually
found in software titles selling for more than $40.
INDUSTRY BACKGROUND
The worldwide consumer software market has grown dramatically in recent years,
driven by the increasing installed base of multimedia PCs in the home, the
proliferation of software titles, and the development of new and expanding
distribution channels. Rapidly declining prices of microprocessors and CD-ROM
drives have made high-end interactive computer entertainment more affordable,
and have resulted in low-end PCs costing $500, or even less, targeted to the
mass market or "casual users".
The worldwide consumer software industry has also recently undergone a number
of profound changes with the introduction of new hardware platforms and new
technologies, such as on-line networks and the Internet. The proliferation of
on-line networks and the Internet has created new opportunities for the
consumer software industry, including on-line game playing by users in various
locations and direct on-line marketing, sales and distribution to end users.
Growth in the installed base of multimedia PCs has created a mass market for
consumer software products. The development of a mass market for software
products has been characterized by the rise in importance of mass merchant
software sales as a distribution channel, increasing price pressure as well as
competition for retail shelf space. This increased competition has emphasized
the importance of marketing, merchandising and brand name recognition. Faced
with the challenges of marketing and distribution, many independent software
developers and
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content providers are pursuing relationships with publishing companies with
broader distribution capabilities, including better access to mass market
retailers and greater merchandising, marketing and promotional support. At the
same time, retailers with limited shelf space are faced with the challenge of
managing an increasing number of new titles. A significant result of these
market pressures is a trend in the a industry toward the consolidation of
software companies and the diversification of products offered by such
companies.
The Company believes that its success in the industry will be achieved by
focusing on its "Family Friendly" products, creating significant brand name
recognition, establishing strong distribution and retail relationships, and
consistently offering a diversified high-quality, high-value software portfolio
providing significant sell-through and return-on-investment opportunities for
retailers of all kinds.
BUSINESS STRATEGY
The worldwide market of PC users in the home and small office represents the
primary market for the Company's products. Nearly 50% of all U.S. families are
expected to own a personal computer by the end of 1998, up from 45 percent at
the end of 1997, according to ZD Market Intelligence, a La Jolla, California
market-research firm. 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
consumer entertainment and small office/home office personal productivity
segments of the market. 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 market research, is 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 product
content 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, 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 its
products and revises or upgrades products in response to consumer feedback
gained from consumer's registration of products they have purchased.
Develop Efficient Distribution Channels and Expand Internet Strategies. 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. Additionally, the Company believes that the
proliferation of the Internet and on-line networks has created new
opportunities for the consumer software industry, including opportunities for
the Company to strengthen customer relationships, to effect direct marketing,
promotion and distribution, to broaden its
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reach to new customers, to add value to existing products and to develop new
products and markets. The Company has initiated steps to take advantage of
these opportunities, including the expansion of its site on the World Wide Web
and the development of its Internet infrastructure and capabilities, including
electronic distribution capabilities, incorporation of on-line functionality
into existing products, and continued development of, and investment in, new
Internet-based business and products, including multi-user entertainment
products. In order to reduce the resources required for effective distribution,
the Company intends to incorporate Internet capabilities into 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 before purchasing them.
Market Brand Names That Deliver Consistent Quality. The Company focuses 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, the Company believes that
the 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. During its first two years as a
public company, the Company did not achieve 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 be profitable in fiscal 1998. 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 as personal
computer prices continue to decline. 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 a large national distributor, Slash Corporation
("Slash"), which is a division of GT Interactive Software Corporation ("GTIS"),
for its retail sales in North America while using the Internet to market and
distribute software directly to consumers. Internet sales currently account
for an insignificant portion of the Company's sales. The Company presently
has an exclusive distribution agreement with Slash covering distribution of the
Company's products to retailers in North America. Slash accounted for
approximately 35% and 81% of the Company's net sales during fiscal 1997 and
1998, respectively. The Company believes that for the year ending June 30,
1999, Slash could account for approximately 85% of the Company's net sales (see
Dependence on Distributor and Associated Credit Risk, page 9). As reported in
GTIS's Form 10-K filed with the Securities and Exchange Commission for the year
ended December 31, 1997, GTIS believes that it is currently the largest
distributor of consumer software to mass merchants in the United States, and
that it is also the largest supplier of consumer software (including its own
and third-party published software) to approximately 2,325 stores of
Wal-Mart(TM) Stores, Inc. ("Wal-Mart") and approximately 790 Target(TM) stores.
GTIS also supplies value-priced software under specially designed programs to
approximately 2,115 Kmart(TM) stores. Retailers that purchase the Company's
products through Slash 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 currently distributes its products in Australia, Belgium, Brazil,
China (Hong Kong), Colombia, Italy, Mexico, Netherlands, New Zealand, Norway,
Philippines, Singapore, South Africa, the United Kingdom and Venezuela. The
Company is currently in the final stages of negotiations for distribution
agreements in Argentina, Chile, France, Germany, Portugal, Spain and other
Scandinavian countries.
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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, stocking levels are adequate, promotions and advertising are
coordinated with product releases and 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 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). 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. (See
Dependence on Distributor and Associated Credit Risks, page 9)
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
with limited resources to very large corporations with greater financial,
marketing, distribution, technical and other resources than the Company.
Although there are a variety of consumer and business software publishers,
based on product lines and price points, Cendant Software, The Learning
Company, Expert Software, GT Interactive, Electronic Arts, Humongous (a
subsidiary of GT Interactive), Cosmi, Microsoft, Activision, Interplay, Hasbro
Interactive and Virgin 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
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existing products. Extensive price competition, reduced demand, or
distribution channel changes may have a material adverse effect on the
Company's business, financial condition, liquidity and operating results.
The market is also extremely competitive with respect to access to third-party
developers and content providers. To the extent that competitors achieve
better access to distribution channels, have greater financial resources to pay
for development fees or royalties, or have developed a widely-recognized
reputation, the Company may not be successful in competing for the most
sought-after content for its products.
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") oversees 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 to achieve a "better than" positioning relative to direct
competitive products. 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 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 the intended 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 licensed technology are
generally paid through royalties based on actual sales which reduces the
Company's investment risk in a product.
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.
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DEPENDENCE ON KEY PERSONNEL
The continued success of the Company depends to a significant extent upon the
continued performance and contribution of its top management and its ability to
continue to attract, motivate and retain highly qualified employees. The loss
of the services of any of the Company's top management could have a material
adverse effect on the Company's business, operating results and financial
condition. Competition for highly skilled employees with technical, management,
marketing, sales, product development and other specialized training is
intense. Specifically, the Company may experience increased costs in order to
attract and retain skilled employees. The Company's failure to attract
additional qualified employees or to retain the services of key personnel could
materially and adversely affect the Company's business, operating results and
financial condition.
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 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. In order to remain competitive, the Company provides telephone and
Internet technical support to its customers at no additional charge. However,
costs associated with these activities are not significant. The Company
believes that high-quality, user-friendly support aids 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, operations and development activities are conducted at its
headquarters location in Langhorne, PA. Warehousing and production for most
product shipments to major customers are performed by independent contractors
at their facilities 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, 1998, the Company had 26 full-time employees of which 4 were
employed in software development; 14 in sales, marketing and customer support;
and 8 in operations, finance and administration. In addition, the Company
utilizes approximately 10 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.
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Policing unauthorized use of an easily duplicated and broadly disseminated
product such as computer software is very difficult. Software piracy is
expected to be a persistent problem for the software industry for the
foreseeable future. Software piracy is a much greater problem in certain
international markets such as South America, the Middle East, the Pacific Rim
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, and
there has been substantial litigation in the industry regarding copyright,
trademark and other intellectual property rights. If any such claims or
litigation, with or without merit, were brought against the Company, such
claims could 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. As of the date of filing
this document, the Company is not subject to such a claim.
FACTORS AFFECTING FUTURE PERFORMANCE
This report contains 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, the factors
discussed below and the factors identified in Management's Discussion and
Analysis should be considered by investors in the Company.
EARLY STAGE COMPANY; CONSUMER SOFTWARE BUSINESS; LOSSES. The Company
commenced operations in July 1992. The Company experienced significant losses
from inception through fiscal 1997. Fiscal 1998 was the first year the Company
earned a profit. After earning $1,253,000 in fiscal 1998, the accumulated
deficit for the Company at June 30, 1998 was approximately $6,731,000. Prior
to fiscal 1998, the Company's operations were 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 can 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.
DEPENDENCE ON DISTRIBUTOR AND ASSOCIATED 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. As reported in GTIS's Form
10-K filed with the Securities and Exchange Commission for the year ended
December 31, 1997, GTIS believes that it is currently the largest distributor
of consumer software to mass merchants in the United States. During the year
ended June 30, 1998, Slash accounted for approximately 81% of the Company's net
sales. The Company believes that for the year ending June 30, 1999, Slash could
account for 85% or more of the Company's net sales. The Company's agreement
with Slash does not specify minimum purchase requirements and can 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
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relationship with Slash would have a material adverse effect on the Company's
business, operating results, liquidity 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
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 to meet its needs, and the failure to do either would 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 maintain cash flow from operations at 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. Currently, the Company believes cash and working capital balances
will be sufficient to fund the Company's operations for the foreseeable future.
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. Sales of a substantial number of shares of
the Company's Common Stock in the public market could adversely affect the
market price for the Common Stock. Of the 9,371,200 shares of Common Stock
outstanding on June 30, 1998, approximately 4,685,128 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 4,685,128
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. However, of the 4,043,461 shares
presently eligible for sale under Rule 144, approximately 2,351,000 shares have
been subject to certain restrictions on their sale pursuant to lock-up
agreements with the Pennsylvania Securities Commission entered into at the time
of the Company's initial public offering. These lock-up agreements expire on
October 14, 1998, which could result in increased sales of such restricted
shares. As of June 30, 1998, options and warrants to purchase 2,064,938 shares
of Common Stock were outstanding, of which 1,545,938 were immediately
exercisable, but only 230,913 were in-the-money as of June 30, 1998. Shares
issuable upon the exercise of these stock options and warrants 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.
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
technological advances and responses 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
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purchasing decisions in anticipation of such products, which could have a
material adverse effect on the Company's business, liquidity and operating
results.
UNCERTAINTY OF FUTURE OPERATING RESULTS; FLUCTUATIONS IN QUARTERLY OPERATING
RESULTS. Historical results of the Company's revenue and operating results are
not necessarily 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 product's value such as:
vendor and product reputation; product quality, performance and price; 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, which are comparable or
superior to those offered by the Company, offer lower priced 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 the Company 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. 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 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 on 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
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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. The loss of the services of one or more key employees
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 1998, the Company derived approximately 8% of
its total revenues from international sales versus 4% in 1997. 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 Applied Optical Media Corporation, Virtual Reality Laboratories, Inc.,
and Software Partners Publishing and Distribution Limited (see Note 17 of the
Consolidated Notes to the Financial Statements). The process of integrating
the business operations of acquired companies into the Company's operations
could 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
is not able to 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
believes that its future growth will depend, in part, on its ability to
continue to identify, acquire and integrate companies, which have software
development and publishing capabilities. While the Company reviews acquisition
opportunities in the ordinary course of its business, some of which may be
material and some of which are currently under investigation or discussion, the
Company presently has no commitments or undertakings with respect to any
material acquisitions. There can be no assurance that the Company will be
successful in identifying and acquiring suitable acquisition candidates or
integrating such acquired businesses into the Company's operations.
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, liquidity and financial condition.
YEAR 2000 ISSUES. The Company has reviewed its critical information systems
for Year 2000 compliance and has developed a plan to remedy any deficiencies in
a timely manner. The Company expects to resolve Year 2000 compliance issues
relating to its software primarily through normal upgrades of its software or,
when necessary, through replacement of existing software with Year 2000
compliant applications. The cost of these upgrades or replacements, which are
estimated to be less than $10,000, is not expected to be material to the
Company's financial position or results of operations. However, there can be no
assurance that such upgrades and replacements can be completed on schedule or
within estimated costs or will successfully address the Company's Year 2000
compliance issues. In addition, the Company is in the process of seeking
verification from its key distributors, vendors and suppliers that they are
Year 2000 compliant or, if they are not yet so compliant, to provide a
description of their plans to become so. If the Company's present efforts to
address the Year 2000 compliance issues are not successful, or if distributors,
suppliers and other third parties with which the Company conducts business do
not successfully address such issues, the Company's business, operating results
and financial position could be materially and adversely affected.
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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
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.
LISTING OF SECURITIES; 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, 1998 the
Company satisfied the minimum level of stockholders' equity required to be
listed ($2,000,000) and all other aspects of its listing agreement.
If the Company fails to maintain the criteria for trading on the Nasdaq
SmallCap Market, 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 believes that its current facilities will
be adequate for the Company's anticipated needs through fiscal 1999. (See Note
6 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
None.
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 range of high and low
bid prices for fiscal 1998 and 1997, as reported by Nasdaq:
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
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
Fiscal 1998
-----------
First quarter $2.000 $0.969
Second quarter $3.000 $1.500
Third quarter $2.813 $2.375
Fourth quarter $2.719 $1.719
</TABLE>
On August 26, 1998, the approximate number of stockholders of record of the
Company's Common Stock was 2,150. 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
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, 1998 COMPARED TO THE YEAR ENDED JUNE 30, 1997
NET SALES AND COST OF SALES
Net sales for the year ended June 30, 1998 were $9,276,000 compared to
$4,383,000 for the year ended June 30, 1997, representing an increase of
$4,893,000 or 112%. This increase resulted from a $6,605,000 increase in sales
of the Company's Galaxy Series' products, including its Galaxy of Games, Galaxy
of Home Office Help, Galaxy of Arcade and Game Master products. The increase
was partially offset by a $1,712,000 decrease in non-Galaxy Series product
sales, as a result of the discontinuation of sales of such products during the
1998 fiscal year. The Company primarily distributes its Galaxy Series'
products in North America through a large national distributor, Slash
Corporation ("Slash"), a division of GT Interactive Software Corporation. The
Company's product sales to Slash accounted for 81% and 35% of the Company's net
sales for the years ended June 30, 1998 and 1997, respectively. The Company
believes that for the year ending June 30, 1999, sales to Slash could account
for 85% or more of the Company's net sales. The Company's agreement with Slash
does not specify minimum purchase requirements and can be terminated at any
time by Slash. The Company intends to focus its efforts on diversifying its
distribution channels, including distribution via the Internet and expanding
international distribution of its products.
The cost of sales for the year ended June 30, 1998 were $3,442,000 compared
to $1,571,000 for the year ended June 30, 1997, representing an increase of
$1,871,000 or 119%. This increase was caused primarily by the additional
product costs of $1,661,000 associated with the increased product sales during
the 1998 fiscal year. Product costs consists mainly of replicated compact
discs, printed materials, protective jewel cases and attractive boxes for
certain products. The decrease in gross profit margin to 62.9% from 64.2% was
caused primarily by the discontinuance of direct mail sales in the year ended
June 30, 1998, which yielded a significantly higher gross profit than
distributor sales, but resulted in significantly higher marketing costs
reflected in the operating expenses for the year ended June 30, 1997.
OPERATING EXPENSES
Product development expenses for the year ended June 30, 1998 were $397,000
compared to $415,000 for the year ended June 30, 1997, a decrease of $18,000 or
4.3%. This decrease was caused primarily by a $122,000 decrease in salary and
related costs for employees engaged in development activities, which was
partially offset by a $100,000 increase in net contractor costs due mainly from
a $90,000 reimbursement for a development contract received in the year ended
June 30, 1997.
Selling, general and administrative expenses for the year ended June 30,
1998 were $4,135,000 compared to $3,998,000 for the year ended June 30, 1997,
an increase of $137,000 or 3.4%. This increase was caused primarily by
increases in marketing promotional fees of $471,000, legal fees of $108,000 and
the asset write-off relating to the terminated FileABC Asset Acquisition of
$175,000, which were partially offset by a decrease in direct mail marketing
costs of $630,000.
The Company closed its San Luis Obispo, CA facility on September 19, 1997
and the space previously occupied 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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Net interest expense for the year ended June 30, 1998 was $46,000 compared
to $48,000 for the year ended June 30, 1997, a decrease of $2,000 or 4.2%. The
reason for this decrease was the reduction of long term debt and capital lease
obligations due to normal monthly principal payments made during the year ended
June 30, 1998.
The weighted average common shares outstanding on a diluted basis increased
3,274,089 for the year ended June 30, 1998. During the year ended June 30,
1998, 303,030 shares of common stock were issued in connection with the
conversion of the Class One Convertible Preferred Stock, 907,948 shares of
common stock were issued in connection with the conversion of 1,271,340 shares
of the Class Two Convertible Preferred Stock, 1,487,508 shares of common stock
were issued in connection with the conversion of 1,250,000 shares of the Class
Three Convertible Preferred Stock, and 137,100 shares of common stock were
issued in connection with the exercise of 117,100 warrants and 20,000 stock
options. In addition, due to the $118,000 and $559,000 accretion of the
beneficial conversion feature of the Class Two and Class Three Convertible
Preferred Stock for the years ended June 30, 1998 and 1997, respectively, the
Company's net income per common share was negatively impacted by $0.01 for the
year ended June 30, 1998, and the Company's net loss per common share was
negatively impacted by $.09 for the year ended June 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The financial information presented reflects the Company's financial position
as of June 30, 1998.
As of June 30, 1998, the Company's cash and working capital balances were
$953,648 and $2,415,021, respectively. During the year ended June 30, 1998,
the Company received $274,200 in net proceeds from the exercise of 117,100
warrants and 20,000 stock options. After accounting for the above transactions
and the Company's $1,252,630 in net income, total stockholders' equity at June
30, 1998 was $2,594,652.
As indicated in the accompanying financial statements, the Company's net
income for fiscal 1998 was $1,252,630 and the Company's net loss for fiscal
1997 was $1,650,925. In addition, cash provided by operating activities for
fiscal 1998 was $706,496, which compared favorably to cash used by operating
activities in fiscal 1997 of $2,556,976. 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. The Company believes
cash and working capital balances will be sufficient to fund the Company's
operations for the foreseeable future. However, there can be no assurances
that the Company will continue achieving 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, 1998 the Company continued to satisfy the minimum level of
stockholders' equity required and all other aspects of its listing agreement
for the Nasdaq SmallCap Market. At June 30, 1998, the Company had $2,594,652
in net tangible assets.
SEVERANCE CHARGE
On June 22, 1998, the Company accepted the resignation of Joseph A.
Falsetti, the Company's Chairman and Chief Executive Officer, who left to
pursue other interests. As the result of the separation agreement and general
release dated June 22, 1998 between the Company and Mr. Falsetti, the Company
expensed approximately $225,000 in severance costs in the year ended June 30,
1998 which is to be paid out over twelve months.
SUBSEQUENT EVENT
On August 14, 1998, the Company acquired all of the outstanding stock of
Software Partners Publishing and Distribution Limited ("Software Partners"), a
United Kingdom-based software distributor, in exchange for 150,000 shares of
the Company's Common Stock valued at approximately $213,000. This acquisition
will be accounted for as a purchase and the corresponding goodwill in the
approximate amount of $200,000 will be amortized over five
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years. At June 30, 1998 the Company had a trade accounts receivable of $122,000
with Software Partners and for the year ended June 30, 1998 the Company had
recorded $457,000 in sales with Software Partners. The Company believes that
this acquisition will allow the Company to expand its product offerings in the
United Kingdom, while providing a base for the Company to distribute its
products into the European markets.
EARNINGS PER SHARE
The Company has adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share", which became effective in the second quarter of
fiscal 1998. This statement simplifies the standards for computing earnings per
share ("EPS") and makes them comparable to international EPS standards. It
replaces the presentation of primary EPS with a presentation of basic EPS and
requires dual presentation of basic and diluted EPS on the face of the
statement of operations for all entities with complex capital structures. It
also requires a reconciliation of the basic EPS computation to the diluted EPS
computation. All prior periods have been restated to conform to this
standard.
Since the Company experienced a net loss in fiscal 1997, common stock
equivalents such as stock options, warrants and other instruments which were
convertible into common stock were anti-dilutive, and as such were not used in
calculating diluted EPS for fiscal 1997. In fiscal 1998, the Company's diluted
EPS was effected by these types of common stock equivalents, since the Company
experienced net income for the year.
NEW ACCOUNTING PRONOUNCEMENTS
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 currently does not have any items
of other comprehensive income, and therefore the adoption of this standard
will not have an impact on the Company's financial reporting practices.
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
continues to operate in one segment, and therefore the adoption of this
standard will not have an impact on the Company's financial statement
disclosures.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-2, "Software Revenue Recognition" (the "SOP").
The SOP established criteria for recognizing revenue in certain software sales
arrangements. The SOP will be effective for fiscal year 1999 and will be
adopted by the Company on a prospective basis. The Company believes that the
adoption of the SOP will not have a material financial impact on the results of
operations.
The Company will be required to adopt Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pension and Other
Post-retirement Benefits", which revises employers' disclosures about pension
and other post-retirement benefit plans. This standard is effective for fiscal
years beginning after December 15, 1997. The Company does not believe that the
adoption of this standard will have any impact on the Company's financial
statement disclosures.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities" (SFAS 133), which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as derivatives) and for
hedging activities. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. As the Company does not currently
engage or plan to engage in derivative or hedging activities, it does not
expect that there will be any impact to the Company's results of operations,
financial position or cash flows upon the adoption of this standard.
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YEAR 2000
The Company has reviewed its critical information systems for Year 2000
compliance and has developed a plan to remedy any deficiencies in a timely
manner. The Company expects to resolve Year 2000 compliance issues primarily
through normal upgrades of its software or, when necessary, through replacement
of existing software with Year 2000 compliant applications. The cost of these
upgrades or replacements, which are estimated to be less than $10,000, is not
expected to be material to the Company's financial position or results of
operations. However, there can be no assurance that such upgrades and
replacements can be completed on schedule or within estimated costs or will
successfully address the Company's Year 2000 compliance issues. In addition,
the Company is in the process of seeking verification from its key
distributors, vendors and suppliers that they are Year 2000 compliant or, if
they are not yet so compliant, to provide a description of their plans to
become so. If the Company's present efforts to address the Year 2000 compliance
issues are not successful, or if distributors, suppliers and other third
parties with which the Company conducts business do not successfully address
such issues, the Company's business, operating results and financial position
could be materially and adversely affected.
FORWARD-LOOKING STATEMENTS
This report contains statements that are forward-looking, as that term is
defined by the Private Securities Litigation Reform Act of 1995 and by the
Securities and Exchange Commission in rules, regulations and releases. These
statements include, but are not limited to, statements regarding: the Company's
efforts to diversify the distribution channels used to distribute its products,
including use of the Internet and expansion into international markets through
the Company's wholly-owned subsidiary, Software Partners Publishing and
Distribution; the projected percentage of sales of the Company's products to
Slash Corporation during the 1999 fiscal year; the sufficiency of the Company's
cash and working capital balances to fund the Company's operations in the
future; the affect of adopting new accounting pronouncements on the Company's
financial statements and practices; the Company's expectations and cost
estimates regarding its Year 2000 compliance efforts; and the success of the
Company's Galaxy branding strategy. All forward-looking statements are based
on current expectations regarding significant risk factors, and the making of
such statements should not be regarded as a representation by the Company or
any other person that the results expressed in this report will be achieved.
The following important factors, among others, could affect the Company's
actual results to differ materially from those indicated by the forward-looking
statements contained in this report: the success of the Galaxy branding
strategy and market acceptance of the Company's Galaxy Series titles in the
United States and international markets; the allocation of adequate shelf space
for the Company's products in major retail chain stores; successful
sell-through results for the Company's products at retail stores; the continued
success of the distribution relationship between the Company with Slash
Corporation; the continued expansion of the computer in homes in North America
and the world; the ability to deliver products in response to orders within a
commercially acceptable time frame; downward pricing pressure; fluctuating
costs of developing, producing and marketing the Company's products; access to
alternative distribution channels and the success of the Company's efforts to
develop its Internet sales; consumers' continued demand for value-priced
software; increased competition in the value-priced software category; the
ability of the Company and its key distributors, vendors and suppliers to
effectively address Year 2000 compliance issues; and various other factors,
many of which are beyond the Company's control. The Company does not undertake
to update any forward-looking statement made in this report or that may be made
from time to time by or on behalf of the Company.
Page 19
<PAGE> 20
ITEM 7. FINANCIAL STATEMENTS
RomTech, Inc.
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report....................................................... 21
Consolidated Balance Sheet June 30, 1998........................................... 22
Consolidated Statements of Operations for the years
ended June 30, 1998 and 1997....................................................... 23
Consolidated Statements of Stockholders' Equity for the years
ended June 30, 1998 and 1997....................................................... 24
Consolidated Statements of Cash Flows for the years
ended June 30, 1998 and 1997....................................................... 25
Notes to Consolidated Financial Statements......................................... 27
</TABLE>
Page 20
<PAGE> 21
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, 1998, 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, 1998. 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, 1998 and the results of their operations and their
cash flows for each of the years in the two-year period ended June 30, 1998, in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
August 14, 1998
Page 21
<PAGE> 22
ROMTECH, INC.
CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
<TABLE>
<CAPTION>
1998
----
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 953,648
Restricted cash 16,531
Accounts receivable, net of allowances totaling $60,000 1,978,238
Inventory 800,742
Prepaid expenses 79,363
-----------
Total current assets 3,828,522
Furniture and equipment, net 253,864
Intangibles and other assets 321,036
-----------
Total assets $ 4,403,422
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable $ 44,341
Accounts payable 853,754
Accrued expenses 489,848
Capital lease obligations 25,558
-----------
Total current liabilities 1,413,501
Capital lease obligations, net of current portion 20,070
Note payable-long term portion 225,199
Convertible subordinated debt 150,000
-----------
Total liabilities 1,808,770
Commitments and contingencies - Notes 6, 12, 13 and 17
Stockholders' equity:
Common stock, no par value (40,000,000 shares authorized;
9,371,200 issued and outstanding) 8,176,826
Additional paid in capital 1,148,550
Accumulated deficit (6,730,724)
-----------
Total stockholders' equity 2,594,652
-----------
Total liabilities and stockholders' equity $ 4,403,422
===========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 22
<PAGE> 23
ROMTECH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net sales $9,275,889 $4,382,693
Cost of sales 3,441,793 1,571,064
---------- -----------
Gross profit 5,834,096 2,811,629
Operating expenses:
Product development 397,272 414,973
Selling, general and administrative 4,135,266 3,997,747
---------- -----------
Total operating expenses 4,532,538 4,412,720
---------- -----------
Operating income/(loss) 1,301,558 (1,601,091)
Interest expense, net 45,859 48,104
Provision for taxes 3,069 1,730
---------- -----------
Net income/(loss) 1,252,630 (1,650,925)
Accretion of beneficial conversion feature on
preferred stocks, including dividend payable in
the form of common stock 117,991 559,434
---------- -----------
Net income/(loss) attributable to common stock $1,134,639 ($2,210,359)
========== ============
Net income/(loss) per common share - basic $0.13 ($0.35)
===== =======
Net income/(loss) per common share - diluted $0.12 ($0.35)
===== =======
Weighted average common shares outstanding - basic 8,716,756 6,380,517
========= =========
Dilutive effect of common stock equivalents 937,850 - 0 -
--------- ---------
Weighted average common shares outstanding - diluted 9,654,606 6,380,517
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 23
<PAGE> 24
ROMTECH, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
--------------- ------------ Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Equity
------ ------ ------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
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
Net income 1,252,630 1,252,630
Shares issued in connection with
exercise of warrants and options 137,100 274,200 274,200
Shares issued in connection with the
conversion of Class One Preferred (1,000,000) (1,000,000) 303,030 1,000,000 - 0 -
Shares issued in connection with the
conversion of Class Two Preferred (1,271,340) (1,271,340) 907,948 1,271,340 - 0 -
Shares issued in connection with the
conversion of Class Three Preferred (1,250,000) (1,250,000) 1,487,508 1,250,000 - 0 -
Effects from the beneficial conversion
feature of Class Two Preferred 3,716 (3,716) - 0 -
Effects from the beneficial conversion
feature of Class Three Preferred 101,725 (101,725) - 0 -
Stock dividend accrued
on Class Three Preferred 12,550 (12,550) - 0 -
-------- ---------- --------- ---------- ---------- ------------ ----------
Balance as of June 30, 1998 - 0 - - 0 - 9,371,200 $8,176,826 $1,148,550 ($6,730,724) $2,594,652
===== ===== ========= ========== ========== ============ ==========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 24
<PAGE> 25
ROMTECH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) $1,252,630 ($1,650,925)
Adjustments to reconcile net income/(loss) to net cash
from operating activities:
Depreciation and amortization 262,276 220,455
Loss on disposal of equipment - 0 - 4,683
Changes in items affecting operations:
Restricted cash 8,257 (24,788)
Accounts receivable (944,766) (608,174)
Prepaid expenses 146,154 (184,107)
Inventory (431,160) (164,361)
Accounts payable 216,312 261,275
Accrued expenses 196,793 (411,034)
---------- ------------
Net cash provided by (used in) operating activities 706,496 (2,556,976)
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales and maturities of short term investments - 0 - 398,952
Purchase of furniture and equipment (187,416) (80,175)
Purchase of software rights and other assets (217,615) (294,656)
Repayments of loan from related party 2,000 2,750
---------- ------------
Net cash provided by (used in) investing activities (403,031) 26,871
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of convertible preferred
stock - 0 - 2,178,496
Repayments of notes payable (39,594) (133,834)
Proceeds from exercise of warrants and stock options 274,200 10,000
Repayments of lease obligations (29,897) (33,746)
---------- ------------
Net cash provided by financing activities 204,709 2,020,916
Net increase (decrease) in cash and cash equivalents 508,174 (509,189)
CASH AND CASH EQUIVALENTS:
Beginning of period 445,474 954,663
---------- ------------
End of period $ 953,648 $ 445,474
========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
Page 25
<PAGE> 26
ROMTECH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $56,229 $80,638
======= =======
Non-cash investing and financing activities:
Capital lease additions $ - 0 - $81,643
======= =======
Conversion of debt for $100,000 of convertible preferred
stock and $100,000 exercise of common stock warrants $ - 0 - $200,000
======= ========
Conversion of debt for common stock $ - 0 - $20,000
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
Page 26
<PAGE> 27
ROMTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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's sales are primarily made
through a large national distributor. The Company intends to increase its
presence on the Internet through a more aggressive web offering including
online gaming and a fully functional order entry tool known as a "shopping
cart" to grow the Company's direct sales of its line of family-friendly,
value-priced consumer software.
CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary. 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, 1998 approximate fair value 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).
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.
LONG-LIVED ASSETS
In accordance with Statement of Financial Standards Board No. 121, "Accounting
for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of", the Company records impairment losses on long-lived assets, including
intangible assets, used in operations when indicators of impairment are
presented and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount.
Page 27
<PAGE> 28
INTANGIBLE ASSETS
The Company has intangible assets resulting primarily from the purchase of
software rights and clip art images. Accumulated amortization at June 30, 1998
was $285,843. The Company amortizes these intangible assets over three years
and recorded amortization expense of $141,217 and $133,481 for the years ended
June 30, 1998 and 1997, respectively.
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 distributes the majority of its products through a large national
distributor, which is covered by a distributor agreement that does not allow
for the return of non-defective products. As of June 30, 1998 the Company has
only received defective returns from this distributor, which have been
immaterial. For other distributors the Company maintains a return policy that
allows for return of 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 accounts receivable, is estimated based
primarily upon historical experience, analysis of distributor and retailer
inventories of the Company's products and analysis of market conditions. Gross
product sales subject to returns were approximately $9,261,000 and $4,334,000
for the years ended June 30, 1998 and 1997, respectively, and returns during
the same periods were $39,000 and $270,000, 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
$54,000 and $319,000 for the years ended June 30, 1998 and 1997, 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.
ADVERTISING
Advertising cost is charged to expense as incurred. Advertising expense was
approximately $520,000 and $981,000 for the years ended June 30, 1998 and 1997,
respectively.
Page 28
<PAGE> 29
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 EARNINGS/(LOSS) PER SHARE
The Company has adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share", which became effective in the second quarter of fiscal
1998. This statement simplifies the standards for computing earnings per share
("EPS") and makes them comparable to international EPS standards. It replaces
the presentation of primary EPS with a presentation of basic EPS and requires
dual presentation of basic and diluted EPS on the face of the statement of
operations for all entities, with complex capital structures. It also requires
a reconciliation of the basic EPS computation to diluted EPS computation.
Management believes that the adoption of this standard did not have a material
impact on the Company's financial reporting practices.
Since the Company experienced a net loss in fiscal 1997, common stock
equivalents such as stock options, warrants and other instruments which were
convertible into common stock were anti-dilutive, and as such were not used in
calculating that year's EPS. In fiscal 1998, the Company's diluted EPS was
effected by these types of common stock equivalents, since the Company
experienced net income for the year.
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 11 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. 130, "Reporting Comprehensive Income", which will become
effective for fiscal year 1999. The Company currently does not have any items
of other comprehensive income, and therefore the adoption of this standard will
not have an impact on the Company's financial reporting practices.
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
continues to operate in one segment, and therefore the adoption of this
standard will not have an impact on the Company's financial statement
disclosures.
In October 1997, the American Institute of Certified Public Accountants issued
Statement of Position 97-2, "Software Revenue Recognition" (the "SOP"). The
SOP established criteria for recognizing revenue in certain software sales
arrangements. The SOP will be effective for fiscal 1999 and will be adopted by
the Company on a prospective basis. The Company does not expect the SOP to
have a significant effect on the Company's financial position or results of
operations.
Page 29
<PAGE> 30
The Company will be required to adopt Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pension and Other
Post-retirement Benefits", which revises employers' disclosures about pension
and other post-retirement benefit plans. This standard is effective for fiscal
years beginning after December 15, 1997. The Company does not believe that the
adoption of this standard will have any impact on the Company's financial
statement disclosures.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities" (SFAS 133), which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. SFAS No.
133 is effective for all fiscal quarters of fiscal years beginning after June
15, 1999. As the Company does not currently engage or plan to engage in
derivative or hedging activities, there will be no impact to the Company's
results of operations, financial position or cash flows upon the adoption of
this standard.
2. INVENTORY
Inventory consists of the following:
<TABLE>
<S> <C>
Raw materials $415,949
Finished goods 384,793
--------
$800,742
========
</TABLE>
3. FURNITURE AND EQUIPMENT
Furniture and equipment consists of the following:
<TABLE>
<S> <C>
Equipment $251,009
Furniture 217,393
Equipment under capital leases 154,332
--------
622,734
Accumulated depreciation (368,870)
--------
Furniture and equipment, net $253,864
========
</TABLE>
4. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<S> <C>
Accrued payroll $266,329
Accrued marketing promotions 85,970
Accrued professional fees 49,135
Accrued royalties 54,885
Other accrued expenses 33,529
--------
$489,848
========
</TABLE>
5. NOTE PAYABLE
Note payable consists of the following:
<TABLE>
<S> <C>
Note payable to bank, bearing interest at the prime rate plus 2.75%
(11.25% at June 30, 1998). Matures on March 24, 2003, principal and
interest of $6,035 payable monthly. The note is guaranteed by a
former officer of the Company and the Small Business Administration. $269,540
Less current portion 44,341
--------
Long term portion $225,199
========
</TABLE>
Page 30
<PAGE> 31
6. LEASE OBLIGATIONS
The Company leases its operating facility under an operating lease expiring in
September 2002. Rent expense was $157,000 and $128,000 for the years ended
June 30, 1998 and 1997, 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 $36,000 and $71,000 at June 30, 1998 and
1997, respectively and are recorded in Furniture and Equipment.
Future payments of leases are as follows:
<TABLE>
<CAPTION>
Operating Capital
Leases Leases Total
------ ------ -----
<S> <C> <C> <C>
1999 $109,641 $29,630 $139,271
2000 94,317 14,719 109,036
2001 86,114 5,954 92,068
2002 85,087 992 86,079
2003 21,450 - 0 - 21,450
-------- ------- --------
$396,609 51,295 $447,904
======== ------- ========
Less interest (5,667)
-------
Present value of future lease payments 45,628
Less current portion (25,558)
-------
Long term portion $20,070
=======
</TABLE>
7. CONVERTIBLE SUBORDINATED DEBT
In connection with the merger of its subsidiary with Virtual Reality
Laboratories, Inc. ("VRLI") on April 5, 1996 the Company assumed $150,000 of
10% convertible subordinated debt, maturing in November 2000. The note is
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), at anytime by the
holder. Interest is payable quarterly. The convertible debt is subordinated to
the note payable ($269,540 at June 30, 1998) guaranteed by the Small Business
Administration.
8. INCOME TAXES
No federal income tax expense or benefit was required to be recorded for the
periods presented. Any deferred tax asset was offset by a valuation allowance
of equal amount, as management believed that the realization of such deferred
tax asset was not assured.
The tax effect of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at June 30, 1998 and
1997 is as follow:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Accrued expenses and other $108,900 $61,680
Bad debt reserve 10,927 28,014
Other reserves 28,741 53,027
Net operating losses 1,742,696 2,244,205
----------- -----------
Gross deferred tax assets 1,891,264 2,386,926
Less: Valuation allowance (1,891,264) (2,386,926)
----------- -----------
Net deferred tax assets - 0 - - 0 -
Deferred tax liabilities: - 0 - - 0 -
----------- -----------
Net deferred tax assets/(liabilities) - $ 0 - - $ 0 -
=========== ===========
</TABLE>
Page 31
<PAGE> 32
As of June 30, 1998, the Company has approximately $5,000,000 of net operating
loss carry-forwards ("NOL's") for federal income tax purposes (expiring in
years 2005 through 2013), which may be available to offset future federal
taxable income for tax purposes. The Company's NOL's may be subject to the
provisions of Internal Revenue Code ("IRC") Section 382, as established by the
Tax Reform Act of 1986, related to changes in stock ownership. The Company
intends to have a study performed in fiscal 1999 to make a determination on
what effect, if any, the application of IRC section 382 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. As a result of the Company's previous
acquisitions, it is possible that some portion of the NOL's may never be
utilized due to this IRC Section 382 limitation. The Company determined that
it had sufficient post-acquisition NOL's not to record any federal tax
liability as of June 30, 1998.
9. PREFERRED STOCK
During the year ended June 30, 1998, 1,000,000 shares of the Company's Class
One Convertible Preferred Stock were converted into 303,030 shares of Common
Stock; 1,271,340 shares of the Company's Class Two Convertible Preferred Stock
were converted into 907,948 shares of Common Stock; and 1,250,000 shares of the
Company's Class Three Convertible Preferred Stock were converted into 1,487,508
shares of Common Stock. As of June 30, 1998, there were no shares of preferred
stock outstanding.
During the years ended June 30, 1998 and 1997 respectively, the Company
amortized to accumulated deficit $118,000 and $559,000 in the accretion of the
beneficial conversion feature of the Class Two and Class Three Convertible
Preferred Stock, including a dividend payable in the form of common stock,
which negatively impacted the net income/(loss) per share during the same
periods.
10. COMMON STOCK
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.
11. 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 1997 Annual Meeting, the stockholders of the
Company approved an amendment to increase the number of shares available for
issuance under the 1995 Plan from the 950,000 shares of common stock approved
during the 1996 Annual Meeting to a total of 1,950,000 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. Each
non-employee director 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.
Page 32
<PAGE> 33
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.
Information regarding the stock option plans is as follows:
<TABLE>
<CAPTION>
Number of Weighted Average
shares Exercise Price
------ --------------
<S> <C> <C>
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
Granted 1,045,000 2.06
Canceled 528,821 3.44
Exercised 20,000 2.00
--------- -----
Balances, June 30, 1998 1,226,151 $2.08
========= =====
</TABLE>
At June 30, 1998, 707,151 options outstanding under the 1994 and 1995 Plans
were vested and 830,849 options were available for issuance under these plans.
The following summarizes information about the Company's stock options
outstanding at June 30, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------------ ----------------------------------
Weighted Avg. Weighted Weighted
Number Remaining Avg. Number Avg.
Range of Outstanding at Contractual Life Exercise Exercisable at Exercise
Exercises Prices June 30, 1998 (in years) Price June 30, 1998 Price
---------------- ------------- ---------- ----- ------------- -----
<S> <C> <C> <C> <C> <C>
$1.35-$1.57 176,651 3.93 $1.51 65,151 $1.50
$2.00-$3.50 1,049,500 3.52 $2.18 642,000 $2.08
--------- ---- ----- ------- -----
$1.35-$3.50 1,226,151 3.58 $2.08 707,151 $2.03
========= =======
</TABLE>
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 income/(loss) and net income/(loss) per share would have
been negatively impacted by the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Years ended June 30,
1998 1997
---- ----
<S> <C> <C> <C>
Net income/(loss) attributable to Common Stock As reported $1,134,639 ($2,210,359)
Pro forma $ 563,254 ($2,619,463)
Net income/(loss) per share - basic As reported $0.13 ($0.35)
Pro forma $0.06 ($0.41)
Net income/(loss) per share - diluted As reported $0.12 ($0.35)
Pro forma $0.06 ($0.41)
</TABLE>
Page 33
<PAGE> 34
The per share weighted-average fair values of stock options granted during the
years ended June 30, 1998 and 1997 were $1.52 and $2.41, respectively, on the
date of grant using the Black-Scholes option-pricing model with the following
assumptions:
<TABLE>
<CAPTION>
Years ended June 30,
1998 1997
---- ----
<S> <C> <C>
Dividend yield 0% 0%
Volatility factor 119.43% 82.01%
Risk-free interest rate 5.51% - 6.13% 6.05% - 6.45%
Average expected option life 4.74 Years 4.64 Years
</TABLE>
The fair value of stock options included in the pro forma amounts for the years
ended June 30, 1998 and 1997 is not necessarily indicative of future effects on
net income/(loss) and net income/(loss) per share. The pro forma net
income/(loss) amounts reflect only options granted since July 1, 1995.
Therefore, the full impact of calculating compensation cost for stock options
under Statement No. 123 is not reflected in the pro forma net income/(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 cancelled the options outstanding under the 1995
Plan that had exercise prices in excess of the market price of the Company's
common stock on May 22, 1997, and reissued all such options with an exercise
price of $3.50. On July 1, 1997 the Company cancelled the options outstanding
under the 1995 Plan that had exercise prices in excess of the market price of
the Company's common stock on July 1, 1997, and reissued all such options with
an exercise price of $2.00.
On March 24, 1998, 20,000 stock options were exercised and the Company received
net proceeds of $40,000.
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 the common
stock issuable upon exercise of the warrants, which shares have been registered
by the Company 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,
which exercise price was adjusted as described below. Registration rights were
granted for the common stock issuable upon exercise of the underwriter's
warrants, and such common stock has been registered by the Company. In
addition, 425,000 warrants were issued to the former owners of Applied Optical
Media Corporation, of which 1,200 warrants were exercised on March 1, 1996,
45,200 warrants were exercised on January 24, 1997 and 198,687 warrants were
exercised on January 30, 1997. The remaining warrants from this group 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:
<TABLE>
<CAPTION>
Number of Warrants Exercise Price
------------------ --------------
<S> <C> <C>
Balances, June 30, 1996 593,800 $0.50 - $3.60
Warrants granted 605,974 5.50 - 6.25
Warrants canceled - 0 - - 0 -
Warrants exercised (243,887) 0.50
--------- ------------
Balances, June 30, 1997 955,887 $0.50 - $6.25
Warrants granted - 0 - - 0 -
Warrants canceled - 0 - - 0 -
Warrants exercised (117,100) 2.00
--------- ------------
Balances, June 30, 1998 838,787 $0.50 - $6.25
======= =============
</TABLE>
Page 34
<PAGE> 35
On October 1, 1997, the Company adjusted the exercise price of 332,988 warrants
to acquire the Company's Common Stock to $2.00 per share, the fair market value
of the Company's Common Stock on October 1, 1997, until December 12, 1997. Of
the 332,988 warrants, 155,000 were originally issued at $3.60 per share and
177,988 were issued at $6.00 per share. During the second quarter ended
December 31,1997, 117,100 such warrants were exercised and the Company received
net proceeds of $234,200. The warrants that were not exercised during the
exercise price reduction period were subsequently returned to their original
exercise prices.
12. 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 $162,000 and $73,000 for the years ended June 30, 1998 and 1997,
respectively.
13. RELATED PARTY TRANSACTIONS
During the years ended June 30, 1998 and 1997, the Company engaged in certain
related party transactions with a company owned and operated by an individual
who also performed the buyer function for the Company as a part-time employee.
As of June 30, 1998, this individual was no longer an employee and was
continuing to perform the function of a distributor of the Company's line of
products. The Company recorded $773,000 in sales and $220,000 in commission
expense with this related party during the year ended June 30, 1998. The
Company recorded $896,000 in revenues and $332,000 in commission expense with
this related party during the year ended June 30, 1997. At June 30, 1998 the
Company had a trade accounts receivable of approximately $55,000 with this
related party.
On June 22, 1998, the Company accepted the resignation of Joseph A. Falsetti,
the Company's Chairman and Chief Executive Officer, who left to pursue other
interests. As the result of the separation agreement and general release dated
June 22, 1998 between the Company and Mr. Falsetti, the Company expensed
approximately $225,000 in severance costs in the year ended June 30, 1998 which
is to be paid out over twelve months.
During the year ended June 30, 1997, 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.
14. MAJOR CUSTOMERS AND EXPORT SALES
During the years ended June 30, 1998 and June 30, 1997 the Company had two
customers, which accounted for approximately 81% and 8% and 35% and 20% of net
sales, 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 years
ended June 30, 1998 and 1997, Slash accounted for approximately 81% and 35%,
respectively, of the Company's net sales. The Company believes that for the
year ending June 30, 1999 Slash could account for 85% 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. The amount
of export sales included in net sales was approximately $694,000 and $169,000
or 8% and 4% for the years ended June 30, 1998 and 1997, respectively.
15. LIQUIDITY
As indicated in the accompanying financial statements, the Company's net
income/(loss) was $1,252,630 and ($1,650,925) in fiscal 1998 and 1997,
respectively. In addition, cash provided by (used in) operating activities
totaled $706,496 and ($2,556,976) in fiscal 1998 and 1997, respectively. The
Company's ability to continue achieving positive cash flow depends upon a
variety of factors, including the timeliness and success of developing
Page 35
<PAGE> 36
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, 1998
the Company's cash and working capital balances were $953,648 and $2,415,021,
respectively.
At June 30, 1998 the Company satisfied the minimum level of stockholders'
equity required to be listed ($2,000,000) and all other aspects of its listing
agreement. Although management of the Company believes that it will continue to
satisfy this requirement, there can be no assurance that this will indeed
occur, (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).
16. TERMINATED ACQUISITION
The Company terminated an Asset Acquisition Agreement (the "Agreement") entered
into with FileABC(TM) L.P. ("FileABC") in October 1996, and did not consummate
the acquisition of certain assets of FileABC pursuant to the Agreement. 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. On June 23, 1998, the Company settled
this suit in exchange for a worldwide non-exclusive license to distribute one
of the FileABC products.
17. SUBSEQUENT EVENT
On August 14, 1998, the Company acquired all of the outstanding stock of
Software Partners Publishing and Distribution Limited ("Software Partners"), in
exchange for 150,000 shares of the Company's Common Stock valued at
approximately $213,000. This acquisition will be accounted for as a purchase
and the corresponding goodwill in the approximate amount of $200,000 will be
amortized over five years. At June 30, 1998 the Company had a trade accounts
receivable of $122,000 with Software Partners and for the year ended June 30,
1998 the Company had recorded $457,000 in sales with Software Partners.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
Page 36
<PAGE> 37
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 1998 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 1998 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 1998 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 1998 Annual Meeting to be filed with the Securities and
Exchange Commission.
Page 37
<PAGE> 38
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>
Page
Exhibit No. Description of Exhibit Number
- ----------- ---------------------- ------
<S> <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.
2.4 Sale and Purchase Agreement between the Registrant and the shareholders of Software
Partners Publishing and Distribution Limited dated August 14, 1998.
(3) 3.1 Amended and Restated Articles of Incorporation of the Registrant.
(4) 3.2.1 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 1994 Stock Option Plan.
10.4 Amended and Restated 1995 Stock Option Plan.
(5) 10.5 Form of Purchase Agreement for the Class Two Convertible Preferred Stock (the "Class
Two Preferred") dated as of November 15, 1996.
(5) 10.6 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) 10.7 Form of Registration Rights Agreement for the Common Stock underlying the Class Two
Preferred and the Warrants dated as of November 15, 1996.
(5) 10.8 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) 10.9 Purchase Agreement dated January 30, 1997 between RomTech, Inc. and Odyssey Capital
Group, L.P.
</TABLE>
Page 38
<PAGE> 39
<TABLE>
<CAPTION>
Page
Exhibit No. Description of Exhibit Number
- ----------- ---------------------- ------
<C> <S>
(6) 10.10 Agreement dated January 30, 1997 between RomTech, Inc. and Odyssey Capital Group,
L.P.
(6) 10.11 Registration Rights Agreement dated January 30, 1997 between RomTech, Inc. and
Odyssey Capital Group, L.P.
(7) 10.12 Form of Securities Purchase Agreement for the Class Three Convertible Preferred Stock
(the "Class Three Preferred").
(7) 10.13 Form of Warrant Agreement for the Warrants (the "Class Three Warrants") issued to the
holders of the Class Three Preferred.
(7) 10.14 Form of Registration Rights Agreement for the Common Stock underlying the Class Three
Preferred and the Class Three Warrants.
(8) 10.15 Asset Acquisition Agreement Between RomTech, Inc. and FileABC, LP.
(9) 10.16 Warrant Agreement dated January 30, 1997 by and between Registrant and PJM Trading
Company, Inc.
(9) 10.17 Distribution Agreement dated May 1, 1997 between the Registrant and GT Interactive
Software.
10.18 Separation Agreement and General Release dated June 22, 1998 between the Registrant
and Joseph A. Falsetti.
10.19 Amendment to Distribution Agreement dated September 4, 1998 between the Registrant
and GT Interactive Software.
11.1 Computation of Earnings/(Loss) Per Share.
21.1 Subsidiaries.
23.1 Consent of KPMG Peat Marwick LLP.
(10) 24.1 Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- ---------------------------------------
(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, 1997.
(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 for
the quarter ended September 30, 1996 as filed with the Securities and
Exchange Commission on November 14, 1996.
(9) Incorporated by reference herein from the Registrant's Form 10-KSB for
the year ended June 30, 1997 as filed with the Securities and Exchange
Commission on September 29, 1997.
(10) See signature page.
Page 39
<PAGE> 40
(b) REPORTS ON FORM 8-K
On April 29, 1998 the Company filed a report on Form 8-K regarding a press
release stating the Company's sales and earnings for the quarter ended March
31, 1998.
On June 24, 1998 the Company file a report on Form 8-K regarding a press
release announcing a management change.
On July 16, 1998 the Company filed a report on Form 8-K regarding a press
release announcing the Company's unaudited results for the fourth quarter and
year ended June 30, 1998.
On August 19, 1998 the Company filed a report on Form 8-K regarding a press
release announcing the Company's acquisition on August 14, 1998 of Software
Partners Publishing and Distribution Limited, a U.K. distributor of personal
computer software for consumer entertainment and small office/home office
applications.
Page 40
<PAGE> 41
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/ Gerald W. Klein
-------------------------------------------------------
Gerald W. Klein, President, Chief Executive Officer and
Chief Financial Officer
Date: September 10, 1998
------------------
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.
<TABLE>
<S> <C>
Date: September 10, 1998 /s/ Gerald W. Klein
------------------ --------------------
Gerald W. Klein, President, Chief Executive
Officer, Chief Financial Officer and Director
Date: September 10, 1998 /s/ Thomas W. Murphy
------------------ --------------------
Thomas W. Murphy, Controller and Chief
Accounting Officer
</TABLE>
Each person in so signing also makes, constitutes and appoints Thomas
D. Parente, Chairman of the Board of Directors, and Gerald W. Klein, President,
Chief Executive Officer 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.
<TABLE>
<S> <C>
Date: September 10, 1998 /s/ Thomas D. Parente
------------------ -----------------------
Thomas D. Parente
Chairman of the Board of Directors
Date: September 10, 1998 /s/ Robert M. Aiken, Jr.
------------------ --------------------------
Robert M. Aiken, Jr.
Director
Date: September 10, 1998 /s/ Lambert C. Thom
------------------ ---------------------
Lambert C. Thom
Director
</TABLE>
Page 41
<PAGE> 1
EXHIBIT 2.4
DATED 14TH AUGUST 1998
(1) JEFFREY S FENTON
KAREN MILLS
CAROLINE R MONK
PAUL WARD
LOUISE WARD
(2) ROMTECH, INC
AGREEMENT
FOR THE SALE AND PURCHASE OF THE
ENTIRE ISSUED SHARE CAPITAL OF
SOFTWARE PARTNERS PUBLISHING AND DISTRIBUTION LIMITED
EVERSHEDS
10 NEWHALL STREET
BIRMINGHAM
B3 3LX
TEL: 0121 233 2001
FAX: 0121 236 1583
<PAGE> 2
REF: AR/36
FINAL VERSION 11.08.98
<PAGE> 3
CONTENTS
1. Interpretation
2. Sale and purchase
3. Consideration
4. Warranties
5. Tax Covenant
6. Limitation of liability
7. Restrictive covenants
8. Completion
9. Issue of 2nd Tranche of Consideration Shares
10. Orderly Market Provisions
11. Announcements
12. Costs
13. Interest
14. Notices
15. General
SCHEDULE 1 The Vendors
SCHEDULE 2 Details of the Company
SCHEDULE 3 The Property
SCHEDULE 4 Warranties
AGREED FORM DOCUMENTS:
Directors' and Secretary's Resignations
Powers of Attorney (re. voting on shares)
Clean break deeds (clause 8.1.4)
Service Agreements: Caroline Monk and Paul Ward
Disclosure Letter
An Agreement to acquire Common Stock
<PAGE> 4
THIS AGREEMENT is made on 14th August 1998
BETWEEN
(1) The persons whose names and addresses are set out in Schedule 1 ("the
Vendors"); and
(2) ROMTECH, INC. a PENNSYLVANIA CORPORATION whose principal place of
business is at 200 Cabot Boulevard, Suite 110, Langhorne, PA 19047-1811
("the Purchaser")
OPERATIVE CLAUSES
1. INTERPRETATION
In this Agreement:-
1.1 the following expressions have the following meanings unless
inconsistent with the context:-
Expression Meaning
---------- -------
"the Accounting Date" 31 May 1998
"the Accounts" The audited accounts
of the Company for
the financial year
which ended on the
Accounting Date,
comprising a balance
sheet, a profit and
loss account, notes
and directors' and
auditors' reports
"the Act" The Companies Act
1985
"Business Day" Any day (other than
Saturday or Sunday)
on which Clearing
Banks are open for a
full range of
banking
2
<PAGE> 5
transactions and on
which banks in the
State of
Pennsylvania are
also open for a full
range of banking
transactions
"Clearing Bank" A bank which is a
member of CHAPS
Clearing Company
Limited
"the Company" Software Partners
Publishing and
Distribution Limited
registered number
2463167, whose
registered office is
at Unit 2, Edison
Road, Somersham Road
Industrial Estate,
St Ives, Huntingdon,
Cambridgeshire, PE17
4LF
"Completion" Completion of the
sale and purchase in
accordance with
clause 8
"Consideration Shares" The shares in the
capital of the
Purchaser to be
allotted pursuant to
clause 3
"Contract" Any agreement or
commitment whether
legally binding or
not
"the Disclosure Letter" The letter in the
agreed form having
the same date as
this Agreement from
the Vendors to the
Purchaser qualifying
the Warranties
3
<PAGE> 6
"Environment" Any air (including
air within natural
or man-made
structures above or
below ground); water
(including
territorial, coastal
and inland waters
and ground water and
water in drains and
sewers); and land
(including the
seabed or river bed
under any water),
surface land and
sub-surface land
"Environmental Authorisations" All or any permits,
consents, licences,
approvals,
certificates, and
other authorisations
required under
Environmental Law
and all terms and
conditions thereof
required under any
Environmental Law
for the operation of
the business of the
Company or the state
or use of any land
or premises in
relation to the
business of the
Company
"Environmental Law" All or any Laws
from time to time
with regard to the
pollution or
protection of the
Environment or harm
to or the protection
of human health and
safety or the health
of animals and
plants
"Environmental Liability" Criminal or civil
liability under
Environmental Law or
in relation to any
matter concerning in
any
4
<PAGE> 7
way the Environment
"ERA" The Employment
Rights Act 1996
"Event" Any event, fact or
circumstance
whatsoever,
including (but not
limited to) the
earning, receipt or
accrual of any
income, profits or
gains, the sale and
purchase of the
Shares pursuant to
this Agreement and
Completion
"Hazardous Substances" Any matter, whether
alone or in
combination with any
other matter capable
of causing harm to
man or any other
living organism or
damaging to the
Environment or
public health or
welfare, including
without limitation
radioactive matter,
ozone depleting
substances, and
genetically modified
organisms
"the Independent Accountant" The independent
chartered accountant
or firm of chartered
accountants
appointed pursuant
to clause 8.5
"Intellectual Property Rights" Patents, trade
marks, service
marks, registered
designs, design
rights, copyright,
know-how and all
other intellectual
property and any
applications for the
same
5
<PAGE> 8
"the July Sales Information" the sales figures
for the month of
July 1998 in the
agreed terms
"the Management Accounts" the unaudited
management accounts
of the Company for
the month ended on
the Management
Accounts Date
"the Management Accounts Date" 30 June 1998
"the Property" The property
specified in
Schedule 3 and each
and every part of
such property
"the Purchaser's UK Solicitors" Eversheds of 10
Newhall Street,
Birmingham B3 3LX
"Relief" Any relief,
deduction or credit
available from,
against or in
relation to Taxation
or in the
computation for any
Taxation purpose of
income, profits or
gains
"the Shares" All the issued
shares in the
capital of the
Company
"Stock" Stocks (as defined
in Statement of
Standard Accounting
Practice No. 9
adopted by the
Accounting Standards
Board) of the
Company
"Taxation" (a) Any tax, duty,
impost or levy of
the United Kingdom
or elsewhere
6
<PAGE> 9
whether national or
local and
(b) any fine, penalty,
surcharge, interest
or other imposition
relating to any
tax, duty, impost
or levy or to any
account, record,
form, return or
computation
required to be
kept, preserved,
maintained or
submitted for the
purposes of any
tax, duty, impost
or levy
"the Vendors' Solicitors" Palmer Wheeldon of
Daedalus House,
Station Road,
Cambridge CB1 2RE
"the Warranties" The warranties set
out or referred to
in clause 4 and
Schedule 4;
1.2 references to any statutory provisions will be construed as including
references to any earlier or subsequent statutory provisions in force
at any time prior to Completion which they have, or by which they have
been, directly or indirectly amended or replaced;
1.3 all obligations entered into by two or more persons are (unless
otherwise expressly stated) joint and several;
1.4 references to clauses and Schedules are to clauses of and Schedules to
this Agreement, and references to paragraphs are to paragraphs in the
Schedule in which such references appear;
7
<PAGE> 10
1.5 the Schedules form part of this Agreement and will have the same effect
as if in the body of this Agreement;
1.6 the headings to clauses and paragraphs (save for headings in Schedules
1, 2 and 3) will not affect its construction;
1.7 where any document is stated as being in the agreed terms, it shall,
unless it is to be entered into contemporaneous with this Agreement be
in a form initialled for and on behalf of the Vendors and the Purchaser
2. SALE AND PURCHASE
2.1 Each of the Vendors will sell with full title guarantee, and the
Purchaser will buy, the number of the Shares specified opposite that
Vendor's name in Schedule 1.
2.2 Each of the Shares will be sold and bought free from any third party
right, and with all rights attached or accruing to it including all
rights to any dividends or other distributions paid after the execution
of this Agreement.
2.3 Each of the Vendors waives any rights of pre-emption over any of the
Shares.
2.4 The Purchaser will not be obliged to purchase any of the Shares unless
the purchase of all the Shares is completed simultaneously.
3. CONSIDERATION
3.1 The consideration for the sale of the Shares will be the issue to the
Vendors of 150,000 shares of unregistered common stock of the
Purchaser, subject to the provision of clauses 9 and 10.
3.2 The Purchaser warrants to the Vendors that the Consideration Shares
will rank equally in all respects (save that they will not be
registered) with the common stock of the Purchaser in issue at
Completion, and shall carry the
8
<PAGE> 11
right receive in full all dividends and other distributions declared,
made or paid after Completion.
3.3 The Purchaser undertakes to the Vendors that it shall use its
reasonable endeavours to ensure that (subject to the provisions of
clauses 9 and 10) the Consideration Shares shall be capable of being
dealt in on any stock exchange on which the common stock of the
Purchaser is listed at Completion.
4. WARRANTIES
4.1 The Vendors:-
4.1.1 warrant and represent to the Purchaser in the terms of the
Warranties, provided that the Purchaser will not be entitled
to claim that any fact or combination of facts constitutes a
breach of any of the Warranties to the extent fairly disclosed
in the Disclosure Letter, and agree that the Purchaser is
entering into this Agreement in reliance on each of the
Warranties (none of which will be construed restrictively, by
reference to any other Warranty or term of this Agreement);
4.1.2 will indemnify the Purchaser against any costs or expenses
(including legal costs) which it may incur, either before or
after the commencement of any action, directly or indirectly
as a result of any breach of any of the Warranties;
4.1.3 undertake that, if any claim is made against any of them in
connection with the sale of the Shares to the Purchaser, they
will not make any claim against the Company, or against any
director or employee of the Company, on which or on whom any
of them may have relied before agreeing to any provision of
this Agreement or the Disclosure Letter, but so that this
undertaking will not preclude any Vendor from claiming
9
<PAGE> 12
against any other Vendor under any right of contribution to
which such Vendor may be entitled.
4.2 Without restricting the rights of the Purchaser to claim damages on any
basis available to it, the Vendors undertake to the Purchaser that if
there is a breach of any of the Warranties and the value of any asset
of the Company is less, or the amount of any liability of the Company
is greater, than would have been the case in the absence of such
breach, then the Vendors will, forthwith on demand by the Purchaser,
pay to the Purchaser or the Company (as the Purchaser directs) the
amount of such diminution in the value of the asset or (as the case may
be) increase in the amount of the liability ("the Indemnified Amount")
but the Vendors shall be entitled to claim credit against any claim
under this provision for the amount by which they are able to
demonstrate that:-
4.2.1 the value of any current assets of the Company was understated
in the Accounts;
4.2.2 any liability shown in the Accounts has been fully discharged
or satisfied for a lesser amount;
4.2.3 any specific contingency or specific provision made in the
Accounts has been ascertained and proved to have been an over
provision.
4.3 In this Agreement, unless otherwise specified, where any Warranty
refers to the knowledge or awareness of the Vendors (or similar
expression), each Vendor will be deemed to have such knowledge or
awareness as such Vendor would have obtained had such Vendor made all
due and careful enquiries into the subject matter of that Warranty and
the knowledge and awareness of any one of the Vendors shall be imputed
to the remaining Vendors.
5. TAX COVENANT
10
<PAGE> 13
5.1 In this clause 5:-
5.1.1 references to Events include Events which are deemed to have
occurred for any Taxation purpose;
5.1.2 references to an Event which occurred on or before Completion
include the combined result of two or more Events, the first
of which occurred on or before Completion;
5.1.3 references to the loss of a Relief include the disallowance of
a Relief and the failure to obtain a Relief; and
5.1.4 references to a payment of Taxation which the Company is
liable to make include any stamp duty which is charged on any
document, or in the case of a document which is outside the
United Kingdom any stamp duty which would be charged on the
document if it were brought into the United Kingdom, which is
necessary to establish the title of the Company to any asset
or in the enforcement or production of which the Company is
interested, and any interest, fine or penalty relating to such
stamp duty.
5.2 Subject to clause 6, the Vendors covenant with the Purchaser to pay to
the Purchaser an amount equal to the amount of:-
5.2.1 any payment of, or in respect of, Taxation which the Company
has made or is liable to make as a result of, or in connection
with, any Event which occurred on or before Completion; and
5.2.2 any payment of Taxation which the Company would have been
liable to make as a result of, or in connection with, any
Event which occurred on or before Completion but for the use
of any Relief or the set-off of any right to repayment of
Taxation; and
11
<PAGE> 14
5.2.3 any payment of Taxation which the Company would not have been
liable to make but for the loss of any Relief (including a
Relief surrendered to the Company by another company) as a
result of, or in connection with, any Event which occurred on
or before Completion, on the basis of the rates of Taxation
current at the date of the loss, assuming for this purpose
that the Company had sufficient profits or was otherwise in a
position actually to use the Relief; and
5.2.4 any repayment of Taxation to which the Company would have had
the right but for the loss of such right as a result of, or in
connection with, any Event which occurred on or before
Completion; and
5.2.5 any costs, fees or expenses (including legal costs on a full
indemnity basis) incurred by the Company or the Purchaser in
connection with:-
5.2.5.1 any matter in respect of which the Vendors are or may
be liable under any of clauses 5.2.1 to 5.2.4
(inclusive); or
5.2.5.2 taking or defending any action (including but not
limited to legal proceedings) under this clause 5.
12
<PAGE> 15
5.3
5.3.1 Except as required by law all payments by the Vendors
under this clause 5 will be made free and clear of
all deductions and withholdings.
5.3.2 If any deduction or withholding is required to be
made from any payment by the Vendors under this
clause 5 or if (ignoring any available Relief or
right to repayment of Taxation) the Purchaser is
subject to Taxation in respect of any payment by the
Vendors under this clause 5, the Vendors covenant
with the Purchaser to pay to the Purchaser such
additional amount as is necessary to ensure that the
net amount received and retained by the Purchaser
(after taking account of such deduction or
withholding or Taxation) is equal to the amount which
it would have received and retained had the payment
in question not been subject to the deduction or
withholding or Taxation.
5.4 The Vendors shall not be liable under this clause 5 for any
payment of or in respect of Taxation:-
5.4.1 to the extent that either an appropriate provision or
reserve in respect of the liability for Taxation was
made in the Accounts, or the liability was
specifically quantified in the notes to the Accounts,
and specifically referred to in those notes as being
taken into account in making any general provision in
the Accounts;
5.4.2 to the extent that the liability arises as a result
only of the appropriate provision or reserve in the
Accounts being insufficient by reason of any increase
in rates of Taxation or variation in the method of
calculating the rate of Taxation, in either case made
after the date of this Agreement;
13
<PAGE> 16
5.4.3 to the extent that the liability would not have
arisen but for the Company being deemed to be
associated with the Purchaser and its group for the
purposes of section 13 of the Income & Corporation
Taxes Act 1988;
5.4.4 for which the Company is or may become liable as a
result of transactions in the ordinary course of its
business after the Accounting Date and before
Completion;
5.4.5 to the extent that it would not have arisen but for
the fact that the treatment of any assets or
liabilities, or of the Taxation attributable to
timing differences in future accounts of the Company
is different from the treatment in the Accounts save
where any changes made to the way the accounts of the
Company are prepared are required to comply with
generally accepted accounting practice for a UK
company at the current at the date of Completion;
5.4.6 to the extent of any recovery by the Purchaser under
the Warranties in respect of the same liability to
Taxation;
5.4.7 which would not have arisen but for a voluntary act,
omission or transaction carried out by the Company
after Completion or occurring after Completion,
otherwise than in the usual course of business, and
which the Purchaser knew or ought reasonably to have
known would cause the Taxation liability in question
to arise.
5.5 The Purchaser shall procure that the Company:-
5.5.1 gives notice within a reasonable period in writing to
the Vendors of any information which comes to its
notice, whereby it appears that the Vendors are or
may become liable under this clause 5; and
14
<PAGE> 17
5.5.2 takes such action (at the Vendor's expense) to
contest any claim which could give rise to a
liability under this clause 5 as the Vendors may
reasonably request; provided that the Vendors shall
(if reasonably so requested by the Purchaser or the
Company) provide security to the Purchaser's
reasonable satisfaction in respect of any costs or
expenses which the Company may incur in taking such
action and provided that the Purchaser shall not be
required to take any action which it reasonably
considers to be materially prejudicial to the
business affairs of the Company.
5.6 As between the Vendors (but without affecting the right of the
Purchaser to take action under this clause 5 against the
Vendors) if any liability for Taxation in respect of which the
Vendors are liable under this clause 5 is attributable to any
remuneration paid or benefit provided by the Company to or for
an individual Vendor, the liability shall be borne by the
Vendor in question and he or she shall indemnify the other
Vendors accordingly.
6. LIMITATION OF VENDORS' LIABILITY
6.1 In this clause, "Claim" means a claim for breach of the
Warranties, or a claim under clause 5, or both. The provisions
of this clause 6 shall have effect to limit the Vendors'
liability for any Claim.
6.2 The Vendors shall not be liable in respect of any Claim unless
written notice, containing sufficient information so as to
identify the nature and substance of the Claim) has been given
to the Vendors:-
6.2.1 in the case of any Claim relating to Taxation, the
seventh anniversary of Completion; or
6.2.2 in the case of any Claim relating to Warranties
contained in paragraph 14 of Schedule 4 or paragraph
17.7 of Schedule 4, on or by the date on which the
relevant statute of limitations
15
<PAGE> 18
would apply so as to prevent the making of the claim
which would give rise to the breach of the relevant
Warranty;
6.2.3 in the case of any other claim the second anniversary
of Completion;
and any claim for a breach of the Warranties (but not under
clause 5) shall (if it has not been previously satisfied,
settled or withdrawn) be deemed to have been withdrawn six
months after the expiry of the relevant period unless
proceedings in respect of the Claim have been commenced and
served on the Vendors.
6.3 The Vendors shall not be liable for any Claim unless the
total of all Claims exceeds (pound sterling) 15,000 but in
that event the Vendors shall be liable for the total amount
of the Claims and not merely the excess.
6.4 The total liability of the Vendors in respect of all Claims
shall be limited to (pound sterling) 132,026.00
6.5 If the Company has a right of action against any third party
in respect of the subject matter of any Claim, the Purchaser
shall procure that, on discharge or satisfaction of the Claim
by the Vendors, the Company:-
6.5.1 assigns to the Vendors all such rights of action; and
6.5.2 gives to the Vendors (at their expense) all such
assistance as they may reasonably request, to enable
the Vendors to pursue such rights of action against
any relevant third party
save that the Purchaser shall not be obliged to procure that
the Company takes such action as may otherwise be required
under clauses 6.5.1 and 6.5.2 if in the reasonable opinion of
the Purchaser the pursuance of such rights of action against
any relevant third party could have a materially prejudicial
effect on the goodwill of the Company.
16
<PAGE> 19
6.6 No Claim may be made against the Vendors to the extent that
the amount of such Claim is recoverable under any policy of
insurance effected by the Company, or would have been
recoverable under a policy of insurance if all the policies of
insurance in force immediately prior to Completion had been
maintained in force after Completion on a no less favourable
basis.
6.7 As between the Vendors (but without affecting the right of the
Purchaser to take action against any or all of the Vendors in
respect of any Claim) liability for any Claim shall be met be
the Vendors in proportion to their respective holdings of the
Shares; and each Vendor shall contribute to any Claim and
indemnify the others Vendors accordingly.
6.8 Notwithstanding any other provision of this Agreement, the
provisions of clauses 6.2 to 6.7 shall not apply to the extent
that any Claim arises by reason by of any fraudulent,
dishonest or wilful mis-statement or fraudulent, dishonest or
wilful omission on behalf of the Vendors or any of them.
7. RESTRICTIVE COVENANTS
7.1 In consideration for the Purchaser agreeing to buy the Shares
each of Caroline Monk and Paul Ward severally covenants that
such Vendor will not, without the prior written consent of the
Purchaser, whether directly or indirectly and whether alone or
in conjunction with, or on behalf of, any other person and
whether as principal, shareholder, director, employee, agent,
consultant, partner or otherwise:-
7.1.1 for a period of 18 months from Completion canvass,
solicit or approach, or cause to be canvassed,
solicited or approached, for orders any person who at
any time during the 12 months immediately preceding
the date of Completion is or was negotiating with the
Company for the supply by the Company of goods or
services or is or was a client or customer of the
Company, where the orders relate to goods and/or
services which are competitive with or of the type
supplied by the
17
<PAGE> 20
Company at any time during the 12 months immediately
preceding the date of Completion;
7.1.2 for a period of 18 months immediately following
Completion, deal or contract with any person who at
any time during the 12 months immediately preceding
the date of Completion is or was negotiating with the
Company for the supply by the Company of goods or
services or a client or customer of the Company,
where the dealing or contracting relates to goods
and/or services which are competitive with or of the
type supplied by the Company at any time during the
12 months immediately preceding the date of
Completion;
7.1.3 for a period of 18 months immediately following
Completion, interfere, or seek to interfere, with the
continuance of supplies to the Company from any
supplier who has been supplying goods and/or services
to the Company at any time during the 12 months
immediately preceding the date of Completion if such
interference causes or would cause that supplier to
cease supplying, or materially reduce its supply of,
those goods and/or services to the Company;
7.1.4 for a period of 2 years immediately following
Completion, solicit or entice, or endeavour to
solicit or entice, away from the Company, or employ,
any person employed in a managerial, supervisory,
technical or sales capacity by, or who is or was a
consultant to, the Company at Completion or at any
time during the period of 1 month immediately
preceding the date of Completion;
7.1.5 for a period of 18 months and within the United
Kingdom immediately following Completion be engaged,
concerned or interested in any business which
supplies goods and/or services
18
<PAGE> 21
which are competitive with or of the type supplied by
the Company;
7.1.6 use in connection with any business any name which
includes the name of the Company or any colourable
imitation of it where such use infringes the goodwill
as at the date of this Agreement of the Company.
7.2 Further in consideration for the Purchaser agreeing to buy the
Shares, each of the Vendors severally covenants that such
Vendor will not, without the prior written consent of the
Purchaser, whether directly or indirectly and whether for
his/her own benefit or for the benefit of any other person at
any time after Completion make use of, disclose or cause
unauthorised disclosure to any person (except those authorised
by the Purchaser in writing to know), any secret or
confidential information relating to the Company which
includes confidential or secret information relating to the
trade secrets, know-how, ideas, business methods, finances,
prices, business plans, marketing plans, development plans,
manpower plans, sales targets, sales statistics, customer
lists, customer relationships, computer systems or computer
software.
7.3 The parties agree that each of the undertakings set out in
this clause 7 is separate and severable and, if any of such
undertakings or part of an undertaking is held to be against
the public interest or unlawful, the remaining undertakings or
part of the undertaking will continue in full force.
7.4 If this Agreement or any wider arrangement of which it forms
part constitutes an agreement, particulars of which are
required to be furnished to the Director General of Fair
Trading pursuant section 24 of the Restrictive Trade Practices
Act 1976, then none of the parties shall give effect to or
enforce or purport to enforce any restriction by virtue of
which the Agreement (or wider arrangement) is subject to
registration until the day
19
<PAGE> 22
after relevant particulars have been duly furnished in
accordance with section 24 of that Act.
8. COMPLETION
The sale and purchase of the Shares will be completed at the offices of
the Purchaser's UK Solicitors immediately, when:-
8.1 the Vendors will deliver to the Purchaser:-
8.1.1 duly executed transfers of the Shares in favour of
the Purchaser (or as it will direct) together with
all relevant share certificates;
8.1.2 written resignations from Jeffrey Fenton as a
director and Roger Keyworth as the secretary of the
Company in the agreed terms;
8.1.3 a deed in the agreed terms acknowledging that neither
such Vendor nor any such spouse, child or company
controlled by such Vendor (as control is defined in
section 840, ICTA) has any claim against the Company
except as may be expressly disclosed in such deed and
that there is no agreement or arrangement under which
the Company has any actual, contingent or prospective
obligation (including, but not limited to, any
obligation under any guarantee entered into by the
Company) to such Vendor, spouse, child or controlled
company;
8.1.4 the certificate of incorporation, any certificate(s)
of incorporation on change of name, the common seal
and the statutory books and registers (all entered up
to date) of the Company;
8.1.5 all deeds and documents relating to the title of the
Company to the Property;
20
<PAGE> 23
8.1.6 all cheque books in current use of the Company;
8.1.7 bank statements in respect of each account of the
Company as at the close of business on the last
Business Day prior to Completion, together in each
case with a reconciliation statement to show the
position at Completion (listing unpresented cheques
drawn or received by the Company and standing orders
payable since the date of such bank statements);
8.1.8 all licences, certificates or other documents
previously specified by the Purchaser;
8.1.9 all keys, credit cards and other property (if any) of
the Company which are under the control of any person
who resigns as an officer of the Company in
accordance with this clause 8;
8.1.10 duly executed powers of attorney in the agreed terms;
8.1.11 an agreement to acquire Common Stock in the agreed
terms entered into by each of the Vendors relating to
the Consideration Shares;
8.2 each Vendor will repay, and will procure that any spouse or
child of such Vendor or any company of which such Vendor
(and/or any such spouse or child) has control (as defined in
section 840 Income and Corporation Taxes Act 1988) will repay,
all amounts owed by him, her or it to the Company, whether due
for payment or not;
8.3 the Vendors will procure that duly convened meetings are held
at which:-
8.3.1 the transfers referred to in clause 8.1.1 (subject to
stamping) are approved for registration in the books
of the Company;
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<PAGE> 24
8.3.2 any persons nominated by the Purchaser are appointed
as additional directors and as secretary of the
Company; and
8.3.3 all existing instructions to the bankers of the
Company are revoked and new instructions given to
such bankers as the Purchaser may nominate, in such
form as the Purchaser directs;
8.4 Caroline Monk and Paul Ward will enter into service agreements
with the Company in the agreed terms; and
8.5 the Purchaser will issue to each Vendor the number of
Consideration Shares set opposite that Vendor's name under the
heading "Tranche 1" in Schedule 1; and deliver to each Vendor
the relevant documents of title to such Consideration Shares.
9. ISSUE OF 2ND TRANCHE OF CONSIDERATION SHARES
9.1 Subject to the provisions of clause 9.2, the Purchaser shall
on the next Business Day falling after 90 days from Completion
("the Second Tranche Date") issue to the Vendors the number of
the Consideration Shares set opposite that Vendor's name under
the heading "Tranche 2" in Schedule 1 and deliver to each
Vendor the relevant documents of title to those Consideration
Shares.
9.2 Without prejudice to any other rights or remedies which the
Purchaser may have pursuant to any provision of this Agreement
or otherwise, in the event that the Purchaser discovers a
breach of the Warranties or the existence of a claim under
clause 5 prior to the Second Tranche Date then the number of
Consideration Shares which would otherwise fall to be issued
on the Second Tranche Date to the Vendors shall be reduced (on
a pro-rata basis) by such number as the Purchaser reasonably
believes to be equal in value to (in the case of an alleged
breach of the Warranties) the Indemnified Amount (as referred
to in clause 4.2) or (in the case of a claim under clause 5)
the value of the claim (assuming, for the purposes of this
clause, a value of (pound sterling) 0.88 per
22
<PAGE> 25
Consideration Share) and the Purchaser shall as soon as
practicable following the Second Tranche Date notify the
Vendors of the fact that it has withheld such Consideration
Shares specifying is reasonable detail the matter in respect
of which it believes has given rise to the alleged breach of
the Warranties or existence of a claim under clause 5. For the
avoidance of doubt, if the Purchaser reasonably believes that
the value of the Indemnified Amount or the value of the claim
under clause 5 exceeds the value of the Consideration Shares
which would otherwise fall to be issued on the Second Tranche
Date, then the Purchaser shall be entitled to withhold all
such Consideration Shares.
9.3 Without prejudice to any other rights or remedies which the
Purchaser may have pursuant to any other provisions of this
Agreement or otherwise, the number of Consideration Shares
which would otherwise fall to be issued on the Second Tranche
Date to the Vendors shall be reduced (on a pro-rata basis) by
such number as is equal (assuming, for the purposes of this
clause, a value of (pound sterling) 0.88 per Consideration
Share) to the value of any debts owing to the Company as at
Completion but which remain outstanding as at the Second
Tranche Date ("the Uncollected Debts") provided that:-
9.3.1 for the avoidance of doubt, if the value of the
Uncollected Debts exceeds the value of the
Consideration Shares which would otherwise fall to be
issued on the Second Tranche Date then the Purchaser
shall be entitled to withhold all such Consideration
Shares; and
9.3.2 for the avoidance of doubt, the Purchaser shall only
be entitled to being a warranty claim against the
Vendors pursuant to paragraph 5 of Schedule 4 to the
extent that it has not withheld Consideration Shares
which would otherwise fall to be issued on the Second
Tranche Date under this clause 9.3.
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<PAGE> 26
9.4 If the Vendors believe that the Purchaser has in contravention
to clauses 9.2 or 9.3 withheld Consideration Shares which
would otherwise fall to be issued on the Second Tranche Date
acted then they shall within 14 days of the Second Tranche
Date serve notice on the Purchaser specifying that fact, and
setting out in reasonable detail its reasons for believing
that the Purchaser has so acted in contravention of clause 9.2
or 9.3.
9.5 Upon receipt by the Purchaser of a notice served by the
Vendors pursuant to clause 9.4 the Vendors and the Purchaser
shall for a period of 14 days endeavour to reach agreement on
whether the Purchaser was justified in withholding
Consideration Shares and, if so, the number of Consideration
Shares which it was justified in withholding. If the Vendors
and the Purchaser are unable so to agree within the aforesaid
period of 14 days then the matter shall be submitted to an
independent chartered accountant or firm of chartered
accountants mutually acceptable to the Vendors and the
Purchaser or in default of agreement between them within 7
days to be selected at the instance of either of them by the
President for the time being of the Institute of Chartered
Accountants in England and Wales. Such submission shall be in
the form of written statements of position by the Vendors and
the Purchaser as well as an opportunity to respond to such
written statements and any request for statements or
information from the Independent Accountant. The Vendor and
the Purchaser shall co-operate to procure that the Independent
Accountant is able to reach its decision as to whether the
Purchaser was justified in withholding Consideration Shares
and if so, how many.
9.6 If at any time after the Second Tranche Date:-
9.6.1 the Independent Accountant so determines; or
9.6.2 any Uncollected Debt has been collected; or
24
<PAGE> 27
9.6.3 the Purchaser's claim for breach of the Warranties or
under clause 5 has been quantified and found to be
less than the value of the Consideration Shares
withheld from the Vendors
the Purchaser shall immediately issue the appropriate number
of Consideration Shares to the Vendors, and deliver to them
the relevant documents of title.
9.7 The Purchaser shall procure that the Company shall take all
reasonable and proper steps in the ordinary course of business
(without resort to taking legal action) to collect any
Uncollected Debts.
9.8 If as a result of any claim for breach of the Warranties
and/or under clause 5 and/or under clause 9.2 any
Consideration Shares are permanently withheld (and, for the
purposes of this clause, Consideration Shares shall be deemed
to have been permanently withheld if not issued to the Vendors
prior to 31 March 1999 unless at that date a submission has
been made to the Independent Accountant pursuant to Clause 9.5
or the Independent Accountant has not made a decision, in
which case, Consideration Shares shall (if relevant) be deemed
to have been permanently withheld at such later date as the
Independent Accountant makes a decision) and not issued to the
Vendors, such withholding shall be treated as a reduction in
the purchase consideration for the Shares.
10. ORDERLY MARKET PROVISIONS
10.1 Each Vendor hereby agrees with and undertakes to the
Purchasers as follows:-
10.1.1 He or she will not offer to sell, sell or otherwise
dispose of any of the Consideration Shares for a
period of 12 months following Completion ("the First
Period");
25
<PAGE> 28
10.1.2 He or she will not offer to sell, sell or otherwise
dispose of more than 33% of the Consideration Shares
issued to him or her for a period of 6 months
immediately following the expiry of the First Period
("the Second Period");
10.1.3 He or she will not offer to sell, sell or otherwise
dispose of more than 33% of the Consideration Shares
issue to him or her for a period of 6 months
immediately following the expiry of the Second Period
("the Third Period"). 10.2 Each Vendors may,
following the expiry of the Third Period sell or
otherwise dispose of any Consideration Shares held by
him or her.
10.2 Each Vendors may, following the expiry of the Third period
sell or otherwise dispose of any Consideration Shares held by
him or her.
11. ANNOUNCEMENTS
No announcement concerning the transactions contemplated by this
Agreement will (save as required by law or any recognised investment
exchange ) be made by the Vendors except with the prior written
approval of the Purchaser or by the Purchaser except with the prior
written approval of any of the Vendors.
26
<PAGE> 29
12. COSTS
Each party to this Agreement will bear their own costs and expenses
relating to this Agreement, except where otherwise expressly stated
save that the Purchaser shall pay the Vendors' reasonable legal and
accounts and expenses, subject to an aggregate maximum amount of (pound
sterling) 8000 (inclusive of VAT).
13. INTEREST
If any Vendor becomes liable to pay any sum pursuant to this Agreement,
whether by way of damages or otherwise, and fails to pay such sum
within 10 Business Days of its becoming payable such Vendor will be
liable to pay interest on such sum from the due date for payment at the
annual rate of 4 per cent above the base lending rate from time to time
of National Westminster Bank plc, accruing on a daily basis until
payment is made, whether before or after any judgement.
14. NOTICES
14.1 Any demand, notice or other communication in connection with
this Agreement will be in writing and will, if otherwise given
or made in accordance with this clause 14, be deemed to have
been duly given or made as follows:-
14.1.1 if sent within the United Kingdom by prepaid first
class post to an address in the United Kingdom, on
the second Business Day after the date of posting; or
14.1.2 if sent from the United States of America to an
address within the United Kingdom by prepaid airmail,
on the sixth Business Day after the date of posting;
or
14.1.3 if sent from the United Kingdom to an address within
the United States of America by prepaid airmail, on
the sixth Business Day after the date of posting; or
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<PAGE> 30
14.1.4 if delivered by hand, upon delivery at the address
provided for in this clause 14; or
14.1.5 if sent by facsimile, on the day of transmission
provided that a confirmatory copy is, on the same
Business Day that the facsimile is transmitted, sent
by pre-paid first class post in the manner provided
for in this clause 14,
provided that, if it is delivered by hand or sent by facsimile
on a day which is not a Business Day or after 4 p.m. on a
Business Day, it will instead be deemed given or made on the
next Business Day.
14.2 Any such demand, notice or other communication will, in the
case of service by post or delivery by hand, be addressed to
the recipient at the recipient's address stated in this
Agreement or such other address as may from time to time be
notified in writing by the recipient to the sender as being
the recipient's address for service and will, in the case of
service by facsimile, be sent using a facsimile number then
used by the recipient, provided that if given or made to the
Vendors' Solicitors, it will be treated as validly given or
made to all of the Vendors.
15. GENERAL
15.1 This Agreement will be binding on and enure for the benefit of
each party's successors, assigns and personal representatives.
15.2 Except insofar as they have been fully performed at
Completion, the provisions of this Agreement will continue in
full force and effect notwithstanding Completion.
15.3 The parties will do anything which may be required on or after
Completion to vest in the Purchaser legal and beneficial
ownership of the Shares and otherwise to give effect to the
terms of this Agreement.
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<PAGE> 31
15.4 Failure or delay by any party in exercising any right or
remedy under this Agreement will not operate as a waiver of
it.
15.5 Any waiver of any breach of this Agreement will not be deemed
a waiver of any subsequent breach and will in no way affect
the other terms of this Agreement.
15.6 The formation, existence, construction, performance, validity
and all aspects whatsoever of this Agreement or of any term of
this Agreement (including, but not limited to, quantum of
damage for breach) shall be governed by English law. The
parties agree that, on the balance of convenience the English
Courts shall have exclusive jurisdiction to settle any
disputes which may arise out of or in connection with this
Agreement.
29
<PAGE> 32
SCHEDULE 1
THE VENDORS
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF ORDINARY SHARES OF FIRST TRANCHE SECOND TRANCHE
(POUND STERLING) 1 IN THE CAPITAL OF OF
OF THE COMPANY TO BE SOLD CONSIDERATION SHARES CONSIDERATION
SHARES
<S> <C> <C> <C>
Jeffrey S Fenton 6,050 81,675 9,075
23 High Street
Stetchworth
Newmarket
Suffolk
CB8 9TH
Karen Mills 1,000 13,500 1,500
Castle Farm
Hasseroad
Soham
Ely
Cambridgeshire
PE7 5UW
Caroline R Monk 1,000 13,500 1,500
Cambria House
127 Station Road
Walboys
Huntingdon
Cambs
PE17 2TH
Paul Ward 950 12,825 1,425
4 Priory Road
Needingworth
St Ives
Cambridgeshire
PE17 3SD
Louise Ward 1,000 13,500 1,500
4 Priory Road
Needingworth
St Ives
Cambridgeshire
PE17 3SD
</TABLE>
30
<PAGE> 33
<TABLE>
<CAPTION>
<S> <C> <C> <C>
TOTAL 10,000 135,000 15,000
</TABLE>
31
<PAGE> 34
SCHEDULE 2
DETAILS OF THE COMPANY
Name of Company : Software Partners Publishing and
Distribution Limited
Registered number : 2463167
Registered office : Unit 2, Edison Road, Somersham Road
Industrial Estate, St Ives, Huntingdon,
Cambridgeshire PE17 4LF
Date of incorporation : 25 January 1990
Place of incorporation : England and Wales
Status of Company : private limited company
Authorised share capital : (pound sterling) 25,000 divided into 25,000
ordinary shares of (pound sterling) 1 each
Issued share capital : (pound sterling) 10,000 divided into 10,000
ordinary shares of (pound sterling) 1 each
Directors' full names : Jeffrey Stewart Fenton
Karen Mills
Caroline Rebecca Monk
Paul Ward
Secretary's full name : Roger Malcolm Keyworth
Accounting reference date : 31 May
Auditors : Hugill, Chartered Accountants, 18 Bedford
Row, London WC1R 4OB
Description of business : Software Consultancy and Supply
32
<PAGE> 35
SCHEDULE 3
THE PROPERTY
Short particulars of the Property (stating whether freehold or leasehold; in the
case of leasehold, giving brief details of the lease; and including short
particulars of any tenancy or licence affecting the title)
Property: Unit 2, Lexitron Development, Edison Road, St Ives,
Huntingdon, Cambridgeshire
Use: Warehouse and offices
Tenure: Leasehold, held on a lease dated 8 May 1997 made between (1)
Brenda Mary Smith and David James Smith and (2) the Company
for a term of 10 years from 8 May 1997.
33
<PAGE> 36
SCHEDULE 4
WARRANTIES
1. SCHEDULES 1 & 2; CAPITAL
1.1 The information contained in Schedules 1 and 2 is true and
complete in all respects.
1.2 The Shares are in issue fully paid and are beneficially owned
and registered as set out in Schedule 1 free from any third
party right.
1.3 No Contract has been entered into which requires or may
require the Company to allot or issue any share or loan
capital.
1.4 The Company has no interest in the share capital of any body
corporate.
2. INFORMATION SUPPLIED TO THE PURCHASER
2.1 The information given in the Disclosure Letter is true in all
respects and is not misleading because of any omission or
ambiguity.
2.2 The July Sales Information has been honestly prepared and is
true in all material respects.
3. THE ACCOUNTS AND THE MANAGEMENT ACCOUNTS
3.1 The Accounts:-
3.1.1 comply with the requirements of the Act and have been
prepared in accordance with all applicable accounting
standards (as that term is defined in section 256 of
the Act) and (to the extent that none are applicable)
with accounting principles and practices generally
accepted in the United Kingdom;
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<PAGE> 37
3.1.2 have been prepared on bases and principles which are
consistent with those used in the preparation of the
audited statutory accounts of the Company for the
three financial years immediately preceding that
which ended on the Accounting Date;
3.1.3 show a true and fair view of the assets and
liabilities (including contingent, unquantified and
disputed liabilities) of the Company and of the state
of affairs of the Company as at the Accounting Date
and of the results of the Company for the financial
year ended on that date; and
3.1.4 are not affected (except as disclosed in the
Accounts) by any extraordinary or exceptional item.
3.2 The Management Accounts (a true copy of which is enclosed with
the Disclosure Letter):-
3.2.1 have been honestly prepared and on bases consistent
with those used in the preparation of the Company's
management accounts for the year ended on the
Accounting Date; and
3.2.2 show with reasonable accuracy the assets and
liabilities of the Company as at the Management
Accounts Date, and give a reasonably accurate view of
its income and expenditure during the year ended on
that date.
3.3 The accounting records of the Company are up to date and
contain complete and accurate details of all transactions of
the Company and comply with the provisions of sections 221 and
222 of the Act.
35
<PAGE> 38
ASSETS
4. UNENCUMBERED TITLE; POSSESSION
Each asset reflected in the Accounts (save for current assets disposed
of by the Company in the ordinary course of its business since the
Accounting Date) and each asset treated as an asset of the Company
and/or used by the Company at the date of this Agreement:-
4.1 is in the legal and beneficial ownership of the Company, free
from any third party right and from any Contract to grant the
same;
4.2 is situated at the Property; and
4.3 is not to any extent surplus to requirements.
5. DEBTORS
The Company has not factored or discounted any debt or agreed to do so.
All of the debts which are reflected in the Accounts as owing to the
Company (apart from bad and doubtful debts to the extent to which they
have been provided for in the Accounts) or which have subsequently been
recorded in the books of the Company have realised or will realise in
the normal course of collection and within three months of Completion
their full value as included in the Accounts or in the books of the
Company, and no such debt nor any part of it has been outstanding for
more than two months from its due date for payment.
6. STOCK
The Stock now held by the Company and not written off in the Accounts:-
6.1 is not obsolete, slow moving or likely to realise less than
its book value; and
6.2 so far as the Vendors are aware is fit for its intended
purpose and of satisfactory quality and accords with any other
representation or contractual
36
<PAGE> 39
term, express or implied, which has been given, or which would
in the normal course of its business be given, by the Company
in respect of it.
7. PLANT ETC.
The plant and machinery, vehicles, fixtures and fittings, furniture,
tools and other equipment used in connection with the business of the
Company have (where appropriate) been regularly serviced and maintained
and the Vendors are not aware that any such plant and machinery,
vehicles, fixtures and fittings, furniture, tools and other equipment
is not in a good and safe state of repair and condition and in
satisfactory working order.
8. PROPERTY
8.1 The particulars of the Property shown in Schedule 3 are
complete and correct. The use of the Property for the purpose
stated in Schedule 3 corresponds to the use to which it is in
fact put.
8.2 The Company has a good and marketable title to the Property
for the estate or interest stated in Schedule 3, free from any
defects, and has in its possession, or under its control, all
duly stamped deeds and documents necessary to prove title to
the Property.
8.3 The Company does not own, occupy or use any property other
than the Property.
8.4 The Company's interest in the Property is not affected by any
of the following:-
8.4.1 any easement, covenant, restriction, agreement or
other third party right;
8.4.2 any notice, order, proposal, dispute or complaint
relating to it or its present use; or
37
<PAGE> 40
8.4.3 outgoings (other than uniform business rates, water
charges utilities, and insurance premiums) whether or
not periodically recurring, and whether payable by
the owner or occupier of the Property.
8.5 There are no subsisting allegations of a breach of any
obligations, restrictions, conditions and covenants in any
lease relating to the Property or its present use.
8.6 The use of the Property for the purpose stated in Schedule 3
is the permitted user under the provisions of all relevant
legislation and regulations made under it and all
restrictions, conditions and covenants imposed by or pursuant
to such legislation have been observed and performed.
8.7 The replies given by the Vendors' Solicitors to the
Purchaser's Solicitors written enquiries concerning the
Property are complete and correct in all respects.
9. INTELLECTUAL PROPERTY
9.1 The Company has no interest in any Intellectual Property
Rights (whether registered or not) save for the Intellectual
Property Rights details of which are given in the Disclosure
Letter, all of which are (where applicable) registered in the
name of the Company and are beneficially owned by it.
9.2 The processes employed and the products and services dealt in
by the Company do not use, embody or infringe any Intellectual
Property Rights (whether registered or not) vested in any
other party and do not give rise (contingently or otherwise)
to payment by the Company of any royalty or of any sum.
9.3 The Company is not passing off any part of its business as and
for the business of any other person and, so far as the
Vendors are aware, no person is passing off its business as
and for any part of the Company's business.
38
<PAGE> 41
10. MILLENNIUM AND EURO COMPLIANCE
The Company's computer systems and other equipment will not require any
remedial work and/or replacement to enable any part of them:
10.1 to continue functioning satisfactorily and accurately
notwithstanding the change in year digits caused by the
beginning of the year 2000, either before, during or after 1
January 2000; or
10.2 to be capable of converting sterling into Euro (meaning the
single European currency) and vice versa on and after 1
January 1999.
11. REMUNERATION AND EMPLOYEES
11.1 Full particulars of the identities, dates of commencement of
employment (or appointment to office) and terms and conditions
of employment (including remuneration and any bonus,
commission or profit sharing arrangement) of all the employees
and officers of the Company are accurately set out in the
Disclosure Letter.
11.2 Since the Accounting Date, no change has been made in the
terms of employment of any of the Company's employees (and
there is no Contract to make any such change), and no employee
has been engaged by the Company; and during the three months
ending on the date of this Agreement no employee has ceased
(or given or received notice to cease) to be so employed.
11.3 There are no amounts owing to any present or former officers
or employees of the Company, and none of them is entitled to
accrued holiday pay other than in respect of the Company's
current holiday year.
11.4 There is no person previously employed by the Company who now
has or may have a right to return to work or a right to be
reinstated or re-engaged by the Company under the provisions
of the Employment Rights Act 1996.
39
<PAGE> 42
11.5 The Company has maintained adequate and suitable records
regarding the service of each of its employees and complied
with all agreements for the time being relating to them.
12. PENSIONS
12.1 There is not in existence, and no proposal has been announced
to establish, any retirement, death or disability benefit
scheme or obligation to present or former officers or
employees or their dependants pursuant to which the Company is
or may become liable to make payments.
12.2 The Company is not under any legal or moral obligation or
ex-gratia arrangement to pay pensions, gratuities or the like
to present or former officers or employees or their
dependants.
13. INSURANCE
13.1 All assets of the Company of an insurable nature are, and have
at all material times been, insured in amounts equal to their
full replacement or reinstatement value against fire and other
risks normally insured against by persons carrying on the same
classes of business as the Company and the Company is, and has
at all material times been, covered against employer's
liability, public liability, product liability and
professional indemnity liability.
13.2 All premiums due in relation to the Company's insurances have
been paid, and nothing has been done or omitted to be done
which would make any such insurances void or voidable or which
is likely to result in an increase in premium or which would
release any insurer from any of its obligations.
13.3 There is no insurance claim pending or outstanding and, as far
as the Vendors are aware, there are no circumstances likely to
give rise to any such claim.
13.4 Full particulars of all the Company's insurances are set out
in or enclosed with the Disclosure Letter.
40
<PAGE> 43
14. ENVIRONMENTAL MATTERS
14.1 ENVIRONMENTAL AUTHORISATIONS
To the best of the Vendors' knowledge information and belief,
the Company does not require any Environmental Authorisations
to carry on its business as now carried on.
14.2 COMPLIANCE WITH ENVIRONMENTAL LAW
14.2.1 So far as the Vendors are aware, the Company and its
officers agents and employees (where the Company
could be held liable for their actions) comply and
have at all times complied with Environmental Law.
14.2.2 The Company has not received any communication in any
form from any relevant authority from which it
appears that it may be or is alleged to be in breach
of any Environmental Law, or failure to comply with
which could constitute a breach of any Environmental
Law, or compliance with which could be secured by
further proceedings. There are no circumstances known
to the Vendors which might give rise to such a
communication being received and the Vendors are not
aware of any intention on the part of any such
authority to give such notice.
14.2.3 The Company has not received any communication in any
form whereby it appears that any proceedings or other
action, claim or investigation are or have been in
existence or pending or threatened against the
Company arising from or in relation to any
Environmental Authorisations or otherwise concerning
Environmental Law.
14.3 LIABILITY
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<PAGE> 44
14.3.1 There are no facts or circumstances known to the
Vendors which may give rise to any actual or
potential Environmental Liability on the part of the
Company.
14.3.2 The Company has not received any notice or intimation
of any complaint or claim from any person in respect
of any matter concerning the Environment.
14.3.3 The Company is not and has not been engaged in any
action, litigation, arbitration or dispute resolution
proceedings relating to or concerning any actual or
potential Environmental Liability and the Vendors are
not aware of any such matters pending or being
threatened or of any circumstances or facts likely to
give rise to any such matters.
14.3.4 The Company is not and has not been subject to any
injunction or similar remedy or order by a court of
competent jurisdiction, or to any undertaking given
to such court in respect of any matters relating to
or concerning the Environment.
14.4 CONTAMINATION OF LAND
14.4.1 To the best of the Vendors' knowledge, and belief,
the Company has not contaminated any sites now or
formerly owned or occupied by the Company are free
from any Hazardous Substances which could give rise
(whether on the relevant site or elsewhere) to any
actual or potential Environmental Liability.
14.4.2 So far as the Vendors are aware, there are no
circumstances which may require expenditure (whether
by the Company or by any other person or authority)
in cleaning up or decontaminating or otherwise on any
sites now or formerly owned or occupied by the
Company in order to comply with
42
<PAGE> 45
Environmental Law or otherwise for the protection of
the Environment.
14.5 ENVIRONMENTAL INFORMATION
14.5.1 The Company has at all times properly supplied to the
competent authorities such information required by
Environmental Law to be supplied; all such
information given (whether under a legal obligation
or otherwise) was correct at the time the information
was supplied and all information contained on public
registers relating to such matters is correct.
14.5.2 The replies by the Vendors to the Environmental
Questionnaire dated 28 July 1998 are true complete
and accurate in all respects and there are attached
to such replies complete copies of all documents
referred to in such replies.
14.5.3 Full details of any remedial work carried out at any
sites now or formerly owned or occupied by the
Company and of any environmental assessment, audit,
review or investigation conducted by or on behalf of
the Company or otherwise in relation to any such
sites are contained in or annexed to the Disclosure
Letter.
15. TAXATION
15.1 All notices, returns, computations, registrations and payments
which should have been made by the Company for any Taxation
purpose have been made within the requisite periods and are
up-to-date, correct and on a proper basis and none of them is,
or is likely to be, the subject of any dispute with any
Taxation authority.
15.2 The Company has duly and properly made all Taxation claims,
disclaimers, elections and surrenders and given all notices
and consents and done all
43
<PAGE> 46
other things in respect of Taxation the making, giving or
doing of which was assumed to have been made for the purposes
of the balance sheet comprised in the Accounts.
15.3 The Company maintains complete, correct and up-to-date records
which are necessary for all Taxation purposes.
15.4 The Company is not involved in any dispute with any Taxation
authority concerning any matter likely to affect in any way
the liability of the Company to Taxation and there are no
circumstances known to the Vendors which are likely to give
rise to any such dispute.
15.5 The Company has not entered into or been a party to any
scheme, arrangement or transaction designed partly or wholly
or containing steps or stages designed partly or wholly for
the purpose of avoiding or deferring Taxation or reducing a
liability to Taxation.
15.6 If each of the capital assets of the Company owned at the
Accounting Date was disposed of for a consideration equal to
the book value of that asset in, or adopted for the purpose
of, the balance sheet comprised in the Accounts or, in the
case of assets acquired since the Accounting Date, equal to
the consideration given on acquisition, no liability to
corporation tax on chargeable gains or balancing charge under
the Capital Allowances Act 1990 would arise (and for this
purpose there will be disregarded any relief available to the
Company other than amounts falling to be deducted from the
consideration receivable under section 38 Taxation of
Chargeable Gains Act 1992).
15.7 Since the Accounting Date no event has occurred outside the
ordinary course of business of the Company which has given
rise or will or may give rise to any liability to Taxation on
the Company.
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<PAGE> 47
15.8 The Company has no interest in any asset to which Part XV
Value Added Tax Regulations 1995 applies and has not made any
election under paragraph 2(1) Schedule 10 Value Added Tax Act
1994.
16. FINANCING AND WORKING CAPITAL
16.1 Full and accurate details of all overdrafts, loans or other
financial facilities outstanding or available to the Company
are contained in the Disclosure Letter, and no person who
provides any such facility has given any indication that it
may be withdrawn or its terms altered.
16.2 The details contained in the Disclosure Letter of the credit
or debit balances on all the bank or deposit accounts of the
Company were correct at the date stated in the Disclosure
Letter and since such date there have been no payments out of
any such accounts except for routine payments and the balances
on such accounts are not now substantially different from the
balances shown in the Disclosure Letter.
16.3 The Company has, since the Accounting Date, paid its creditors
in accordance with their respective credit terms.
16.4 Having regard to existing bank and other facilities the
Company has sufficient working capital to enable it to perform
in accordance with their terms all Contracts which have been
entered into by it.
17. MATERIAL CONTRACTS
The Company is not, and has not since the Accounting Date been, a party
to or subject to any Contract which:-
17.1 involves agency, distributorship, franchising, partnership,
joint venture, consortium, or similar arrangements;
17.2 involves hire purchase, conditional sale, credit sale,
leasing, hiring or similar arrangements;
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<PAGE> 48
17.3 commits the Company to capital expenditure;
17.4 is incapable of complete performance in accordance with its
terms within six months after the date on which it was entered
into;
17.5 is for the supply of goods and/or services by or to the
Company on terms under which retrospective or future discounts
or other financial incentives are given by or to the Company
dependent on the level of purchases or any other factor;
17.6 involves warranties, indemnities or representations given in
connection with a sale of shares or assets, or is a guarantee
or indemnity in respect of the obligations of a third party,
under which any liability or contingent liability is
outstanding;
17.7 involves the Company in any residual liability in respect of
any leasehold property at any time assigned or otherwise
disposed of by it;
17.8 is not on arm's length terms or is in any way not in the
ordinary and proper course of the Company's business; or
17.9 is with or for the benefit of any Vendor or a person connected
(within the meaning of section 839 Income and Corporation
Taxes Act 1988) with any Vendor.
18. OTHER BUSINESS MATTERS
During the 12 months ended on the date of this Agreement there has been
no substantial change in the basis or terms on which any person is
prepared to do business with the Company (apart from normal price
changes), and no substantial customer or supplier of the Company has
ceased or substantially reduced its business with the Company, and no
indication has been received by the Company or any of the Vendors that
there will or may be any such change, cessation or reduction.
19. COMPANY LAW MATTERS AND GENERAL COMPLIANCE
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<PAGE> 49
19.1 Compliance has been made with all legal requirements in
connection with the formation of the Company and all issues
and grants of shares or other securities of the Company.
19.2 The copy of the memorandum and articles of association of the
Company enclosed with the Disclosure Letter is accurate and up
to date.
19.3 All returns and other documents relating to the Company
required to be filed with the Registrar of Companies have been
properly filed, and none has been so filed during the period
of 14 days ending with the date of this Agreement.
19.4 The statutory books (including all registers and minute books)
of the Company have been properly kept.
19.5 The Company has conducted its business in all material
respects in accordance with all applicable laws and
regulations of the United Kingdom.
19.6 No agreement, practice or arrangement to which the Company is
party is or ought to be (or ought to have been) registered
under or infringes any competition, anti-restrictive trade
practice or consumer protection legislation applicable in the
United Kingdom or elsewhere.
19.7 So far as the Vendors are aware, there is not pending, or in
existence, any investigation or enquiry by, or on behalf of,
any governmental or other body in respect of the affairs of
the Company.
20. LITIGATION
20.1 Neither the Company nor any person for whose acts or defaults
the Company may be liable is involved (whether as plaintiff,
defendant or any other party) in any civil, criminal, tribunal
or arbitration proceedings, and, so far as the Vendors are
aware there are no facts likely to give rise to any such
proceedings.
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<PAGE> 50
20.2 There is no unsatisfied judgment or unfulfilled order
outstanding against the Company and the Company is not party
to any undertaking or assurance given to a court, tribunal or
any other person in connection with the determination or
settlement of any claim or proceedings.
21. DEFAULT
21.1 So far as the Vendors are aware, the Company has not sold,
supplied or provided any product or service which did not,
does not or will not comply fully with all applicable laws,
regulations or standards or which was, is or will be faulty,
defective or dangerous or not in accordance with any
representation, or contractual term, express or implied,
relating to it.
21.2 So far as the Vendors are aware, the Company is not in breach
of any Contract to which it is a party, and no other party to
any such Contract is in breach of it.
22. EVENTS SINCE THE ACCOUNTING DATE
Since the Accounting Date:-
22.1 there has been no reduction in the value of the net assets of
the Company determined in accordance with the same accounting
policies as those applied in the Accounts (and valuing no
asset at a figure greater than the value attributed to it in
the Accounts or, in the case of any asset acquired since the
Accounting Date, greater than cost);
22.2 other than Stock acquired in the ordinary course of business
the Company has not acquired, or agreed to acquire, any single
asset having a value in excess of (pound sterling) 10,000 or
assets having an aggregate value in excess of (pound sterling)
25,000;
22.3 the Company has not disposed of, or agreed to dispose of, any
asset other than finished goods;
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<PAGE> 51
22.4 no dividend or other payment which is, or could be treated as,
a distribution for the purposes of Part VI ICTA or section 418
ICTA has been declared, paid or made by the Company;
22.5 the trade and business of the Company have been carried on in
the ordinary and normal course;
22.6 there has been no adverse change in the financial or trading
position or prospects of the Company;
22.7 no resolution of the shareholders of the Company has been
passed;
22.8 no management or similar charge has become payable or been
paid by the Company; and
22.9 no payment has been made by the Company to, or benefit
conferred by the Company on, any of the Vendors, save as
specified in the Disclosure Letter.
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23. EFFECTS OF THE AGREEMENT
This Agreement will not entitle any person to terminate or avoid any
Contract to which the Company is party or have any effect on any such
Contract.
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<PAGE> 53
This Agreement has been executed as a deed and delivered on the date
stated at the beginning of this Agreement
SIGNED AS A DEED )
AND DELIVERED BY )
JEFFREY STEWART FENTON ) JEFFREY STEWART FENTON
in the presence of:- )
Witness's signature: PHILIP SPEER
Name: Philip Speer
Address: Daedalus House, Station Road, Cambridge
Occupation: Solicitor
SIGNED AS A DEED )
AND DELIVERED BY )
KAREN MILLS ) KAREN MILLS
in the presence of:- ) (signed by her attorney
Caroline Monk)
Witness's signature: Philip Speer
Name:
Address:
Occupation:
51
<PAGE> 54
SIGNED AS A DEED )
AND DELIVERED BY )
CAROLINE REBECCA MONK ) CAROLINE MONK
in the presence of:- )
Witness's signature: Philip Speer
Name:
Address:
Occupation:
SIGNED AS A DEED )
AND DELIVERED BY )
PAUL WARD ) PAUL WARD
in the presence of:- )
Witness's signature: Philip Speer
Name:
Address:
Occupation:
SIGNED AS A DEED )
AND DELIVERED BY )
LOUISE WARD ) LOUISE WARD
in the presence of:- )
Witness's signature: Philip Speer
Name:
Address:
Occupation:
52
<PAGE> 55
ROMTECH, INC.
A PENNSYLVANIA CORPORATION
BY: _GERALD W KLEIN
Gerald W Klein
President and Chief Executive Officer
53
<PAGE> 1
Exhibit 10.4
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.
(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
<PAGE> 2
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 by the 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:
(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
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<PAGE> 3
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 by-law,
agreement, vote of the stockholders or directors, or otherwise.
2.2 (a) 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.
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<PAGE> 4
(b) The Board reserves the right 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 service or otherwise, based on such
factors as the Board shall determine, in its sole
discretion.
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 1,950,000, 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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<PAGE> 5
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 be
purchased. Such notice shall be accompanied by payment in full of the purchase
price, either by cash,
5
<PAGE> 6
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 the best interests
of the Company.
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<PAGE> 7
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 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
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<PAGE> 8
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.
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:
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<PAGE> 9
(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 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.
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(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, or on such
accelerated basis as the Board may determine at or after grant, for a period of
three months, or such other period as the Board may specify from time to time.
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.
(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.
10
<PAGE> 11
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 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
11
<PAGE> 12
the Rules.
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. 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 and
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.
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.
12
<PAGE> 13
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.
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
13
<PAGE> 14
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.
14
<PAGE> 1
EXHIBIT 10.18
June 23, 1998
Joseph A. Falsetti
RomTech, Inc.
2000 Cabot Boulevard, Suite 100
Langhorne, Pennsylvania 19047
Re: Separation Agreement and General Release
Dear Joe:
This letter is to confirm the terms of your resignation as Chairman of the
Board and Chief Executive Officer of RomTech, Inc.
(the "Company").
In an effort to amicably resolve any issues relating to your employment
and its termination, the Company proposes the following agreement ("Agreement"),
which includes a general release:
1. In consideration for your general release and your fulfillment of the
various undertakings set forth in this Agreement, the Company, intending to be
legally bound, agrees as follows:
a. The Company will pay you your current base salary for a period of
12 months, commencing on the date of your execution of this agreement (the
"Severance Period"), at regular pay intervals and less taxes and other
deductions required by law to be withheld.
b. During the Severance Period, the Company will continue to provide
you with the same health insurance, disability insurance and life insurance that
the Company provided to you immediately prior to your termination. You will be
advised in a separate written communication of your right under COBRA to
continue the health insurance coverage beyond the Severance Period at your own
cost. Aside from the Company's health insurance, disability insurance and life
insurance plans, you are no longer eligible to participate in any other Company
benefit plans.
c. The Company has previously granted to you options to acquire a
total of 57,500 shares of the Company's Common Stock (the "Stock Options"). The
Company hereby agrees that you may exercise the Stock Options as such options
vest in accordance with their terms, and, notwithstanding the termination of
your
<PAGE> 2
employment with the Company, the Stock Options shall continue to be exercisable
for the remainder of respective terms.
2. In consideration for the Company's promises in paragraph 1 and
intending to be legally bound, you represent, warrant and agree as follows:
a. By your signature on this Agreement, you release and forever
discharge the Company and all of its affiliates and related entities, and the
past, present and future officers, directors, attorneys, employees, shareholders
and agents of each of the foregoing, as well as their respective heirs, legal
representatives, successors and assigns (collectively "Released Parties"),
jointly and severally, from any and all actions, charges, causes of action or
claims of any kind (collectively "claims"), known or unknown, which you, your
heirs, legal representatives, agents, or anyone claiming by or through you, ever
had, now have or hereafter may have against any of the Released Parties arising
out of any matter, occurrence or event existing or occurring prior to the date
you execute this Agreement, including, without limitation, the following: any
claims relating to or arising out of your employment with and/or termination of
employment by the Company; any claims for unpaid or withheld wages, severance,
benefits, bonuses, commissions and/or other compensation of any kind; any claim
that you are entitled to Company stock (except upon the exercise of the Stock
Options held by you on the date hereof and referred to in paragraph 1c hereof)
or stock options; any claims for attorneys' fees, costs or expenses; any claims
of discrimination based on age, sex, race, religion, color, creed, disability,
handicap, citizenship, national origin, sexual preference or any other factor
prohibited by law; and/or any other statutory or common law claims, now existing
or hereinafter recognized, including, but not limited to, breach of contract,
libel, slander, fraud, wrongful discharge, promissory estoppel, equitable
estoppel and misrepresentation. The general release provided for in this
paragraph 2a does not apply to any claims to enforce this Agreement, to any
claims to enforce your rights under the Stock Options or to any claim arising
out of any matter, occurrence or event occurring after your execution of this
Agreement.
b. You shall not disparage or deprecate the Company or its
affiliates or related entities or any of their officers, directors, employees,
shareholders or principals, or any of their operations, assets, services, work
product, character, motives or financial standing. Further, you agree to keep
the terms and conditions of this Agreement secret and confidential and not to
disclose them voluntarily to any third party, except to the extent required by
law, to enforce the Agreement or to obtain confidential legal, tax or financial
advice. You shall maintain the confidentiality of and not reveal to any third
parties any information, documents, plans, programs, policies or other material
of the Company which are confidential or secret to the Company or in which the
Company has a proprietary interest. In making this Agreement, you acknowledge
that any violation or breach of this commitment by you will cause immediate,
irreparable and substantial harm to the Company and that the Company will be
entitled to appropriate injunctive and other relief, including monetary damages,
against you in a court of competent jurisdiction.
c. You hereby voluntarily and irrevocably resign as a director of
<PAGE> 3
the Company and as Chairman of the Board of the Company.
d. You represent and warrant that you have returned to the Company
all memoranda, notes, records, reports, manuals, drawings and other documents
(and all copies thereof whether in written form or on computer disk or tape)
relating to the business of the Company and/or its affiliates and all property
associated therewith, which you possess or have under your control. Without
limiting the generality of the foregoing, you acknowledge that you have returned
to the Company all copies of all databases containing information about the
Company and/or its affiliates and related entities, regardless of whether such
information is in hard copy or stored electronically or on tape. You agree that
on and after the date of this letter you have not sought and will not seek to
access the information systems of the Company or its affiliates for any purpose
whatsoever.
e. Non-Competition.
(i) Until June 30, 1999, you shall not, unless acting with the
prior written consent of the board of directors of the Company, directly or
indirectly, own, manage, operate, join, control, finance or participate in the
ownership, management, operation, control or financing of, or be connected as an
officer, director, advisor, employee, partner, principal, agent, representative,
consultant or otherwise with or use or permit your name to be used in connection
with, any business or enterprise engaged in the Business (as hereinafter
defined). You recognize that the Business as engaged in by the Company is and
will continue to be international in scope, and that geographical limitations on
this non-competition covenant (and the non-solicitation covenant set forth in
paragraph f hereof) are therefore not appropriate. For purposes of this
Agreement, "Business" shall be defined as any business or enterprise engaged in
the design, development, manufacture, marketing, distribution or sale of any
software or Internet-based product which competes with any software or
Internet-based product sold or otherwise provided by the Company and/or any
subsidiary or affiliate of the Company.
(ii) The foregoing restriction shall not be construed to
prohibit your ownership of not more than 5% of any class of securities of any
corporation which is engaged in the Business having a class of securities
registered pursuant to the Securities Exchange Act of 1934 as amended (the
"Exchange Act"), provided that such ownership represents a passive investment
and that neither you nor any group of persons including yourself in any way,
either directly or indirectly, manages or exercises control of any such
corporation, guarantees any of its financial obligations, otherwise takes any
part in its business other than exercising your rights as a shareholder, or
seeks to do any of the foregoing.
f. No Solicitation. Until June 30, 1999, you shall not, either
directly or indirectly, (i) call on or solicit any person, firm, corporation or
other entity who or which at any time during the period from the date hereof to
June 30,
<PAGE> 4
1999 was a customer of the Company or any of its subsidiaries or affiliates with
respect to the activities prohibited by paragraph 2e hereof or (ii) solicit the
employment of any person who was employed by the Company or any of its
subsidiaries or affiliates on a full or part-time basis at anytime during the
period from the date hereof to June 30, 1999.
3. The Company's obligations under paragraph 1 above will cease if you:
(1) initiate an action against any of the Released Parties with respect to a
claim that has been released pursuant to paragraph 2a above; or (2) breach any
of the representations, warranties or agreements set forth in this Agreement.
4. You acknowledge and agree that the money and benefits you will receive
under paragraph 1 above exceed the money and benefits to which you otherwise
would be entitled, and that such excess is sufficient consideration to support
the grant of the general release in paragraphs 2a and 3 above and to support
your other undertakings set forth in this Agreement.
5. This Agreement sets forth our complete understanding and agreement and
supersedes all prior agreements between us, oral or written, express or implied.
6. This Agreement is being offered for the sole purpose of settling
amicably any and all possible disputes between us and assisting you in your
transition to a new job. This Agreement should not be construed as an admission
or concession of liability or wrongdoing by the Company or by you.
7. If any provision of this Agreement is deemed unlawful or unenforceable
by a court of competent jurisdiction, the remaining provisions shall continue in
full force and effect.
8. By your execution of this Agreement, your represent, warrant and agree
that:
a. You have read carefully the terms of this Agreement, including
the general release.
b. You have had an opportunity to and have been encouraged to review
this Agreement, including the general release, with an attorney.
c. You understand the meaning and effect of the terms of this
Agreement, including the general release.
d. You were given sufficient time to determine whether you wished to
enter into this Agreement, including the general release.
e. The entry into and execution of this Agreement, including the
general release, is your own free and voluntary act without compulsion of any
kind.
<PAGE> 5
f. No promise or inducement not expressed herein has been made to
you.
If you agree with the proposed terms as set forth above, please sign this
letter indicating your understanding and agreement and return it to me on or
before Thursday, June 25, 1998. The additional copy is for your records.
If I do not receive a signed copy of this letter by Thursday, June 25,
1998, I will assume that you have rejected this proposal. If this proposal is
rejected, your employment shall nevertheless be deemed to have terminated
effective on the date of this letter and this letter constitutes notice of such
termination.
We wish you the best in the future.
Sincerely,
RomTech, Inc.
UNDERSTOOD AND AGREED,
INTENDING TO BE LEGALLY BOUND: By: /s/ Gerald W. Klein
-----------------------------
Gerald W. Klein,
Vice President and
Chief Financial Officer
/s/ Joseph A. Falsetti
- -----------------------------
Joseph A. Falsetti
Date: June 24, 1998
-------------
Witness: /s/ Lawrence Fanelle
--------------------
<PAGE> 1
EXHIBIT 10.19
AMENDMENT TO DISTRIBUTION AGREEMENT
This Amendment (the "Amendment") to the Distribution Agreement dated
May 1, 1997 is made this 4th day of September, 1998 by and between RomTech,
Inc., a Pennsylvania corporation, with its principal place of business located
at 2000 Cabot Boulevard, Suite 110, Langhorne, Pennsylvania 19047 (Contact: John
Baer) (the "Manufacturer"), and GT Interactive Software, Value Products
Division, a Delaware corporation, with its principal place of business located
at 2300 Berkshire Lane North, Plymouth, Minnesota 55441 (Contact: Timothy Stahl)
(the "Distributor").
Manufacturer and Distributor entered into a Distribution Agreement on
May 1, 1997 ("Distribution Agreement"). A copy of the Distribution Agreement is
attached hereto as Exhibit A. All the terms, conditions and provisions of the
Distribution Agreement, unless specifically modified in this Amendment, are made
a part of this Amendment.
Manufacturer and Distributor hereby amend the Distribution Agreement in
the following manner.
Paragraph 1: The terms "Addendum of this Agreement" in
Paragraph 1 shall be replaced with "Exhibit B", which is attached
hereto.
Paragraph 3: Paragraph 3 shall be stricken and replaced with
the following:
Manufacturer grants to Distributor and Distributor accepts
from Manufacturer the right to distribute the Products and to market
the Products to Resellers located in North America excluding Micro
Center and DHR. Such right shall be exclusive to Distributor with the
exception that Manufacturer shall be entitled to distribute the
Products in any manner through electronic commerce.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date set forth above.
MANUFACTURER DISTRIBUTOR
RomTech, Inc. GT Interactive Software
By: /s/ John Baer By: /s/ Timothy Stahl
--------------------------------- --------------------------
John Baer, Vice President, Sales Timothy Stahl, Senior Buyer
<PAGE> 2
Exhibit "A"
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, Pennsylvania 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
<PAGE> 3
Product can be returned upon Manufacturer's authorization.
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
By /s/ John Baer By /s/ Timothy Stahl
---------------------- -----------------------
Authorized Signature Authorized Signature
<PAGE> 4
EXHIBIT B
Galaxy
Software
Retail Price List
Productivity
9/9/98
<TABLE>
<CAPTION>
PRODUCT PLATFORM DATE INDIVIDUAL CASE CASE
SHIPPING DIMENSIONS QTY. DIMENSIONS
------- -------- -------- ---------- ---- ----------
<S> <C> <C> <C> <C> <C>
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Fonts 2,600 Win.95 / Win. 3.1 Now 8.25x10.25x2.125 40 21.250x17.250x22.5
Presentation Pictures & Sounds Win.95 / Win. 3.1 Now 8.25x10.25x2.125 40 21.250x17.250x22.5
Custom Calendar Win.95 Now 8.25x10.25x2.125 40 21.250x17.250x22.5
FindIt! Win.95 / NT Now 8.25x10.25x2.125 40 21.250x17.250x22.5
Student Essentials Win.95 SEPTEMBER, 1998 8.25x10.25x2.125 40 21.250x17.250x22.5
Galaxy of Clipart, 75,000 images Win.95 / Win. 3.1 Now 9.75x11.25x2 40 23.25x20.125x21.25
GALAXY OF HOME OFFICE HELP:
JEWEL CASE PRODUCT:
PrintIt! 2.0 Win.95 / Win. 3.1 Now 5.5x4.9x.438 100 10.75x10.125x11.75
Fonts 2,600 Win.95 / Win. 3.1 Now 5.5x4.9x.438 100 10.75x10.125x11.75
Clipart 25,000 Win.95 / Win. 3.1 Now 5.5x4.9x.438 100 10.75x10.125x11.75
Presentation Pictures Win.95 / Win. 3.1 Now 5.5x4.9x.438 100 10.75x10.125x11.75
Wav Sound Effects Win.95 / Win. 3.1 Now 5.5x4.9x.438 100 10.75x10.125x11.75
Icons 8,000 Win.95 / Win. 3.1 Now 5.5x4.9x.438 100 10.75x10.125x11.75
Custom Calendar Win.95 Now 5.5x4.9x.438 100 10.75x10.125x11.75
Clipart 25,000 Vol II Win.95 / Win. 98 Now 5.5x4.9x.438 100 10.75x10.125x11.75
Christian Desktop Win.95 / Win. 98 SEPTEMBER, 1998 5.5x4.9x.438 100 10.75x10.125x11.75
EDUCATION
Universe Explorer Win.95 / Win. 3.1 Now 8.25x10.25x2.125 40 21.250x17.250x22.5
Exploring Civilizations Win.95 / Win. 3.1 Now 8.25x10.25x2.125 40 21.250x17.250x22.5
LANDSCAPE RENDERING
VistaPro 4.0 Win95 / NT Now 8.25x10.25x2.125 40 21.250x17.250x22.5
</TABLE>
<TABLE>
<CAPTION>
PRODUCT CASE STREET UPC CODE
WEIGHT PRICE 7439990+
------- ------ ------ --------
<S> <C> <C> <C>
GALAXY OF HOME OFFICE HELP:
RETAIL BOX PRODUCT:
Clipart 50,000 23 lbs. $ 14.95 ...11359
PrintIt! 2.0 Plus 23 lbs. $ 14.95 ...11854
Fonts 2,600 23 lbs. $ 14.95 ...10253
Presentation Pictures & Sounds 23 lbs. $ 14.95 ...10307
Custom Calendar 23 lbs. $ 14.95 ...10956
FindIt! 23 lbs. $ 14.95 ...10857
Student Essentials 23 lbs. $ 14.95 ...13704
Galaxy of Clipart, 75,000 images 24.5 lbs. $ 19.95 ...10758
GALAXY OF HOME OFFICE HELP:
JEWEL CASE PRODUCT:
PrintIt! 2.0 22 lbs. $ 12.95 ...11809
Fonts 2,600 22 lbs. $ 12.95 ...09608
Clipart 25,000 22 lbs. $ 12.95 ...09509
Presentation Pictures 22 lbs. $ 12.95 ...08656
Wav Sound Effects 22 lbs. $ 12.95 ...08700
Icons 8,000 22 lbs. $ 12.95 ...10352
Custom Calendar 22 lbs. $ 12.95 ...10901
Clipart 25,000 Vol II 22 lbs. $ 12.95 ...12356
Christian Desktop 22 lbs. $ 12.95 ...13902
EDUCATION
Universe Explorer 23 lbs. $ 19.95 ...09455
Exploring Civilizations 23 lbs. $ 19.95 ...11755
LANDSCAPE RENDERING
VistaPro 4.0 23 lbs. $ 69.95 ...12004
</TABLE>
GTIS PART NUMBER IS THE UPC NUMBER WITHOUT THE FIRST AND LAST DIGIT
<PAGE> 5
EXHIBIT B, CONT'D
Galaxy
Software
Retail Price List
Productivity
9/9/98
<TABLE>
<CAPTION>
PRODUCT PLATFORM DATE INDIVIDUAL CASE CASE
SHIPPING DIMENSIONS QTY. DIMENSIONS
------- -------- -------- ---------- ---- ----------
<S> <C> <C> <C> <C> <C>
GALAXY OF HOME OFFICE HELP:
RETAIL BOX PRODUCT:
Clipart 50,000 Win.95 / Win. 3.1 Now 8.25x10.25x2.125 40 21.250x17.250x22.5
PrintIt! 2.0 Plus Win.95 / Win. 3.1 Now 8.25x10.25x2.125 40 21.250x17.250x22.5
Fonts 2,600 Win.95 / Win. 3.1 Now 8.25x10.25x2.125 40 21.250x17.250x22.5
Presentation Pictures & Sounds Win.95 / Win. 3.1 Now 8.25x10.25x2.125 40 21.250x17.250x22.5
Custom Calendar Win.95 Now 8.25x10.25x2.125 40 21.250x17.250x22.5
FindIt! Win.95 / NT Now 8.25x10.25x2.125 40 21.250x17.250x22.5
Student Essentials Win.95 SEPTEMBER, 1998 8.25x10.25x2.125 40 21.250x17.250x22.5
Galaxy of Clipart, 75,000 images Win.95 / Win. 3.1 Now 9.75x11.25x2 40 23.25x20.125x21.25
GALAXY OF HOME OFFICE HELP:
JEWEL CASE PRODUCT:
PrintIt! 2.0 Win.95 / Win. 3.1 Now 5.5x4.9x.438 100 10.75x10.125x11.75
Fonts 2,600 Win.95 / Win. 3.1 Now 5.5x4.9x.438 100 10.75x10.125x11.75
Clipart 25,000 Win.95 / Win. 3.1 Now 5.5x4.9x.438 100 10.75x10.125x11.75
Presentation Pictures Win.95 / Win. 3.1 Now 5.5x4.9x.438 100 10.75x10.125x11.75
Wav Sound Effects Win.95 / Win. 3.1 Now 5.5x4.9x.438 100 10.75x10.125x11.75
Icons 8,000 Win.95 / Win. 3.1 Now 5.5x4.9x.438 100 10.75x10.125x11.75
Custom Calendar Win.95 Now 5.5x4.9x.438 100 10.75x10.125x11.75
Clipart 25,000 Vol II Win.95 / Win. 98 Now 5.5x4.9x.438 100 10.75x10.125x11.75
Christian Desktop Win.95 / Win. 98 SEPTEMBER, 1998 5.5x4.9x.438 100 10.75x10.125x11.75
EDUCATION
Universe Explorer Win.95 / Win. 3.1 Now 8.25x10.25x2.125 40 21.250x17.250x22.5
Exploring Civilizations Win.95 / Win. 3.1 Now 8.25x10.25x2.125 40 21.250x17.250x22.5
LANDSCAPE RENDERING
VistaPro 4.0 Win95 / NT Now 8.25x10.25x2.125 40 21.250x17.250x22.5
</TABLE>
<TABLE>
<CAPTION>
PRODUCT CASE STREET UPC CODE
WEIGHT PRICE 7439990+
------- ------- ------ --------------
<S> <C> <C> <C>
GALAXY OF HOME OFFICE HELP:
RETAIL BOX PRODUCT:
Clipart 50,000 23 lbs. $ 14.95 ...11359
PrintIt! 2.0 Plus 23 lbs. $ 14.95 ...11854
Fonts 2,600 23 lbs. $ 14.95 ...10253
Presentation Pictures & Sounds 23 lbs. $ 14.95 ...10307
Custom Calendar 23 lbs. $ 14.95 ...10956
FindIt! 23 lbs. $ 14.95 ...10857
Student Essentials 23 lbs. $ 14.95 ...13704
Galaxy of Clipart, 75,000 images 24.5 lbs. $ 19.95 ...10758
GALAXY OF HOME OFFICE HELP:
JEWEL CASE PRODUCT:
PrintIt! 2.0 22 lbs. $ 12.95 ...11809
Fonts 2,600 22 lbs. $ 12.95 ...09608
Clipart 25,000 22 lbs. $ 12.95 ...09509
Presentation Pictures 22 lbs. $ 12.95 ...08656
Wav Sound Effects 22 lbs. $ 12.95 ...08700
Icons 8,000 22 lbs. $ 12.95 ...10352
Custom Calendar 22 lbs. $ 12.95 ...10901
Clipart 25,000 Vol II 22 lbs. $ 12.95 ...12356
Christian Desktop 22 lbs. $ 12.95 ...13902
EDUCATION
Universe Explorer 23 lbs. $ 19.95 ...09455
Exploring Civilizations 23 lbs. $ 19.95 ...11755
LANDSCAPE RENDERING
VistaPro 4.0 23 lbs. $ 69.95 ...12004
</TABLE>
GTIS PART NUMBER IS THE UPC NUMBER WITHOUT THE FIRST AND LAST DIGIT
<PAGE> 1
ROMTECH, INC. EXHIBIT 11.1
COMPUTATION OF EARNINGS/(LOSS) PER SHARE
<TABLE>
<CAPTION>
Years ended June 30,
--------------------------------
1998 1997
---- ----
<S> <C> <C>
Net income/(loss) attributable to common stock $1,134,639 ($2,210,359)
========== ============
Weighted average common shares outstanding - basic 8,716,756 6,380,517
Adjustments to common and common equivalent shares
outstanding - basic:
Dilutive effect of common stock equivalents 937,850 - 0 -
---------- ------------
Weighted average common shares outstanding - diluted 9,654,606 6,380,517
========= =========
Net income/(loss) per common and common
Equivalent share - diluted $0.12 ($0.35)
===== =======
</TABLE>
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES
<TABLE>
<CAPTION>
Name Place of Incorporation
---- ----------------------
<S> <C>
1. Virtual Reality Laboratories, Inc. Pennsylvania
2. Software Partners Publishing and England and Wales
Distribution Limited
</TABLE>
<PAGE> 1
EXHIBIT 23.1
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 and in the registration statement
(No. 333-42661) on Form S-8 of RomTech, Inc. of our report dated August 14,
1998, relating to the consolidated balance sheet of RomTech, Inc. and
subsidiary as of June 30, 1998, 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, 1998, which report appears in the June 30, 1998
Annual Report on Form 10-KSB of RomTech, Inc.
/s/ KPMG Peat Marwick LLP
- ---------------------------
Philadelphia, Pennsylvania
September 9, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 953,648
<SECURITIES> 0
<RECEIVABLES> 1,978,238
<ALLOWANCES> 60,000
<INVENTORY> 800,742
<CURRENT-ASSETS> 3,828,522
<PP&E> 622,734
<DEPRECIATION> 368,870
<TOTAL-ASSETS> 4,403,422
<CURRENT-LIABILITIES> 1,413,501
<BONDS> 0
0
0
<COMMON> 8,176,826
<OTHER-SE> 1,148,550
<TOTAL-LIABILITY-AND-EQUITY> 4,403,422
<SALES> 9,275,889
<TOTAL-REVENUES> 9,275,889
<CGS> 3,441,793
<TOTAL-COSTS> 3,441,793
<OTHER-EXPENSES> 4,532,538
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 56,229
<INCOME-PRETAX> 1,255,699
<INCOME-TAX> 3,069
<INCOME-CONTINUING> 1,252,630
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,252,630
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0.12
</TABLE>
