UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number 34-015178A
ROYCE LABORATORIES, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
FLORIDA 59-2202295
- ------------------------------ ---------------------------------
State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization
5350 N.W. 165TH STREET, MIAMI, FLORIDA 33014
- -------------------------------------- --------
Address of principal executive offices) (Zip Code)
(305) 624-1500
--------------------------------------------------
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days. Yes X No _____
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
13,519,213 shares of Common Stock, $.005 par value as of November 7,
1996.
<PAGE>
ROYCE LABORATORIES, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets at
September 30, 1996 and December 31, 1995 3
Consolidated Statements of Operations for the
Three and Nine Month Periods Ended September 30, 1996 and 1995 4
Consolidated Statement of Changes in Stockholders' Equity for the
Nine Months Ended September 30, 1996 5
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1996 and 1995 6
Notes to Consolidated Financial Statements 7
Item 2. Management's discussion and analysis of financial
condition and results of operations 10
PART II OTHER INFORMATION
Item 1. Legal proceedings 14
Item 2. Changes in securities 14
Item 3. Defaults upon senior securities 14
Item 4. Submission of matters to a vote of security holders 14
Item 5. Other information 14
Item 6. Exhibits and reports on Form 8-K 15
</TABLE>
2
<PAGE>
ROYCE LABORATORIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARES)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------- -------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ...................................................... $ 3,950 $ 2,291
Accounts receivable, net of allowances
of $1,740 and $909, respectively ............................................. 3,780 3,466
Inventories .................................................................... 5,858 4,212
Prepaid expenses and other current assets ...................................... 582 315
------- -------
Total current assets ......................................................... 14,170 10,284
Property and equipment, net ....................................................... 3,359 1,732
Other assets ...................................................................... 59 77
------- -------
$17,588 $12,093
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................................... $ 1,746 $ 2,521
Accrued liabilities ............................................................ 649 628
Current maturities of long-term debt ........................................... 386 90
------- -------
Total current liabilities .................................................... 2,781 3,239
Long-term debt .................................................................... 1,053 181
------- -------
Total liabilities ............................................................ 3,834 3,420
------- -------
Commitments and contingencies ..................................................... -- --
------- -------
Stockholders' equity:
Common stock, $.005 par value, 35,000,000 shares
authorized; 13,519,213 and 12,838,466 shares issued,
respectively ................................................................. 67 64
Additional paid-in capital ..................................................... 30,335 26,471
Accumulated deficit ............................................................ (16,637) (17,851)
Treasury stock (2,500 shares at cost) .......................................... (11) (11)
------- -------
Total stockholders' equity ................................................... 13,754 8,673
------- -------
$17,588 $12,093
======= =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
3
<PAGE>
ROYCE LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT SHARES AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- -------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 5,823 $ 2,379 $ 17,216 $ 6,522
Cost of goods sold 4,020 1,838 11,200 4,784
-------- ----------- ---------- -----------
Gross profit 1,803 541 6,016 1,738
Operating Expenses:
Research and development 499 567 1,252 1,235
Selling, general and administrative 1,180 791 3,633 2,122
-------- ----------- ---------- -----------
Operating income (loss) 124 ( 817) 1,131 ( 1,619)
-------- ----------- ---------- -----------
Other income (expense):
Other income 30 58 162 123
Interest expense ( 27) ( 7) ( 47) ( 17)
-------- ----------- ---------- -----------
3 51 115 106
-------- ----------- ---------- -----------
Income (loss) before income taxes 127 ( 766) 1,246 ( 1,513)
Income taxes ( 9) -- ( 32) --
-------- ----------- ---------- -----------
Net income (loss) $ 118 ($ 766) $ 1,214 ($ 1,513)
======== =========== ========== ===========
Per share data:
Earnings (loss) per common and common
equivalent share $ .01 ($ .06) $ .09 ($ .12)
======== ========== ========== ==========
Weighted average number of common and
common equivalent shares outstanding 13,644,879 12,632,768 14,013,366 12,189,873
========== =========== ========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
4
<PAGE>
ROYCE LABORATORIES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS EXCEPT SHARES)
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock Additional Total
------------------------ Paid-in Accumulated Treasury Stockholders'
Shares Amount Capital Deficit Stock Equity
------- ------ ---------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1995 12,838,466 $ 64 $ 26,471 ($ 17,851) ($ 11) $ 8,673
Issuance of stock -
exercise of warrants and
options 680,747 3 3,766 -- -- 3,769
Stock options -- -- 98 -- -- 98
Net income -- -- -- 1,214 -- 1,214
----------------- ------- ----------- ----------- -------- -----------
Balance at September 30, 1996 13,519,213 $ 67 $ 30,335 ($ 16,637) ($ 11) $ 13,754
========== ======= =========== ========== ======= ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
5
<PAGE>
ROYCE LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS EXCEPT IN SUPPLEMENTAL DISCLOSURES)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------
1996 1995
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,214 ($ 1,513)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation 396 207
Option grant 32 --
Changes in operating assets and liabilities:
Increase in accounts receivable ( 314) ( 758)
Increase in inventories ( 1,646) ( 1,434)
Increase in other current assets ( 267) ( 190)
(Increase) decrease in other assets 18 ( 4)
Decrease in accounts payable ( 775) ( 213)
Increase in accrued liabilities 87 76
-------- --------
Net cash used in operating activities ( 1,255) ( 3,829)
-------- --------
Cash flows from investing activities:
Acquisition of property and equipment ( 1,464) ( 652)
-------- --------
Net cash used in investing activities ( 1,464) ( 652)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 743 138
Repayment of long-term debt ( 134) ( 39)
Net proceeds from issuance of stock 3,769 4,485
Collection of loans receivable - 27
-------- --------
Net cash provided by financing activities 4,378 4,611
-------- --------
Net increase in cash and cash equivalents 1,659 130
Cash and cash equivalents, beginning of period 2,291 3,323
-------- --------
Cash and cash equivalents, end of period $ 3,950 $ 3,453
======== ========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
During the nine months ended September 30, 1996 and 1995, the Company made
cash payments for interest totaling approximately $50,000 and $16,000,
respectively.
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
During the nine months ended September 30, 1996 and 1995, the Company
incurred $546,000 and $101,000, respectively, in capital lease obligations
for new equipment.
During the nine months ended September 30, 1995, the Company issued 12,017
shares of unregistered common stock in satisfaction of contract obligations.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
6
<PAGE>
ROYCE LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
NOTE 1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
I. Interim Financial Statements
The unaudited financial statements presented herein have been prepared in
accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. These statements should be read in conjunction with the financial
statements and notes thereto included in the Company's Form 10-K for the year
ended December 31, 1995. The accompanying unaudited financial statements have
not been examined by independent certified public accountants in accordance with
generally accepted auditing standards, but in the opinion of management such
financial statements include all adjustments, consisting only of normal
recurring adjustments, that are necessary to present fairly the Company's
financial position and results of operations for the interim periods. The
results of operations for the three and nine month periods ended September 30,
1996 may not be indicative of the results that may be expected for the year
ending December 31, 1996.
II. Significant Accounting Policies
(A) Earnings (loss) per common and common equivalent share
Earnings (loss) per common and common equivalent share amounts are computed by
dividing net income (loss) by the weighted average number of shares of common
stock and common stock equivalents outstanding during each of the periods.
Warrants, options and other common stock equivalents have not been included in
the calculation of loss per share for the three and nine month periods ended
September 30, 1995 because their effect would be anti-dilutive. Primary and
fully diluted earnings per share were the same for the three and nine month
periods ended September 30, 1996.
(B) Reclassification
Certain amounts in the 1995 financial statements have been reclassified to
conform to the 1996 presentation.
NOTE 2. INVENTORIES
September 30, December 31,
1996 1995
------------- ------------
(Unaudited)
Raw materials $ 2,276 $ 2,439
Work-in-progress 1,585 783
Finished goods 1,997 990
---------- ----------
$ 5,858 $ 4,212
========== ==========
7
<PAGE>
ROYCE LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
NOTE 3. LONG-TERM DEBT
On August 5, 1996, the Company received $742,500 in net proceeds under a bank
term loan related to purchases of equipment. The term loan is payable in 48
monthly installments of $19,022, consisting of principal and interest, and is
collateralized by a first priority security interest in all of the equipment and
fixtures owned by the Company, except equipment financed under capital leases.
The effective interest rate on the term loan is 10.5%. In connection with this
loan, the Company is required to comply with various covenants, including debt
to equity and interest coverage ratios.
On August 27, 1996, the Company entered into a $546,000 non-cancelable
three-year capital lease agreement for furniture and equipment. The obligation
is payable in monthly installments, consisting of principal and interest at
10.4% per annum, and is secured by the furniture and equipment leased. At the
end of the original lease term, the Company has the option to purchase the
equipment for 25% of its total cost.
NOTE 4. INCOME TAXES
The Company used approximately $0.2 million and $1.5 million, respectively, of
its net operating loss carryforwards to offset 90% of its taxable income in the
three and nine month periods ended September 30, 1996. Accordingly, the
Company's net deferred tax asset and its valuation allowance for such asset were
reduced by approximately $60,000 and $550,000, respectively, in the three and
nine month periods ended September 30, 1996. The provision for income taxes for
the three and nine months ended September 30, 1996 consists of the Company's
estimate of alternative minimum taxes incurred during the periods.
NOTE 5. CAPITAL STOCK
1995 Private placement warrants
As part of the Company's 1995 private placement, the Company issued 833,333
twelve-month warrants (the "Private Warrants") to purchase one share of common
stock at an exercise price of $6.50 per share until July 20, 1996. The exercise
price of these warrants was reduced from $6.50 to $6.00 during the 60 day period
beginning December 12, 1995. During the nine months ended September 30, 1996,
the Company issued 581,333 shares of its common stock as a result of the
exercise of 581,333 Private Warrants. Net proceeds from the exercise of these
warrants amounted to approximately $3.4 million. The remaining 252,000 Private
Warrants expired on July 20, 1996. The shares of common stock underlying the
Private Warrants were registered for sale by the holders thereof under the
Securities Act of 1933, as amended.
8
<PAGE>
ROYCE LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
NOTE 6. COMMITMENTS AND CONTINGENCIES
In February 1993, the Securities and Exchange Commission (the "SEC") initiated a
formal investigation into possible violations of the federal securities laws by
the Company and certain of its officers and directors. The SEC's examination
focused on the Company's public disclosure during the period between July 1991
and April 1992 regarding the status of the Company's abbreviated new drug
applications ("ANDAs") for Piroxicam and Minoxidil and on sales of securities
during this period by certain persons, including certain Company executive
officers and/or directors.
On May 2, 1996, the Company and Patrick J. McEnany, the Company's Chairman and
Chief Executive Officer, entered into a settlement (the "Settlement") with the
SEC resolving the SEC's formal investigation with respect to the Company and Mr.
McEnany, without admitting or denying that a violation of the securities laws
had occurred. As part of the Settlement, the Company and Mr. McEnany consented
to the granting of a civil injunction requiring them to comply with the federal
securities laws in the future. Further, in connection with the Settlement, Mr.
McEnany paid a $25,000 administrative fine, which amount was reimbursed to Mr.
McEnany by the Company under the indemnification provisions of the Company's
Articles of Incorporation and By-Laws. The Company believes that the Settlement
brings to a close the SEC's investigation of the Company and Mr.
McEnany.
In January 1994, the Company was served with a suit brought by one of its
shareholders who opted out of the Company's settlement of the class action
litigation settled during 1993. The suit, DINESH SHAH V. ROYCE LABORATORIES,
INC. AND CHATFIELD DEAN & CO., INC., 94 CIV 0061 (S.D. N.Y.) which was also
brought against one of the underwriters of the Company's January 1992 public
offering, alleged that the Company's January 9, 1992 prospectus was false and
misleading. In August 1996, the Company settled this matter for $25,000 in cash.
On August 4, 1995, the Company was sued by Bristol-Myers Squibb Company, Inc.
and E.R. Squibb & Sons, Inc. (collectively, "Bristol-Myers") in the Southern
District of Florida with respect to Captopril (Case No. 95-1682-CIV-Davis). For
information regarding this suit, see Note 10 (IV) (A) of the Notes to
Consolidated Financial Statements included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1995. In July 1996, this suit was
dismissed without any further liability to the Company.
An agreement in which one of the Company's customers could earn options to
purchase shares of the Company's common stock by meeting certain purchase
targets expired during the second quarter of 1996. The Company believes, and has
been so advised by its legal counsel, that based upon the terms and its
interpretation of the written agreement, the customer did not satisfy the
purchase requirement under the agreement and thus, did not earn the options.
Accordingly, the Company has not recorded any sales allowance relating to these
options. Notwithstanding, the customer may disagree with this interpretation and
no assurance can be given as to the ultimate outcome of any dispute with respect
to this issue. The future resolution of this matter in a manner inconsistent
with the Company's interpretation would result in a charge to earnings at the
time of any such resolution.
In the ordinary course of business, the Company is at times involved in other
legal actions and proceedings. Presently, there are no such actions which are
expected to have a significant effect on the Company's operations.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING IS MANAGEMENT'S DISCUSSION AND ANALYSIS OF CERTAIN FACTORS WHICH
HAVE AFFECTED THE COMPANY'S FINANCIAL POSITION AND OPERATING RESULTS DURING THE
PERIODS INCLUDED IN THE ACCOMPANYING FINANCIAL STATEMENTS. THIS DISCUSSION ALSO
CONTAINS FORWARD LOOKING INFORMATION WHICH INVOLVES RISKS AND UNCERTAINTIES AND
IS BASED ON INFORMATION CURRENTLY AVAILABLE TO THE COMPANY. ACTUAL RESULTS MAY
DIFFER FROM THOSE DESCRIBED HEREIN AND FUTURE RESULTS MAY ALSO BE SUBJECT TO
NUMEROUS FACTORS, MANY OF WHICH ARE BEYOND THE CONTROL OF THE COMPANY. THIS
DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE INFORMATION CONTAINED IN THE
COMPANY'S ANNUAL REPORT ON FORM 10-K FOR 1995 AND THE QUARTERLY REPORTS ON FORM
10-Q FOR THE FIRST AND SECOND QUARTERS OF 1996.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Net sales for Q3 1996 were $5.8 million, representing an increase of $3.4
million or 145% over net sales of $2.4 million for Q3 1995. Approximately 67% of
the increase in net sales was attributable to sales of products which were
introduced by the Company after September 30, 1995 ("New Products"), while the
remaining 33% of the increase in net sales was attributable to sales of products
in the Company's product line prior to September 30, 1995 ("Existing Products").
Hydroxychloroquine Sulfate and the Hydrocodone line of products accounted for
most of the New Product Sales. Most of the increase in sales of Existing
Products was attributable to increased sales volume and prices of Quinine
Sulfate. A material portion of Quinine Sulfate sales for Q3 1996 were to one
customer. Three products each accounted for more than 10% of sales for Q3 1996
and in total, accounted for approximately 68% of such sales. Industry-wide
changes in the distribution of generic drugs led to widespread price decreases
for generic products in Q3 1996. While many of the Company's products were
affected, the Company's unit sales exceeded Q3 1995 levels by 34%.
Gross profit for Q3 1996 was $1.8 million, or 31% of net sales, compared to
$541,000, or 23% of net sales for Q3 1995. Gross profit, as well as the gross
profit margin, increased due to the introduction of New Products and sales
increases of Existing Products, both of which resulted in increased operating
leverage on the Company's fixed costs of manufacturing. The gross profit margin
declined in Q3 1996 versus Q2 1996 due to intensified price competition. The
Company believes that because of current industry dynamics, price competition
will continue in the foreseeable future, which will likely continue to depress
prices and gross margins further, although the extent of any such decreases
cannot be estimated with any certainty. The Company also believes that new
products launched in the future will likely have a positive impact on margins,
however the extent of such impact will depend on the level of competition for
such new products.
Research and development ("R&D") expenses decreased 12% to $499,000 in Q3 1996
versus $567,000 in Q3 1995. The Company expects that the R&D expenses for the
full year 1996 to approximate their 1995 levels.
Selling, general & administrative ("SG&A") expenses increased 49% to $1.2
million or 20% of net sales in Q3 1996, versus $791,000 or 33% of net sales in
Q3 1995. Approximately 35% of the increase in SG&A expenses was attributable to
increases in certain variable expenses which increased in relation to sales.
Reserve for bad debts accounted for 19% of the increase in SG&A expenses and was
due mainly to the bankruptcy filing of one customer. Payroll and benefits
accounted for 34% of the increase in SG&A expenses and, along with increases in
other SG&A expenses, were due mainly to the growth of the Company's operations.
Offsetting these increases was a decrease in legal fees of $117,000, which were
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
mainly attributed to the Company's litigation over Captopril in Q3 1995.
The Company recorded $9,000 of income tax expense in 1996 which was the
Company's estimate of alternative minimum tax incurred for the period, after
utilizing net operating loss carryforwards to offset 90% of taxable income. As a
result of the above factors, the Company's net income for Q3 1996 was $118,000,
compared to a net loss of $766,000 for Q3 1995.
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Net sales for the first nine months of 1996 were $17.2 million, representing an
increase of $10.7 million or 164% over net sales of $6.5 million for the first
nine months of 1995. Approximately 67% of the increase in net sales was
attributable to the sales of New Products, while the remaining 33% of the
increase in net sales was attributable to sales of Existing Products. Most of
the increase in net sales of New Products was the result of Hydroxychloroquine
Sulfate and the Hydrocodone line of products. Most of the increase in net sales
of Existing Products was attributable to increased sales of Quinine Sulfate.
Three products each accounted for more than 10% of 1996 sales and together,
accounted for approximately 57% of such sales. Unit volumes for the first nine
months of 1996 increased 55% compared to the same period in 1995.
Gross profit for the first nine months of 1996 was $6.0 million, or 35% of net
sales, compared to $1.7 million, or 27% of net sales for the first nine months
of 1995. Gross profit, as well as the gross profit margin, increased due to the
introduction of New Products and sales increases of Existing Products, both of
which caused an improvement in the operating leverage on the Company's fixed
costs of manufacturing.
The Company's R&D expenses were approximately the same in the first nine
months of 1996 ($1.3 million) as in the first nine months of 1995 ($1.2
million).
SG&A expenses increased 71% to $3.6 million or 21% of net sales in the first
nine months of 1996, versus SG&A of $2.1 million or 33% of net sales in the
first nine months of 1995. Approximately 39% of the increase in SG&A expenses
was attributable to increases in certain variable expenses which increase in
relation to sales. Advertising expenses associated with the launch of New
Products accounted for 14% of the increase in SG&A expenses. Payroll and
benefits accounted for 23% of the increase in SG&A expenses and, along with
increases in other SG&A expenses, were due mainly to the growth of the Company's
operations.
The Company recorded $32,000 of income tax expense in 1996, which was the
Company's estimate of alternative minimum taxes incurred for the period, after
utilizing net operating loss carryforwards to offset 90% of taxable income. As a
result of the above factors, the Company's net income for the first nine months
of 1996 was $1.2 million, compared to a net loss of $1.5 million for the first
nine months of 1995.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has historically financed itself through sales of its
equity securities. In early 1996, the Company received net proceeds of $3.4
million from the exercise of 581,333 Private Warrants (See Note 5 of the Notes
to Consolidated Financial Statements). In Q3 1996, the Company received $742,500
in net proceeds from the issuance of long-term debt and entered into a $546,000
capital lease agreement (see Note 3 of the Notes to Consolidated Financial
Statements) to finance equipment purchases.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cash and cash equivalents increased $1.7 million from year end 1995. This
increase represents the $4.4 million received from financing activities less
$1.2 million used mainly to increase inventories and $1.5 million used for
property and equipment purchases.
Inventories at September 30, 1996 increased by $1.6 million over year end 1995
due to the introduction of new products, increased sales volumes of Quinine
Sulfate, and management's decision to increase inventories to improve service
levels. The Company expects that its inventory level will be stable during the
remainder of 1996.
Capital expenditures for the nine months ended September 30, 1996 were $1.5
million. These purchases consisted mainly of manufacturing equipment and plant
improvements to meet growing production needs and the construction of a new
research and development laboratory.
As the Company grows, it will continue to require additional capital. The
Company's recent profitability has positively impacted cash flow, however
profits have not yet reached the level where they can fund all of the Company's
capital requirements. The Company believes that continued growth in sales will
be necessary for the Company to generate sufficient cash flow from operations to
be able to internally fund its capital requirements over the next 12 months. The
Company expects that once it has established a history of earnings, revolving
credit bank financing on cost effective terms should become available. The
Company may have to sell additional equity securities to help finance its
business plans and/or strategic alliances or acquisitions in the next year.
There can be no assurance that necessary capital will be available in the future
when and if it is required. If the Company is unable to maintain sufficient
capital, it will likely be forced to reduce the level of its research and
development efforts and to make other necessary changes to its present business
plans until such funding can be secured.
ISSUES AND UNCERTAINTIES
THE FOLLOWING STATEMENTS ARE FORWARD LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES AND ARE BASED ON INFORMATION CURRENTLY AVAILABLE TO THE COMPANY.
ACTUAL RESULTS COULD DIFFER FROM THOSE DESCRIBED HEREIN AND FUTURE RESULTS MAY
BE SUBJECT TO NUMEROUS FACTORS, MANY OF WHICH ARE BEYOND THE CONTROL OF THE
COMPANY.
While the generic industry in the United States is rapidly growing and the
Company is optimistic about its long-term prospects, competition continues to
intensify. The recent decline in sales prices and gross margins of many of the
Company's products is indicative of such competition. The Company cannot predict
to what extent, if any, prices may continue to decline in the future. The
Company is attempting to lower its raw material costs with its vendors and
continues to focus on new product development as a way to combat price and
margin erosion.
The Company has been actively seeking strategic alliances and acquisitions that
would increase the Company's reach in domestic and international marketing,
product technology, and unique raw material sourcing and/or add complementary
products lines. The Company continues to believe that its long-term success will
increasingly depend on the Company finding synergistic partners whose abilities
complement those of the Company's and which allow the Company, together with its
partners, to market more unique products which have less competition in the
market.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company believes revenues for Q4 1996 will approximate those of Q3 1996
which would result in 1996 revenues of approximately $23 million, versus $10.5
million in 1995. R&D expenses are estimated to be $800,000 in Q4 1996. Q4 1996
earnings are expected to be break-even or possibly, a slight loss. The Company
is not yet in a position to estimate its 1997 results, however, it expects to be
profitable in 1997.
In addition to the above-mentioned issues and uncertainties, the Company's
results of operations in future periods will be subject to many variables,
including the timing of ANDA approvals, the timing of expenditures for research
and development, the availability of raw materials and product mix. The above
discussion describes some, but not all, of the risks and uncertainties facing
the Company. For further information, please see the Company's 1995 Form 10-K
and the Company's Forms 10-Q for the first and second quarters of 1996.
13
<PAGE>
ROYCE LABORATORIES, INC.
PART II
ITEM 1. LEGAL PROCEEDINGS
See Note 6 to the attached consolidated financial statements.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of securities holders during the third
quarter of 1996.
ITEM 5. OTHER INFORMATION.
On September 6, 1996, the Company became aware of the filing of a Complaint for
injunctive and other civil relief (the "Complaint") by the SEC against three
Company employees who allegedly traded securities of the Company while in the
possession of material non-public information. The Complaint also names as
defendants three other persons who allegedly traded securities of the Company
based upon material non-public information provided to them by one of the
Company employee defendants.
The Complaint alleges that Abul Bhuiyan, Nilkanth Patel and Hasmukh Patel
violated Section 10b of the Securities Exchange Act of 1934 (the "Exchange Act")
by purchasing and, in the case of Messrs. Patel and Patel, selling shares of the
Company's common stock while in the possession of material non-public
information. The alleged improper purchases and sales occurred in September 1991
and April 1992, respectively. The Complaint also alleges that all of the
defendants except Mr. Bhuiyan violated Section 17(a) of the Securities Act of
1933, as amended (the "Securities Act"), by reason of their purchases and sales.
The suit seeks as to all defendants injunctive relief enjoining the defendants
from future violations of Section 10b and 10b-5 under the Exchange Act and, as
to all defendants except Mr. Bhuiyan, enjoining them from future violations of
Section 17(a) under the Securities Act. The suit also seeks disgorgement from
all of the defendants except Mr. Bhuiyan. Finally, the suit seeks penalties
under Section 21A(a) of the Securities Act from each defendant of up to three
times his profits gained and losses avoided as a result of the violations
alleged in the Complaint.
After reviewing the allegations contained in the Complaint, the Company took
certain corrective actions which it believes were appropriate under the
circumstances. These actions were as follows: (i) the Company removed Mr.
Bhuiyan as an executive officer of the Company (although Mr. Bhuiyan remains an
employee of the Company in a product development function); (ii) the Company
terminated Nilkanth Patel as an employee of the Company; and (iii) the Company
reprimanded Hasmukh Patel, but retained him as an employee of the Company (Mr.
Patel is an analytical research and development manager for the Company).
The Company does not believe that the outcome of this suit will have a material
adverse impact on the Company, its business, financial position or results of
operations.
14
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBIT 10.1
Master Lease Agreement, Equipment Schedule, Exhibits A, B, X, and
Indenture and Bill of Sale between the Company and USL Capital.
(b) EXHIBIT 11
(c) REPORTS ON FORM 8-K
A Current Report on Form 8-K was filed on September 17, 1996,
reporting "Other Events" under Item 5.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, Royce Laboratories, Inc. has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized, in the City of Miami,
Florida on the 13th day of November, 1996.
ROYCE LABORATORIES, INC.
By: /S/PATRICK J. MCENANY
Patrick J. McEnany
President and Chief Executive Officer
By: /S/ROBERT E. BAND
Robert E. Band
Vice President - Finance and Chief Financial Officer
MASTER LEASE AGREEMENT
LESSOR: USL CAPITAL CORPORATION LESSEE: Royce Laboratories, Inc.
---------------------------
ADDRESS: 733 Front Street ADDRESS: 5350 Northwest 165th Street
---------------------------
San Francisco, California 94111 Miami, Florida 33014
---------------------------
TERMS AND CONDITIONS OF LEASE
The undersigned Lessee hereby requests Lessor to purchase the personal property
described in any Equipment Schedule hereunder (herein called "Equipment") from
supplier listed in any Equipment Schedule hereunder (herein called "Vendor"
and/or "Manufacturer", as applicable) and to lease the Equipment to Lessee on
the terms and conditions of the lease set forth below.
Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the
Equipment upon the following terms and conditions:
1. NO WARRANTIES BY LESSOR. Lessee has selected the Equipment and may have
entered into certain purchase, licensing, or maintenance agreements with the
Vendor and/or Manufacturer (herein referred to as an "Acquisition Agreement")
covering the Equipment as further described in Paragraph 26 hereof. If Lessee
has entered into any Acquisition Agreement, each agreement shall provide for
certain rights and obligations of the parties thereto with respect to the
Equipment, and Lessee shall perform all of the obligations set forth in each
Acquisition Agreement as if this lease did not exist. LESSOR MAKES NO WARRANTY,
EXPRESS OR IMPLIED, AS TO ANY MATTER WHATSOEVER, INCLUDING THE CONDITION OF THE
EQUIPMENT, ITS MERCHANTABILITY OR ITS FITNESS FOR ANY PARTICULAR PURPOSE, AND,
AS TO LESSOR, LESSEE LEASES THE EQUIPMENT "AS IS." LESSOR SHALL HAVE NO
LIABILITY FOR ANY LOSS, DAMAGE OR EXPENSE OF ANY KIND WHATSOEVER RELATING
THERETO, INCLUDING WITHOUT LIMITATION ANY SPECIAL, INDIRECT, INCIDENTAL OR
CONSEQUENTIAL DAMAGES OF ANY CHARACTER.
2. CLAIMS AGAINST VENDOR AND/OR MANUFACTURER. If the Equipment is not properly
installed, does not operate as represented or warranted by Vendor and/or
Manufacturer, or is unsatisfactory for any reason, Lessee shall make any claim
on account thereof solely against Vendor and/or Manufacturer pursuant to the
Acquisition Agreement, if any, and shall, nevertheless pay Lessor all rent
payable under this lease. All warranties from Vendor and/or Manufacturer are, to
the extent they are assignable, hereby assigned to Lessee for the term of the
lease or until an Event of Default occurs hereunder for Lessee's exercise at
Lessee's expense. Lessee may directly inquire with Vendor and/or Manufacturer to
receive an accurate and complete statement of such warranties, including any
disclaimers or limitations of such warranties or of any remedies with respect
thereto.
3. VENDOR NOT AN AGENT. Lessee understands and agrees that neither Vendor, nor
any sales representative or other agent of Vendor, is an agent of Lessor. Sales
representatives or agents of Vendor, and persons that are not employed by Lessor
(including brokers and agents) are not authorized to waive or alter any term or
condition of this lease, and no representation as to the Equipment or any other
matter by Vendor or any other person that is not employed by Lessor (including
brokers and agents) shall in any way affect Lessee's duty to pay the rent and
perform its other obligations as set forth in this lease.
4. NON-CANCELLABLE LEASE. This lease and any Equipment Schedule hereto cannot be
cancelled or terminated except as expressly provided herein. Lessee agrees that
its obligation to pay all rent and other sums payable hereunder and the rights
of Lessor in and to such rent are absolute and unconditional and are not subject
to any abatement, reduction, setoff, defense, counterclaim or recoupment due or
alleged to be due to, or by reason of, any past, present or future claims which
Lessee may have against Lessor, any assignee, any Manufacturer or Vendor, or
against any person for any reason whatsoever.
5. ORDERING EQUIPMENT. Lessee shall arrange for delivery of the Equipment so
that it can be accepted in accordance with Paragraph 6 hereof within 90 days
after the date on which Lessor accepts Lessee's offer to enter into this lease
with respect to any Equipment Schedule or by such other date as may be set forth
in an Equipment Schedule or Commitment Letter issued by Lessor as the Commitment
Expiration Date. Unless otherwise specified on the Equipment Schedule, Lessee
shall be responsible for all transportation, packing, installation, testing and
other charges in connection with the delivery, installation and use of the
Equipment. Lessee hereby authorizes Lessor to insert in any Equipment Schedule
hereunder the serial numbers and other identification data of Equipment when
determined by Lessor.
6. ACCEPTANCE. Lessee acknowledges that for purposes of receiving or accepting
the Equipment from Vendor, Lessee is acting on Lessor's behalf. Upon delivery of
the Equipment to Lessee and Lessee's inspection thereof, Lessee shall furnish
Lessor a written statement (a) acknowledging receipt of the Equipment in good
condition and repair and (b) accepting it as satisfactory in all respects for
the purposes of this lease (the "Certificate of Acceptance"). The date of
receipt and acceptance of the Equipment covered by an Equipment Schedule (or any
later date that Lessor chooses) shall be the Rent Commencement Date the refor.
Lessor is authorized to fill in on any Equipment Schedule hereunder the Rent
Commencement Date in accordance with the foregoing.
7. TERMINATION BY LESSOR. If, by the Commitment Expiration Date, the Equipment
described in any Equipment Schedule has not been delivered to Lessee and
accepted by Lessee as provided in Paragraph 6 hereof, or if other conditions of
Lessor's Commitment Letter, if any, have not been met, then Lessor may, at its
option, terminate this lease and its obligations hereunder with respect to such
Equipment Schedule at any time after the expiration of such 90 days or any date
after the Commitment Expiration Date, as applicable. Lessor shall give Lessee
written notice whether or not it elects to exercise such option within 10 days
after Lessor's receipt of Lessee's written request for such notice.
8. TERM. The term of this lease commences upon the Rent Commencement Date, as
provided in Paragraph 9 below. The term shall continue until all of Lessee's
obligations are fulfilled hereunder. The Initial Term with respect to any
Equipment Schedule begins on the Rent Commencement Date for such Equipment
Schedule (as defined in Paragraph 6) and expires after the later of (i) the
number of periods for which the rent payments are due, or (ii) the date Lessee
fulfills all Lessee's obligations hereunder.
9. RENTAL. Lessee shall pay the rent payments as stated on each Equipment
Schedule the first of which shall be due on the Rent Commencement Date for said
Equipment Schedule, and subsequent payments shall be due on the same day of each
calendar period as indicated on the Equipment Schedule for the balance of the
Initial Term. Rent payments shall be due whether or not Lessee has received any
notice that such payments are due. All rent payments shall be paid to Lessor at
its address set forth on the Equipment Schedule or as otherwise directed by
Lessor in writing.
10. RENEWAL. If no default shall have occurred and be continuing, Lessee shall
be entitled to renew the lease with respect to all, but not less than all, of
the Equipment covered by an Equipment Schedule for a minimum 12 month period at
an amount equal to the fair market rental value thereof, in use and operational,
in the condition required by the lease, payable on a periodic basis, as mutually
agreed by Lessor and Lessee ("Renewal Rent"). Lessee must give Lessor written
notice of its intention to exercise said option, which notice must be received
by Lessor at least 90 days before expiration of the Initial Term. The first
installment of the Renewal Rent shall be due at expiration of the Initial Term
of the lease. Should Lessee fail to comply with the provisions described above
covering Renewal, upon expiration of the Initial Term, the term of the
<PAGE>
lease shall be automatically extended for a term of 3 months. Thereafter, the
term of the lease will be extended for subsequent full month periods, on a month
to month basis, until Lessee has given at least 90 days written notice
terminating the lease. Such termination will take effect upon completion of all
Lessee's obligations under the lease (including payment of all periodic rental
payments due during such 90 day period, as provided in Paragraph 9 of the
lease). At any time after the expiration of the Initial Term, if the lease has
been automatically extended as set forth herein, Lessor reserves the right to
terminate the lease by 30 days written notice to Lessee.
11. LOCATION; INSPECTION; LABELS. The Equipment shall be delivered to and shall
not be removed without Lessor's prior written consent from the "Equipment
Location" shown on the related Equipment Schedule, or if none is specified,
Lessee's billing address shown on the Equipment Schedule. Lessor shall have the
right to inspect the Equipment at any reasonable time. If Lessor supplies Lessee
with labels stating that the Equipment is owned by Lessor, Lessee shall affix
such labels to and keep them in a prominent place on the Equipment.
12. REPAIRS; USE; ALTERATIONS. Lessee, at its own cost and expense, shall keep
the Equipment in good repair and working order, in the same condition as when
delivered to Lessee, reasonable wear and tear excepted, and in accordance with
the manufacturer's recommended specifications; shall use the Equipment lawfully;
shall not alter the Equipment without Lessor's prior written consent; shall use
the Equipment in compliance with any existing Manufacturer's service and
warranty requirements and any insurance policies applicable to the Equipment and
shall furnish all parts and servicing required therefor. All parts, repairs,
additions, alterations and attachments placed on or incorporated into the
Equipment which cannot be removed without damage to the Equipment shall
immediately become part of the Equipment and shall be the property of the
Lessor. Lessee will obtain and maintain all permits, licenses and registrations
necessary to lawfully operate the facility where the Equipment is located.
Lessee shall comply with all applicable environmental and industrial hygiene
laws, rules and regulations (including but not limited to federal, state, and
local environmental protection, occupational, health and safety or similar laws,
ordinances and restrictions). Lessee shall, not later than 5 days after the
occurrence of any event, provide Lessor with copies of any report of such event
that is required to be filed with governmental agencies regulating environmental
claims. Lessee shall immediately notify Lessor in writing of any existing,
pending or threatened investigation, inquiry, claim or action by any
governmental authority in connection with any law, rule or regulation relating
to industrial hygiene or environmental conditions that could affect the
Equipment.
13. MAINTENANCE. If the Equipment is such that Lessee is not normally capable of
maintaining it, Lessee, at its expense, shall enter into and maintain in full
force and effect throughout the Initial Term, and any renewal term, Vendor
and/or Manufacturer's standard maintenance contract, and shall comply with all
its obligations thereunder. An alternate source of maintenance may be used with
Lessor's prior written consent. Such consent shall be granted if, in Lessor's
reasonable opinion, the Equipment will be maintained in an equivalent state of
good repair, condition and working order.
14. SURRENDER. Provided that Lessee does not exercise the purchase option as set
forth in Paragraph 28 hereof, upon the expiration of the Initial Term, or any
renewal term, or upon demand by Lessor made pursuant to Paragraph 22 of the
lease, Lessee, at its expense, shall return all, but not less than all, of the
Equipment by delivering it to such place or on board such carrier, packed for
shipping, as Lessor may specify. Lessee agrees that the Equipment, when
returned, shall be in the same condition as when delivered to Lessee, reasonable
wear and tear excepted, and in a condition which will permit Lessor to be
eligible for Manufacturer's standard maintenance contract without incurring any
expense to repair or rehabilitate such Equipment. Lessee shall be liable for
reasonable and necessary expenses to place the Equipment in such condition.
Lessee shall remain liable for the condition of the Equipment until it is
received and accepted at the destination designated by Lessor as set forth
above. If any items of Equipment are missing or damaged when returned, such
occurrence shall be treated as an event of Loss or Damage with respect to such
missing or damaged items and shall be subject to the terms specified in
Paragraph 15 below. Lessee shall provide Lessor with a Letter of Maintainability
from the Manufacturer of the Equipment, which letter shall state that the
Equipment will be eligible for the Manufacturer's standard maintenance contract
when sold or leased to a third party. Lessee shall give Lessor prior written
notice that it is returning the Equipment as provided above, and such notice
must be received by Lessor at least 90 days prior to such return. Should Lessee
fail to comply with the provisions described above covering surrender, upon
expiration of the Initial Term, the term of the lease shall be automatically
extended for a term of 3 months. Thereafter, the term of the lease will be
extended for subsequent full month periods on a month to month basis, until
Lessee has given at least 90 days written notice terminating the lease. Such
termination will take effect upon completion of all Lessee's obligations under
the lease (including payment of all periodic rental payments due during such 90
day period, as provided in Paragraph 9 of the lease).
15. LOSS OR DAMAGE. Lessee shall bear the entire risk of loss, theft,
destruction of or damage to the Equipment or any item thereof (herein "Loss or
Damage") from any cause whatsoever. No Loss or Damage shall relieve Lessee of
the obligation to pay rent or of any other obligation under this lease. In the
event of Loss or Damage, Lessee, at the option of Lessor, shall: (a) place the
same in good condition and repair; (b) replace the same with like equipment
acceptable to Lessor in good condition and repair with clear title thereto in
Lessor, or (c) pay to Lessor the total of the following amounts: (i) the total
rent and other amounts due and owing at the time of such payment, plus (ii) an
amount calculated by Lessor which is the present value at 5% per annum simple
interest discount of all rent and other amounts payable by Lessee with respect
to said item from date of such payment to date of expiration of its Initial
Term, plus (iii) the "reversionary value" of the Equipment, which shall be
determined by Lessor as the total cost of the Equipment less 60% of the total
rent (net of sales/use taxes, if any) required to be paid pursuant to Paragraph
9. Upon Lessor's receipt of such payment, Lessee and/or Lessee's insurer shall
be entitled to Lessor's interest in said item, for salvage purposes, in its then
condition and location, "as-is", without any warranty, express or implied.
16. INSURANCE. Lessee shall provide, maintain and pay for (a) all risk property
insurance against the loss or theft of or damage to the Equipment, for the full
replacement value thereof, naming Lessor as a loss payee, and (b) commercial
general liability insurance (and if Lessee is a doctor, hospital or other health
care provider, medical malpractice insurance). All such policies shall name
Lessor as an additional insured and shall have combined single limits in amounts
acceptable to Lessor. All such insurance policies shall be endorsed to be
primary and non-contributory to any policies maintained by Lessor. In addition,
Lessee shall cause Lessor to be named as an additional insured on any excess or
umbrella policies purchased by Lessee. A copy of each paid-up policy evidencing
such insurance (appropriately authenticated by the insurer) or a certificate of
the insurer providing such coverage proving that such policies have been issued,
providing the coverage required hereunder shall be delivered to Lessor prior to
the Rent Commencement Date. Al1 insurance shall be placed with companies
satisfactory to Lessor and shall contain the insurer's agreement to give 30 days
written notice to Lessor before cancellation or any material change of any
policy of insurance.
17. TAXES. Lessee shall reimburse to Lessor (or pay directly if, but only if,
instructed by Lessor) all charges and taxes (local, state and federal) which may
now or hereafter be imposed or levied upon the sale, purchase, ownership,
leasing, possession or use of the Equipment, excluding, however, all income
taxes levied on (a) any rental payments made to Lessor hereunder, (b) any
payment made to Lessor in connection with Loss or Damage to the Equipment under
Paragraph 15 hereof, or (c) any payment made to Lessor in connection with
Lessee's exercise of its purchase option under Paragraph 28 hereof.
18. LESSOR'S PAYMENT. If Lessee fails to provide or maintain said insurance, to
pay said taxes, charges and fees, or to discharge any levies, liens and
encumbrances created by Lessee, Lessor shall have the right, but shall not be
obligated, to obtain such insurance, pay such taxes, charges and fees, or effect
such discharge. In that event, Lessee shall remit to Lessor the cost thereof
with the next rent payment.
19. INDEMNITY. (a) GENERAL INDEMNITY. Lessee shall indemnify Lessor against and
hold Lessor harmless from any and all claims, actions, damages, costs, expenses
including reasonable attorneys' fees, obligations, liabilities and liens
(including any of the foregoing arising or imposed under the doctrines of
"strict liability" or "product liability" and including without limitation the
cost of any fines, remedial action, damage to the environment and cleanup and
the fees and costs of consultants and experts), arising out of the manufacture,
purchase, lease, ownership, possession, operation, condition, return or use of
the Equipment, or by operation of law, excluding however, any of the foregoing
resulting from the sole negligence or willful misconduct of Lessor. Lessee
agrees that upon written notice by Lessor of the assertion of such a claim,
action, damage, obligation, liability or lien, Lessee shall assume full
responsibility for the defense thereof. Lessee's choice of counsel shall be
mutually acceptable to both Lessee and Lessor. This indemnity also extends to
any environmental claims arising out of or relating to prior acts or omissions
of any party whatsoever. The provisions of this paragraph shall survive
termination of this lease with respect to events occurring prior to such
termination.
(b) TAX INDEMNITY. Lessee acknowledges that Lessor shall be entitled to all tax
benefits of ownership with respect to the Equipment (the "Tax Benefits"),
including but not limited to, (i) the accelerated cost recovery deductions
determined in accordance with Section 168(b)(1) of the Internal Revenue Code of
1986 for the Equipment based on the original cost of the Equipment to Lessor
(ii) deductions for interest on any indebtedness incurred by Lessor to finance
the Equipment and (iii) sourcing of income and losses attributable to this lease
to the United States. Lessee represents that the Equipment shall be depreciable
for Federal tax purposes utilizing the MACRS Recovery Period as set forth in the
Equipment Schedule. with such depreciation commencing
<PAGE>
as of the date of Equipment acceptance by Lessee as set forth on the Certificate
of Acceptance. Lessee agrees to take no action inconsistent with the foregoing
or any action which would result in the loss, disallowance or unavailability to
Lessor of all or any part of the Tax Benefits. Lessee hereby indemnifies and
holds harmless Lessor and its assigns from and against (i) the loss,
disallowance, unavailability or recapture of all or any part of the Tax Benefits
resulting from any action, statement, misrepresentation or breach of warranty or
covenant by Lessee of any nature whatsoever including but not limited to the
breach of any representations, warranties or covenants contained in this
paragraph, plus (ii) all interest, penalties, fines or additions to tax
resulting from such loss, disallowance, unavailability or recapture, plus (iii)
all taxes required to be paid by Lessor upon receipt of the indemnity set forth
in this paragraph. Any payments made by Lessee to reimburse Lessor for lost Tax
Benefits shall be calculated (i) on the assumption that Lessor is subject to the
maximum Federal Corporate Income Tax with respect to each year and that all Tax
Benefits are currently utilized, and (ii) without regard to whether Lessor or
any members of a consolidated group of which Lessor is also a member is then
subject to any increase in tax as a result of the loss of Tax Benefits. For the
purposes of this paragraph, "Lessor" includes for all tax purposes the
consolidated taxpayer group of which Lessor is a part.
(c) PAYMENT. The amounts payable pursuant to this Paragraph 19 shall be payable
upon demand of Lessor, accompanied by a statement describing in reasonable
detail such claim, action, damage cost, expense, fee, obligation liability, lien
or tax and setting forth the computation of the amount so payable which
computation shall be binding and conclusive upon Lessee, absent manifest error.
The indemnities and assumptions of liabilities and obligations contained in this
Paragraph 19 shall continue in full force and effect notwithstanding the
expiration or other termination of this Lease.
20. ASSIGNMENT. Without Lessor's prior written consent, Lessee shall not assign,
transfer, pledge, hypothecate or otherwise dispose of this lease, the Equipment,
or any interest therein. Lessee's interest in this lease may not be assigned or
transferred by operation of law without Lessor's prior written consent, which
will not be unreasonably withheld. Without Lessor's prior written consent,
Lessee shall not sublet or lend the Equipment or permit it TO be used by anyone
other than Lessee or Lessee's employees. Lessor may assign this lease in whole
or in part without notice to Lessee. If lessee is given notice of such
assignment it agrees to acknowledge receipt thereof in writing. Each such
assignee shall have all of the rights, but none of the obligations, of Lessor
under this lease. Lessee shall not assert against assignee any defense,
counterclaim or offset that Lessee may have against Lessor. Notwithstanding any
such assignment, Lessor warrants that Lessee shall quietly enjoy use of the
Equipment subject to the terms and conditions of this lease so long as Lessee is
not in default hereunder. Subject to the foregoing, this lease inures to the
benefit of and is binding upon the successors and assigns of the parties hereto.
21. DELINQUENT PAYMENTS. (a) Service Charge. Since It would be impractical or
extremely difficult to fix Lessor's actual damages for collecting and accounting
for a late payment, if any payment to Lessor required herein (including, but not
limited to, rental, renewal, tax, purchase and other amounts) is not paid on or
before its due date, Lessee shall pay to Lessor an amount equal to 5% of any
such late payment. (b) Interest. Lessee shall also pay interest on any such late
payment from the due date thereof until the date paid at the lesser of 18% per
annum or the maximum rate allowed by law.
22. DEFAULT; REMEDIES. Any of the following shall constitute an Event of
Default: If a) Lessee fails to pay when due any rent or other amount required
herein to be paid by Lessee, or b) Lessee makes an assignment for the benefit of
creditors, whether voluntary or involuntary, or c) a petition is filed by or
against Lessee under any bankruptcy, insolvency or similar legislation, or d)
Lessee violates or fails to perform any provision of either this lease or any
Acquisition Agreement, or violates or fails to perform any covenant or
representation made by Lessee herein, or e) Lessee makes a bulk transfer of
furniture, furnishings, fixtures or other equipment or inventory, or f) Lessee
ceases doing business as a going concern or there is a change in the legal
structure of ownership of Lessee, or a consolidation or merger of Lessee into or
with another entity, which results, in the opinion of Lessor, in a material
adverse change in Lessee's ability to perform its obligations under the lease,
or 9) any representation or warranty made by Lessee in this lease or in any
other document or agreement furnished by Lessee to Lessor shall prove to have
been false or misleading in any material respect when made or when deemed to
have been made. An Event of Default with respect to any Equipment Schedule shall
constitute an Event of Default for all Equipment Schedules. Lessee shall
promptly notify Lessor of the occurrence of any Event of Default.
If an Event of Default occurs, Lessor shall have the right to exercise any
one or more of the following remedies in order to protect the interests and
reasonably expected profits and bargains of Lessor: a) Lessor may terminate this
lease with respect to all or any part of the Equipment, b) Lessor may recover
from Lessee all rent and other amounts then due and as they shall thereafter
become due hereunder, c) Lessor may take possession of any or all items of
Equipment, wherever the same may be located, without demand or notice, without
any court order or other process of law and without liability to Lessee for any
damages occasioned by such taking of possession, and any such taking of
possession shall not constitute a termination of this lease, d) Lessor may
recover from Lessee, with respect to any and all items of Equipment, end with or
without repossessing the Equipment the sum of (1) the total amount due and owing
to Lessor at the time of such default, plus (2) an amount calculated by Lessor
which is the present value at 5% per annum simple interest discount of all rent
and other amounts payable by Lessee with respect to said item(s) from date of
such payment to date of expiration of its Initial Term, plus (3) the
"reversionary value" of the Equipment, which shall be determined by Lessor as
the total cost of the Equipment less 60% of the total rent (net of sales/use
taxes, if any) required to be paid pursuant to Paragraph 9; and which the
parties agree is a reasonable estimate of such value; and upon the payment of
all amounts described in clauses (1), (2) and (3) above, Lessee will become
entitled to the Equipment as is, where is, without warranty whatsoever;
provided, however, that if Lessor has repossessed or accepted the surrender of
the Equipment, Lessor shall sell, lease or otherwise dispose of the Equipment in
a commercially reasonable manner, with or without notice and on public or
private bid, and apply the net proceeds thereof (after deducting all expenses,
including attorneys' fees incurred in connection therewith), to the sum of (1),
(2) and (3) above, and e) Lessor may pursue any other remedy available at law or
in equity, including but not limited to seeking damages or specific performance
and/or obtaining an injunction.
No right or remedy herein conferred upon or reserved to Lessor is exclusive
of any right or remedy herein or by law or equity provided or permitted; but
each shall be cumulative of every other right or remedy given hereunder or now
or hereafter existing at law or in equity or by statute or otherwise, and may be
enforced concurrently therewith or from time to time, but Lessor shall not be
entitled to recover a greater amount in damages than Lessor could have gained by
receipt of Lessee's full, timely and complete performance of its obligations
pursuant to the terms of this lease plus accrued delinquent payments under
Paragraph 21.
23. LESSOR'S EXPENSE. Lessee shall pay Lessor all costs and expenses, including
reasonable attorneys' fees and the fees of collection agencies incurred by
Lessor in enforcing any of the terms, conditions, or provisions hereof or in
protecting Lessor's rights herein. Lessee's obligation hereunder includes all
such costs and expenses expended by Lessor (a) prior to filing of an action, (b)
in connection with an action which is dismissed, and (c) in the enforcement of
any judgment. Lessee's obligation to pay Lessor's attorneys' fees incurred in
enforcing any judgment is a separate obligation of Lessee, severable from
Lessee's other obligations hereunder, which obligation will survive such
judgment and will not be deemed to have been merged into such judgment.
24. OWNERSHIP, PERSONAL PROPERTY. The Equipment shall at all times remain the
property of Lessor and Lessee shall have no right, title or interest therein or
thereto except as expressly set forth in this lease and the Equipment shall at
all times be and remain personal property notwithstanding that the Equipment or
any part thereof may now be, or hereafter become, in any manner, affixed or
attached to real property or any improvements thereon.
25. NOTICES. Service of all notices under this lease shall be sufficient if
given personally or mailed to the respective party at its address set forth on
any Equipment Schedule, or at such address as either party may provide in
writing from time to time. Any such notice mailed to said address shall be
effective when deposited in the United States mail, duly addressed and with
postage prepaid.
26. ACQUISITION AGREEMENTS. If the Equipment is subject to any Acquisition
Agreement, Lessee, as part of this lease, transfers and assigns to Lessor all of
its rights, but none of its obligations (except for Lessee's obligation to pay
for the Equipment conditioned upon Lessee's acceptance in accordance with
Paragraph 6), in and to the Acquisition Agreement, including but not limited to
the right to take title to the Equipment. Lessee shall indemnify and hold Lessor
harmless in accordance with Paragraph 19 from any liability resulting from any
Acquisition Agreement as well as liabilities resulting from any Acquisition
Agreement Lessor is required to enter into on behalf of Lessee or with Lessee
for purposes of this lease.
27. UPGRADES. Any existing lease between Lessor and Lessee subject to an
"upgrade" program shall continue in full force and effect and shall be kept free
of default by Lessee (even if the equipment covered by the existing lease is
sold, traded-in, etc.) until any such existing lease is cancelled by Lessor
when, if applicable, the new Equipment is accepted by Lessee for all purposes of
this lease.
28. PURCHASE OPTION. If no default shall have occurred and be continuing, Lessee
shall be entitled, at its option upon written notice to Lessor, which notice
must be received by Lessor at least 90 days prior to the end of either the
Initial Term or any renewal term of any Equipment Schedule, to purchase all, but
not less than all, of the Equipment covered by such Equipment
<PAGE>
Schedule from Lessor at the end of the Initial Term or any renewal term for such
Equipment Schedule at a purchase price equal to the then fair market value of
the Equipment in use and operational, in the condition required by the lease, as
mutually agreed by Lessor and Lessee. On a date which is no later than the
expiration date of the Initial Term or any renewal term, as applicable, Lessee
shall pay to Lessor the purchase price for the Equipment covered by such
Equipment Schedule (plus any taxes levied thereon) and Lessor shall sell the
Equipment "as-is where-is" without any warranties expressed or implied.
29. RELATED EQUIPMENT SCHEDULES. In the event that any Equipment Schedule
hereunder shall include Equipment that may become attached to, affixed to, or
used in connection with Equipment covered under another Equipment Schedule
hereunder ("Related Equipment Schedule"), Lessee acknowledges the following: (a)
if Lessee elects to exercise a purchase option or renewal option under any
Equipment Schedule, if provided; or (b) if Lessee elects to return the Equipment
under any Equipment Schedule as described in Paragraph 14, then Lessor, at its
discretion, may require the similar disposition of all Related Equipment
Schedules as provided for by this lease.
30. MISCELLANEOUS. This instrument and any Commitment Letter issued by Lessor
and any Equipment Schedule hereunder constitutes the entire agreement between
Lessor and Lessee, and shall not be amended, altered or changed except by a
written agreement signed by the parties hereto, and in the case of Lessor, such
agreement shall not be valid unless executed by Lessor at Lessor's home office.
To the extent any provision of this lease may be determined to be invalid or
unenforceable, it shall be ineffective without affecting the other provisions of
this lease. To the extent permitted by applicable law, Lessee hereby waives any
provisions of law which render any provision of this lease unenforceable in any
respect. Unless specified otherwise, in the event such written agreement is
attached to and made a part of an Equipment Schedule, the terms and conditions
of said written agreement shall apply only to said Equipment Schedule and shall
not apply to any other Equipment Schedule attached to and made a part of this
lease. In the event Lessee issues a purchase order to Lessor covering Equipment
to be leased hereunder, it is agreed that such purchase order is issued for
purposes of authorization and Lessee's internal use only, and none of its terms
and conditions shall modify the terms and conditions of this lease and/or
related documentation, or affect Lessor's responsibility to Lessee as defined in
this lease. An executed Equipment Schedule that incorporates by reference the
terms of this Master Lease Agreement, marked "Original," shall be the original
of the lease for the Equipment described therein for all purposes. All other
executed counterparts of the lease shall be marked "Duplicate." To the extent
the lease constitutes chattel paper, as such term is defined in the Uniform
Commercial Code of the applicable jurisdiction, no security interest in the
lease may be created through the transfer of possession of any counterpart other
than the Original of the lease. Lessor reserves the right to charge Lessee fees
for its provision of additional administrative services related to the lease
requested by Lessee. Lessee shall provide Lessor with such corporate
resolutions, opinions of counsel, financial statements, and other documents
(including documents for filing or recording) as Lessor may request from time to
time. LESSEE REPRESENTS AND WARRANTS THAT ALL CREDIT AND FINANCIAL INFORMATION
SUBMITTED TO LESSOR HEREWITH OR AT ANY OTHER TIME IS TRUE AND CORRECT. LESSEE
HEREBY APPOINTS LESSOR OR ITS ASSIGNEE ITS TRUE AND LAWFUL ATTORNEY IN FACT TO
EXECUTE ON BEHALF OF LESSEE ALL UNIFORM COMMERCIAL CODE FINANCING STATEMENTS OR
OTHER DOCUMENTS WHICH, IN LESSOR'S DETERMINATION, ARE NECESSARY TO SECURE
LESSOR'S INTEREST IN SAID EQUIPMENT. The filing of UCC Financing Statements is
precautionary and shall not be evidence that the lease is intended as security.
If for any reason this agreement is determined not to be a lease, Lessee hereby
grants Lessor a security interest in the lease, the Equipment or collateral
pertaining thereto and the proceeds thereof, including re-lease, sale or
disposition of the Equipment or other collateral. If more than one Lessee is
named in this lease, the liability of each shall be joint and several. Time is
of the essence with respect to this lease. Lessee represents and warrants that
the Equipment is being leased hereunder for business purposes. The descriptive
headings which are used in this lease are for convenience of the parties only
and shall not affect the meaning of any provision of the lease. Any failure of
the Lessor to require strict performance by the Lessee or any waiver by Lessor
of any provision herein shall not be construed as a consent or waiver of any
other breach of the same or of any other provision. This agreement shall be
governed by the laws of the state of California (without giving effect to
principles of conflicts of law thereof).
31. LESSEE'S REPRESENTATIONS; WAIVER OF JURY TRIAL. Lessee represents and
warrants, as of the date of this lease: (a) Lessee is duly organized, validly
existing and in good standing under the laws of the state of its incorporation
or organization, and is duly qualified to do business wherever necessary to
carry on its present business and operations and to own its property; (b) this
lease (and any Equipment Schedule entered into pursuant to this lease) has been
duly authorized by all necessary action on the part of the Lessee, duly executed
and delivered by authorized officers or agents of Lessee, does not require any
further shareholder or partner approval, does not require the approval of, or
the giving notice to, any federal, state, local or foreign governmental
authority, does not contravene any law binding on Lessee or contravene any
certificate or articles of incorporation or by-laws or partnership certificate
or agreement, or any agreement, indenture or other instruments to which Lessee
is a party or by which it or any of its assets or property may be bound; (c)
this lease (and any Equipment Schedule entered into pursuant to this lease)
constitutes the legal, valid and binding obligation of Lessee and is enforceable
in accordance with its any time is true and correct, and there does not exist
any pending or threatened action or proceeding before any court or
administrative agency which might materially adversely affect Lessee's financial
condition or operations; (e) Lessee agrees to furnish to Lessor (i) as soon as
available, and in any event within 120 days after the last day of each fiscal
year of Lessee, a copy of the financial statements of Lessee as of the end of
such fiscal year, certified by an independent certified public accounting firm;
(ii) at any time if requested by Lessor, a copy of quarterly financial
statements certified by the principal financial officer of Lessee, and (iii)
such additional information concerning Lessee as Lessor may reasonably request.
LESSEE AND LESSOR HEREBY WAIVE THE RIGHT TO TRIAL BY JURY OF ANY MATTERS ARISING
OUT OF THIS LEASE OR ANY OTHER AGREEMENT EXECUTED IN CONNECTION HEREWITH.
32. COMMITMENT FEE REQUIREMENT. Lessee agrees, with respect to each transaction,
to pay the commitment fee specified in Lessor's proposal for such transaction or
in the Equipment Schedule related thereto. This commitment fee is given in
consideration for Lessor's costs and expenses in investigating and appraising
and/or establishing credit for Lessee. This commitment fee shall not be refunded
unless Lessor declines to accept Lessee's offer to enter into the lease. Upon
Lessor's acceptance of Lessee's offer to enter into the lease, unless otherwise
specified in the proposal or Equipment Schedule, the amount shall be applied to
the first period's rent payment. Lessee acknowledges that Lessor's act of
depositing any commitment fee into Lessor's bank account shall not in itself
constitute Lessor's acceptance of Lessee's offer to enter into the lease.
IN WITNESS WHEREOF, the parties have executed this Master Lease Agreement
effective as of the first date it is executed by Lessee below.
<TABLE>
<CAPTION>
<S> <C>
USL CAPITAL CORPORATION (LESSOR) ROYCE LABORATORIES, INC. TITLE DATE
BY BY
Name _______________________________________ x /S/PATRICK J. MCENANY PRES. 8/27/96
Title ACCOUNT COORDINATOR BEF BY
Business Unit _______________________________ x
HOME OFFICE: 733 FRONT STREETM, SAN FRANCISCO, CA 94111 (415) 627-9000 ________________(CO-LESSEE) TITLE DATE
NOT VALID UNLESS EXECUTED BY LESSOR AT LESSOR'S HOME OFFICE. BY
x
</TABLE>
<PAGE>
EQUIPMENT SCHEDULE/CERTIFICATE OF ACCEPTANCE
EQUIPMENT SCHEDULE TO MASTER LEASE AGREEMENT DATED AUGUST 27, 1996
LESSOR LESSEE
USL Capital Corporation Royce Laboratories, Inc.
733 Front Street 5350 Northwest 165th Street
San Francisco, California 94111 Miami, Florida 33014
All terms and conditions of the above referenced Master Lease Agreement are
hereby expressly incorporated into this Equipment Schedule and made a part
hereof as if such terms and conditions were fully set forth herein. By their
execution of the Equipment Schedule, the parties reaffirm all terms and
conditions of the Master Lease Agreement except as they may be modified hereby.
<TABLE>
<CAPTION>
TOTAL COST OF EQUIPMENT TO LESSOR: $512,452.18 EQUIPMENT: AS SET FORTH ON THE EXHIBIT A ATTACHED HERETO.
# OF RENT INITIAL TERM
PAYMENTS RENTAL AMOUNT FREQUENCY (MONTHS) EQUIPMENT LOCATION (ADDRESS, CITY, STATE, ZIP CODE)
<S> <C> <C> <C> <C>
1 51,245.22 Month 36 16600 North West 54th Street
3,330.94 Miami, Florida 33014
---------
54,576.16
(FOLLOWED BY) X IN CITY LIMITS __ NOT IN CITY LIMITS DADE COUNTY
1 51,245.22 Month
3,330.94 EQUIPMENT CONTACT
--------- NAME: Robert E. Band
54,576.16 PHONE: 305 624-1500
(FOLLOWED BY)
34 10,870.08 Monthly
706.56
---------
11,576.64 INVOICING ADDRESS
5350 N.W. 165th Street
COMMITMENT FEE: $54,576.16 Miami, Florida 33014
NAME: Partial Sale/Leaseback INVOICE CONTACT
PHONE NAME: Accounts Payable
PHONE: 305 624-1500
MACRS RECOVERY PERIOD 5 YEARS
LESSEE REFERENCE NUMBER:
</TABLE>
SPECIAL TERMS: THE TERMS AND CONDITIONS OF THE ABOVE REFERENCED MASTER LEASE
AGREEMENT ARE HEREBY MODIFIED FOR THIS EQUIPMENT SCHEDULE AS FOLLOWS: In
Paragraph 28, PURCHASE OPTION, the first sentence is modified by replacing the
words, "the then fair market value of the Equipment as mutually agreed by Lessor
and Lessee" with the words "25% of the Total Cost of Equipment to Lessor" or
return the Equipment to Lessor. If the Equipment is returned to Lessor, Lessee
agrees to pay 10% of Total Cost of Equipment to Lessor. All notices required and
payments due shall be made in accordance with the terms of the lease.
WE CERTIFY THAT THE EQUIPMENT DESCRIBED IN THAT ATTACHED EXHIBIT "A" HAS BEEN
INSTALLED, OPERATES PROPERLY, AND IS, THEREFORE, ACCEPTED FOR PURPOSES OF THE
LEASE.
WE REQUEST THAT LESSOR PAY THE VENDOR FOR THE EQUIPMENT AND WE UNDERSTAND THAT
RENTAL PAYMENTS WILL COMMENCE.
ATTACHMENTS: IN ADDITION TO EXHIBIT A, THE FOLLOWING EXHIBITS ARE ATTACHED
HERETO AND INCORPORATED HEREIN.
B, X
IN WITNESS WHEREOF, the parties have executed this Equipment Schedule effective
as of the first date it is executed by Lessee below.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
USL CAPITAL CORPORATION LESSEE SIGNATURE TITLE 8/27/96
BY BY
X X [ILLEGIBLE] Pres.
- --------------------------------------------- ----------------------------------------------------
BY BY
X X
- --------------------------------------------- ----------------------------------------------------
HOME OFFICE: 733 FRONT STREETM, SAN FRANCISCO, CA 94111 CO-LESSEE SIGNATURE TITLE DATE
BY
NOT VALID UNLESS EXECUTED BY LESSOR AT LESSOR'S HOME OFFICE. X
----------------------------------------------------
INTERNAL USE COMMITMENT DATE RENT COMMENCEMENT DATE BILLING ACCOUNT NO. LEASE NO.
ONLY
</TABLE>
<PAGE>
EXHIBIT A
EQUIPMENT DESCRIPTION
TO EQUIPMENT SCHEDULE DATED AUGUST 27, 1996
<TABLE>
<CAPTION>
DESCRIPTION (Include Quantity, Model #, Serial #) COST
<S> <C>
Scientific/Medical Equipment as more fully detailed on the invoices listed below
GEO CODE #09-025-410-0, COUNTY: DADE, 6.50% RENTAL TAX
VENDOR #1: Stokes-Merrill Corporation, St. Louis, Missouri
invoice #00012792, dated 2/13/96 (PAID BY LESSEE) $184,795.00
VENDOR #2: Waters Corporation, Atlanta, Georgia
invoice #2276327,(including freight) dated 6/27/96 162,928.74
VENDOR #3: Hanson Research Corporation, Chatswerth, CA 91311
invoice #52861, dated 7/19/96 61,685.00
VENDOR #4: DHI Mark Products, Miami, Florida 33186
invoice #001400, dated 8/26/96 ($92,894.51 PAID BY LESSEE) 103,043.44
</TABLE>
SUBTOTAL (THIS PAGE) $ 512,452.18
TOTAL COST $ 512,452.18
LESSEE INITIALS PJM
-------------------
PAGE 1 OF 1
<PAGE>
EXHIBIT B
AMENDMENT TO EQUIPMENT SCHEDULE(S) DATED AUGUST 27. 1996
TO MASTER LEASE AGREEMENT ("LEASE")
BETWEEN
USL CAPITAL CORPORATION ("LESSOR")
AND
ROYCE LABORATORIES. INC. ("LESSEE")
With respect to the above referenced Equipment Schedule(s) only, the terms
and conditions of the Lease shall be modified as follows:
Lessee and Lessor hereby agree that the rent payments shown on the
Equipment Schedule shall be adjusted if, for the week preceding the week in
which the Equipment is accepted for purposes of the Lease, the weekly average of
the Three-Year Treasury Note interest rate as specified in the Federal Reserve
statistical release H. 15 is greater than or less than 6.00%, and said variance
is at least equal to one quarter of one percent (.25%), then the rent payments
will be adjusted so that for each one one-hundredth of one percent (.01%)
increase or decrease in the aforementioned Treasury interest rate, all rent
payments shall be increased or decreased by .014509%.
IN WITNESS WHEREOF, the parties have executed this Amendment to Lease
effective as of the date set forth above.
<TABLE>
<CAPTION>
<S> <C>
USL CAPITAL CORPORATION (LESSOR) LESSEE SIGNATURE TITLE
BY BY
X X /s/Patrick J. McEnany President
- -------------------------------------------------------- -------------------------------------------------------
BY By
X X
- -------------------------------------------------------- ------------------------------------------------------- ---------
HOME OFFICE: 733 FRONT STREET, SAN FRANCISCO, CA 94111 CO-LESSEE SIGNATURE TITLE
NOT VALID UNLESS EXECUTED BY LESSOR AT LESSOR'S HOME BY
OFFICE X
------------------------------------------------------- ---------
</TABLE>
<PAGE>
EXHIBIT X
AMENDMENT TO EQUIPMENT SCHEDULE(S) DATED AUGUST 27, 1996
TO MASTER LEASE AGREEMENT ("LEASE")
BETWEEN
USL CAPITAL CORPORATION ("LESSOR")
AND
ROYCE LABORATORIES, INC. ("LESSEE")
With respect to the above referenced Equipment Schedule(s) only, Paragraphs 5,
6, 7, 8 and 26 of the Lease are hereby deleted and replaced with the following
paragraphs:
5. COMMITMENT DATE. Lessee shall provide Lessor with documentation in
accordance with Paragraph 8(a) hereof by the date set forth in an Equipment
Schedule or Commitment Letter issued by Lessor as the Commitment Expiration
Date.
6. CERTIFICATION OF ACCEPTANCE. If Lessor so requests, Lessee shall furnish
Lessor a written statement (a) acknowledging that the Equipment is in good
condition and repair and (b) accepting it as satisfactory in all respects for
the purposes of this lease (the "Certificate of Acceptance").
7. TERMINATION BY LESSOR. If, by the Commitment Expiration Date, the Lessee
has not furnished the Lessor with the documentation in accordance with
Paragraphs 6 and 8(a) hereof, Lessor may, at its option, terminate this lease
and its obligations hereunder with respect to such Equipment Schedule at any
time after the Commitment Expiration Date. Lessor shall give Lessee written
notice whether or not it elects to exercise such option within ten (10) days
after Lessor's receipt of Lessee's written request for such notice.
8. TERM; COMMENCEMENT. The term of this lease commences upon the earlier of
(a) the date upon which Lessor receives title to the Equipment pursuant to a
Bill of Sale or similar documentation or (b) the date of Lessor's execution of
this lease. The Rent Commencement Date shall be the later of (a) or (1), above.
Lessor is authorized to fill in on this lease the Rent Commencement Date in
accordance with the foregoing. The term shall continue until all Lessee's
obligations are fulfilled hereunder, unless sooner terminated as to all or any
part of the Equipment. The Initial Term of this lease begins on the Rent
Commencement Date and expires after the number of periods for which the rent
payments are due.
26. ACQUISITION AGREEMENTS. If the Equipment described in any Equipment
Schedule is subject to any Acquisition Agreement between the Lessee and the
Vendor and/or Manufacturer, Lessee shall indemnify and hold Lessor harmless in
accordance with Paragraph 19 from any liability resulting from any Acquisition
Agreement as well as liabilities resulting from any Acquisition Agreement Lessor
is required to enter into on behalf of Lessee or with Lessee for purposes of
this lease.
Except as amended hereby, the Lease shall remain in full force and effect.
In the event of any conflict between the Lease and this Amendment to Equipment
Schedule, the Amendment to Equipment Schedule shall govern.
IN WITNESS WHEREOF, the parties have executed this Amendment to Equipment
Schedule as of the date set forth above.
<TABLE>
<CAPTION>
<S> <C>
USL CAPITAL CORPORATION (LESSOR) LESSEE SIGNATURE TITLE
BY BY
X X /s/Patrick J. McEnany President
- -------------------------------------------------------- -------------------------------------------------------
TITLE BUSINESS UNIT By
X ACCOUNT COORDINATOR BEF X
- --------------------------------------------------------
------------------------------------------------------- ---------
HOME OFFICE: 733 FRONT STREET, SAN FRANCISCO, CA 94111 CO-LESSEE SIGNATURE TITLE
NOT VALID UNLESS EXECUTED BY LESSOR AT LESSOR'S HOME BY
OFFICE X
------------------------------------------------------- ---------
</TABLE>
<PAGE>
ACKNOWLEDGMENT
September 29, 1996
Each of the undersigned hereby acknowledges that the transaction
described on the attached page hereto was entered into by USL Capital
Corporation in its capacity as agent for BEF Corporation and not as principal,
pursuant to the Agency Agreement dated as of August 31, 1996 by and between BEF
Corporation and USL Capital Corporation.
IN WITNESS WHEREOF, the undersigned have executed this Acknowledgment
as of the date first above written.
BEF CORPORATION (the "Company")
/S/JEFF JOHNSTON
By: JEFF JOHNSTON
Its: VICE PRESIDENT
USL CAPTIAL CORPORATION (the "Agent")
/S/JEFF JOHNSTON
By: JEFF JOHNSTON
Its: VICE PRESIDENT
(Attach transaction description)
<PAGE>
QUITCLAIM BILL OF SALE
For valuable consideration, receipt of which is hereby
acknowledged, the undersigned seller hereby transfers any and
all of its right, title and interest, if any, in and to the
following described personal property except for its rights
under the Equipment Schedule dated August 27, 1996 to USL
Capital Corporation:
Description of Personal Property (Equipment)
As more fully described on the following invoices:
Waters Corporation, Atlanta, Georgia 30392 invoice #2276327, dated 6/27/96
Executed this 27th day of August 1996.
Royce Laboratories, Inc. ( Seller)
By /S/PATRICK J. MCENANY
Title PRESIDENT
<PAGE>
INDENTURE AND BILL OF SALE
This Indenture and Bill of Sale, dated the 27th day of August, 19 96,
from Royce Laboratories, Inc., a corporation, hereinafter called "Seller", to
USL CAPITAL CORPORATION, hereinafter called "Buyer".
WITNESSETH
----------
For valuable consideration, the receipt of which is hereby
acknowledged, Seller does hereby sell, assign, transfer, convey and deliver to
Buyer all property and equipment of whatsoever kind or character listed,
described or otherwise referred to in "Exhibit A" (the "Equipment"), a copy of
which Exhibit A is attached hereto and incorporated herein by this reference
with the same force and effect as set forth herein in full.
Seller covenants and warrants that:
A. It is the owner of, and has absolute title to, all the Equipment
free and clear of all claims, liens, encumbrances and all other defects of title
of any kind whatsoever.
B. It has not made any prior sale, assignment or transfer of any
item of said Equipment to any person, entity, firm or corporation.
C. It has the present right, power and authority to sell, assign and
transfer each and every item of said Equipment to Buyer.
D. Each and every item of said Equipment is in good repair, condition
and working order.
E. All acts, proceedings and things necessary and required by laws and
the articles of incorporation and by-laws of Seller and agreements or judgments
binding upon Seller to make this Indenture and Bill of Sale a valid, binding and
legal obligation of Seller have been done, taken and have happened; and the
execution and delivery hereof have in all respects been duly authorized in
accordance with law and said articles of incorporation and by-laws.
Seller shall forever warrant and defend the sale, assignment, transfer,
conveyance and delivery of each and every item of said Equipment to Buyer, its
successors and assigns, against each and every person whomsoever lawfully
claiming the same.
Possession of said Equipment shall not be transferred to Buyer but
shall be retained by Seller, it being the intention of Buyer to lease said
Equipment to Seller.
This Indenture and Bill of Sale is binding upon the successors and
assigns of Seller and inures to the benefit of the successors and assigns of
Buyer.
IN WITNESS WHEREOF the undersigned Seller has caused this instrument to
be executed on the day and year first above appearing, by and through an officer
"hereunto duly authorized.
Royce Laboratories, Inc. ( Seller)
By /S/PATRICK J. MCENANY
Title PRESIDENT
<PAGE>
EXHIBIT A TO INDENTURE AND BILL OF SALE
FROM: ROYCE LABORATORIES, INC.
TO USL CAPITAL CORPORATION
DATED AUGUST 27, 1996
Equipment Location: 16600 North West 54th Street, Miami, Florida
33014
Equipment Description: Scientific/Medical Products, Miami, Florida
33186
DHI Mark Products, Miami, Florida 33186
invoice #001400, dated 8/26/96
Stokes-Merrill Corporation, St. Louis, Missouri
invoice #00012792, dated 2/13/96
SCHEDULE OF COMPUTATION OF EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT
SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------- ------------------------------------
1996 1995 1996 1995
--------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net income (loss) $ 118,000 ($ 766,000) $ 1,214,000 ($ 1,513,000)
--------------- --------------- ---------------- ---------------
Weighted average number of common shares
outstanding during the period 13,515,282 12,632,768 13,442,258 12,189,873
Add: Common equivalent shares
determined using the "Treasury
Stock" Method representing
shares issuable upon exercise of
stock options and warrants. 129,597 -- 571,108 --
--------------- --------------- ---------------- ---------------
Weighted average number of common and
common equivalent shares outstanding 13,644,879 12,632,768 14,013,366 12,189,873
--------------- --------------- ---------------- ---------------
Earnings (loss) per common and common
equivalent share $ .01 ($ .06) $ .09 ($ .12)
=============== =============== ================ ===============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SIGNIFICANT FINANCIAL INFORMATION EXTRACTED FROM 10-Q
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 3,950,000
<SECURITIES> 0
<RECEIVABLES> 3,780,000<F1>
<ALLOWANCES> 0
<INVENTORY> 5,858,000
<CURRENT-ASSETS> 14,170,000
<PP&E> 3,359,000<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 17,588,000
<CURRENT-LIABILITIES> 2,781,000
<BONDS> 1,053,000<F3>
0
0
<COMMON> 67,000
<OTHER-SE> 13,687,000
<TOTAL-LIABILITY-AND-EQUITY> 17,588,000
<SALES> 17,216,000
<TOTAL-REVENUES> 17,216,000
<CGS> 11,200,000
<TOTAL-COSTS> 11,200,000
<OTHER-EXPENSES> 4,885,000
<LOSS-PROVISION> 75,000
<INTEREST-EXPENSE> 47,000
<INCOME-PRETAX> 1,246,000
<INCOME-TAX> 32,000
<INCOME-CONTINUING> 1,214,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,214,000
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
<FN>
<F1> Net of allowance of $1,740,000
<F2> Net of depreciation
<F3> Comprised of long-term debt
</FN>
</TABLE>
