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 March 31, 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.
13,441,048 shares of Common Stock, $.005 par value as of April 12, 1996.
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ROYCE LABORATORIES, INC.
INDEX
PART I FINANCIAL INFORMATION PAGE NO.
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets for
March 31, 1996 and December 31, 1995 3
Consolidated Statements of Operations for the
Three Months Ended March 31, 1996 and 1995 4
Consolidated Statement of Changes in Stockholders' Equity for the
Three Months Ended March 31, 1996 5
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 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 12
Item 2. Changes in securities 12
Item 3. Defaults upon senior securities 12
Item 4. Submission of matters to a vote of security holders 12
Item 5. Other information 12
Item 6. Exhibits and reports on Form 8-K 12
</TABLE>
2
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ROYCE LABORATORIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARES)
March 31, December 31,
1996 1995
---- ----
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 3,310 $ 2,291
Accounts receivable, net of allowances
of $1,218 and $909, respectively 4,487 3,466
Inventories 5,609 4,212
Prepaid expenses and other current assets 274 315
-------- --------
Total current assets 13,680 10,284
Property and equipment, net 2,411 1,732
Other assets 38 77
-------- --------
$ 16,129 $ 12,093
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,164 $ 2,521
Accrued liabilities 786 628
Current maturities of long-term debt 92 90
-------- --------
Total current liabilities 3,042 3,239
Long-term debt 156 181
-------- --------
Total liabilities 3,198 3,420
-------- --------
Commitments and contingencies -- --
-------- --------
Stockholders' equity:
Common stock, $.005 par value, 35,000,000 shares
authorized; 13,441,048 and 12,838,466 shares issued,
respectively 67 64
Additional paid-in capital 30,059 26,471
Accumulated deficit (17,184) (17,851)
Treasury stock (2,500 shares at cost) (11) (11)
-------- --------
Total stockholders' equity 12,931 8,673
-------- --------
$ 16,129 $ 12,093
======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
3
<PAGE>
ROYCE LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended
March 31,
-----------------------------------
1996 1995
------------- -------------
Net sales $ 5,726 $ 2,084
Cost of goods sold ( 3,583) ( 1,430)
------------ -------------
Gross profit 2,143 654
Expenses:
Research and development ( 388) ( 265)
Selling, general and administrative ( 1,145) ( 666)
------------ -------------
Operating income (loss) 610 ( 277)
------------ -------------
Other income (expense):
Interest income 59 37
Interest expense ( 9) ( 3)
Miscellaneous income 7 -
------------ -------------
57 34
------------ -------------
Income (loss) before income taxes 667 ( 243)
Income taxes - -
------------ -------------
Net income (loss) $ 667 ($ 243)
============ =============
Per share data:
Earnings (loss) per common and common
equivalent share $ .05 ($ .02)
============ =============
Weighted average number of common and
common equivalent shares outstanding 14,302,236 11,963,131
============ =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
4
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<CAPTION>
ROYCE LABORATORIES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS EXCEPT SHARES)
(UNAUDITED)
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 602,582 3 3,511 - - 3,514
Costs related to stock options
granted to a customer - - 77 - - 77
Net income - - - 667 - 667
------------ ------ ----------- ----------- -------- -----------
Balance at March 31, 1996 13,441,048 $ 67 $ 30,059 ($ 17,184) ($ 11) $ 12,931
============ ======= =========== =========== ======== ===========
</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)
Three Months Ended
March 31,
-------------------
1996 1995
---- ----
Cash flows from operating activities:
Net income (loss) $ 667 ($ 243)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation 110 56
Option grant to a customer 11 -
Changes in operating assets and liabilities:
(Increase) in accounts receivable ( 1,021) ( 176)
(Increase) in inventories ( 1,397) ( 75)
Decrease in prepaid expenses
and other current assets 41 51
Decrease in other assets 39 34
(Decrease) in accounts payable ( 357) ( 323)
Increase in accrued liabilities 224 73
-------- --------
Net cash used in operating activities ( 1,683) ( 603)
-------- ---------
Cash flows from investing activities:
Acquisition of property and equipment ( 789) ( 129)
-------- --------
Net cash used in investing activities ( 789) ( 129)
-------- --------
Cash flows from financing activities:
Proceeds from equipment note - 20
Repayments of notes payable ( 23) ( 7)
Net proceeds from issuance of common stock 3,514 -
-------- --------
Net cash provided by financing activities 3,491 13
-------- --------
Net increase (decrease) in cash and
cash equivalents 1,019 ( 719)
Cash and cash equivalents, beginning of period 2,291 3,323
-------- --------
Cash and cash equivalents, end of period $ 3,310 $ 2,604
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
During the three months ended March 31, 1996 and 1995, the Company made cash
payments for interest totaling approximately $11,000 and $3,000,
respectively.
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
During the three months ended March 31, 1995, the Company issued 10,695
shares of common stock in satisfaction of a contract obligation.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
6
<PAGE>
ROYCE LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 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. The results of operations for the
three months ended March 31, 1996 may not be indicative of the results that may
be expected for the year ended 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 months ended March 31, 1995
because their effect would be anti-dilutive. Primary and fully diluted earnings
per share were the same for the three months ended March 31, 1996.
(B) Reclassification
Certain amounts in the 1995 financial statements have been reclassified to
conform to the 1996 presentation.
NOTE 2. INVENTORIES
March 31, December 31,
1996 1995
---- ----
(Unaudited)
Raw materials $ 3,036 $ 2,439
Work-in-progress 1,382 783
Finished goods 1,191 990
--------- ----------
$ 5,609 $ 4,212
========== ==========
7
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ROYCE LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(UNAUDITED)
NOTE 3. LONG-TERM DEBT
Long-term debt consists of bank notes and capital lease obligations. These
obligations are payable in monthly installments, including interest ranging from
9.6% to 13% per annum, for terms expiring at various dates through 2000, and are
collateralized by equipment. At March 31, 1996, long-term debt totaled $248,000,
of which current maturities comprised $92,000.
NOTE 4. INCOME TAXES
In the three months ended March 31, 1996, the Company used approximately $1.1
million of its net operating loss carryforwards to offset its taxable income
during that period. Accordingly, the Company's net deferred tax asset and its
valuation allowance for such asset were reduced by approximately $400,000.
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 shares of
common stock underlying the Private Warrants have been registered for sale by
the holders thereof under the Securities Act of 1933, as amended.
On December 12, 1995, the Company reduced the exercise price of the Private
Warrants from $6.50 to $6.00 for a 60 day period as an incentive for warrant
holders to exercise their Private Warrants. During the three months ended March
31, 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 were outstanding as of March 31, 1996.
NOTE 6. COMMITMENTS AND CONTINGENCIES
I. Customer options
The Company has option agreements with two of its customers. For a description
of the agreements, see Note 8 (III) (I) 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.
8
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ROYCE LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(UNAUDITED)
NOTE 6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
II. Litigation
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 examination
focused on the Company's public disclosure during the period between July 1991
and April 1992 regarding the status of the Company's ANDAs for Piroxicam and
Minoxidil and on sales of securities during this period by certain persons.
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 to defray, in part, the SEC's
expenses in connection with the investigation, 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, although the Company believes that
the SEC's investigation continues with respect to the sales of the Company's
securities by two of the Company's executive officers during the period
described above. The Company does not believe, however, that the continuing
aspects of the SEC's investigation will have a material adverse effect on the
Company's financial condition or results of operations.
On January 12, 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 has also been
brought against one of the underwriters of the Company's January 1992 public
offering, alleges that the Company's January 9, 1992 prospectus was false and
misleading. The suit seeks damages for violations of Section 11 of the
Securities Act of 1933 and Section 10b and Rule 10b-5 under the Securities and
Exchange Act of 1934 in the amount of approximately $40,000 plus interest. The
Company is vigorously defending this suit and believes it has a meritorious
defense. No assurances can be given as to the outcome of this matter.
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 the current status of 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. While there can be no
assurance, the Company does not believe that this litigation will have a
material adverse impact on its financial position or results of operations.
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 and
analysis should be read in conjunction with Management's Discussion and Analysis
contained in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995. This Quarterly Report on Form 10-Q contains certain forward
looking statements which involve risks and uncertainties. The Company's actual
results could differ from the forward looking information described herein.
RESULTS OF OPERATIONS
Presented below is a comparison of the results of operations for the three
months ended March 31, 1996 to the three months ended March 31, 1995. Such three
month periods are referred to as 1996 and 1995, respectively.
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
Net sales for 1996 were $5.7 million, representing an increase of $3.6 million
or 175% over net sales of $2.1 million for 1995. Approximately 67% of the
increase in net sales was attributable to sales of products which were
introduced by the Company after March 31, 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 March 31, 1995 ("Existing Products").
Approximately 88% of the increase in sales of New Products was attributable to
the launches of Hydroxychloroquine Sulfate in December 1995, Captopril in
February 1996 and the Hydrocodone Bitartrate line of products in March 1996.
Approximately 63% of the increase in sales of Existing Products was attributable
to increased sales of Quinine Sulfate, a prescription drug for the treatment of
malaria. The majority of the sales increase in the Company's other Existing
Products is due to increased volume.
Gross profit for 1996 was $2.1 million, or 37% of net sales, compared to
$654,000, or 31% of net sales for 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.
Research and development ("R&D") expenses increased 46% to $388,000 in 1996
versus $265,000 in 1995. The Company expects 1996 R&D expenses to continue to
increase over their 1995 levels.
Selling, general & administrative ("SG&A") expenses increased 72% to $1.1
million or 20% of net sales in 1996, versus $666,000 or 32% of net sales in
1995. Approximately 26% of the increase in SG&A expenses was attributable to an
increase in royalties which are based on sales of certain products (See "Item 1.
Business Products" in the Company's Annual Report on Form 10-K for the year
ended December 31, 1995 for a description of such products). The Company
anticipates that royalties will continue to increase as sales of such products
increase and additional New Products subject to royalty arrangements are
launched. Advertising expenses associated with the launch of New Products
accounted for an additional 23% of the increase in SG&A expenses. Other SG&A
expense increases were attributable to the growth of the Company's operations.
10
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
No income tax expense was recorded in 1996 as the Company used its net operating
loss carryforwards to offset its taxable income. As a result of the above
factors, the Company's net income for 1996 was $667,000, compared to a net loss
of $243,000 for 1995.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed itself through sales of its equity
securities. In 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).
Cash and cash equivalents increased $1.0 million from year end 1995. This
increase represents the $3.5 million received from financing activities
(primarily from the exercise of Private Warrants) less $1.7 million used in
operating activities and $0.8 million used for property and equipment purchases.
Net accounts receivable at March 31, 1996 increased by $1.0 million over year
end 1995, due in large part to an increase of $1.8 million in net sales in the
quarter ending March 31, 1996 over the quarter ending December 31, 1995. First
quarter 1996 sales increased as a result of the launches of Captopril and the
Hydrocodone Bitartrate line in February and March, respectively, combined with
increased volume in the sales of the Company's other products. Consistent with
Management's goal of increasing inventories to better meet customers
requirements and support higher sales and the introduction of new products,
inventories at March 31, 1996 increased by $1.4 million over year end 1995
levels.
Property and equipment, net of accumulated depreciation, increased $789,000
between December 31, 1995 and March 31, 1996. This increase related to purchases
of manufacturing equipment and plant improvements to meet growing production
needs.
As the Company grows, it will continue to require additional capital. The
Company will continue to monitor its capital requirements and seek additional
capital if and when it becomes necessary. The Company presently believes that it
has adequate cash reserves and will generate sufficient cash flow from its
operations to support its current level of working capital requirements, capital
expenditures and R&D activities through at least the end of 1996. The Company
expects that once it has established a history of earnings, revolving credit
bank financing on cost effective terms will become available to meet the
Company's working capital requirements, although there can be no assurance of
such. In addition, future expansion of the Company's facilities or acquisitions
might require a significant amount of additional capital. There can be no
assurance that necessary funding will be available in the future when and if it
is required. Any such funding would likely involve sales of additional equity
securities of the Company.
11
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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
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 11
Statement regarding computation of per share earnings
Primary earnings per share and fully-diluted earnings per share are
computed by dividing net income by the weighted average number of
common and common equivalent shares outstanding during the period.
For purposes of computing primary earnings per share, common
equivalent shares include the average number of common shares issuable
upon the exercise of all stock options and warrants, if dilutive, less
the common shares which could have been purchased at the average
market price during the period with the assumed proceeds from the
exercise of the options and warrants.
For purposes of computing fully-diluted earnings per share, common
equivalent shares are computed on a basis comparable to that for
primary earnings per share, except that common shares are assumed to
be purchased at the market price at the end of the period, if such
market price is less than the average market price used in the
computation of primary earnings per share.
(b) REPORTS ON FORM 8-K
No Reports on Form 8-K were filed during the first quarter of 1996.
12
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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 14th day of May, 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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10-Q
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 3,310,000
<SECURITIES> 0
<RECEIVABLES> 5,705,000
<ALLOWANCES> 1,218,000
<INVENTORY> 5,609,000
<CURRENT-ASSETS> 13,680,000
<PP&E> 2,411,000<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 16,129,000
<CURRENT-LIABILITIES> 3,042,000
<BONDS> 156,000<F2>
0
0
<COMMON> 67,000
<OTHER-SE> 12,864,000
<TOTAL-LIABILITY-AND-EQUITY> 16,129,000
<SALES> 5,726,000
<TOTAL-REVENUES> 5,726,000
<CGS> 3,583,000
<TOTAL-COSTS> 1,533,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,000
<INCOME-PRETAX> 667,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 667,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 667,000
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
<FN>
<F1>Net of Depreciation.
<F2>Comprised of long-term debt.
</FN>
</TABLE>
