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 June 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.
13,505,638 shares of Common Stock, $.005 par value as of
August 2, 1996.
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ROYCE LABORATORIES, INC.
INDEX
PART I FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements
Consolidated Balance Sheets at
June 30, 1996 and December 31, 1995 3
Consolidated Statements of Operations for the
Three and Six Month Periods Ended June 30, 1996 and 1995 4
Consolidated Statement of Changes in Stockholders' Equity for the
Six Months Ended June 30, 1996 5
Consolidated Statements of Cash Flows for the
Six Months Ended June 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 15
Item 2. Changes in securities 15
Item 3. Defaults upon senior securities 15
Item 4. Submission of matters to a vote of security holders 15
Item 5. Other information 15
Item 6. Exhibits and reports on Form 8-K 16
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<TABLE>
<CAPTION>
ROYCE LABORATORIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARES)
June 30, December 31,
1996 1995
----------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,109 $ 2,291
Accounts receivable, net of allowances
of $1,733 and $909, respectively 4,759 3,466
Inventories 6,967 4,212
Prepaid expenses and other current assets 264 315
----------- -----------
Total current assets 14,099 10,284
Property and equipment, net 2,740 1,732
Other assets 43 77
----------- ------------
$16,882 $ 12,093
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,642 $ 2,521
Accrued liabilities 552 628
Current maturities of long-term debt 90 90
----------- -----------
Total current liabilities 3,284 3,239
Long-term debt 135 181
----------- -----------
Total liabilities 3,419 3,420
----------- -----------
Commitments and contingencies - -
----------- -----------
Stockholders' equity:
Common stock, $.005 par value, 35,000,000 shares
authorized; 13,457,548 and 12,838,466 shares issued,
respectively 67 64
Additional paid-in capital 30,162 26,471
Accumulated deficit ( 16,755) ( 17,851)
Treasury stock (2,500 shares at cost) ( 11) ( 11)
----------- -----------
Total stockholders' equity 13,463 8,673
----------- -----------
$16,882 $ 12,093
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
3
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<TABLE>
<CAPTION>
ROYCE LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT SHARES AND PER SHARE DATA)
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- -----------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 5,667 $ 2,059 $ 11,393 $ 4,143
Cost of goods sold ( 3,597) ( 1,516) ( 7,180) ( 2,946)
------------- ------------ ------------ -------------
Gross profit 2,070 543 4,213 1,197
Expenses:
Research and development ( 365) ( 403) ( 753) ( 668)
Selling, general and administrative ( 1,308) ( 665) ( 2,453) ( 1,331)
------------- ------------ ------------ -------------
Operating income (loss) 397 ( 525) 1,007 ( 802)
------------- ------------ ------------ -------------
Other income (expense):
Interest income 37 27 96 64
Interest expense ( 11) ( 7) ( 20) ( 10)
Miscellaneous income 29 1 36 1
------------- ------------ ------------ -------------
55 21 112 55
------------- ------------ ------------ -------------
Income (loss) before income taxes 452 ( 504) 1,119 ( 747)
Income taxes ( 23) - ( 23) -
------------- ------------ ------------ -------------
Net income (loss) $ 429 ($ 504) $ 1,096 ($ 747)
============= ============ ============ =============
Per share data:
Earnings (loss) per common and common
equivalent share $ .03 ($ .04) $ .08 ($ .06)
============= ============ ============ =============
Weighted average number of common and
common equivalent shares outstanding 14,148,159 11,966,360 14,225,198 11,964,754
============= ============ ============ =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
4
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<TABLE>
<CAPTION>
ROYCE LABORATORIES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 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 619,082 3 3,604 - - 3,607
Grant of stock options - - 87 - - 87
Net income - - - 1,096 - 1,096
---------- ------- ----------- ----------- -------- -----------
Balance at June 30, 1996 13,457,548 $ 67 $ 30,162 ($ 16,755) ($ 11) $ 13,463
========== ======= =========== ========== ======= ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
5
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<TABLE>
<CAPTION>
ROYCE LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS EXCEPT IN SUPPLEMENTAL DISCLOSURES)
(UNAUDITED)
Six Months Ended
June 30,
-------------------------------
1996 1995
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,096 ($ 747)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation 247 123
Option grant 21 -
Changes in operating assets and liabilities:
Increase in accounts receivable ( 1,293) ( 394)
Increase in inventories ( 2,755) ( 915)
Decrease in other current assets 51 131
Decrease in other assets 34 34
Increase (decrease) in accounts payable 121 ( 601)
Decrease in accrued liabilities ( 10) ( 11)
-------- ----------
Net cash used in operating activities ( 2,488) ( 2,380)
-------- ----------
Cash flows from investing activities:
Acquisition of property and equipment ( 1,255) ( 496)
-------- ----------
Net cash used in investing activities ( 1,255) ( 496)
-------- ----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt - 139
Repayment of long-term debt ( 46) ( 20)
Net proceeds from issuance of stock 3,607 21
Collection of loan receivable - 27
-------- ----------
Net cash provided by financing activities 3,561 167
-------- ----------
Net decrease in cash and cash equivalents ( 182) ( 2,709)
Cash and cash equivalents, beginning of period 2,291 3,323
-------- ----------
Cash and cash equivalents, end of period $ 2,109 $ 614
======== ==========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
During the six months ended June 30, 1996 and 1995, the Company made cash
payments for interest totaling approximately $22,000 and $10,000,
respectively.
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
During the six months ended June 30, 1995, the Company issued 12,017 shares
of unregistered common stock in satisfaction of contract obligations.
During the six months ended June 30, 1995, the Company incurred $38,000 in
capital lease obligations for new equipment.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
6
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ROYCE LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTH PERIODS ENDED JUNE 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 six month periods ended June 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 six month periods ended June
30, 1995 because their effect would be anti-dilutive. Primary and fully diluted
earnings per share were the same for the three and six month periods ended June
30, 1996.
(B) Reclassification
Certain amounts in the 1995 financial statements have been reclassified to
conform to the 1996 presentation.
NOTE 2. INVENTORIES
June 30, December 31,
1996 1995
----------- ------------
(Unaudited)
Raw materials $ 3,352 $ 2,439
Work-in-progress 1,675 783
Finished goods 1,940 990
--------- ----------
$ 6,967 $ 4,212
========== ==========
7
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ROYCE LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTH PERIODS ENDED JUNE 30, 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 June 30, 1996, long-term debt totaled $225,000,
of which current maturities comprised $90,000. See Note 7 regarding a new loan
obtained subsequent to June 30, 1996.
NOTE 4. INCOME TAXES
The Company used approximately $0.5 million and $1.3 million, respectively, of
its net operating loss carryforwards to offset 90% of its taxable income in the
three and six month periods ended June 30, 1996. Accordingly, the Company's net
deferred tax asset and its valuation allowance for such asset were reduced by
approximately $200,000 and $500,000, respectively, in the three and six month
periods ended June 30, 1996. The provision for income taxes for the three months
ended June 30, 1996 consists of the Company's estimate of alternative minimum
taxes incurred during the period.
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 were 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. During the six months ended
June 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.
NOTE 6. COMMITMENTS AND CONTINGENCIES
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
Securities and Exchange Commission 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, although the Company believes that
the SEC's investigation continues with respect to the
8
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ROYCE LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
sales of the Company's securities during the period between September 1991 and
April 1992 by three Company employees. 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 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.
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.
An agreement has recently expired 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. 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. 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 that time.
NOTE 7. SUBSEQUENT EVENT
On August 5, 1996, the Company received $750,000 in 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 at 10% per annum,
and is collateralized by a first priority interest in all of the equipment and
fixtures owned by the Company. In connection with this loan, the Company is
required to comply with various covenants, including debt to equity and interest
coverage ratios.
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 THE FISCAL YEAR ENDED DECEMBER 31, 1995
AND THE QUARTERLY REPORT ON FORM 10-Q FOR THE FIRST QUARTER OF 1996.
RESULTS OF OPERATIONS
Presented below is a comparison of the results of operations for the three and
six month periods ended June 30, 1996 to the same periods ended June 30, 1995.
Such three and six month periods are referred to herein (when the context
requires) as "1996" and "1995", respectively.
THREE MONTHS ENDED JUNE 30, 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 65% of the
increase in net sales was attributable to sales of products which were
introduced by the Company after June 30, 1995 ("New Products"), while the
remaining 35% of the increase in net sales was attributable to sales of products
in the Company's product line prior to June 30, 1995 ("Existing Products").
Sales and gross profits from Captopril during 1996 were not as significant as
had been anticipated prior to its February 13, 1996 launch, due to the large
number of competitors with this product on that date. The Company believes that
an oversupply of Captopril by manufacturers exists which may be causing certain
of these manufacturers to sell short dated Captopril at very low prices. The
Company believes this may be further fueling the current price decline with
respect to this product. While the Company realized normal profit margins on its
Captopril sales in the second quarter of 1996, sales prices have declined
subsequently, and thus, the Company believes there is a strong possibility that
margins on Captopril will decrease in the near future as it meets competition on
this product.
Most of the increase in sales of Existing Products was attributable to increased
sales of Quinine Sulfate. The growth in Quinine Sulfate sales resulted from a
combination of higher volume and higher prices, both of which Management
believes occurred as a result of less competition for this product. A material
portion of Quinine Sulfate sales for the quarter were to a former competitor in
this product. There can be no assurance that such customer will continue to
purchase Quinine Sulfate from the Company rather than manufacturing it. While
the Company believes that Quinine Sulfate will continue to be a significant
product at least for the remainder of 1996, there can be no assurance that the
market demand for this product will continue at its current levels nor that
competition will not increase in the future, both of which
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
could impact the Company's volume and prices for this product. For other
information regarding the status of Quinine Sulfate, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Results of Operations 1995 vs. 1994" in the Company's Annual Report on Form 10-K
for the year ended December 31, 1995. Sales of other Existing Products increased
15% from their 1995 levels. A gain of 11% in unit volume and a better sales mix
of the other Existing Products was partially offset by price decreases in
certain of these products caused by competition. The Company is encouraged by
the recent addition of several key new customers and believes that its sales
will increase moderately in the remainder of 1996.
Gross profit for 1996 was $2.1 million, or 37% of net sales, compared to
$543,000, or 26% 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 resulted in increased operating
leverage on the Company's fixed costs of manufacturing. This increase was
partially offset by higher sales incentives and allowances which were provided
in 1996 to promote the New Products and in response to increased competitive
pressure. Due to price competition, the Company believes that its overall gross
profit margin is likely to decrease moderately in the remainder of 1996, unless
such decrease is offset by future volume gains and new product approvals.
Research and development ("R&D") expenses decreased 9% to $365,000 in 1996
versus $403,000 in 1995. The Company expects that the R&D expenses for the year
ending December 31, 1996 to be higher than their 1995 levels.
Selling, general & administrative ("SG&A") expenses increased 96% to $1.3
million or 23% of net sales in 1996, versus $665,000 or 32% of net sales in
1995. Approximately 17% of the increase in SG&A expenses was attributable to an
increase in royalties which are payable based on sales of certain products.
Advertising expenses associated with New Products accounted for 14% of the
increase in SG&A expenses. Payroll and benefits accounted for 24% 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 reduction in SG&A as a
percentage of sales resulted from economies of scale arising from higher
revenues.
The Company recorded $23,000 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 1996 was $429,000,
compared to a net loss of $504,000 for 1995.
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
Net sales for 1996 were $11.4 million, representing an increase of $7.3 million
or 175% over net sales of $4.1 million for 1995. Approximately 66% of the
increase in net sales was attributable to the sales of New Products, while the
remaining 34% of the increase in net sales was attributable to sales of Existing
Products. Most of the increase in net sales of Existing Products was
attributable to increased sales of Quinine Sulfate. See the discussion above on
the results for the three month period ended June 30, 1996 for further
information. Sales in the Company's other Existing Products increased 19% from
their 1995 levels. A gain of 29% in unit volume and a better sales mix of the
other Existing Products was partially offset by price decreases in certain of
these products caused by competition.
Gross profit for 1996 was $4.2 million, or 37% of net sales, compared to $1.2
million, or 29% of net sales
11
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. This increase was partially offset by higher sales
incentives and allowances which were provided in 1996 to promote the New
Products and in response to increased competitive pressure.
The Company's R&D expenses increased 13% to $753,000 in 1996 versus $668,000 in
1995.
SG&A expenses increased 84% to $2.5 million or 22% of net sales in 1996, versus
SG&A of $1.3 million or 32% of net sales in 1995. Approximately 21% of the
increase in SG&A expenses was attributable to an increase in royalties which are
payable based on sales of certain products. Advertising expenses associated with
the launch of New Products accounted for 18% of the increase in SG&A expenses.
Payroll and benefits accounted for 19% 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 $23,000 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 1996 was $1.1 million,
compared to a net loss of $747,000 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 decreased $0.2 million from year end 1995. This
decrease represents the $3.6 million received from financing activities
(primarily from the exercise of Private Warrants) less $2.5 million used in
operating activities and $1.3 million used for property and equipment purchases.
In August 1996, the Company obtained a bank term loan for $750,000 to finance
equipment purchases (see Note 7 of the Notes to Consolidated Financial
Statements).
Net accounts receivable at June 30, 1996 increased by $1.3 million over year end
1995, due in large part to an increase of $1.8 million in net sales in the
quarter ending June 30, 1996 over the quarter ending December 31, 1995.
Inventories at June 30, 1996 increased by $2.8 million over year end 1995 due to
the introduction of new products, management's decision to increase inventories
to improve service levels, purchasing for higher anticipated sales levels than
actually occurred and higher than normal purchases of Quinine Sulfate in June
1996 to meet a large order shipped in July 1996. The Company expects that its
inventory level will be stable or decrease during the remainder of 1996.
Capital expenditures for the six months ended June 30, 1996 were $1.3 million.
These purchases consisted mainly of manufacturing equipment and plant
improvements to meet growing production needs, and the
12
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 expects to make plant improvements, including
its new R&D lab, and purchase new equipment in the next 12 months in the amount
of $1-$2 million. Also, R&D expenditures in the remainder of 1996 are expected
to increase over first half 1996 levels. The Company does not expect to use
working capital for inventory in the second half of 1966 as it believes its
inventory will not increase during that period. The Company believes that
continued growth in sales will be necessary for the Company to generate
sufficient cash flows from operations to be able to internally fund its current
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
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 of certain products within the
generic industry is indicative of such competition. Below are issues and
uncertainties which, based on recent industry trends, could affect the Company
in the future.
Recently, as a result of increased competition, several competitors and the
Company have had to offer their customers shelf stock adjustments on customers'
inventories of products, the market prices of which had decreased following such
customers' purchases. This type of adjustment is common in the generic drug
industry and is intended to permit the incumbent to maintain market share
following the market entry of new competitors in a particular product.
Generally, shelf stock adjustments are based on the amount of such product the
customer has in inventory at the time of the price decrease times the amount of
the price decrease. The timing and amounts of such shelf stock adjustments are
difficult to estimate since they are a function of future new competition and
price decreases.
The Company purchases inventory based upon its forecast of sales. Its goal is to
maintain enough inventory to maintain high service levels but to avoid excess
inventory levels. Generally, there is both market risk and expiration date risk
related to inventory. Market risk refers to the possibility that competition
could drive market sales prices below the Company's cost of inventory, in which
case, when measuring inventory at the lower of cost or market, a write down of
inventory would be necessary. Expiration date risk refers to the dating of drug
products with expiration dates. Customers generally require a minimum of 12
months from their date of purchase before the product expires. If the Company
builds excess inventories or loses sales due to competition or consolidation in
the industry, parts of its inventory could expire and as result, be required to
be written off.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Consolidation and strategic alliances within the pharmaceutical industry have
resulted in certain of the Company's customers being bought by or forming joint
ventures with competitors. This has resulted in less business opportunities
among the Company's private label customer base and made it increasingly
necessary to develop new customers among wholesalers, retail chains and managed
care customers. To obtain and/or increase business among these segments of the
pharmaceutical business, it is important that the Company broaden its product
line and/or be the only source or one of a limited number of sources of supply
for products.
In response to this competitive landscape, the Company is 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 add complementary products lines. The degree of the Company's
future growth in sales and profitability depends on its ability to identify,
develop and market unique drugs for which there is less competition. The Company
believes that its ability to consummate strategic partnerships and acquisitions
will be a key factor in accomplishing this goal. There can be no assurance as to
the success of these efforts. The Company is also focused on expanding its sales
and marketing efforts in an attempt to increase its market share of the products
it sells and is encouraged by the recent addition of several key new customers.
Despite this competitive environment, the Company has grown and the Company
believes it, along with the generic drug industry, will continue to grow in the
future. Since December 1995, the Company has launched three new products, two of
which have been major contributors in the Company's movement to profitability.
The Company has also experienced important volume gains in the sales of three of
its Existing Products. As to one of these products, the Company has been able to
take advantage of market conditions which have occurred because of decreased
competition with respect to this product. During 1995, the Company filed ANDAs
for seven products and has filed ANDAs for three additional products thus far in
1996 which bring its number of ANDAs pending with the FDA to eleven prescription
pharmaceutical products in 19 dosage strengths.
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 and 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, readers should review the Company's 1995
Form 10-K and Form 10-Q for the first quarter of 1996.
14
<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
At the Company's annual meeting on June 12, 1996, the stockholders approved
the following (refer to the 1996 proxy statement for additional
information):
<TABLE>
<CAPTION>
Votes
----------------------
For Against Abstentions
--- ------- -----------
<S> <C> <C> <C>
1. Election of three persons to the Board of
Directors to serve two years until 1998.
Patrick J. McEnany 9,833,436 - 72,902
Jacqueline Allee 9,829,502 - 76,836
William J. Grant 9,835,463 - 70,875
Two directors, Henry S. Keel and David Cohen Ph.D.,
retired at the end of their terms on June 12, 1996 and
were replaced by Ms. Allee and Mr. Grant.
2. Ratification of Price Waterhouse, LLP as the
Company's independent certified public
accountants for 1996. 9,826,195 48,578 31,565
3. Other Business 9,346,028 479,795 80,515
</TABLE>
ITEM 5. OTHER INFORMATION.
None.
15
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBIT 10.1
Letter Agreement, Note and Security Agreement between the Company and
SunTrust.
(b) EXHIBIT 11
(c) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the second quarter of 1996.
16
<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 14th day of August, 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
17
EXHIBIT 10.1
SUNTRUST SECURITY AGREEMENT
(EQUIPMENT AND CONSUMER GOODS)
______________________
Contract No.
THE TERMS OF THE LETTER AGREEMENT DATED JULY 1996 ARE
INCORPORATED HEREIN BY REFERENCE.
ROYCE LABORATORIES, INC. (and if more than one, each of them jointly and
- -------------------------
(Name(s) of Borrower(s))
severally), hereinafter called "Borrower", of
5350 NW 165TH STREET MIAMI DADE FLORIDA,
- ------------------------------------------------------------------------------
(No. and Street) (City) (County) (State)
for value received and intending to be legally hound hereby grants to
SUNTRUST BANK, MIAMI, N.A.
- --------------------------
(NAME OF SECURED PARTY)
hereinafter called "Secured Party", a security interest in the following
property see below
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
New or
Used Year Manufacturer or Make Description of Model Number or Manufacturer's Serial No.
Model (Trade Name) Collateral Series
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
First priority security interest on all of the Borrower's Equipment and
Fixtures whether now existing or hereafter created or acquired.
together with all increases, parts, fittings, accessories, equipment, and
special tools now or hereafter affixed to any or any part thereof or used in
connection with any thereof, and all replacements of all or any part thereof
plus any returned or unearned premiums from any insurance financed by the
Secured Party in conjunction with this transaction (all of which is hereinafter
called Collateral), to secure the payment of a promissory note or notes executed
by Borrower in the amount of:
SEVEN HUNDRED FIFTY THOUSAND AND 00/100 Dollars ($750,000.00), of even date
herewith, and any and all extensions, modifications or renewals thereof, and
also to secure the performance by Borrower of the agreements hereinafter set
forth, and all other liabilities or obligations (primary, secondary, direct,
contingent, sole, joint or several) due, or to become due or which may be
hereafter contracted or acquired of each Borrower to Secured Party (the
foregoing hereinafter being called the "Liabilities").
Borrower hereby warrants and agrees that
1. (a) Borrower is the owner of the Collateral clear of all liens and
security interests except the security interest granted hereby; (b) Borrower has
the right and power to make this Agreement; and (c) the Collateral is used or
acquired for use primarily for the purpose checked: [ ] personal, family or
household purposes; [ ] farm purposes; or [ ] business purposes; and (d)
if the Collateral consists of "household goods" as defined in 12 C.F.R. 227.12
(d) or if otherwise checked here [X] then the Collateral is being acquired
with the proceeds of the loan provided for in or secured by this Agreement, and
the proceeds will be used for no other purpose, and Borrower hereby authorizes
Secured Party to disburse the proceeds or any part thereof directly to the
seller of the Collateral or to the insurance agent or broker, or both, as shown
on Secured Party's records.
2. (a) The Collateral will be kept at 5350 NW 165TH STREET, MIAMI, FL
-------------------------------
(No. and Street) (City) (State)
33014 DADE AND 16600 NW 54TH AVENUE MIAMI, FL 33014 DADE
- ------------ ------------------------------------------
(No. and Street) (City) (State) (County)
or if left blank, at the address shown at the beginning of this Agreement;
Borrower will promptly notify Secured Party of any change in the location of the
Collateral within said state; and Borrower will not remove the Collateral from
said state without the written consent of Secured Party. (b) If the Collateral
is used or acquired for use primarily for personal, family or household
purposes, or for farm purposes, Borrower's residence in Florida is that shown at
the beginning of this Agreement and Borrower will immediately notify Secured
Party of any change in the location of said residence.
3. (a) If the Collateral is acquired or used primarily for business use and
is of a type normally used in more than one state, whether or not so used, and
Borrower has a place of business in more than one state, the chief place of
business of Borrower is 5350 NW 165TH STREET MIAMI, DADE FLORIDA or, if left
----------------------------------------
(No. and Street) (City) (County) (State)
blank, is that shown at the beginning at this Agreement
and Borrower will immediately notify Secured Party in writing of any change in
Borrower's chief place of business; and (b) if certificates of title are issued
or outstanding with respect to any of the Collateral, Borrower will promptly
cause the interest of Secured Party to be properly noted thereon and deliver
such certificates of titled Secured Party.
4. Borrower will defend the Collateral against the claims and demands of
all persons, other than Secured Party, at any time claiming the same or any
interest therein.
5. No Financing Statement covering any Collateral or any proceeds thereof
is on file in any public office; Borrower authorizes Secured Party to file, in
jurisdictions where this authorization will be given effect, a Financing
Statement signed only by the Secured Party describing the Collateral in the same
manner as it is described herein; Borrower will from time to time at the request
of Secured Party, execute one or more Financing Statements and such other
documents (and pay the cost of filing or recording the same in all public
offices deemed necessary or desirable by the Secured Party) and do such other
acts and things, all as the Secured Party may request to establish and maintain
an enforceable first priority security interest in the Collateral (free of all
other liens and claims whatsoever) to secure the payment of the Liabilities.
<PAGE>
6. Borrower will not (a) permit any liens or security interest other than
Secured Party's security interest, to attach any of the Collateral; (b) permit
any of the Collateral to be levied upon under legal process; (c) sell, transfer,
lease, dismantle, alter, modify, or otherwise dispose of any of the Collateral
or any interest therein, or offer so to do, without the prior written consent of
Secured Party; (d) permit anything to be done that may impair the value of any
of the Collateral or the security intended to be afforded by this Agreement; (e)
permit the Collateral to be or become a fixture (and is expressly covenanted,
warranted and agreed, that the Collateral, and every part hereof, whether
affixed to any realty or not, shall be and remain personal property), or to
become an accession to other goods or property; or (f) locate Collateral on any
property not owned or controlled by Borrower, without the prior written consent
of the Secured Party.
7. Borrower will (a) at all times keep the Collateral insured in amounts
not less than the full insurable value thereof, against loss, damage, theft, and
such other risks as Secured Party may require in such companies, under such
policies, in such form and for such periods, as shall be satisfactory to Secured
Party and each such policy shall provide, by New York Standard or Union Standard
endorsement, that loss thereunder and proceeds payable thereunder shall be
payable to Secured Party as its interest may appear (and Secured Party may apply
any proceeds of such insurance which may be received by Secured Party toward
payment of the Liabilities, whether due or not due, in such order of application
as Secured Party may determine) and each such policy shall provide for a minimum
of 10 days written cancellation notice to Secured Party; and each such policy
shall, if Secured Party so requests, be deposited with Secured Party and Secured
Party may act as attorney for Borrower in obtaining, adjusting, settling, and
canceling such insurance and endorsing any drafts; (b) at all times keep the
Collateral free from any adverse lien, security interest, or encumbrance and in
good order and repair and will not waste or destroy the Collateral or any part
thereof; (c) Borrower shall be obligated to pay for the placement of any Vendor
Single Interest Insurance ("VSI"), or any other similar type of insurance,
should the Borrower fail to adequately protect the Collateral. Should VSI or any
other insurance be placed by the Secured Party, than any Earned and/or Unearned
Insurance Premium Refund will be credited to Borrower by the Secured Party.
Should the Secured Party receive any compensation for Administrative or
Experience Rated Refunds due to the placement and termination or such insurance,
such compensation and/or refund shall be paid to Secured Party. Any interest
earned during the period of placement of such insurance may be retained by
Secured Party.
8. (a) Borrower will not use the Collateral or permit the same to be used
in violation of any statute, law or ordinance; and Secured Party may examine and
inspect the Collateral at any time, wherever located, (b) Borrower will pay
promptly when due all taxes and assessments upon the Collateral or for its use
of operation or upon this Agreement or upon any note or notes or other writing
evidencing the Liabilities, or any of them.
9. At its options, Secured Party may discharge taxes, liens or security
interests or other encumbrances at any time levied or placed on the Collateral,
may pay for insurance on the Collateral, and may pay for the maintenance and
preservation of the Collateral. Borrower agrees to reimburse Secured Party on
demand for any payment made, or any expense incurred, by Secured Party, pursuant
to the foregoing authorization, together with interest thereon at the highest
lawful rate and each such payment and interest thereon shall be secured by this
Security Agreement. Until default, Borrower may have possession of Collateral
and use it in any lawful manner not inconsistent with this Agreement and not
inconsistent with any policy of insurance thereon.
10. Borrower shall be in default under this Agreement upon the happening of
any of the following events or conditions: (a) failure or omission to pay when
due any Liability (or any installment thereof or interest thereon), or default
in the payment or performance of any obligation, covenant, agreement, or
Liability contained or referred to therein; (b) any warranty, representation, or
statement made or furnished to Secured Party by or on behalf of any Borrower
proves to have been false in any material respect when made or furnished; (c)
loss, theft, substantial damage, destruction, sale, or encumbrance to or of any
of the Collateral, or the making of any levy, seizure, or attachment thereof or
thereon; (d) any Obligor (which term as used herein shall mean each Borrower and
each other Party primarily or secondarily or contingently liable on any of the
Liabilities) becomes insolvent or unable to pay debts as they mature or makes an
assignment for the benefit of creditors, or any proceeding (including any
proceeding in bankruptcy) is instituted by or against any Obligor alleging that
such Obligor is insolvent or unable to pay debts as they mature; (e) entry of
any judgment against any Obligor; (f) death of an Obligor who is a natural
person, or of any partner of any Obligor which is a partnership; (g)
dissolution, merger or consolidation, or transfer of a substantial part of the
property of any Obligor which is a corporation or partnership; (h) appointment
of a receiver for the Collateral or any part thereof or for any property in
which any Borrower has an interest; and (i) the Collateral is used by anyone to
transport or store goods the possession, transportation or use of which is
illegal.
11. Upon the occurrence of any such default or at any time thereafter,
Secured Party may, at its option, declare all Liabilities secured hereby, or any
of them (notwithstanding any provisions thereof), immediately due and payable
without demand or notice of any kind and the same thereupon shall immediately
become and be due and payable without demand or notice (but with such
adjustments, if any, with respect to interest or other charges as may be
provided for in the promissory note or other writing evidencing such Liability),
and Secured Party shall have and may exercise from time to time any and all
rights and remedies of a Secured Party under the Uniform Commercial Code and any
and all rights and remedies available to it under any other applicable law; and
upon request or demand of Secured Party, Borrower shall, at its expense,
assemble the Collateral and make it available to the Secured Party at a
convenient place acceptable to Secured Party; and Borrower shall promptly pay
all costs of Secured Party of collection of any and all liabilities, and
enforcement of any rights hereunder, including reasonable attorneys' fees and
legal expenses and expenses of any repairs to any of the Collateral and expenses
of any repairs to any realty or other property to which any of the Collateral
may be affixed. Any notice of sale, disposition or either intended action by
Secured Party, sent to Borrower at the address of Borrower specified above or at
any other address shown on the records of Secured Party, at least five days
prior to such action, shall constitute reasonable notice to Borrower. In the
event of repossession Borrower authorizes Secured Party to take into custody any
personal property found in or on the Collateral and to hold the same until
claimed by Borrower at the principal place of business of Secured Party and in
the event such personal property is not claimed within a reasonable time by
Borrower, Secured Party is authorized to dispose of same. Expenses of retaking,
holding, preparing for sale, selling, or the like, shall include Secured Party's
reasonable attorneys' fees and legal expenses. Any excess or surplus of proceeds
of any disposition of any of the Collateral may be applied by Secured Party
toward payment of such of the Liabilities, without marshalling of assets and in
such order of application, as Secured Party may from time to time elect.
12. No waiver by Secured Party of any default shall operate as a waiver of
any other default or of the same default on a future occasion. No delay or
omission on the part of Secured Party in exercising any right or remedy shall
operate as a waiver thereof, and no single or partial exercise by Secured Party
of any right or remedy shall preclude any other or further exercise thereof or
the exercise of any other right or remedy. Time is of the essence of this
Agreement. The provisions of this Agreement are cumulative and in addition to
the provisions of any note secured by this Agreement, and Secured Party shall
have all the benefits, rights and remedies of and under any note secured hereby.
If more than one party shall execute this Agreement, the term "Borrower" shall
mean all parties signing this Agreement and each of them, and all such parties
shall be jointly and severally obligated hereunder; provided, however, if one of
the parties signing this Agreement has not executed the promissory note or notes
referred to herein, said party shall have no personal liability under, or in
conjunction with, said promissory note or notes. The singular pronoun, when used
herein, shall include the plural and the neuter shall include masculine and
feminine. If this Agreement is not dated when executed by the Borrower, the
Secured Party is authorized without notice to the Borrower, to date this
Agreement. This Agreement shall become effective as of the date of this
Agreement. All rights of Secured Party hereunder shall inure to the benefit of
its successors and assigns; and all Liabilities of Borrower shall bind the
heirs, executors, administrators, successors and assigns of each Borrower.
<PAGE>
13. This Agreement has been delivered in the State of Florida and shall be
construed in accordance with laws of Florida. Wherever possible, each provision
of this Agreement shall be interpreted in such manner as to be effective and
valid under applicable law, but if any provision of this Agreement shall be
prohibited by or invalid under applicable law, such provision shall be
ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of this
Agreement.
14. BORROWER AND SECURED PARTY HEREBY KNOWINGLY, VOLUNTARILY,
INTENTIONALLY, AND IRREVOCABLY WAIVE THE RIGHT EITHER OF THEM MAY HAVE TO A
TRIAL BY JURY IN RESPECT TO ANY LITIGATION, WHETHER IN CONTRACT OR TORT, AT LAW
OR IN EQUITY, BASED HEREON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS
AGREEMENT AND ANY OTHER DOCUMENT OR INSTRUMENT CONTEMPLATED TO BE EXECUTED IN
CONJUNCTION HEREWITH, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS
(WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY HERETO. THIS PROVISION IS A
MATERIAL INDUCEMENT FOR SECURED PARTY ENTERING INTO THIS AGREEMENT. FURTHER,
BORROWER HEREBY CERTIFIES THAT NO REPRESENTATIVE OR AGENT OF SECURED PARTY, NOR
THE SECURED PARTY'S COUNSEL, HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT
SECURED PARTY WOULD NOT, IN THE EVENT OF SUCH LITIGATION, SEEK TO ENFORCE THIS
WAIVER OF RIGHT TO JURY TRIAL PROVISION. NO REPRESENTATIVE OR AGENT OF THE
SECURED PARTY, NOR SECURED PARTY'S COUNSEL HAS THE AUTHORITY TO WAIVE,
CONDITION, OR MODIFY THIS PROVISION.
IN WITNESS WHEREOF, this Agreement has been duly executed as of the
_________ day of________________ 19_____________
Signed, sealed and delivered
in the presence of ROYCE LABORATORIES, INC. (Seal)
-------------------------------
- -------------------------------- /S/PATRICK J. MCENANY (Seal)
-------------------------------
- -------------------------------- AS ITS: PRESIDENT/CEO (Seal)
------------------------
<PAGE>
SUNTRUST BANK, MIAMI, N.A. Brickell Avenue Office 777 Bricked Avenue Miami.
Florida 33131 Tel (305) 579-7216
H. MONTY WEIGEL
Senior vice President
SUNTRUST
Royce Laboratories, Inc.
Attn: Mr. Robert Band
5350 Northwest 165th St.
Miami, Florida 33014
July 18, 1996
Re: TERM LOAN IN THE AMOUNT OF $750,000 TO ROYCE LABORATORIES, INC.
Dear Bob,
SunTrust Bank, Miami, N.A. (hereinafter called "Lender") has conditionally
agreed to extend financing to ROYCE LABORATORIES, INC. (hereinafter called
"Borrower"), subject to the following terms and conditions:
1. LOAN AMOUNT:
TERM LOAN - $750 000.
2. INTEREST RATES AND PAYMENT SCHEDULE:
The Term Loan shall bear interest on the entire disbursed and unpaid balance
from time to time outstanding at a fixed rate of interest of 10% per annum
together with principal based on a four (4) year fixed payment amortization.
Interest at the foregoing rate shall be computed for the actual number of days
elapsed on the basis of a 360-day year; i.e., 1/360th of a full year's interest
shall accrue for each day the Loan is outstanding.
Interest payments shall be due monthly and shall be payable in arrears. The
unpaid principal balance shall be due on the date of the termination thereof.
3. TERMINATION DATE:
The Loan shall mature 48 months from inception and no later than September 1,
2000.
4. USE OF PROCEEDS:
The proceeds of the Term Loan shall be used to purchase equipment or replenish
cash used in the recent (8 months) purchase of equipment.
5. FEES: The following fees will be payable in connection with the loan:
TERM LOAN COMMITMENT FEE - A commitment fee will be payable upon acceptance in
an amount equal to 1% of the Lender's commitment.
<PAGE>
6. COLLATERAL: The loan shall be collateralized by:
A first priority security interest in all of the Borrower's Equipment and
Fixtures, whether now existing or hereafter created or acquired, except
equipment financed under the capital lease line described in 7(a) below.
7. COVENANTS:
The credit agreement will include typical affirmative and negative covenants
required by the Lender for loans similar to the loan. In addition, the Borrower
shall agree in the credit agreement:
(a) Not to incur, or permit its subsidiaries to incur, any indebtedness or
liabilities, except for a $500,000 lease line and any other indebtedness of the
Borrower and/or its subsidiaries to the Lender and current accounts payable in
the ordinary course of business.
(b) Not to become, or permit its subsidiaries to become, a guarantor, nor make,
or permit its subsidiaries to make, any investment in or advance any monies to,
any person or entities, except guaranties in favor of the Lender and investments
by the Borrower and its subsidiaries in short term investments in corporate or
municipal debt having ratings acceptable to the Lender.
(c) Not to sell, lease, assign, transfer or otherwise dispose of, or permit its
subsidiaries to sell, lease, assign, transfer or otherwise dispose of, any of
their assets or revenues, except in the ordinary course of business.
(d) Not to permit the ratio of total liabilities to tangible net worth at any
time to be more than 1.0 to 1.0.
(e) Not to permit the ratio of consolidated net income available for debt
service as of the end of any fiscal year to be less than 1.5 to 1. The term
"consolidated net income available for debt service" shall mean the consolidated
net income of the Borrower and subsidiaries, plus to the extent deducted in
computing consolidated net income, all interest expense, depreciation and
amortization, income taxes and rental payments under leases, and minus capital
expenditures to the extent not funded with indebtedness. The term "debt service"
shall mean interest expense, rental payments under leases and principal payments
on indebtedness (adjusted on an after-tax basis).
(f) Not to make capital expenditures (including capital leases) or rental
payments on operating leases in any fiscal year in excess of $2,000,000 in the
aggregate.
(g) Within 60 days of fiscal quarter end, deliver to the Lender quarterly
unaudited balance sheets, income statements, accounts receivable and payable
aging reports, and certificates evidencing compliance with the Credit Agreement,
all to be of common date.
(h) Within 90 days of fiscal year end, deliver to the Lender annually audited
financial statements certified by Price Waterhouse, LLP, the Borrower's
independent auditor (PW), including a balance sheet, income statement and
statement of changes in cash flows, and a certificate of PW to the Lender
regarding compliance with the Credit Agreement by the borrower. PW's management
letter shall be delivered to Lender within 120 days of year-end.
8. LOAN DOCUMENTS:
All documentation for the loan will be prepared by counsel for the Lender and
shall be in form and substance satisfactory to the lender and its counsel, and
all legal matters shall be subject to the final approval of counsel to the
lender.
<PAGE>
9. EXPENSES:
The loan shall be made by the Lender without cost or expense to the Lender, and
without limiting the generality of the foregoing, the Borrower shall pay all
reasonable fees and expenses of the Lender's counsel in connection with the
financing, and all recording, filing and other fees, expenses and taxes which
may be occasioned by this transaction, regardless whether any loans are ever
made by the Lender. All fees and expenses incurred prior to the closing date
will be due and payable at closing unless otherwise stated. The Lender's legal
expenses related to this transaction shall not exceed $2,500.
10. SPECIFIC CLOSING CONDITIONS: The making of the loan will be made expressly
contingent upon the following, each of which shall be completed to the
satisfaction of the Lender and its counsel:
(a) Landlord's waiver.
(b) Hazard insurance on the collateral maintained at a minimum of $750,000 and
the Bank shall be a loss payee under such insurance.
(c) Receipt and review of satisfactory trade and credit references performed by
Lender based on contacts supplied by Borrower.
11. NO ADVERSE CHANGE:
Current financial statements on the Borrower are to be submitted to and approved
by the Lender at least ten (10) days prior to the Closing Date. The Lender's
obligation to close and fund the Loan is expressly conditioned on the basis that
there shall be no material adverse change in the financial condition of the
Borrower since the date of the most recent financial statements of the Borrower
delivered to the Lender prior to the date of this letter.
12. TERM OF COMMITMENT:
The Borrower shall comply with all requirements set forth herein and all other
closing requirements of the Lender. The closing pursuant hereto shall take
place, in the offices of the Lender's counsel, as soon as reasonably feasible,
but in no event later than July 31, 1996 (the "Closing Date").
13. NO ASSIGNMENT OF COMMITMENT:
The commitment of the Lender hereunder shall not be assigned by the Borrower to
any other person without prior written consent of the Lender.
14. INDEMNITY:
By their acceptance hereunder, the Borrower hereby agrees to hold the Lender and
its officers, directors, employees and agents harmless from and against all
claims, damages, liabilities and expenses, including reasonable fees and
disbursements of counsel (including those in appellate proceedings), which may
be incurred by or asserted against any of them in connection with or arising out
of any investigation, litigation or proceeding relating to this commitment
and/or the use of any proceeds of the Loan.
15. WAIVER OF JURY TRIAL:
LENDER AND THE BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE
THE RIGHT ANY OF THEM MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION
BASED HEREON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS LETTER OR THE
LOAN AND ANY AGREEMENT CONTEMPLATED TO BE EXECUTED IN CONJUNCTION HEREWITH OR
THEREWITH, OR ANY COURSE OF CONDUCT, COURSE OF
<PAGE>
DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY. THIS
PROVISION IS A MATERIAL INDUCEMENT FOR THE LENDER ISSUING THIS LETTER AND
AGREEING TO ENTER INTO THE LOANS.
The terms of this commitment letter may not be waived, modified or in any way
changed by implication, course of conduct or otherwise unless such waiver,
modification or change is made in the form of an amendment to this commitment
letter in writing and agreed to by both parties. The Lender's offer to make the
Loan on the terms set forth herein shall remain in effect until 5:00 P.M., Miami
time, on July 23, 1996. The commitment of the Lender hereunder shall not be
effective until the original accepted copy of this letter is returned to the
Lender along with a check for the commitment fee in the amount of $7,500. If the
above terms are acceptable to you, please arrange for the execution of the
acceptance hereof on the copy of this letter and return the same to the
undersigned on or before the time set forth above. We look forward to working
with you toward a successful closing.
Very truly yours,
SunTrust Bank, Miami, N.A.
By: Monty Weigel
Senior Vice President
"Borrower"
Royce Laboratories, Inc.
By: Patrick J. McEnany
Its: President and CEO
<PAGE>
SUNTRUST Promissory Note
$ 750.000.00 JULY 26, 1996
The terms of the letter agreement dated July 18, 1996 are incorporated herein by
reference.
The undersigned (whether one or more hereinafter called "Maker"), jointly and
severally; promise(s) to pay to the order of Sun Trust Bank, Miami, N.A. (herein
called "Bank") at its offices located at 777 Brickell Ave., Miami Florida, Seven
Hundred Fifty Thousand and 00/100 Dollars ($ 750,000.00), together with interest
from the date hereof at the rate hereinafter provided, and applicable fees in
the following manner.
REPAYMENT SCHEDULE:
[ ] Single Payment Principal Due in Full On:________
Interest Payable:___________________________________
[X] Installment Payment (including interest): In 48
----- ----------------
(No.) (Period)
Installments of $19,022.00 commencing on SEPTEMBER 1, 1996, and on the
same day of each successive month thereafter, together with a FINAL
PAYMENT of $19,022.00 due and payable on AUGUST 1, 2000.
[ ] Installment Payment (plus interest):_________ _______________
(No.) (Period)
Principal installments of $____________, plus interest, commencing on
______________, 19___, and on the same day of each successive
_____________ thereafter, together with a FINAL PAYMENT of $_________,
plus accrued interest due and payable on ______________, 19__.
[ ] Multiple Payment Principal and interest are payable as follows:______
____________________________________________________
____________________________________________________
[ ] ON DEMAND Principal payable ON DEMAND with Interest payable___
________________commencing on __________________ and
each __________________ thereafter.
[ ] Prepayment Right Bank shall have the absolute and unconditional right, at
its sole discretion, to require Maker to pay the entire loan balance, along
with accrued unpaid interest at any time after the sixty-first (61st )
month from the note date. If the bank elects to exercise such right of
payment, Bank will provide Maker ninety (90) days prior written notice of
its intention to demand payment. If Bank does not exercise such right of
payment, the loan balance outstanding, along with accrued unpaid interest
is due and payable on the one hundred twentieth (120th) installment.
THE INTEREST RATE IS AS FOLLOWS: [ ] If checked here, the interest rate
provided herein shall be computed on the basis of a 365 day year and shall be
calculated for the actual number of days elapsed. If not checked, the interest
rate shall be computed on the basis of a 360 day year and shall be calculated
for the actual number of days elapsed.
Variable Interest Rate
[X] Not applicable
[ ] Applicable, provided however that the interest rate charged hereunder
shall never exceed the maximum rate allowed, from time to time, by law. If this
loan is for a consumer purpose and is secured by a dwelling, the maximum
interest rate charged will never exceed 18% per annum or the state usury
ceiling, whichever is less.
If applicable, the interest rate stated herein shall, from time to time,
automatically increase or decrease so that at all times it shall be equivalent
to (check appropriate box and complete):
[ ] _____% over the annual interest rate announced by __________________, from
time to time, as the prime rate (which interest rate is only a bench mark,
is purely discretionary and is not necessarily the best or lowest rate
charged borrowing customers of any subsidiary bank of Sun Banks, Inc.). Any
such change in prime rate will increase or decrease your periodic interest
payments. Any change in prime rate shall be effective at the beginning of
the business day on which such change is announced; or,
[ ] % over the________________________________________________________________
__________________________________________________________________________
FIXED RATE [X] Applicable at 10% per annum, simple interest.
[ ] Not Applicable.
LATE CHARGE FEE If a payment is late, you may be charged 5% of
such payment as a late charge. A payment which
is not received on the due date shall be deemed late.
SERVICE FEE A service fee of the lesser of $50.00 or 2 percent
of the principal amount of this loan will be charged.
The service fee charge will not be refunded in the
event of prepayment.
ADDITIONAL FEES The Bank may charge various additional fees for servicing or
processing the loan. The name of the fee shall describe the work performed.
In the event any installment of principal or interest or any part
thereof is not paid when it becomes due, or in the event of any default
thereunder, the principal sum remaining unpaid hereunder, together with all
accrued and past due interest thereon, shall immediately and without notice
become due and payable at the election of the holder at any time thereafter.
Notwithstanding any rate of interest provided herein, the interest rate
on any payment or payments of principal or interest, or any part thereof, which
is not made when due shall, thereafter, be at the maximum rate allowed, from
time to time, by law. Minimum interest of $10.00 on any single payment loan or
$15.00 on any installment loan will be charged.
This note is [X] SECURED [ ] UNSECURED (Notwithstanding the fact that this note
is marked `unsecured', Maker understands and agrees that any other security
interest the Bank now holds or may hereafter acquire from the Maker may secure
this note).
As security for the payment of this note Maker has pledged or deposited with
Bank and hereby grants to Bank a security interest In the following property:
FIRST PRIORITY SECURITY INTEREST ON ALL OF THE BORROWER'S EQUIPMENT AND FIXTURES
WHETHER NOW EXISTING OR HEREAFTER CREATED OR ACQUIRED.
(Including all cash, stock and other dividends and all rights to subscribe for
securities incident to, declared, or granted in connection with such property
and including any returned or unearned premiums from any insurance financed
hereunder), which property, together with all additions and substitutions
hereafter pledged or deposited with Bank is called the Collateral. The
Collateral is also pledged as security for all other liabilities (primary,
secondary, direct, contingent, sole, joint, or several), due or to become due or
which may be hereafter contracted or acquired, of each Maker (including each
Maker and any other person) to Bank and for all renewals, extensions or
modifications of this note. The surrender of this note, upon payment or
otherwise, shall not affect the right of Bank to retain the Collateral for such
other liabilities.
Lender may request periodically as it deems necessary, complete and current
financial statements, balance sheets, profit and loss statements, and cash flow
information for Maker and Cosigner.
Maker understands and agrees that the jury waiver, the additional agreements and
provision on the reverse side hereof, hereby incorporated by reference,
constitute agreements of the Maker and a part of this note. Maker acknowledges
receipt of a completed copy of this note.
- -------------------------------------------------------------------------------
Notice to Cosigner: You are being asked to guarantee this debt. Think
carefully before you do. If the borrower doesn't pay the debt, you will have to.
Be sure you can afford to pay if you have to, and that you want to accept this
responsibility.
You may have to pay up to the full amount of the debt if the borrower does
not pay. You may also have to pay later fees or collection costs, which increase
this amount.
The Bank can collect this debt from you without first trying to collect from
the borrower. The Bank can use the same collection methods against you that can
be used against the borrower, such as suing you, garnishing your wages, etc.
If this debt is ever in default, that fact may become a part YOUR credit record.
- -------------------------------------------------------------------------------
Address: 5350 NW 165TH STREET ROYCE LABORATORIES, INC. (Seal) ______________
--------------------- ------------------------ Date
MIAMI, FLORIDA 33014 ________________________ (Seal) ______________
BY: /s/Patrick J. McEnany Date
as its: PRESIDENT/CEO
===============================================================================
<PAGE>
If the variable interest rate is not applicable and if this note is payable
on demand, Bank reserves, and is hereby granted the right, to adjust the
interest rate from time to time by furnishing Maker with written notice of such
adjusted rate; provided, however, that no such adjusted rate shall exceed the
maximum rate allowed, from time to time, by law.
Additions to, reductions or exchanges of, or substitutions for the
Collateral, payments on account of this note or increases of the same, or other
loans made partially or wholly upon the Collateral, may from time to time, be
made without affecting the provisions of this note.
Upon the happening of any of the following events, each of which shall
constitute a default hereunder, all liabilities of each Maker to Bank shall
thereupon or; thereafter, at the option of the Bank, without notice or demand,
become due and payable: (a) failure of any Obligor (which terms shall mean and
include each Maker, endorser, surety and guarantor of this note) to perform any
agreement hereunder to pay interest hereon when due or requested or demanded or
to pay any other liability whatsoever to Bank when due; (b) the death of any
Obligor; (c) the filing of any petition under the Bankruptcy Code, or any
similar federal or state statute, by or against any Obligor; (d) an application
for the appointment of a receiver or the making of a general assignment for the
benefit of creditors by, or the insolvency of any Obligor; (e) the entry of a
judgment against any Obligor; (f) the issuing of any writ of attachment or writ
of garnishment, or the filing of any lien, against the property of any Obligor,
(g),the taking of possession of any substantial part of the property of any
Obligor at the instance of any governmental authority; (h) the dissolution,
merger, consolidation, or reorganization of any Obligor; (i) the assignment by
any Maker of any equity in any of the Collateral, without the written consent of
Bank.
Bank is hereby given a lien upon and a security interest in all property of
each Maker now or at any time hereafter in the possession of Bank in any
capacity whatsoever, including but not limited to any balance or share of any
deposit, trust, or agent account as security for the payment of this note, and a
similar lien upon and security interest in all such property of each Maker as
security for the payment of all other liabilities of each Maker to Bank
(including liabilities of each Maker and any other person); and Bank shall have
the same rights as to such property as it has with respect to the Collateral.
Upon the occurrence of any default hereunder Bank shall hays the remedies
of a secured party under the Uniform Commercial Code and, without limiting the
generality of the foregoing, Bank shall have the right, immediately and without
further action by it, to set off against this note all money owed by Bank in any
capacity to each or any Obligor, whether or not due, and also to set off against
all other liabilities of each Maker to Bank all money owed by Bank in any
capacity to each or any Maker; and Bank shall be deemed to have exercised such
right of set off and to have made a charge against any such money immediately
upon the occurrence of such default even though such a charge is made or entered
on the books of Bank, subsequent thereto. Unless the Collateral is perishable or
threatens to decline speedily in value or is of a type customarily sold on a
recognized market, the Bank will give Maker reasonable notice of the time and
place of any public sale thereof or of the time after which any private sale or
any other intended disposition thereof is to be made. The requirement of
reasonable notice shall be met if such notice is mailed, postage prepaid, to any
Maker at the address given below or at any other address shown on the records of
the Bank, at least five days before the time of the sale or disposition. Sale at
a wholesale dealer's auction is a commercially reasonable disposition. Upon
disposition of any Collateral after the occurrence of any default hereunder,
Maker shall be and remain liable for any deficiency; and Bank shall account to
Maker for any surplus, but Bank shall have the right to apply all or any part of
such surplus (or to hold the same as a reserve against) any and all other
liability of each or any Maker to Bank. The Obligors, jointly and severally,
promise and agree to pay all costs and expenses of collection and reasonable
attorneys' fees, including costs, expenses and reasonable attorneys' fees on
appeal, if collected by legal proceedings or through an attorney at law: Maker
hereby waives any right to a trial by jury in any civil action arising out of,
or based upon, this note or the Collateral.
Bank shall exercise reasonable care in the custody and preservation of the
Collateral to the extent required by applicable statute, and shall be deemed to
have exercised reasonable care if it takes such action for that purpose as
Makers shall reasonably request in writing, but no omission to do any act not
requested by Maker shall be deemed a failure to exercise reasonable care, and no
omission to comply with any request of Maker shall of itself be deemed a failure
to exercise reasonable care. Bank shall not be bound to take any steps necessary
to preserve any rights in the Collateral against prior parties and Maker shall
take all necessary steps for such purposes. Bank or its nominee need not collect
interest on or principal of any Collateral or give any notice with respect to
it.
If Collateral shall at any time become unsatisfactory to Bank, Maker shall
within one day after demand pledge and deposit with Bank as part of the
Collateral additional property which is satisfactory to Bank.
Bank shall have the right, which may be exercised at any time whether or
not this note is due, to notify the Obligors on any Collateral to make payment
to Bank on any amounts due or to become due thereon. In the event of any default
hereunder, Bank shall thereafter have, but shall not be limited to, the
following rights: (i) to pledge or transfer this note and the Collateral and
Bank shall thereupon be relieved of all duties and responsibilities hereunder
and relieved from any and all liability with respect to any Collateral so
pledged or transferred, and any pledge or transferee shall for all purposes
stand in the place of Bank hereunder and have all the rights of Bank hereunder;
(ii) to transfer the whole or any part of the collateral into the name of itself
or its nominee; (iii) to vote the Collateral; (iv) to demand, sue for, collect,
or make any compromise or settlement it deems desirable with reference to the
Collateral; and (v) to take control of any proceeds of Collateral.
I HEREBY CONSENT TO THE ATTACHMENT OR GARNISHMENT OF MY EARNINGS.
No delay or omission on the part of Bank in exercising any right hereunder shall
operate as a waiver of such right or of any other right under this note.
Presentment, demand, protest, notice of dishonor, and extension of time without
notice are hereby waived by each and every Obligor. Any notice to Maker shall be
sufficiently served for all purposes if placed in the mail, postage prepaid,
addressed to or left upon the premises at, the address shown on the Bank's
records.
I waive any and all privilege and rights which I may have under
Chapter 47, Florida Statutes, relating to venue, as it now exists or may
hereafter be amended. I agree that any action shall be brought in the County in
which the Bank's business office is located as designated above or at which the
loan was closed.
JURY WAIVER. MAKER AND BANK HEREBY KNOWINGLY, VOLUNTARILY,
INTENTIONALLY, AND IRREVOCABLY, WAIVE THE RIGHT EITHER OF THEM MAY HAVE TO A
TRIAL BY JURY IN RESPECT TO ANY LITIGATION, WHETHER IN CONTRACT OR TORT, AT LAW
OR IN EQUITY, BASED HEREON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS
AGREEMENT AND ANY OTHER DOCUMENT OR INSTRUMENT CONTEMPLATED TO BE EXECUTED IN
CONJUNCTION HEREWITH, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS
(WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY HERETO. THIS PROVISION IS A
MATERIAL INDUCEMNT FOR BANK ENTERING INTO THIS AGREEMENT, FURTHER, MAKER HEREBY
CERTIFIES THAT NO REPRESENTATIVE OR AGENT OF BANK, NOR THE BANK'S COUNSEL, HAS
REPRESENTED, EXPRESSLY OR OTHERWISE, THAT BANK YOULD NOT, IN THE EVENT OF SUCH
LITIGATION, SEEK TO ENFORCE THIS WAIVER OF RIGHT TO JURY TRIAL PROVISION. NO
REPRESENTATIVE OR AGENT OF THE BANK, NOR THE BANK'S COUNSEL HAS THE AUTHORITY TO
WAIVE, CONDITION, OR MODIFY THIS PROVISION.
- -------------------------------------------------------------------------------
The undersigned acknowledges having received and read the NOTICE TO
CO-SIGNER appearing on the reverse side hereof.
- -------------------------------------------------------------------------------
__________________________(Date) _____________________________________(Seal)
__________________________(Date) _____________________________________(Seal)
__________________________(Date) _____________________________________(Seal)
<TABLE>
<CAPTION>
EXHIBIT 11
SCHEDULE OF COMPUTATION OF EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------------- ------------------------------------
1996 1995 1996 1995
--------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net income (loss) $ 429,000 ($ 504,000) $ 1,096,000 ($ 747,000)
=============== ================ ============ ==============
Weighted average number of common shares
outstanding during the period 13,451,021 11,966,360 13,405,345 11,964,754
Add: Common equivalent shares
determined using the "Treasury
Stock" Method representing
shares issuable upon exercise of
stock options and warrants. 697,138 - 819,853 -
--------------- ---------------- ------------ --------------
Weighted average number of common and
common equivalent shares outstanding 14,148,159 11,966,360 14,225,198 11,964,754
--------------- ---------------- ------------ --------------
Earnings (loss) per common and common equivalent
share $ .03 ($ .04) $ .08 ($ .06)
=============== ================ ================ ==============
</TABLE>
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 2,109,000
<SECURITIES> 0
<RECEIVABLES> 4,759,000<F1>
<ALLOWANCES> 0
<INVENTORY> 6,967,000
<CURRENT-ASSETS> 14,099,000
<PP&E> 2,740,000<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 16,882,000
<CURRENT-LIABILITIES> 3,284,000
<BONDS> 135,000<F3>
0
0
<COMMON> 67,000
<OTHER-SE> 13,396,000
<TOTAL-LIABILITY-AND-EQUITY> 16,882,000
<SALES> 11,393,000
<TOTAL-REVENUES> 11,393,000
<CGS> 7,180,000
<TOTAL-COSTS> 7,180,000
<OTHER-EXPENSES> 3,206,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,000
<INCOME-PRETAX> 1,119,000
<INCOME-TAX> 23,000
<INCOME-CONTINUING> 1,096,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,096,000
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
<FN>
<F1> Net of allowance of $1,733,000
<F2> Net of depreciation
<F3> Comprised of long-term debt
</FN>
</TABLE>
