U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
[ ] 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: 0-20436
RT INDUSTRIES, INC.
(Name of small business issuer in its charter)
DELAWARE 65-0309477
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
1875 E. LAKE MARY BLVD., SANFORD, FL 32773
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (800) 998-6966
Securities registered under Section 12 (b) of the Exchange Act:
Name of each exchange on
which registered: Nasdaq Small Cap
Title of each class: Common
Securities registered under Section 12 (g) of the Act:
Common Stock
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and 2) has been
subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X].
The Issuer's revenues for its most recent fiscal year were $3,912,237.
The aggregate market value of the voting stock held by non-affiliates (shares
held in street name are assumed to be non-affiliates) was approximately as at
March 21, 1997, based on the closing sale price, was approximately $____ per
share.
The number of shares of Common Stock outstanding as at March 21, 1997, was
8,322,782. No annual reports to securities holders, proxy or information
statements, or prospectuses filed pursuant to Rule 424(b) have been incorporated
by reference in this report.
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RT INDUSTRIES, INC.
FORM 10-KSB
TABLE OF CONTENTS
PART I PAGE
- ------ ----
ITEM 1. Description of Business 3
ITEM 2 Description of Property 5
ITEM 3 Legal Proceedings 5
ITEM 4 Submission of Matters to a Vote of
Security Holders 6
PART II
- -------
ITEM 5 Market for Common Equity and Related
Stockholder Matters 6
ITEM 6 Management's Discussion and Analysis or
Plan of Operation 7
ITEM 7 Financial Statements 11
ITEM 8 Changes in and Disagreements With
Accountants on Accounting and Financial
Disclosure 12
PART III
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ITEM 9 Directors, Executive Officers, Promoters
and Control Persons; Compliance with Section
16 (a) of the Exchange Act 12
ITEM 10 Executive Compensation 13
ITEM 11 Security Ownership of Certain Beneficial
Owners and Management 15
ITEM 12 Certain Relationships and Related
Transactions 16
ITEM 13 Exhibits, Lists and Reports on Form 8-K 18
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PART I.
ITEM 1. DESCRIPTION OF THE BUSINESS
RT Industries, Inc., a Delaware corporation (together with its wholly-owned
subsidiary, Roinco Manufacturing, Inc., the "Company") was organized on January
16, 1992 to manufacture, assemble and/or distribute new automotive friction
products (brake linings and new brake pads) as well as to assemble and
distribute ignition wires for the automotive aftermarket (replacement parts sold
for use on motor vehicles after initial purchase).
The Company's core business is the manufacture, assembly and distribution of new
replacement brake pads for the automotive passenger car and light truck
aftermarket. This market is distinct from the market for original equipment
automotive parts which are parts used by the automobile manufacturer for use in
the assembly of new vehicles. The automotive aftermarket for replacement parts
encompasses the parts and services sold to the vehicle owners for repair or
replacement of original equipment parts. As a general rule, the market for
aftermarket replacement parts includes vehicles which are three to twelve years
old. Due in part to the increasing cost of new vehicles, the average age of the
vehicles in service has increased. Therefore, the market for aftermarket
replacement parts has and will, in the Company's opinion, continue to grow.
The Company manufacturers and distributes both integrally molded and riveted
brake pads. Typically, brake pads are manufactured either by a process of
integrally molding the friction material to a steel plate or by riveting
friction material to the steel plate. Riveted brake pads are common on older
vehicles which were manufactured by US domestic automobile manufacturers.
Integrally molded brake pads are original equipment on all vehicles manufactured
by foreign automobile manufacturers and imported into the US. In addition, late
model vehicles manufactured by US automobile manufacturers are usually equipped
with integrally molded brake pads. The Company manufacturers a wide range of
parts for both domestic and foreign manufactured vehicles.
Automobile manufacturers' specifications require brake pads which are
constructed with either a semi metallic or an organic (either asbestos or
non-asbestos) friction material. The Company manufacturers semi metallic and
non-asbestos organic friction material for integrally molded and riveted brake
pads. The Company has never manufactured asbestos friction material.
As part of a general restructuring plan, the Company has consolidated
operations formerly performed by Ultratech of South Florida, Inc.
("Ultratech"), RT Friction, Inc. ("RT Friction") and Ultra Brake Corporation
("Ultra Brake"), all subsidiaries of the Company. None of these subsidiaries
currently conduct any business operations. Such operations are now performed
by the Company or have been contracted out to independent suppliers.
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Under the Company's restructuring plan, the Company also ceased in April, 1996
the assembly and distribution of ignition wire sets through its subsidiary,
Ultratech. The remaining raw material and finished goods were sold to an
independent third party. In August 1996, the Company's assembly and distribution
facility in Lindenhurst, NY was closed, and all inventory and equipment was
moved to the Company's Sanford, FL facilities. As a result of such
consolidation, none of the Company's subsidiary corporations are currently
engaged in any business activities and will either be dissolved in the near
future or retained solely to preserve ownership of their corporate names.
The Company has developed multiple sources for all raw material used in
production. Raw material required for production include: stamped steel backing
plates, resins, various fibers and fillers. For a number of stamped steel
backing plates, the Company is limited to one supplier. However, other suppliers
of stamped steel backing plates are developing the tooling to produce these
applications.
As vehicles have been downsized, the braking systems have been downsized. This
downsizing has reduced the size of the brake pad, and caused a shift from
riveted brake pads to integrally molded brake pads. The Company's ability to
manufacture a wide range of integrally molded brake pads gives it an advantage
over many competitors.
The automotive replacement parts industry has been characterized by an
increasing number of business consolidations of manufacturers, distributors and
retailers of automotive replacement parts. This industry consolidation includes,
but is not limited to, the acquisition of mid-sized brake pad manufacturers by
larger automotive replacement parts manufacturing companies with substantially
greater financial resources than the Company. At the same time, a number of
manufacturers have entered the market for riveted brake pads, selling to
regional markets based primarily on price. With the consolidation of ownership
of distributors and retailers, the manufacturers, in turn, have had fewer
customers to which to sell, resulting in increased competition for such
customers.
The Company sells its products to independent wholesale and retail automotive
distributors in the United States and in twelve foreign countries. The Company
does not market its products directly to retail customers. The Company markets
its products mainly through the efforts of a nationwide network of independent
sales representatives with Company support including parts catalogs, promotional
material and by attending trade shows. Currently, the Company's products are
sold using the Roinco(TM), Ultra Brake(TM) and MaxLife(R) names or in customer
identity packaging. The Company has a broad customer base, and is not dependent
on just a select few customers.
The Company owns no patents. The Company has nonetheless developed and currently
owns certain proprietary processes and formulas with respect to the composition
of its friction material. The Company relies upon the treatment of such
information as confidential by, and non-disclosure by, its employees and
consultants for the protection of such propriety information. There is no
assurance that such confidential treatment can or will be maintained or that
such proprietary processes and formulas will afford the Company meaningful
competitive advantages for its brake products.
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The Company is not subject to any federal, state or local government regulation
which is specific to replacement brake products. However, where organic
materials (asbestos) are incorporated in the manufacture of brake products, the
existence of such materials must be clearly indicated on the brake pad
packaging. The Company does not use asbestos in any formulations of its friction
material; however, certain products which are purchased from independent third
parties for subsequent distribution by the Company may contain asbestos.
The Company believes that it is in compliance with federal, state and local laws
and regulations governing the discharge of materials in the environment and
noise levels.
As of December 31, 1996 the Company had 100 full time employees. These consisted
of 13 salaried and 87 hourly personnel. Five employees are in management
positions, three in sales and marketing and ninety two in manufacturing,
assembly and warehousing positions. The Company's employees are not members of
any union, and the Company has not experienced any work stoppages and considers
its employee relations to be good. In addition to the full time employees, the
Company had five part time employees involved in warehousing activities at
December 31, 1996.
ITEM 2 DESCRIPTION OF PROPERTY
RT Industries currently leases two facilities in Sanford, Florida. The
manufacturing facility is 37,000 square feet and is used primarily for the
production of the Company's integrally molded brake pads. The lease expires on
March 31, 1998 and requires monthly rental payments of $9,500 for the remainder
of the lease (see also "Item 12 -- Certain Relationships and Related
Transactions"). The warehouse facility is approximately 49,000 square feet and
functions as the distribution center for the Company's products and as an
assembly location for the Company's riveted brake pad production. The monthly
rental is $7200, and the lease expires on October 31, 1999.
The Company closed its New York facility during the third quarter of 1996,
thereby consolidating all manufacturing and distribution operations into the
Florida facility.
ITEM 3. LEGAL PROCEEDINGS
As of December 31, 1996 the Company was not involved in any legal proceedings.
During the year ended 1996, there were dismissed or settled by the Company all
pending legal proceedings and claims which had been made against the Company
(and its former President and Vice President of Operations) as a result of the
termination of the Company's operations at its City of Caruthersville, Missouri
facility and the transfer of the manufacturing equipment from Missouri to the
Company's Florida facilities in 1994-95. Specifically, the transfer of the
equipment from the Missouri facility was deemed a default of the equipment loan
agreements between the Company's subsidiary and the First State Bank &
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Trust Co. of Caruthersville, Caruthersville, MO, (First State Bank) and the US
Small Business Administration (SBA). Through a settlement made in the final
quarter of 1996, the equipment note was reinstated for its original term for and
in consideration of a payment by the Company to the SBA of a lump sum of $6,300
for charges associated with an earlier discount granted by the State of Missouri
to First State Bank (and revoked upon acceleration of note upon default) and six
equal quarterly installment payments of $27,444 with respect to past due
principal and interest of $164,662 each, with final payment due October 1998.
The Company is current in its payments.
Under the settlement with the SBA of the equipment loans, the criminal
complaints filed in the United States District Court, Eastern District of
Missouri on or about October 14, 1994 and the Circuit Court of Premiscot County,
Missouri, Division II, on or about August 31, 1994 (both alleging that the prior
management of the Company, with intent to defraud, converted such equipment)
were dismissed. None of the named defendants were employed by the Company in
1996. Likewise, a related civil complaint served against the Company by the SBA
on or about February 25, 1996 in the United States District Court, Western
District of Missouri, was dismissed on October 8, 1996.
As of December 31, 1996, there was still owing from the Company to the City of
Caruthersville, MO accrued rent, in the amount of $49,940, under the lease for
the Missouri plant. Since terminating the Company's operations there, the City
of Caruthersville had sublet the facilities under short term leases for fourteen
of the thirty- six months since RT Friction vacated the facilities. The monthly
rent on the building is $2,269. Currently, the Company is negotiating with the
City to reach a settlement on the lease.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Security holders during the fourth
quarter of 1996.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded in the over-the counter market (NASDAQ
Symbol RTIC) as reported in the NASDAQ SmallCap Market System. As of March 21,
1997, there were approximately 8,705,882 shares of the Company's common stock
outstanding held of record by approximately sixty-three shareholders.
The following table sets forth, for the periods indicated, high and low bid
prices of the Company's common stock. The quotations constitute quotations among
dealers and do not reflect retail mark-ups, markdowns, or commissions, and may
not represent actual retail transactions:
Quarter High Low
------- ------- -------
Fiscal 1995(1)
First Quarter 3.50 1.41
Second Quarter 3.88 2.50
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Third Quarter 3.75 2.00
Fourth Quarter 2.94 2.00
Fiscal 1996
First Quarter 5.00 2.19
Second Quarter 7.06 3.81
Third Quarter 6.50 4.63
Fourth Quarter 5.50 4.50
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(1) The figures are adjusted for a 1-to-five reverse stock split effected on
February 16, 1995, with respect to shareholders of record on January 20, 1995.
The payment of dividends on the Company's common stock is within the discretion
of the Company's Board of Directors. To date, the Company has not paid any
dividends on its common stock, and does not expect to pay any dividends in the
foreseeable future. The Company intends to retain all earnings for use in the
Company's operations. Moreover, pursuant to the terms of its loan agreement with
its principal lender, the Company is precluded from paying any dividends.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Statements other than historical information contained in this report are
considered forward looking and involve a number of risks and uncertainties.
Factors that could cause such statements not to be accurate include, but are not
limited to, increased competition for the company's products, improvements in
alternative technologies, a lack of market acceptance for new products
introduced by the Company and the failure of the Company to successfully market
its products.
LIQUIDITY AND CAPITAL RESOURCES
In January 1995, the Company initiated a debt restructuring by entering into a
Composition of Creditors Agreement (the "Agreement") with approximately 82% of
its unsecured trade creditors. Under the Agreement, creditors representing
approximately $2,500,000 of Company debt (the "Trade Debt") elected to accept as
full payment of their outstanding balances an amount equal to $.35 for every
dollar outstanding. A group of creditors holding approximately $336,000 of
Company debt (approximately 11%) elected to accept payment of their outstanding
balances over a five-year period. In order to fund the initial payment and as
part of the Agreement, the Company borrowed $750,000 from the then-President and
principal shareholder of the Company through the issuance of a note payable and
also obtained a commitment for a $200,000 credit line from a bank. In connection
with the Agreement, the Company recorded an extraordinary gain from forgiveness
of debt, net of related expenses, of $1,539,056 during the year ended December
31, 1995.
The Company successfully negotiated settlements with respect to almost all of
the Trade Debt held by the seven percent (7%) of the unsecured trade creditors
not electing to participate in the Agreement, representing approximately
$300,000 of the Trade Debt. The Company has
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satisfied it's obligation to such non-electing trade creditors in accordance
with such settlement arrangements by payment of $12,900 in the last quarter of
1996.
In September 1994, the Company closed its plant in Tennessee and abandoned the
building and certain equipment located at the facility. The land, building and
equipment of the Tennessee facility were constructed and purchased by the
Company with financing provided by the State of Tennessee Department of Economic
Development and the City of Brownsville. In connection with its withdrawal from
the facility, the Company entered into an agreement with the City of Brownsville
whereby the City would use its best efforts to locate a buyer for the facility
and the related equipment. The net book value of the Tennessee facility land,
building and equipment of $771,962 was recorded as assets held for sale on the
Company's balance sheet. During October 1996, the assets held for sale were sold
to a third party. In exchange for the assets, the Tennessee Department of
Economic Development agreed to assume the Company's liability under the related
mortgage note. The difference between the recorded amount of the assets held for
sale and the outstanding mortgage note obligation was materially offset by a
reserve recorded in 1995, resulting in no significant gain or loss being
recorded for the year ended December 31, 1996.
As of December 31, 1996, the Company was party to four outstanding
equipment loans, as follows:
(i) An equipment loan with the City of Brownsville, TN, which was
refinanced in 1995, with an outstanding principal balance of $176,670 plus
interest equal to prime minus 5%, with a floor of 2.5% and a cap of 6.5% (3.25%
as at December 31, 1996). Current monthly installments on the note equal $2,616
with the final installment payment due in March, 2003.
(ii) Two equipment loans with Concord Financial with an outstanding balance
of (a)$2,153, payable by February, 1997 (which note was paid off in February
1997) and (b)$186,753, payable in monthly installments of $11,107, with the
final installment due June 1998, respectively.
(iii) The reinstated equipment loan with the First State Bank & Trust Co.
of Caruthersville, Caruthersville, MO, and the US Small Business Administration
in connection with the Company's former facilities in the State of Missouri,
with an outstanding principal balance of $259,000 as of December 31, 1996.
As of December 31, 1996, the Company was indebted to Congress Financial
Corporation (Congress) under its secured line of credit for $758,486. The line
of credit matures in April 1997, and automatically renews on a yearly basis,
unless terminated by either party in accordance with the loan agreement, and
bears interest at a rate per annum of 1.5% above the prime rate as announced by
Philadelphia National Bank from time to time. The line of credit is
collateralized by all of the assets of the Company, excluding real estate and
pre-existing first liens on equipment. The Company is charged a monthly service
fee of $4,000 during the term of the loan agreement. The loan agreement requires
the Company to maintain a specific working capital level. The Company failed to
meet the required working capital level during the year ended December 31, 1995
resulting in a default under the note. The 1995 default is continuing as of the
two- year period ended and as of December 31, 1996. Congress is aware of the
default but continues to fund the line of credit. Congress has not formally
waived the default and, as such, can cease funding the line of credit and demand
payment in full of the outstanding
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balance at any time. In 1996, the Company executed a settlement agreement with
Mr. Ron Tygar, the former Chairman of the Board, CEO, President and majority
shareholder of the Company, which agreement removed Mr. Tygar as a personal
guarantor of the Congress loan (see penultimate paragraph of "Item 12 - Certain
Relationships and Related Transactions"}. As of March 1997, the loan balance
with Congress was approximately $464,335. Given the low outstanding balance,
Congress has indicated that it does not intend to renew the current financing
arrangement with the Company. The Company is currently seeking alternative
financing arrangements.
In connection with loans from a principal stockholder, Elm Grove Associates II,
L.P., which loans, in the aggregate amount of $590,000, were repaid in part in
1996 and fully paid in March 1997, the Company issued 1,180,000 stock warrants
each for the purchase of one(1) share of stock of the Company at an exercise
price of $2.28 per share. The fair market value of the warrants at the date of
issuance of $329,600 was recorded as deferred loan costs, of which $237,000 was
charged to operations in the year ended 1996.
During 1996, the Company completed the private placement of its securities in
the form of 2,396,000 units, with each unit consisting of one share of the
Company's common stock and two common stock purchase warrants. Each common stock
purchase warrant enables the holder to purchase one share of the Company's
common stock at a price of $4.20. The warrants are redeemable at the option of
the Company at a redemption price of $.005 per warrant, beginning six months
from the private placement closing date. The Company received net proceeds of
$2,763,743 from such sales.
In a transaction unrelated to the private placements units, the Company sold
100,000 shares of its common stock at $1.00 per share to an individual who is
unrelated to the Company. [This individual held an option to buy up to 100,000
restricted shares at $1.00 per share from a private placement initiated in
1995.]
For the year ended December 31, 1996, the Company issued a total of $3,775,000
of convertible debentures pursuant to Regulation S promulgated by the Securities
and Exchange Commission under the Securities Act of 1933, as amended. Each
convertible debenture enabled its holder to convert such debenture into the
Company's common stock at the lesser (i) of 75% or 80% of market value of the
Company's common stock on the date of conversion (depending on the terms of the
debenture) or (ii) 110% of the average market value of the Company's common
stock for five days prior to the closing date of the convertible debenture.
During 1996, $2,275,000 aggregate principal amount of such debentures plus
accured interest was converted into an aggregate of 660,628 shares of common
stock of the Company. For the year ended December 31, 1996, $1,214,534 of
interest expense has been recorded for the difference between the conversion
prices of the convertible debentures and the fair market value of the Company's
common stock at the time of conversion. In addition, a deferred loan cost of
$253,750, associated with the converted debentures, was charged to operations as
an interest expense in 1996. At December 31, 1996, two unsecured convertible
debentures in the aggregagte amount of $1,500,000 payable with interest at 10%
remained outstanding. Principal and accrued interest were converted into an
aggregate of 383,100 shares of the Company's common stock in February of 1997.
The Company issued 85,000 shares of the Company's common stock as payment for
consulting services. Consulting fees of $321,902 were recorded during 1996
related to these
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stock issuances.
MATERIAL CHANGES IN FINANCIAL CONDITION
The Company's cash on hand at December 31, 1996 was $956,548 as compared to
$121,417 as of December 31, 1995. The difference of $835,131 was principally due
to cash received from placement of the convertible debentures in December 1996
and a private placement of the Company's common stock in 1996. Accounts
receivable net of allowance for doubtful accounts decreased by $320,634 from
December 31, 1995 to December 31,1996. The reduction was principally due to the
reduction of sales between the two periods.
Inventory at December 31, 1996 and December 31, 1995, was $3.371,647 and
$3,821,827, respectively. The decrease in inventory of $450,180 (11.8%) was the
result of: I) consolidation of inventory occurring because of a closing of
certain warehouse locations by the Company; and II) improved inventory
management. The mix of the inventory changed as follows:
INVENTORY ITEM 1996 1995 % CHANGE
-------------- ---- ---- --------
Raw Materials $ 662,504 $1,012,700 (34.6)
Work - in - Progress 154,273 236,574 (34.8)
Finished Goods 2,554,870 2,572,553 (0.7)
---------- ---------- -----
Total $3,371,647 $3,821,827 (11.8)
========== ========== =====
In 1995, the Company had a fixed asset held for sale (Brownsville, TN Facility)
in the amount of $771,962. The difference between the recorded amount of the
assets held for sale and the outstanding mortgage note obligation was materially
offset by a reserve recorded in 1995, resulting in no significant gain or loss
being recorded for the year ended December 31, 1996.
Total assets for the Company were $8,712,379 and $9,734,137 as at December 31
1996 and 1995, respectively. The difference of $1,021,758 was the result of the
sale of the Brownsville Facility, the reduction in accounts receivable, the
reduction in inventory and the reduction in property and equipment, and the
offset of these reductions by the increase in cash.
Total liabilities were $4,292,498 and $6,245,130 as at December 31, 1996 and
1995, respectively. The reduction in total liabilities of $1,952,632 was the
result of the following: I) a reduction in the Note to Bank (Congress Financial)
in the amount of $1,683,256 (68.9%); II) trade payables reduced by $595,262
(60.8%) due to the elimination of past due payables, payments made under the
Composition Agreement, and reduction in material purchases due to lower sales.
III) a decrease in accrued liabilities by $283,257; and IV) a reduction in long
term debt in the amount of $1,054,707. These reductions were offset to some
extent by the increase in Convertible Notes by $1,500,000.
Total equity increased by $930,874 to $4,419,881 in 1996 from $3,489,007 in
fiscal 1995. This increase was the result of $7,045,802 in additional paid in
capital offset against an increase in accumulated deficit of $6,118,170.
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MATERIAL CHANGES IN RESULTS OF OPERATIONS
For the year ended December 31, 1996, the Company had a net loss of $6,118,170
as compared to a net loss of $4,179,642 for the year ended December 31, 1995.
The increase of $1,938,528 in net loss resulted despite a reduction of
$2,156,512 in total operating expenses from $4,851,008 in fiscal 1995 to
$2,694,496 in fiscal 1996. The full impact of the reduction in operating
expenses was offset by a decrease in net sales from $8,369,067 to $3,912,237 in
1995 and 1996, respectively. The loss of sales is attributable to the loss of
customers and the impaired ability to attract new customers as a result of the
Company's financial difficulties. A related reduction in selling and delivery
and general administration expenses was significant but not sufficient to offset
the loss of sales.
Selling and delivery expenses were $574,939 and $909,669 in 1996 and 1995,
respectively. The decrease of $334,730 was the result of lower sales in 1996.
General and administrative expenses were reduced by $1,495,546 (46.4%) from
$3,220,897 in 1995 to $1,725,351 in 1996. This reduction was the result of the
Company's continuing restructuring efforts. Bad debt expense was $394,206 and
$720,442 in 1996 and 1995. respectively. Lower sales and improved collection
efforts accounted for this reduction.
Interest expense increased from $460,832 in 1995 to $2,027,746 in 1996. The
increased interest expense of $1,566,914 is due to an interest charge of
$1,214,534 for the value of the conversion discount off the fair market value of
the Company's common stock available to the holders of the convertible
debentures at the date of issuance and the write off of deferred loan costs
associated with the conversion of debentures.
In 1995, the Company had an income tax benefit of $772,999, that resulted from
the reversal of the deferred tax liability on the balance sheet as of December
31, 1994. No income tax benefit was recorded in 1996 as a result of the change
in the valuation allowance on the deferred income tax asset. The net loss before
extraordinary gain was $5,864,420 and $5,195,698 for 1996 and 1995,
respectively. The extraordinary gain from forgiveness of debt, net of income
taxes was $1,016,056 in 1995. As a result of this extraordinary item, the net
loss for the Company was $6,118,170 and $4,179,642 in 1996 and 1995,
respectively.
ITEM 7 FINANCIAL STATEMENTS
The following documents are attached:
Page
----
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheet F-3 to F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Stockholders Equity F-6
Consolidated Statements of Cash Flows F-7
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Summary of Significant Accounting Policies F-8 to F-9
Notes to Consolidated Financial Statements F-10 to F-25
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16 (A) OF THE EXCHANGE ACT
The table below sets forth the name, age and certain information as to the
Directors and executive officers of the Company.
NAME AGE POSITION BECAME A DIRECTOR
- ---- --- -------- -----------------
John K. Kenney 53 President, Chief 1995
Executive Officer &
Chairman of the Board
of Directors
Alfred H. Paul 47 Chief Financial Officer, N/A
Chief Accounting Officer &
Secretary Treasurer
David Love 62 Director 1996
Mandel Sherman 58 Director 1996
John K. Kenney has been President, Chief Executive Officer and a Director
since November 1995. He has been Chairman of the Board of directors since
July, 1996. Mr. Kenney has over twenty years experience in the automotive
parts industry and came to the Company from ITM Automotive Parts, Inc.
("ITM"), where he served as Vice President of Sales from 1989 to 1991 and
President and Chief Operating Officer from 1991 to 1995. Prior to ITM, Mr.
Kenney held executive positions at DNE Corporation, Valley Industries,
Worldparts Corporation and Maremont Corporation. Mr. Kenney has served on
the Board of Directors of the Auto Internationale Association.
Alfred H. Paul has been Chief Financial Officer, Chief Accounting Officer and
Secretary since July 1996. Mr. Paul's background includes financial management
experience in manufacturing, construction and fabrication with CSR/Gypsum
Dealers Manufacturing (1993- 1996) and Zurn Industries (1989-1993). Previously,
Mr. Paul had been Director of Finance in the aerospace industry with the Dee
Howard Company (1987-1989) and Controller with Far West Products (1982-1987), a
manufacturer and builder of restaurant equipment and facilities.
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Mr. David Love has been a Director since July, 1996. Over the past five plus
years, Mr. Love has been a practicing independent Certified Public Accountant
and Attorney in the greater Boston area. In addition, Mr. Love is a
practicing arbitrator and mediator. Mr. Love is currently the Chief
Financial Officer of Quality Microwave, Inc., a private corporation located
in Wilmington, MA.
Mr. Mandel Sherman has been a Director since July, 1996. Mr. Sherman has also
been actively involved with the Company through Baroque Investments, Inc., a
consulting firm engaged by the Company for a three year period in December 1995.
Since 1983, Mr. Sherman has served as an investor and manager in a variety of
privately-held real estate ventures and more recently, investment firms and
companies, including without limitation First Providence Financial Association
Inc., a member of NASD. He presently serves as President and principal
stockholder of Miss Sloan Capital Ltd., an investment company and general
partner of Elm Grove Associates II, L.P., which partnership is a principal
stockholder of the Company. Previously, Mr. Sherman served as an executive
officer in both public and private companies engaged in the precious metals
industry.
ITEM 10. EXECUTIVE COMPENSATION
OFFICERS SALARIES
The following table sets forth the compensation of the Company's Chief Executive
Officer and any executive officer of the Company, other than the Chief Executive
Officer, whose aggregate compensation exceeded $100,000 for the years ended
December 31, 1996, 1995, and 1994:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Name/ Year Salary Bonus Other Restricted Securities LTIP All
Position Annual Stock Underlying Payouts other
Compensation Awards Options/SARs Compensation
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John K. 1996 $110,000 N/A $18,000 none none none none
Kenney,
President &
CEO/Chairman
of the Board
1995 $22,856(1) none none none none none none
Alfred H. 1996 62,000 none $4,200 none none none none
Paul,
Chief Financial
Officer/ Chief
Accounting
Officer
Ron 1995 136,000(3) none $25,000 none none(4) $90,621(5)
Tygar (2) 1994 $296,000 none $30,000 none none none none
Bernie 1995 $99,626(7) none $27,500 none N/A(8) none none
Bard (6) 1994 $53,333 none $20,000 none none none none
Neil 1995 $18,461(10) none none none none none none
Tygar (9) 1994 $118,616 none none none none none none
</TABLE>
- ----------
(1) Based on 2.5 months employment at approximately $9,100 per
month. Mr. Kenney was employed by the Company effective
mid-October, 1995.
(2) Former President, Chief Executive Officer and Chairman of the Board of
Directors, terminated as of October 1995.
(3) Based on 10 months employment durring 1995 at approximately $13,600 per
month.
(4) Alleged claim of options for an aggregate of 206,044 shares of the
Company's common stock was revoked by Mr. Tygar and Mr. Tygar further
agreed to release the Company from any such claim. Current management of
the Company believes that such options were not properly authorized and
therefore are not valid.
13
<PAGE>
(5) Forgiveness of debt.
(6) Former Chief Financial Officer, terminated as of November
1995.
(7) Based on 11 months employment during 1995 at approximately $9,000 per
month.
(8) Mr. Bard claims that options for an aggregate of 137,363 shares of the
common stock of the Company were granted to him in 1995. Current
management of the Company believes that any such options were not properly
authorized and therefore not valid.
(9) Former Vice President of Operations, terminated as of
February 1995.
(10) Based on 2 months employment during 1995 at approximately
$9,200 per month.
DIRECTOR FEES AND OTHER REMUNERATION
Each director is entitled to receive compensation in the amount of $3,000 per
month for services as a member of the Board of Directors. Only two of the three
directors elected to collect compensation in the year ended 1996. The third
director did not waive his right to such compensation and the Company has not
accrued for such compensation.
STOCK PLANS
At December 31, 1996, the Company had two stock option plans. On March 13, 1992,
the Company's Board of Directors and shareholders approved the Company's
Employee Stock Option Plan (the "ESO Plan"). Under the ESO Plan, in the
discretion of the Compensation Committee of the Board of Directors, options may
be granted to key employees (including officers) of the Company and its
subsidiaries for the purchase of shares of the Company's common stock. Options
granted may be (a) incentive stock options within the meaning of the U.S.
Internal Revenue Code Section 42 (b) or (b) non-qualified options. The ESO Plan
does not limit the number of options which may be granted to an employee or the
number of shares which may be subject to any option, except that (y) the
aggregate fair market value (as determined at the time the option is granted) of
the Company's common stock with respect to which incentive stock options are
exercisable for the first time by any employee during any calendar year may not
exceed $100,000, and (z) no incentive stock options or non-qualified stock
options may be granted to any employee who owns (at the time the option is
granted) stock possessing more than 10% of the total combined voting power of
all classes of stock of his employer corporation or any of its parent
corporations or subsidiary corporations. If any option expires, terminates or is
canceled for any reason without having been exercised in full, the shares which
were reserved for issuance upon its exercise again become available for the
purposes of the ESO Plan.
Each option under the ESO Plan is granted pursuant to an agreement with the
optionee. Required terms of the option agreement are (a) the option price may
not be less than 100% of the fair market value of the Company's common stock at
the time the option is granted; (b) an incentive option may not be exercised
more than 10 years from the date granted; (c) a non- qualified option may not be
exercised more than 11 years from the date granted; (d) an option may not be
transferred by an optionee otherwise than by will or in accordance with the laws
of decent and distribution, and may be exercised, during his lifetime, only by
the optionee; (e) each option may be exercised, commencing one year from the
date granted, in cumulative annual portions of 25% of the total number of shares
subject to such option; (f) an option may be exercised within three months after
the date of the optionee's termination of employment (or within 12 months after
the termination date in the event termination of employment was on account of
death or disability), but only to the extent the option is otherwise exercisable
on that date; and (g) the exercise price of any option may be paid, at the
optionee's election, either in cash or by his exchange of shares of the
Company's common stock previously held by optionee at their fair market value.
The incentive options are subject to anti - dilution protection.
14
<PAGE>
The Company is authorized to issue up to 60,000 options under the ESO Plan.
During the period of June 12, 1992, through September 30, 1994 all of the
options were granted to various employees of the Company at prices ranging from
$3.75 to $17.1875. All of the options become exercisable at various dates and
expire at the end of not more than 10 years from the date of the grant. The ESO
Plan terminated in March 2000.
NON-QUALIFIED OPTIONS
Under the Company's 1995 Stock Option Plan, the Company is authorized to issue
up to 750,000 shares of the Company's common stock. On June 2, 1995, the Company
issued an aggregate of 578,622 non-qualified options to certain current and
former officers, employees and consultants of the Company. The options are
exercisable at $3.00 per share and are vested upon execution of each individual
stock option agreement. The option can be exercised at any time within the ten
year term of the option agreement. The option agreements contain adjustment
provisions which provide the optionee with anti-dilution protection from certain
equity transactions which may effect the value of the Company's common stock.
The above stock option plan, recorded as previously adopted in 1995, was adopted
under circumstances that present management of the Company does not believe
resulted in validly issued options. Although reportedly issued, a principal
recipient of such options has surrendered such options. None of the stockholders
of the balance of such options have exercised them and, if such action were
attempted, the Company's position is, and would be, that such options are not
validly issued.
MISCELLANEOUS
Certain options and warrants have also been issued to various parties. See
"Certain Relationships and Related Transactions
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth known beneficial ownership of common stock of the
Company as of March 14, 1997 by each person owning 5% or more of the common
stock of the Company, each Director, each executive officer of the Company named
herein and by all Directors and executive officers as a group. (Unless otherwise
indicated, the beneficial owners exercise sole voting and/or investment power
over their shares.)
Name Title Number of Shares Percent of
---- ----- ---------------- ----------
Class(1)
--------
Elm Grove Associates, II, L.P. N/A 750,000(1) 8.6%
210 Dartmouth
Pawtucket, RI 02860
John Kenney President, Chief 0 0
c/o RT Industries, Inc. Executive
1875 E. Lake Mary Blvd. Officer and
Sanford, Florida 32773 Chairman of the
Board
Alfred Paul Chief Financial 0 0
c/o RT Industries, Inc. Officer, Chief
1875 E. Lake Mary Blvd. Accounting
Sanford, Florida 32773 Officer and
Secretary
15
<PAGE>
Mandel Sherman Director 0 0
c/o RT Industries, Inc.
1875 E. Lake Mary Blvd.
Sanford, Florida 32773
David Love Director 0 0
c/o RT Industries, Inc.
1875 E. Lake Mary Blvd.
Sanford, Florida 32773
All directors and 750,000(1) 8.6%
officers as a group
(1) Includes 750,000 shares purchased from Ron Tygar (former President, CEO
and Chairman of the Board) pursuant to that Agreement, as amended, dated
October 20, 1995. Does not include warrants held by Elm Grove Associates
II, L.P. currently exercisable to purchase up to 1,180,000 shares of the
Company's common stock, at the exercise price of $2.28.
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company leases its current manufacturing facility pursuant to a Lease and
Option Agreement dated April 28, 1989 (the "Lease") with FRNT Realty Co. Ltd., a
Florida Limited Partnership. Ronald Tygar (the former President, Chief Executive
Officer and Chairman of the Board) is the President and principal stockholder of
NFR, Inc., the General Partner of FRNT Realty Co. Ltd. Under the terms of the
Lease and a Lease Extension Agreement, the Lease expires on March 31, 1998 and
provides for a base rent of $108,000 per annum (payable in twelve (12) monthly
installments of $9,000 each) through March 31, 1995 and thereafter, $114,000 per
annum (payable in monthly installments of $9,500) through the date of
expiration. As amended by the Settlement Agreement entered into during February
1997 (described below in the penultimate paragraph of this Item 12), the Company
has the absolute irrevocable option to purchase the facility at a price equal to
the outstanding mortgage balance at the time of exercising the option by the
assumption or payment of such mortgage. Management believes the Lease is for
rental higher than fair market value.
As of December 31, 1996, the Company was indebted in the principal amount of
$100,000, plus interest at a rate of 12% per annum, to Elm Grove Associates II,
L.P. ("Elm Grove"), a principal stockholder of the Company, for a loan made by
Elm Grove to the Company in 1996. Mandel Sherman, a director of the Company, is
the President and principal stockholder of Miss Sloan Capital, Inc., the general
partner of Elm Grove. The principal and interest of the debt, as evidenced by a
promissory note, was repaid in March, 1997.
In connection with the making of the loan from Elm Grove described in the
preceeding paragraph and an additional loan in the amount of $490,000 repaid
during 1996, the Company granted Elm Grove warrants to purchase an aggregate of
1,180,000 shares of the Company's common stock at an exercise price of $2.28 per
share, subject to anti-dilution protection. The Company may redeem such warrants
at a redemption price of $0.05 per warrant. The Company also entered into a
Registration Rights Agreement providing Elm Grove with piggyback and demand
registration rights, commencing as of February 1, 1996. The Company anticipates
registering such shares of Common Stock pursuant to such registration rights
within the first half of the 1997 calendar year.
16
<PAGE>
In October, 1995, the Company entered into a Consulting Agreement (since
amended) with RT Consulting, Inc., which agreement provided for periodic
payments to the consultant. Ron Tygar (the former President, Chief Executive
Officer and Chairman of the Board) is the principal owner and officer of RT
Consulting, Inc. In January 1997, the Company terminated the Agreement pursuant
to a Settlement Agreement among RT Consulting, Inc., Ron Tygar, and others,
whereby the remaining consulting fee obligations under the Consulting Agreement
were terminated by RT Consulting, Inc. and the Company released from the
obligations to pay such fees. For and in consideration of the Settlement
Agreement, the Company issued 75,678 shares of its common stock (having a fair
market value of $387,850) to RT Consulting, Inc., Mr. Tygar and others. (See the
discussion of the Settlement Agreement in the penultimate paragraph of this Item
12.) RT Consulting, Inc. (and Mr. Tygar) have agreed not to compete with the
Company for a period of eight (8) years.
Under the Consulting Agreement, the Company also granted the RT Consulting, Inc.
a five year option to purchase 100,000 shares of the Company's common stock for
a purchase price of $5.00 per share. Such option remains in effect. Subject to
certain conditions, the Company agreed in the Settlement Agreement to include
such shares in any public registration of common stock by the Company. The
Company anticipates registering such shares of Common Stock pursuant to such
registration rights within the first half of the 1997 calendar year.
In December 1995, the Company retained the services of Baroque Investments, Inc.
for three calendar years commencing January, 1996, to provide various consulting
service for the Company, including but not limited to (i) developing capital
sources for the Company, (ii) searching for possible business acquisitions, and
(iii) providing management advice to the Company as requested by the Company's
President. Mr. Mandel Sherman, a director of the Company, is a principal of
Baroque Investments, Inc. Compensation to the consultant is $5,000 per month.
Mr. Richard Rossi, who served as a director of the Company until July 11, 1996,
is the principal officer of the law firm of Rossi & Associates, Attorneys, P.A.,
which firm furnished legal services to the Company during part of 1996. Mr.
Rossi is also the President of International Escrow Agents, Inc. which supplied
escrow services to the Company in 1996.
As part of the Company's overall restructuring program, the Company entered into
a Settlement Agreement during the final quarter of 1996 with Ron Tygar (the
former President and Chief Executive Officer of the Company) and other entities
owned or controlled by Mr. Tygar (which agreement was executed in January 1997).
In addition to the matters discussed above as effected by the Settlement
Agreement, the Settlement Agreement also provided for: (i) the release of the
Company from any obligation with respect to stock options claimed by Mr. Tygar
to have been granted to him in 1995; and (ii) the registering of 100,000 shares
of common stock in a public offering by the Company.
[Based upon the management's inquiries, made at the time of the foregoing
transactions, the Company believes that such transactions were on terms no less
favorable than the terms reasonably available to the Company from unaffiliated
parties. Future transactions between the Company and its officers and directors
and their respective affiliates will be on terms and conditions no less
favorable to the Company than could be obtained from unaffiliated third parties
based on similar transactions and will be approved by a majority of the
independent and disinterested members of the Board of Directors of the Company.]
17
<PAGE>
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
(a) Financial Statements
See list of Financial Statements on F-1.
(b) Reports on Form 8-K
The Company filed reports with the Securities and Exchange
Commission on Forms 8-K on each of December 20, 1996 and December 30, 1996 in
connection with the issuance of convertible debentures pursuant to Regulation S
promulgated by the Commission under the Securities Acto of 1933.
(c) Exhibits
3.1 Certificate of Incorporation of the Company(1)
3.2 By-laws of the Company(1)
10.1 Settlement Agreement dated January 30, 1997 among the Company, RT
Consulting Inc., FRNT Realty Co., Ltd. and Ronald Tygar.
21 Subsidiaries of the Registrant
27 Financial Data Schedule
- ----------
(1) Previously filed with the Securities and Exchange Commission as Exhibits
to, and incorporated herein by reference from, the Company's Annual Report on
Form 10-KSB for the years ended May 31, 1995, May 31, 1994, May 31, 1993, May
31, 1992 or May 31, 1991.
The Company will provide, without charge, a copy of these exhibits to each
stockholder of the Company upon the written request of any stockholder therefor.
All such requests should be directed to RT Industries, Inc., 1875 E. Lake Mary
Boulevard, Sanford, FL 32773, Attn: President.
18
<PAGE>
RT Industries, Inc.
Consolidated Financial Statements
As of December 31, 1996
and For the Years Ended December 31, 1996 and 1995
<PAGE>
RT Industries, Inc.
Contents
- --------------------------------------------------------------------------------
Report of Independent Certified Public Accountants F-2
Financial statements
Consolidated balance sheet F-3 - F-4
Consolidated statements of operations F-5
Consolidated statements of stockholders' equity F-6
Consolidated statements of cash flows F-7
Summary of significant accounting policies F-8 - F-9
Notes to financial statements F-10 - F-25
F-1
<PAGE>
Report of Independent Certified Public Accountants
To the Board of Directors and Stockholders
RT Industries, Inc.
We have audited the accompanying consolidated balance sheet of RT Industries,
Inc. and Subsidiaries as of December 31, 1996 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
two years in the period ended December 31, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of RT Industries, Inc.
and Subsidiaries as of December 31, 1996 and the results of their operations and
their cash flows for each of the two years in the period ended December 31, 1996
in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As described in Notes 5 and 11 to the
financial statements, the Company has experienced significant operating losses,
has an accumulated deficit and has been in continuous default on a note payable
to its primary lender throughout the two-year period ended and as of December
31, 1996. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 11. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Certified Public Accountants
Orlando, Florida
March 7, 1997
F-2
<PAGE>
RT Industries, Inc.
Consolidated Balance Sheet
================================================================================
December 31, 1996
================================================================================
Assets (Note 5)
Current:
Cash $ 956,548
Trade receivables, net of allowances for
doubtful accounts of $459,897 582,381
Inventories (Note 2) 3,371,647
Prepaid expenses 368,620
- -------------------------------------------------------------------------------
Total current assets 5,279,196
- -------------------------------------------------------------------------------
Property and equipment, net (Notes 4 and 5) 3,161,293
- -------------------------------------------------------------------------------
Other assets:
Deferred loan costs, net of accumulated
amortization of $237,142 242,458
Other 29,432
- -------------------------------------------------------------------------------
Total other assets 271,890
- -------------------------------------------------------------------------------
$8,712,379
================================================================================
See accompanying summary of significant accounting policies
and notes to consolidated financial statements.
F-3
<PAGE>
RT Industries, Inc.
Consolidated Balance Sheet
================================================================================
December 31, 1996
================================================================================
Liabilities and Stockholders' Equity
Current liabilities:
Note payable to bank (Note 5) $ 758,486
Accounts payable - trade 384,317
Accrued liabilities 226,460
Current maturities of long-term debt (Note 7) 436,511
- -------------------------------------------------------------------------------
Total current liabilities 1,805,774
Accounts payable to shareholder (Note 8) 387,850
Convertible notes payable (Note 6) 1,800,000
Long-term debt, less current maturities (Note 7) 298,874
- -------------------------------------------------------------------------------
Total liabilities 4,292,498
- -------------------------------------------------------------------------------
Commitments and contingencies (Notes 3, 5, 8 and 11) --
Stockholders' equity (Note 10):
Common stock, $.001 par value, shares authorized 30,000,000,
issued and outstanding 8,322,771 8,323
Additional paid-in capital 15,592,938
Accumulated deficit (11,181,380)
- -------------------------------------------------------------------------------
Total stockholders' equity 4,419,881
- -------------------------------------------------------------------------------
$ 8,712,379
================================================================================
See accompanying summary of significant accounting policies
and notes to consolidated financial statements.
F-4
<PAGE>
RT Industries, Inc.
Consolidated Statements of Operations
================================================================================
Year ended December 31, 1996 1995
================================================================================
Net sales $ 3,912,237 $ 8,369,067
- --------------------------------------------------------------------------------
Cost of sales 5,335,027 9,025,924
- --------------------------------------------------------------------------------
Gross loss (1,422,790) (656,857)
- --------------------------------------------------------------------------------
Operating expenses:
Selling and delivery 574,939 909,669
General and administrative 1,725,351 3,220,897
Bad debt expense 394,206 720,442
- --------------------------------------------------------------------------------
Total operating expenses 2,694,496 4,851,008
- --------------------------------------------------------------------------------
Operating loss (4,117,286) (5,507,865)
- --------------------------------------------------------------------------------
Other income (expense):
Interest expense (2,027,746) (460,832)
Other income 26,862 --
- --------------------------------------------------------------------------------
(2,000,884) (460,832)
- --------------------------------------------------------------------------------
Net loss before income tax benefit
and extraordinary gain (6,118,170) (5,968,697)
Income tax benefit -- 772,999
- --------------------------------------------------------------------------------
Net loss before extraordinary gain (6,118,170) (5,195,698)
Extraordinary gain from forgiveness of debt,
net of income taxes of $523,000 (Note 1) -- 1,016,056
- --------------------------------------------------------------------------------
Net loss $(6,118,170) $(4,179,642)
================================================================================
Loss per common share:
Before extraordinary gain $ (0.90) $ (1.81)
Extraordinary gain -- .35
- --------------------------------------------------------------------------------
Net loss $ (0.90) $ (1.46)
================================================================================
Weighted average common shares outstanding 6,771,801 2,864,101
================================================================================
See accompanying summary of significant accounting policies
and notes to consolidated financial statements.
F-5
<PAGE>
RT Industries, Inc.
Consolidated Statements of Stockholders' Equity
================================================================================
<TABLE>
<CAPTION>
Common Stock
------------------------- Additional
Par Paid-in Accumulated
Shares Value Capital Deficit
===================================================================================================================================
<S> <C> <C> <C> <C>
Balance, December 31, 1994 1,241,143 $ 1,241 $ 4,390,342 $ (883,568)
Reclassification of liabilities for
stock options issued as compensation -- -- 122,650 --
Issuance of common stock as payment
of consulting fees (Note 10) 527,000 527 526,473 --
Issuance of common stock as payment
of notes payable (Note 10) 1,250,000 1,250 1,225,908 --
Sale of common stock, net of
offering costs of $128,675 2,063,000 2,063 2,281,763 --
Net loss -- -- -- (4,179,642)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 5,081,143 5,081 8,547,136 (5,063,210)
Sale of common stock through private
placements, net of offering costs
of $231,258 (Note 10) 2,496,000 2,496 2,861,247 --
Issuance of common stock as payment
of consulting fees (Note 10) 85,000 85 321,817 --
Conversion of convertible notes payable
into common stock (Note 10) 660,628 661 2,318,555 --
Issuance of warrants as payment of
loan costs (Note 7) -- -- 329,600 --
Discount on conversion price of
convertible debentures (Note 6) -- -- 1,214,583 --
Net loss -- -- -- (6,118,170)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 8,322,771 $ 8,323 $ 15,592,938 $(11,181,380)
===================================================================================================================================
</TABLE>
See accompanying summary of significant accounting policies
and notes to consolidated financial statements.
F-6
<PAGE>
RT Industries, Inc.
Consolidated Statements of Cash Flows
================================================================================
<TABLE>
<CAPTION>
Year ended December 31, 1996 1995
====================================================================================================
<S> <C> <C>
Reconciliation of net loss to net cash used in operating activities:
Net loss $(6,118,170) $(4,179,642)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 867,907 626,302
Deferred income taxes -- (287,000)
Provision for losses on trade receivables 394,206 720,442
Convertible debenture accrued interest converted to common stock 44,216 --
Issuance of common stock as payment of consulting services 207,830 527,000
Issuance of a note payable as payment of consulting services -- 477,158
Loss on forgiveness of stockholder note receivable -- 90,621
Discount on conversion price of convertible debentures 1,214,583 --
Write-off of deferred loan costs 253,750 --
(Increase) decrease in:
Trade receivables (73,572) 1,130,135
Inventories 450,180 1,663,681
Prepaid expenses 65,942 213,831
Increase (decrease) in:
Accounts payable (595,262) (1,976,041)
Accrued liabilities (224,687) 590,156
Account payable to stockholder 163,850 224,000
- ----------------------------------------------------------------------------------------------------
Net cash used in operating activities (3,349,227) (179,357)
- ----------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of fixed assets held for sale -- 18,038
Purchase of property and equipment (85,138) (65,677)
Increase in other assets 59,074 142,573
- ----------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (26,064) 94,934
- ----------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net payments under note payable to bank (1,683,256) (1,949,235)
Payments received from stockholder note receivable -- 49,629
Proceeds from issuance of convertible notes payable 3,775,000 --
Proceeds from issuance of long-term debt 340,000 --
Payments made under long-term debt (681,315) (365,217)
Sale of common stock 2,863,743 2,283,826
Deferred loan costs (403,750) --
- ----------------------------------------------------------------------------------------------------
Net cash provided by financing activities 4,210,422 19,003
- ----------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 835,131 (65,420)
Cash, beginning of year 121,417 186,837
- ----------------------------------------------------------------------------------------------------
Cash, end of year $ 956,548 $ 121,417
====================================================================================================
</TABLE>
See accompanying summary of significant accounting policies
and notes to consolidated financial statements.
F-7
<PAGE>
RT Industries, Inc.
Summary of Significant Accounting Policies
================================================================================
Principles of
Consolidation
The consolidated financial statements include the accounts of RT Industries,
Inc. and its wholly-owned subsidiaries, Ultra Brake Corporation ("Ultra Brake"),
Ultratech of South Florida, Inc. ("Ultratech"), Roinco Worldwide, Inc.
("Roinco") and RT Friction, Inc. ("RT Friction"), collectively referred to as
the Company. All material intercompany accounts and transactions have been
eliminated.
Inventories
Inventories are valued at the lower of cost (average cost method) or market.
Property,
Equipment and
Depreciation
Property and equipment are stated at cost. Depreciation is computed over the
estimated useful lives of the assets by the straight-line method for financial
reporting and by accelerated methods for income tax purposes.
Amortization
Deferred loan costs are amortized over the contractual terms of the related
loans.
Revenue
Recognition
Sales are recognized upon shipment of products to customers.
Net Loss
Per Share
Net loss per share is computed using the weighted average number of shares
outstanding during each period. Common stock equivalents have not been included
since the effect would be antidilutive.
Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," which requires
recognition of estimated income taxes payable or refundable on income tax
returns for the current year and for the estimated future tax effect
attributable to temporary differences and carryforwards. Measurement of deferred
income tax is based on enacted tax laws including tax rates, with the
measurement of deferred income tax assets being reduced by available tax
benefits not expected to be realized.
F-8
<PAGE>
RT Industries, Inc.
Summary of Significant Accounting Policies
================================================================================
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the period reported. Actual
results could differ from those estimates.
Financial
Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments," requires disclosure of fair value information
about financial instruments. Fair value estimates discussed herein are based
upon certain market assumptions and pertinent information available to
management as of December 31, 1996.
The respective carrying value of certain on-balance-sheet financial instruments
approximated their fair values. These financial instruments include cash, trade
receivables, accounts payable and accrued expenses. Fair values were assumed to
approximate carrying values for these financial instruments since they are short
term in nature and their carrying amounts approximate fair values or they are
receivable or payable on demand.
F-9
<PAGE>
RT Industries, Inc.
Notes to Consolidated Financial Statements
================================================================================
1. Organization
and
Restructuring
RT Industries, Inc. was incorporated in Delaware in 1992 for the purpose of
manufacturing, assembling and distributing automotive brake linings and pads and
distributing after-market automotive ignition wires through its wholly owned
subsidiaries, Ultra Brake, Ultratech, Roinco and RT Friction. The Company's
products are sold to automotive distributors, mass merchandisers and chain
stores located throughout the United States and internationally.
Through July 1994, the Company maintained manufacturing and distribution
locations in Missouri, Tennessee, Florida and New York. During the third quarter
of 1994, the Company ceased its operations in Missouri and Tennessee in order to
consolidate its operations into its Florida and New York facilities (see Notes 3
and 11). The Company closed its New York facility during the third quarter of
1996, thereby consolidating all manufacturing and distribution operations into
the Florida facility.
In January 1995, the Company initiated a debt restructuring by entering into a
Composition of Creditors Agreement (the "Agreement") with a majority of its
unsecured trade creditors. Under the Agreement, creditors representing
approximately $2,500,000 of Company debt elected to accept as full payment of
their outstanding balances an amount equal to $.35 for every dollar outstanding.
A group of creditors holding approximately $336,000 of Company debt elected to
accept payment of their outstanding balances over a five-year period. In order
to fund the initial payment and as part of the Agreement, the Company borrowed
$750,000 from the then-President and principal shareholder of the Company
through the issuance of a note payable (see Note 10) and obtained a commitment
for a $200,000 credit line from a bank (see Note 5). In connection with the
Agreement, the Company recorded an extraordinary gain from forgiveness of debt,
net of related expenses, of $1,539,056 during the year ended December 31, 1995.
F-10
<PAGE>
RT Industries, Inc.
Notes to Consolidated Financial Statements
================================================================================
2. Inventories
Inventories are summarized as follows:
================================================================================
Raw materials $ 662,504
Work-in-process 154,273
Finished goods 2,554,870
- --------------------------------------------------------------------------------
$3,371,647
================================================================================
All inventory is pledged as collateral (see Note 5).
3. Fixed Assets
Held for Sale
In September 1994, the Company closed its plant in Tennessee and abandoned the
building and certain equipment located at the facility. The land, building and
equipment of the Tennessee facility were constructed and purchased by the
Company with financing provided by the State of Tennessee Department of Economic
Development and the City of Brownsville. In connection with its withdrawal from
the facility, the Company entered into an agreement with the City of Brownsville
whereby the City would use its best efforts to locate a buyer for the facility
and the related equipment. The net book value of the Tennessee facility land,
building and equipment of $771,962 was recorded as assets held for sale on the
Company's balance sheet. The City of Brownsville and the Tennessee Department of
Economic Development agreed to accept payments of interest only under the
outstanding mortgage note related to the building and land (see Note 7) until
the facility was sold. During October 1996, the assets held for sale were sold
to a third party. In exchange for the assets, the Tennessee Department of
Economic Development agreed to assume the Company's liability under the related
mortgage note. The difference between the recorded amount of the assets held for
sale and the outstanding mortgage note obligation was materially offset by a
reserve recorded in 1995, resulting in no significant gain or loss being
recorded for the year ended December 31, 1996.
F-11
<PAGE>
RT Industries, Inc.
Notes to Consolidated Financial Statements
================================================================================
4. Property and
Equipment
Property and equipment are summarized as follows:
Useful Lives
================================================================================
Leasehold improvements 10 years $ 237,641
Machinery and equipment 5-15 years 5,854,151
Furniture and fixtures 3-10 years 297,506
- --------------------------------------------------------------------------------
6,389,298
Less accumulated depreciation (3,228,005)
- --------------------------------------------------------------------------------
$ 3,161,293
================================================================================
All property and equipment is pledged as collateral (see Notes 5 and 7).
5. Note Payable
to Bank
Note payable to bank consists of borrowings under a $7,500,000 line of credit
which is collateralized by substantially all of the Company's business assets.
Borrowings under the line of credit, which expires April 1997, are limited to a
combination of i) 80% of eligible accounts receivable net of allowances for bad
debt, ii) the lesser of 50% of the value of finished goods inventory plus 30% of
raw materials inventory or $3,500,000 minus 70% of the amount of any outstanding
letters of credit. Interest at 1.5% over prime (9.75% at December 31, 1996) is
due monthly. A temporary overadvance of $200,000 under the line of credit was
issued by the bank in connection with the Company's funding of the Composition
of Creditors Agreement (see Note 1). The Company repaid the overadvance prior to
December 31, 1995. In addition, the loan agreement requires the Company to
maintain a specific working capital level. The Company failed to meet the
required working capital level during the year ended December 31, 1995 resulting
in a default under the note. The 1995 default is continued throughout the
two-year period ended and as of December 31, 1996. The bank is aware of the
default but continues to fund the line of credit. The bank has not formally
waived the default and, as such, can cease funding the line of credit and demand
payment in full of the outstanding balance at any time. In February 1997, the
Company was informed that the bank was electing not to renew the line of credit.
The Company has substantially reduced the outstanding balance on this loan and
is seeking financing arrangements with other asset-based lenders (see Note 11).
F-12
<PAGE>
RT Industries, Inc.
Notes to Consolidated Financial Statements
================================================================================
6. Convertible
Notes Payable
Convertible notes payable consist of the following:
<TABLE>
<CAPTION>
=============================================================================================
<S> <C>
Two unsecured convertible notes payable with interest at
8% due monthly and principal due at the demand of the
holder. These notes were converted into 300,000 shares
of Company common stock subsequent to December 31,
1996 $ 300,000
Two unsecured cumulative convertible debentures payable with interest at 10%
Principal and accrued interest were converted into 383,100 shares of
Company common stock
subsequent to December 31, 1996 1,500,000
- ---------------------------------------------------------------------------------------------
Total convertible notes payable $1,800,000
=============================================================================================
</TABLE>
During 1996, the Company issued a total of $3,775,000 of convertible debentures
payable. Upon the issuance of the convertible debentures, the holders had the
right to convert the debentures into Company common stock at the lesser of 75%
to 80% of the market value of the Company's common stock on the date of
conversion or 110% of the average market value of the Company's common stock for
five days prior to issuance of the convertible debt. Accordingly, $1,214,583 of
interest expense has been recorded for the year ended December 31, 1996 for the
difference between the conversion prices of the convertible debentures and the
fair market value of the Company's common stock at the time of issuance.
F-13
<PAGE>
RT Industries, Inc.
Notes to Consolidated Financial Statements
================================================================================
7. Long-Term
Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
===========================================================================================
<S> <C>
Note payable to bank, bearing interest at 9%, principal and interest of $11,107
due monthly through June 1998, collateralized by certain
Company equipment $186,753
Note payable, bearing interest at 7.25%, principal and interest of $170,739 and
$82,455 due in 1997 and 1998, respectively, collateralized by certain
Company equipment 253,194
Unsecured note payable, bearing interest at 12%, principal and accrued
interest due March 1997 100,000
Note payable, bearing interest at prime minus 5% (3.25% at December 31, 1996),
floored at 2.5% and capped at 6%, principal and interest of $2,616 due
monthly through March 2003, collateralized by certain Company equipment 176,670
Three notes payable due currently, collateralized by certain equipment 18,768
- -------------------------------------------------------------------------------------------
735,385
Less current maturities 436,511
- -------------------------------------------------------------------------------------------
Total long-term debt $298,874
===========================================================================================
</TABLE>
During 1996, the Company issued 1,180,000 warrants for the purchase of the
Company's common stock with an exercise price of $2.28 per share to a company
owned by a director of the Company as payment of deferred loan costs upon the
issuance of certain promissory notes. The fair market value of the warrants at
the date of issuance of $329,600 was recorded as deferred loan costs.
At December 31, 1995, the Company was obligated under a $713,392 mortgage note
payable related to its closed Tennessee facility. In October 1996, the
obligation was assumed by the State of Tennessee Department of Economic
Development in exchange for the sale of the Tennessee facility (see Note 3).
F-14
<PAGE>
RT Industries, Inc.
Notes to Consolidated Financial Statements
================================================================================
The aggregate amount of long-term debt maturing in future years is as follows as
of December 31, 1996:
================================================================================
1997 $436,511
1998 173,718
1999 27,241
2000 28,279
Thereafter 69,636
- --------------------------------------------------------------------------------
$735,385
================================================================================
8. Commitments,
Contingencies
and Related
Party
Transactions
Leases
The Company conducts its operations from a leased facility in Florida. The
facility is leased from a company controlled by the Company's former president
and current stockholder. The Company also leases certain equipment. These leases
are classified as operating leases and expire on various dates from 1997 through
1999.
As of December 31, 1996, future minimum rental payments required under operating
leases that have initial or remaining noncancelable lease terms in excess of one
year are as follows:
================================================================================
1997 $190,270
1998 114,270
1999 63,558
- --------------------------------------------------------------------------------
Total net minimum lease payments $368,098
================================================================================
Rental expense under all operating leases amounted to approximately $307,000 and
$386,000 for the years ended December 31, 1996 and 1995, respectively. The
rental expense includes amounts for the stockholder lease of approximately
$114,000 and $112,000 for the years ended December 31, 1996 and 1995,
respectively.
In July 1994, the Company closed its Missouri manufacturing facility. The
facility's land and building were originally financed by the Company through
F-15
<PAGE>
RT Industries, Inc.
Notes to Consolidated Financial Statements
================================================================================
a long-term lease agreement that provided for payments of $2,269 per month
through November 2012. The facility has been leased to an unrelated third party
under a month-to-month lease with monthly lease payments of $2,269. However, if
this tenant fails to make payments under this lease for any reason, the Company
will be obligated to make up any shortfall during the remaining term of the
lease. The Company has a similar sublease arrangement on office space in Boca
Raton, Florida, under a lease with annual lease payments totaling approximately
$30,000. The lease expires in 1999.
Consulting Agreement
In October 1995, the Company entered into an eight-year consulting agreement
with a company controlled by the Company's former president and current
stockholder. The agreement stipulated payment for services of $100,000 per year
for the first two years and $50,000 for each of the next six years. In addition,
100,000 nonplan stock options to purchase Company common stock for $5 per share
through October 2000 were issued under the agreement. Subsequent to December 31,
1995, the consulting agreement was amended. Under the amendment, the Company
agreed to pay total compensation of $224,000 at a rate of $4,000 and $3,000 per
month during the years ending December 31, 1996 and 1997, respectively, and
$2,000 per month thereafter until the balance is paid in full. The Company
determined that no future services were to be rendered under the agreement and
recorded consulting expense of $224,000 during the year ended December 31, 1995
for the cost of the amended agreement. During 1996, $44,000 was paid. In January
1997, the Company entered into a settlement agreement with the consulting
company and other parties owned or controlled by the former president. For and
in consideration of 75,678 shares of common stock, the consulting company
released the Company from all remaining compensation payments required under the
consulting agreement. Additional consulting expense of $207,850 has been accrued
at December 31, 1996 representing the difference between the market value of the
shares issued and the remaining balance outstanding under the amended consulting
agreement at the settlement date, resulting in a total accrual of $387,850 as of
December 31, 1996. In addition, the settlement agreement terminated options to
purchase 206,044 of the Company's common stock held by the former president that
were granted in 1995.
F-16
<PAGE>
RT Industries, Inc.
Notes to Consolidated Financial Statements
================================================================================
Forgiveness of Receivable from Stockholder
During 1995, the Company's Board of Directors approved the forgiveness of
$90,621 outstanding under a note receivable from the former Company president
and current stockholder.
9. Income
Taxes
The components of taxes on income are as follows:
Year ended December 31, 1996 1995
================================================================================
Deferred:
Federal $ -- $(657,393)
State -- (115,606)
- --------------------------------------------------------------------------------
Income tax benefit $ -- $(772,999)
================================================================================
The components of the net deferred tax assets consist of the following:
1996
================================================================================
Deferred tax assets:
Net operating loss carryforwards $ 3,849,000
Bad debts 173,000
Amortization 151,000
Inventory overhead 143,000
Consulting agreement settlement 78,000
Consulting fees 68,000
Inventory obsolescence reserve 54,000
Other 10,000
- --------------------------------------------------------------------------------
Gross deferred income tax assets 4,526,000
Valuation allowance (3,777,000)
- --------------------------------------------------------------------------------
Total deferred income tax assets 749,000
- --------------------------------------------------------------------------------
Deferred income tax liabilities:
Depreciation (749,000)
- --------------------------------------------------------------------------------
Net deferred income tax assets $ --
================================================================================
F-17
<PAGE>
RT Industries, Inc.
Notes to Consolidated Financial Statements
================================================================================
The change in the valuation allowance for deferred tax assets was an increase of
approximately $1,784,000 during 1996.
The following summary reconciles differences from taxes at the federal statutory
rate with the effective rate:
Year ended December 31, 1996 1995
================================================================================
Federal income taxes at statutory rates (34.0%) (34.0%)
Losses without tax benefits 34.0% 21.0%
- --------------------------------------------------------------------------------
Income taxes at effective rates -- (13.0%)
================================================================================
Unused net operating losses for income tax purposes, expiring in various amounts
from 2009 through 2011, of approximately $10,228,000 are available at December
31, 1996 for carryforward against future years' taxable income. Under Section
382 of the Internal Revenue Code, the annual utilization of these losses may be
limited due to changes in ownership. The tax benefit of these losses of
approximately $3,849,000 has been offset by a valuation allowance due to it
being more likely than not that the deferred tax assets will not be realized.
10. Stockholders'
Equity
At December 31, 1996, the Company has two stock option plan and has granted
nonplan stock options. Current arrangement however disputes the validity of the
1995 Stock Option Plan. The Company applies APB Opinion 25, "Accounting for
Stock Issued to Employees," and related interpretations in accounting for the
options. Under APB Opinion 25, if options are granted or extended at exercise
prices less than fair market value, compensation expense is recorded for the
difference between the grant price and the fair market value.
Under the Company's 1992 Stock Option Plan, the Company may grant options to
purchase up to 60,000 shares of the Company's common stock to key employees.
Under the Company's 1995 Stock Option Plan, the Company's Board of Directors has
reserved 750,000 shares which may be
F-18
<PAGE>
RT Industries, Inc.
Notes to Consolidated Financial Statements
================================================================================
granted at the Board of Directors' discretion. The maximum term of the options
granted under the option plans is ten years.
Statement of Financial Accounting Standards No. 123 (FAS 123) "Accounting for
Stock-Based Compensation," requires the Company to provide pro forma information
regarding net income and earnings per share as if compensation cost for the
Company's stock options had been determined in accordance with the fair value
based method prescribed in FAS 123. The Company estimates the fair value of each
stock option at the grant date by using the Black-Scholes option-pricing model
with the following weighted-average assumptions used for grants: no dividend
yield, volatility of 60%, risk-free interest rates ranging from 5.7% to 6.7% and
expected lives ranging from one to five years.
Under the accounting provisions of FASB Statement 123, the Company's net loss
and loss per share would have been increased to the pro forma amounts indicated
below:
1996 1995
================================================================================
Net loss
As reported $ (6,118,170) $ (4,179,642)
Pro forma (6,118,170) (5,765,542)
Loss per common share
As reported $ (0.90) $ (1.46)
Pro forma (0.90) (2.01)
================================================================================
F-19
<PAGE>
RT Industries, Inc.
Notes to Consolidated Financial Statements
================================================================================
Changes in 1992 and 1995 plan options outstanding are summarized as follows:
Weighted-Average Weighted-Average
Exercise Price Fair Value of
Shares Per Share Options Granted
================================================================================
Balance, December 31, 1994 52,740 $13.27 $ --
Granted - equal to market value 578,622 3.00 2.25
- --------------------------------------------------------------------------------
Balance, December 31, 1995 631,362 5.26 --
Forfeited (257,384) 7.33 --
- --------------------------------------------------------------------------------
Balance, December 31, 1996 373,978 $ 3.30 $ --
================================================================================
Changes in nonplan options outstanding are summarized as follows:
Weighted-Average Weighted-Average
Exercise Price Fair Value of
Shares Per Share Options Granted
================================================================================
Balance, December 31, 1994 20,000 $5.00 $ --
Granted - equal to market value 100,000 5.00 2.84
- --------------------------------------------------------------------------------
Balance, December 31, 1995 and 1996 120,000 $5.00 $ --
================================================================================
At December 31, 1996, all nonplan options outstanding and a total of 373,201 of
the outstanding 1992 and 1995 plan stock options were exercisable with a
weighted-average exercise price of $3.13 per share.
The following table summarizes information about fixed stock options at December
31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------- ------------------------------------
Number Weighted-Average Number
Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Exercise Prices at Dec. 31, 1996 Contractual Life Exercise Price at Dec. 31, 1996 Exercise Price
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$3.00 372,578 8.5 years $ 3.00 372,578 $ 3.00
$5.00 120,000 3.3 years 5.00 120,000 5.00
$17.15 1,400 5.5 years 17.15 623 17.15
------------- --------------
493,978 493,201
============= ==============
</TABLE>
F-20
<PAGE>
RT Industries, Inc.
Notes to Consolidated Financial Statements
================================================================================
Stock Warrants
At December 31, 1996, the Company had 5,994,000 common stock warrants
outstanding. Information relating to these warrants is summarized as follows:
Number of Exercise
Expiration date Warrants Price
- --------------------------------------------------------------------------------
June 1997 22,000 $19.83
March 2001 4,792,000 4.20
No expiration date 1,180,000 2.28
================================================================================
Private Placements
During 1996, the Company completed a private placement of its securities in the
form of units. Each unit sold in the private placement consisted of one share of
Company common stock and two redeemable common stock purchase warrants. The
common stock purchase warrants enable the holders to purchase one share of the
Company's common stock at a price of $4.20. The warrants are redeemable at the
option of the Company at a redemption price of $.005 per warrant beginning six
months from the private placement closing date. The Company received $2,763,743
of proceeds, net of offering costs of $231,258, for the sale of 2,396,000 units
during the year. In addition, the Company sold 100,000 shares of common stock at
$1 per share in a separate offering not associated with the private placement
described above.
Convertible Debentures
During 1996, the Company issued $3,775,000 of cumulative convertible debentures
payable bearing interest at 10%. Debentures with principal balances of
$2,275,000 and $44,216 of related accrued interest were converted into 660,628
shares of Company common stock during the year. Deferred loan costs of $253,750
associated with the converted debentures were charged to operations as a loss
from early extinguishment of debt and were recorded as interest expense.
F-21
<PAGE>
RT Industries, Inc.
Notes to Consolidated Financial Statements
================================================================================
Convertible Notes Payable
During 1995, the Company issued a note payable of $750,000 to the Company's
former president and current shareholder in connection with the Company entering
into the Composition of Creditors Agreement (see Note 1). The Note payable was
converted into 750,000 shares of Company common stock during 1995.
Common Stock Issued as Payment of Consulting Services
During 1995, the Company entered into various consulting service contracts with
third parties. Under the contracts, the Company agreed to issue a total of
527,000 shares of common stock as payment for the consulting services rendered.
The consultants completed their obligations under the contracts during 1996, and
the Company issued the required shares of common stock. In addition, the Company
issued a $500,000 note payable to a consultant for services rendered in 1995.
The Company paid $22,942 under the note, and the remaining balance was converted
into 500,000 shares of the Company's common stock during 1995. Total consulting
expense of $1,004,058 was recorded by the Company in 1995 related to these
consulting arrangements.
During 1996, the Company issued 85,000 shares of common stock as payment of
consulting services. Consulting expense and prepaid consulting fees of $207,830
and $114,072, respectively, were recorded during 1996 related to these stock
issuances.
Shares Reserved
At December 31, 1996, the Company has reserved common stock for the following
purposes:
- --------------------------------------------------------------------------------
Convertible notes payable 683,100
Stock option plans 810,000
Nonplan stock options 120,000
Stock warrants 5,994,000
- --------------------------------------------------------------------------------
7,607,100
================================================================================
F-22
<PAGE>
RT Industries, Inc.
Notes to Consolidated Financial Statements
================================================================================
Stock Split
On February 15, 1995, the Company's Board of Directors approved a 1-for-5
reverse stock split with respect to the Company's common stock. The loss per
share calculation and all share information contained in these financial
statements have been retroactively adjusted to give effect to the reverse stock
split.
Authorized Common Stock
During 1996, the stockholders approved an increase in the authorized shares of
common stock from 10,000,000 to 30,000,000.
11. Management's
Plans
The Company's financial statements are presented on the going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. RT Industries, Inc. has suffered recurring
losses from operations. At December 31, 1996, the Company has insufficient
working capital to fund current operations through the end of 1997.
The Company has restructured its operations into a single manufacturing and
product distribution facility in Sanford, Florida. As a result of the
consolidated operations, operating expenses have decreased significantly. The
Company believes that with consolidation of operations, improvement in the
product and product presentation, production and delivery of product in a timely
manner and improved order fill rates, it can successfully convey these
improvements to the marketplace and therefore attract new customers and
substantially improve sales. The Company is also negotiating to replace the
existing line of credit and to raise additional working capital through the sale
of common stock.
The financial statements do not include any adjustments to reflect the possible
future effects on the recoverability of assets and classification of liabilities
that would result from the inability of the Company to continue as a going
concern.
F-23
<PAGE>
RT Industries, Inc.
Notes to Consolidated Financial Statements
================================================================================
12. Supplemental
Cash Flow
Information
For purposes of the statement of cash flows, all highly liquid investments with
a maturity date of three months or less are considered to be cash equivalents.
Year ended December 31, 1996 1995
- --------------------------------------------------------------------------------
Cash paid for interest $ 324,772 $ 478,832
Cash paid for income taxes -- --
Noncash financing and investing activities:
Conversion of convertible debentures
payable into common stock
(see Note 10) 2,275,000 --
Issuance of common stock warrants as
deferred loan costs (see Note 7) 329,600 --
Sale of Tennessee facility
(see Notes 3 and 7) 771,962 --
Issuance of common stock for prepaid
consulting fees (see Note 10) 114,072 --
Accrued compensation for stock options
reclassified to additional paid-in capital -- 122,650
Notes payable converted into common
stock (see Note 10) -- 1,227,158
================================================================================
F-24
<PAGE>
RT Industries, Inc.
Notes to Consolidated Financial Statements
================================================================================
13. Fourth
Quarter
Adjustments
During the fourth quarter of 1996, the Company recorded the following
adjustments:
1996
- --------------------------------------------------------------------------------
Increase in the allowance for doubtful accounts $ 396,000
Inventory adjusted to lower of cost or market 380,000
Interest expense associated with amortization of
deferred loan costs 237,000
Consulting expense for the issuance of common
stock for consulting services (see Note 10) 74,000
Deferred loan costs associated with the conversion of
debentures recorded as interest expense
(see Note 10) 253,750
Discount on conversion price of convertible debentures
(see Note 6) 1,214,583
Accrual of consulting agreement settlement (see Note 8) 207,850
- --------------------------------------------------------------------------------
$2,763,183
================================================================================
The accounts receivable write-offs were caused by the ongoing financial
difficulties and quality control issues which culminated in many customers
either not paying their receivables or seeking significant discounts in the
fourth quarter.
The inventory adjustment resulted from excessive production costs in the fourth
quarter, resulting in net realizable value problems.
F-25
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
RT INDUSTRIES, INC.
March 31, 1997 By: /s/ John K. Kenney
-----------------------------------
John K. Kenney, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons in the capacities and on the date
indicated.
SIGNATURE DATED
/s/ John K. Kenney Director, Chief Executive Officer, March 31, 1997
- ------------------- President, (principal executive officer)
John K. Kenney
/s/ Alfred Paul Chief Financial Officer, March 31, 1997
- ------------------- Chief Accounting Officer
Alfred Paul (principal financial officer)
/s/ Mandel Sherma Director March 31, 1997
- -------------------
Mandel Sherman
/s/ David Love Director March 31, 1997
- -------------------
David Love
19
SETTLEMENT AGREEMENT
SETTLEMENT AGREEMENT, made as of this 30th day of January, 1997, by and
among RT Industries, Inc., a Delaware corporation (the "Company"), Ron Tygar
(a/k/a Ronald Tygar) ("Tygar"), FRNT Realty Co., Ltd. ("FRNT"), and RT
Consulting, Inc., a Florida corporation ("Consultant" and, together with Tygar
and FRNT sometimes herein collectively referred to as the "Settlement Parties").
W I T N E S S E T H :
WHEREAS, the Company, Tygar, FRNT and Consultant are parties to various
agreements more fully herein described; and
WHEREAS, the parties now wish to settle certain differences between them in
the manner hereinafter set forth;
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, including without limitation the release by the
Company's principal creditor, Congress Financial Corporation, of Tygar's
personal guarantee of the Company's obligations to such creditor, the receipt
and sufficiency of which are hereby acknowledged, and subject to the conditions
set forth herein, the parties hereto agree as follows:
1. Settlement Payment.
a. A payment to the Settlement Parties by the Company of an aggregate of
75,678 shares of the common stock, par value $.01 per share, of the Company (the
"Settlement Shares"), having a value of $387,850 based upon the closing bid
price of $5.125 per share as reported by the NASDAQ SmallCap Market for the
Company on January 1, 1997.
b. Forty-five (45) days after the effective date of the S-3 Registration
(as defined in Paragraph 3.b. hereof), the Settlement Parties may elect an
alternative payment (in lieu of retaining any unsold Settlement Shares) by the
Company of an amount equal to the difference between the sum of $387,850 and the
lesser amount, if any, theretofore realized upon sale of the Settlement Shares
(the "Settlement Amount"), in accordance with the terms of this Agreement,
against surrender of all unsold Settlement Shares.
2. Release from Bank Guarantee. Tygar hereby acknowledges that the release
by Congress Financial Corporation (the "Bank"), in the form attached hereto as
Exhibit A, with respect to his personal guarantee of the Company's obligations
to
<PAGE>
the Bank is a direct result of the Company paying down its outstanding
obligations to the Bank; it being the intention of the parties hereto that such
release constitutes partial consideration for the parties entering into this
Agreement.
3. Sale and Registration of Shares.
a. The Settlement Parties may, directly or indirectly, sell, offer for
sale, transfer, assign, hypothecate, pledge or otherwise dispose of, the
Settlement Shares and the Option Shares (as defined in paragraph 5.d. hereof),
in whole or part, consistent with the applicable Federal and state securities
laws; provided, however, that the Settlement Parties covenant and agree not sell
or dispose, without the consent of the Company, of any Settlement Shares or
Option Shares other than through Walsh, Manning Securities, Inc. or other
marketmaker for RT Industries Inc. designated by the Company. All proceeds
realized by the sale or disposition pursuant hereto shall, within five (5)
business days of having been so realized, be distributed among the Settlement
Parties as they may agree.
b. The Company hereby agrees, at its sole cost and expense except as
otherwise provided herein, to undertake to prepare and file with the Securities
and Exchange Commission (the "Commission") a registration statement on Form S-3
covering equity and debt securities of the Company held by its stockholders (the
"S-3 Registration"), which S-3 Registration shall, upon the request of the
Settlement Parties deemed given simultaneously herewith, include the Settlement
Shares and Option Shares. Notwithstanding the preceding sentence, the Settlement
Parties (and their respective affiliates) shall be solely responsible for the
fees of any counsel retained by them in connection with such registration and
any transfer taxes or underwriting discounts or applicable commissions. In
connection with the S-3 Registration, the Company further hereby agrees to use
its reasonable efforts (1) to effect as promptly as possible the registration
under the Securities Act of 1933, as amended (the "Securities Act") of the
Settlement Shares and Option Shares (which it has been hereby requested by the
Settlement Parties to register) and, if any stop order shall be issued by the
Commission in connection therewith, to use its reasonable efforts to obtain the
removal of such order and (2) to qualify or register the Settlement Shares and
Option Shares, as the case may be, included in a registration statement for
offering and sale under the securities or blue sky laws of such states as are
reasonably requested by the Settlement Parties, provided that the Company shall
not be obligated to execute or file any general consent to service of process or
to qualify as a foreign corporation to do business under the laws of any such
jurisdiction.
-2-
<PAGE>
4. Sale of Real Estate.
a. For and in consideration of the Settlement Shares and notwithstanding
any provisions to the contrary contained in that lease and option agreement
between FRNT and the Company, dated April 28, 1989, as amended on March 11, 1992
(the "Lease"), FRNT hereby grants to the Company the absolute, irrevocable
option (the "Option") to purchase from it (or its successors and assigns) at the
expiration or earlier termination of the Lease the real property leased
thereunder, located at 501 Silver Lake Drive, Sanford, Florida (the "Real
Estate"), for a purchase price of no greater than $282,202.91 unless the Option
is exercised prior to the expiration of the Lease, in which case the purchase
price for the Real Estate shall be equal to (x) the aggregate principal balance
owing under the Mortgages (as defined below) at the time the Option is exercised
increased by (y) an incremental amount equal to $3,000 for each and every month
that the Option is exercised prior to the expiration of the term of the Lease.
Title to such Real Estate will be delivered to the Company (or its designee) by
FRNT (or its successors and assigns) free and clear of any and all liens and
encumbrances other that the mortgage(s) in the current aggregate principal
amount of $282,202.91 and more particularly described on Exhibit B attached
hereto (the "Mortgages"). It is the intention of the parties hereto that the
appraisal provisions of the Lease with respect to determining the fair market
value of the Real Estate are hereby deleted and that the purchase price shall
consist solely of the assumption by the Company of the balance of the payments
coming due under the Mortgages subsequent to the date the Option first becomes
exercisable. Except as otherwise provided herein, the exercise of the Option
shall be upon the terms and conditions more particularly set forth in Sections
16 and 17 of the Lease, which Lease, to the extent not otherwise modified
herein, shall remain in full force and effect. Any exercise of the Option by the
Company shall be subject to the representations and warranties of contained in
Paragraph 4c hereof and as set forth in the definitive Purchase Agreement.
b. The parties hereby agree to execute and deliver a mutually satisfactory
real estate Purchase Agreement (the "Purchase Agreement") appropriate for the
sale of commercial property located in the State of Florida which Purchase
Agreement (x) reflects the above terms; (y) provides, and is subject to, the
release of Tygar (and any affiliates) from the Mortgages, and any and all
promissory notes and guaranties appendant thereto, by either the assumption of
the Mortgages by the Company (or its designees) or the satisfaction of the
Mortgages by the Company (or its designees) by payment in full of any
outstanding balance thereunder; and (z) contains such representations and
warranties (which would survive any closing thereof), covenants and closing
conditions of a type which are customarily included in such agreements,
including without limitation provisions pertaining to form of title, absence of
encumbrances, allocation of taxes, operating permits, and reciprocal
indemnification provisions by
-3-
<PAGE>
the Company (on the one hand) and Tygar, FRNT and affiliates (on
the other hand) and subject to the Mortgages.
c. For purposes hereof, FRNT represents, warrants and covenants to the
Company that: (1) any interest of UBC Real Estate Corporation, as Lessor, with
respect to the Lease and/or the Real Estate has been validly transferred and
assigned to, and is now fully owned and exclusively held by, FRNT Realty Co.
Ltd., a Florida corporation; (2) neither FRNT, as lessor, nor the Company, as
tenant, is in default with respect to any of the terms, conditions, and
obligations imposed upon them or either of them by the Lease; (3) FRNT has
timely paid all monthly mortgage payments, in the aggregate amount of $6,549.28
per month, up to and through the date hereof; (4) from the date hereof to the
expiration or earlier termination of the Lease term, FRNT shall (x) preserve
intact the Lease and its relationships with the mortgagee and other entities
with whom it has business relations in connection with the Lease, (y) perform
its obligations under the Lease in a manner consistent with past practice and in
compliance with applicable laws, including without limitation the timely payment
of the outstanding mortgage on the Real Estate; and (z) not, directly or
indirectly, sell, lease, mortgage or otherwise encumber or subject to any lien
or dispose of the Real Estate, except as otherwise provided herein and in the
Lease.
5. Consulting Agreement. For and in consideration of the Settlement Shares,
the Consultant hereby:
a. Agrees and covenants with the Company that the consulting agreement
between it and the Company dated October 20, 1995, as amended on October 20,
1995 and February 6, 1996 (the "Consulting Agreement"), shall terminate
effective upon payment of the Settlement Amount, and all obligations of the
Company thereunder shall cease; provided, however, that the provisions of (1)
Section 3 thereof setting forth the covenant not to compete and nondisclosure
obligations of the Consultant shall continue in full force and effect for a
period of two (2) years from the date hereof and (2) Section 2.C thereof,
pertaining to that option to purchase 100,000 shares (the "Option Shares") of
the Company's common stock, at an exercise price of $5.00, shall remain in full
force and effect.
b. Each of the Company and the Consultant releases and discharges, fully
and forever, the other party, (its officers, directors, employees, agents,
successors and assigns) from any and all suits, claims, causes of action and
demands in law or equity, that the Consultant or the Company, as the case may
be, ever had, now has, or hereafter may have, by reason of any matter, cause or
claims relating in any way to the Consulting Agreement except as specifically
preserved by the terms of this Agreement; it being understood and hereby agreed
that neither the Company nor the Settlement Parties (or any person(s) acting on
behalf of such parties) will file, or permit to be filed, any
-4-
<PAGE>
action for legal or equitable relief, including damages and injunctive,
declaratory, monetary or other relief, involving any matter occurring at any
time or related in any way to the Consulting Agreement or involving any
continuing effects of any acts or practices that may have arisen or occurred in
connection with the Consulting Agreement or the termination of the same, other
than the covenants and obligations contained in this Agreement.
6. Alleged Stock Options. For and in consideration of the Settlement
Amount, Tygar hereby:
a. Acknowledges and covenants to the Company that any alleged stock option
agreement between the Company and Tygar, dated June 2, 1995 (the "Alleged Option
Agreement"), for 206,044 shares of the Company's common stock is null and void
and of no force and effect as to the parties thereto.
b. Releases and discharges, fully and forever, the Company (as well as its
officers, directors, employees, agents, successors and assigns) from any and all
suits, claims, causes of action and demands in law or equity, that Tygar ever
had, now has, or hereafter may have, by reason of any matter, cause or claims
relating in any way to the Alleged Option Agreement; it being understood and
hereby agreed by Tygar that none of the Settlement Parties (or any person(s)
acting on behalf of such parties) will file, or permit to be filed, any action
for legal or equitable relief, including damages and injunctive, declaratory,
monetary or other relief, involving any matter occurring at any time or related
in any way to the Alleged Option Agreement or involving any continuing effects
of any acts or practices that may have arisen or occurred in connection with the
Alleged Option Agreement or the termination of the same, other than the
covenants and obligations contained in this Agreement.
7. Indemnification of Tygar from Personal Guarantees. The Company hereby
agrees to indemnify and hold harmless Tygar from any and all suits, claims,
causes of action and demands in law or equity, against Tygar by reason of any
matter, cause or claim resulting from the legitimate obligations of the Company
entered into by the Company in the ordinary course of business and for a valid
business purpose and which obligations Tygar personally guaranteed.
8. Representations, Warranties and Covenants. Each of the Settlement
Parties, jointly and severally, represents, warrants and covenants to the
Company as follows:
a. Each of FRNT and the Consultant is a corporation duly organized, validly
existing and in good standing under the laws of the respective jurisdiction of
its formation, with full corporate power, right, legal capacity and authority to
-5-
<PAGE>
enter into this Agreement and to carry out its obligations hereunder, and this
Agreement has been duly and validly authorized by all necessary corporate action
and constitutes the valid and binding obligation of FRNT and the Consultant,
enforceable against FRNT and the Consultant in accordance with its terms;
b. Tygar has the right, power, legal capacity and authority to enter into
this Agreement and to carry out his respective obligations hereunder, and this
Agreement constitutes the valid and binding obligation of Tygar, enforceable
against him in accordance with its terms;
c. The execution of this Agreement by the Settlement Parties will not
conflict with or constitute an event of default under, or breach of, any
agreement, document or instrument to which any of the Settlement Parties is a
party, or any law, rule or regulation or court order applicable to any of the
Settlement Parties;
d. That the Settlement Shares or Option Shares issued pursuant to this
Agreement are being acquired for the Settlement Parties' own accounts for
investment and not with a view to the sale or distribution thereof except
pursuant to an effective registration statement or an exemption from the
registration requirements under the Securities Act; and that no representation
or warranty of any nature respecting the acquisition of the Settlement Shares or
Option Shares has been made by the Company or any agent, employee or affiliate
of the Company upon which the Settlement Parties or such other parties relied in
connection with such acquisition or which has induced such Settlement Parties in
any manner in respect thereof; that the Settlement Parties have such knowledge
and expertise in financial and business matters and are capable of evaluating
the merits and risks involved in acquiring the Settlement Shares or Option
Shares and, in entering into this Agreement, none of the Settlement Parties is
relying upon any information other than the results of his or its, as the case
may be, independent investigation;
e. That the Settlement Shares and/or Option Shares may not be sold,
transferred or otherwise disposed of (and the undersigned hereby agree that such
shares will not be sold, transferred or otherwise disposed of) unless (1) the
Settlement Shares and/or Option Shares, as the case may be, have been registered
under the Securities Act, or (2) prior thereto, there is delivered to the
Company (i) a written opinion, in form and substance reasonably satisfactory to
the Company, of the Company's counsel or counsel for the undersigned reasonably
acceptable to the Company, or (ii) a copy of a letter from the staff of the
Securities and Exchange Commission, to the effect that the proposed transaction
may be effected without compliance with the registration provisions of the
Securities Act. The
-6-
<PAGE>
undersigned understands that, in the absence of any of the aforementioned
circumstances, the Option Shares must be held by the undersigned indefinitely.
f. That the Settlement Shares or Option Shares, as the case may be, shall
bear a restrictive legend setting forth the matters contained in this paragraph,
and that "stop transfer" instructions may be given to the Company's transfer
agent in respect of all Settlement Shares and Option Shares, and that if so
requested by the Company at the time of issuance of any Settlement Shares or
Option Shares, the Settlement Parties will execute such documents as the Company
may reasonably require in respect of the warranties, representations and
covenants made by the Settlement Parties in this paragraph.
9. Breach.
a. Except as otherwise provided in subparagraph (b) hereof, upon the
failure of any of the Settlement Parties, on the one hand, or the Company, on
the other hand, to perform, satisfy or comply with the covenants contained
herein, which failure is not timely cured by such party within fifteen (15) days
of written notice of such failure, any and all concessions contained herein with
respect to such agreements and/or understandings herein referenced shall, upon
the sole option of the party for whose benefit such covenant was made, be
rendered null and void and without effect and unenforceable as to the parties
hereto.
b. Notwithstanding anything contained herein to the contrary, the Company
shall be entitled to injunctive and other equitable relief for any breach or
threatened breach by Tygar or FRNT (or an affiliated party) of any of his or its
(as the case may be) covenants or obligations with respect to the Lease, in
addition to any other remedies available to the Company under the applicable
Federal and state laws.
10. Governing Law. This Agreement shall be governed by, and construed in
accordance with, the law of the State of Florida without regard to its choice of
law principles. Each of the parties hereto hereby irrevocably and
unconditionally consents to submit to the exclusive jurisdiction of the courts
of the State of Florida and of the United States located in Palm Beach County,
Florida (the "Florida Courts") for any litigation arising out of or relating to
this Agreement and the transactions contemplated hereby (and agrees not to
commence any litigation relating thereto except in such courts), waives any
objection to the laying of venue of any such litigation in the Florida Courts
and agrees not to plead or claim that such litigation brought in the Florida
Courts has been brought in an inconvenient forum.
11. Notice. All notices and other communications given or made pursuant
hereto shall be in writing and shall be
-7-
<PAGE>
deemed to have been duly given if delivered personally, by overnight courier or
by express, registered or certified mail (postage prepaid, return receipt
requested) or by facsimile transmittal, to the parties at the following
addresses (or at such other address for a party as shall be specified by like
notice, except that notices of changes of address shall be effective upon
receipt):
If to the Company: RT Industries, Inc.
Attn: President
1875 E. Lake Mary Boulevard
Sanford, FL 32773
Fax: 407-322-7477
with a copy to: Tenzer Greenblatt LLP
Attn: Gary A. Schonwald, Esq.
405 Lexington Avenue
New York, New York 10174
Fax: 212-885-5001
If to the Settlement Parties:
c/o Ron Tygar
16719 Senterra Drive
Delray Beach, FL 33484
with a copy to: Litow, Cutler, Zabludowski & Allen
Attn: Laurence Litow, Esq.
One Biscayne Tower, Ste. 3100
2 South Biscayne Boulevard
Miami, FL 33131
Fax: 305-381-7910
All such notices and communications shall, when telefaxed, be effective when
telefaxed or if sent by nationally recognized overnight courier service, be
effective one (1) business day after the same has been delivered to such courier
service marked for overnight delivery, or, if mailed, be effective three (3)
days after being mailed by registered or certified mail, return receipt
requested, postage prepaid.
12. Miscellaneous. This Agreement (i) may only be modified by a written
instrument executed by the party to be charged with such modification; (ii) sets
forth the entire agreement of the parties hereto with respect to the subject
matter hereof; and (iii) shall inure to the benefit of, and be binding upon, the
parties hereto and their respective heirs, legal representatives, successors and
assigns.
-8-
<PAGE>
13. Counterparts. This Agreement may be executed in one or more
counterparts.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first set forth above.
RT INDUSTRIES, INC.
By:
-----------------------------
John K. Kenney, President
Settlement Parties:
------------------------------------
RONALD TYGAR
FRNT REALTY CO., LTD.
By:
-----------------------------
Name:
Title:
RT CONSULTING, INC.
By:
-----------------------------
Ronald Tygar , President
-9-
Exhibit 21.1
Subsidiaries of RT INDUSTRIES, Inc.
Name Jurisdiction of Incorporation
- ---- -----------------------------
Ultra Brake Corporation Florida
Ultratech of South Florida, Inc. Florida
Roinco Worldwide, Inc. New York
RT Friction, Inc. Missouri
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY CONSOLIDATED FINANCIAL INFORMATION EXTRACTED FROM
FORM 10-KSB AT DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 956,548
<SECURITIES> 0
<RECEIVABLES> 582,381
<ALLOWANCES> 459,897
<INVENTORY> 3,371,647
<CURRENT-ASSETS> 5,279,196
<PP&E> 3,161,293
<DEPRECIATION> 3,228,005
<TOTAL-ASSETS> 8,712,379
<CURRENT-LIABILITIES> 1,805,774
<BONDS> 0
8,323
0
<COMMON> 0
<OTHER-SE> 15,592,938
<TOTAL-LIABILITY-AND-EQUITY> 8,712,379
<SALES> 3,912,237
<TOTAL-REVENUES> 3,912,237
<CGS> 5,335,027
<TOTAL-COSTS> 2,300,290
<OTHER-EXPENSES> 394,206
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,027,746)
<INCOME-PRETAX> (6,118,170)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,118,170)
<EPS-PRIMARY> (0.90)
<EPS-DILUTED> (0.90)
</TABLE>
