U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the Fiscal Year Ended December 31, 1995
Commission File No. 0-9478
SPECTRUM LABORATORIES, INC.
(Name of small business issuer in its charter)
California 95-3557359
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
23022 La Cadena Drive
Laguna Hills, California 92653
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (714) 581-3880
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange 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 No X
----- -----
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 ].
State issuer's revenues for its most recent fiscal year: $6,478,299
The aggregate market value of voting stock held by nonaffiliates of the
registrant is $161,162 as of April 12, 1996, based on the $.18 per share closing
price for the Common Stock in the over-the-counter market on such date,
representing 895,149 shares held by nonaffiliates.
Number of shares of Common Stock outstanding as of March 31, 1996: 12,834,394
This report includes a total of 34 consecutive numbered pages; the exhibit index
is on page 32
<PAGE>
<TABLE>
TABLE OF CONTENTS
FORM 10-KSB ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 1995
SPECTRUM LABORATORIES, INC.
<CAPTION>
Item No. Page
- -------- ----
<S> <C>
PART I
1. Description of Business.........................................................................-3-
2. Description of Property.........................................................................-7-
3. Legal Proceedings...............................................................................-8-
4. Submission of Matters to a Vote of Security Holders.............................................-8-
PART II
5. Market for Common Equity and Related Shareholder Matters........................................-8-
6. Management's Discussion and Analysis of Financial Condition and Results of
Operation.......................................................................................-9-
7. Financial Statements...........................................................................-11-
8. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.....................................................................................-28-
PART III
9. Directors, Executive Officers, Promoters and Control Persons; Compliance with
Section 16(a) of the Exchange Act..............................................................-28-
10. Executive Compensation.........................................................................-29-
11. Security Ownership of Certain Beneficial Owners and Management.................................-30-
12. Certain Relationships and Related Transactions.................................................-31-
13. Exhibits and Reports on Form 8-K...............................................................-32-
</TABLE>
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Spectrum Laboratories, Inc. (the ACompany@) was incorporated in California on
June 5, 1980 under the name Immutron, Inc., as a successor to a joint venture
organized in October 1978 by Nuclear Medical Systems, Inc., and Life Studies,
Incorporated. On November 23, 1982, the Company changed its name to Spectrum
Laboratories, Inc. The Company is currently investigating the possibility of
acquiring substantially all of the assets of Spectrum Medical Industries, Inc.,
controlled by the Company's Chairman of the Board, Roy T. Eddleman. No
definitive agreement has been reached and no financing has been obtained as of
this date. This Report contains forward looking statements that involve risks
and uncertainties. Spectrum's actual future results could differ materially from
those statements. Factors that could contribute to those differences include,
but are not limited to, those factors discussed in this Item 1 and in Item 6.
HOLLOW FIBER MEMBRANE DEVICES
On August 1, 1995, the Company acquired 98.8% of the stock of Microgon, Inc.
("Microgon"), a California Corporation located in Laguna Hills, California.
Microgon is primarily a manufacturer of hollow fiber membrane devices which are
used by pharmaceutical manufacturers, diagnostic manufacturers, medical device
manufacturers, scientific laboratories and industrial users.
Microgon products fall into three different categories: laboratory products, OEM
and private label products and process products.
Laboratory products, comprising about 25% of sales volume of Microgon product,
are small compact membrane devices and are utilized in general laboratory
filtration. These are generally sold through distributors.
OEM and private label products are special versions of the laboratory products
sold under private label or to manufacturers of medical devices or water
treatment systems. Application areas include: point-of-use water filtration; gas
filtration for semiconductor blow-off guns, plasma gas cauterizing devices,
insufflator kits for endoscopic surgery; drug filtration for surgical eyewash
solutions, and pain management parenterals. These products comprise
approximately 30% of sales volume and are sold direct to third party
manufacturers for resale to the end users.
Process products are tangential flow membrane devices that allow components that
are retained by the membrane to be concentrated. Microgon process products are
sold direct to pharmaceutical and diagnostic manufacturers in the U.S. where
thirty major accounts account for 90% of volume. Overseas sales are both direct
and through distributors depending on the region. Process products account for
approximately 45% of hollow fiber membrane device sales.
MICROBIOLOGICAL SAMPLING AND TRANSPORT PRODUCTS
The sampling and transport products include swabs sold under the trade names
"Calgiswab", "Rayswab" and "Dacroswab" and transport products sold under the
name "Transette". All swab and Transette products are used primarily by
physicians for sample collection of disease organisms for diagnostic purposes
and sell for under $1 each.
The Calgiswab is the leading calcium alginate-tipped swab in the United States.
Other Swab products are marketed with wood, plastic, aluminum or stainless steel
shafts and cotton, dacron or rayon tips, depending upon use or user preference.
3
<PAGE>
Transettes are sterile sample collection and transport systems consisting of a
swab and a plastic pouch containing growth media to protect the sample during
shipment. Transettes are available with any of the swabs marketed by the Company
and also in disease-specific form wherein the growth media is designed
specifically to support the type of organism being tested. A disease-specific
Transette is available for gonorrhea testing.
MEDICAL DISPOSABLE DEVICES
Hydro-Med Products, Inc. ("Hydro-Med") is a wholly-owned subsidiary of the
Company. Hydro-Med is primarily a manufacturer of medical disposable devices
such as sterile surgical drapes for orthopedic and arthroscopic surgical
procedures, sterile camera covers, rubber elastic bandages (sterile and
nonsterile), esmark bandages, and a tamper-resistant container system for use in
harvesting bone and tissue for human transplantation, and other surgical
specialty products.
MARKETS AND METHODS OF DISTRIBUTION
HOLLOW FIBER MEMBRANE DEVICES
The Company has over 225 active customers, comprised of pharmaceutical and
diagnostic manufacturers, medical device manufacturers, laboratories, laboratory
distributors and research institutions for its Microgon products. Approximately
20% of its sales are from non U.S. customers.
MICROBIOLOGICAL SAMPLING AND TRANSPORT PRODUCTS
The Company's microbiological sampling and transport product lines have
approximately 275 active customers, of which approximately 30 are domestic and
foreign distributors, including Baxter Scientific Products, Fisher Scientific,
VWR Scientific and Curtin Matheson Scientific. Direct sales are also made to
physician's offices and research and government laboratories.
The Company relies primarily upon unaffiliated distributors, advertising in the
distributor catalogs, and direct mailings through product postcards and flyers
to market its products. The Company's swab and Transette product lines are
prominently displayed in the Baxter Scientific Products advertising literature.
MEDICAL DISPOSABLE DEVICES
Hydro-Med has over 600 active customers, the most active of which are 450
hospitals and 100 hospital supply dealers. Export and O.E.M. accounts are
currently confined to a select few products, mostly for orthopedics. Hydro-Med
does not employ its own sales force but uses commissioned manufacturers'
representatives to call on end users such as hospitals and doctors, as well as
stocking distributors capable of supplying product delivery on a local level.
RAW MATERIALS AND SUPPLIES
HOLLOW FIBER MEMBRANE DEVICES
The Company purchases common raw membrane polymers and casting solvents from a
variety of sources. Membranes are assembled into housings that are molded from
commonly available plastic resins by third party plastic molders, using tooling
owned by the Company. Membranes are affixed to the housings by means of
proprietary potting resins supplied by two different suppliers who are covered
by an industry cooperative disaster recovery plan which allows manufacturers to
manufacture the resins in the event of an interruption of supply.
4
<PAGE>
MICROBIOLOGICAL SAMPLING AND TRANSPORT PRODUCTS
The principal raw materials used by the Company in its microbiological products
include calcium alginate and several widely available substances such as
plastic, cotton, rayon, dacron and aluminum. There are sources of calcium
alginate located in France and in the United States, and the Company feels it
could supply its need from these sources. The Company orders large quantities of
certain raw materials to obtain competitive pricing or to meet its vendors'
minimum order requirements. The Company is not dependent upon any one or a
limited number of sources for any other raw materials and has not experienced
any difficulty in obtaining necessary supplies.
MEDICAL DISPOSABLE DEVICES
The principal raw materials used by Hydro-Med in producing sterile surgical
drapes and elastic bandages are yarn, natural latex and plastic film. There are
several suppliers in the United States for yarn. Hydro-Med is dependent on one
or a limited number of suppliers for plastic film but has not experienced any
difficulty in obtaining necessary supplies, and none are presently anticipated.
PATENTS AND TRADEMARKS
HOLLOW FIBER MEMBRANE DEVICES
The Company holds patents for hollow fiber syringe tip filters and trademarks
for, DynaFibre, DynaGard, KrosFlo, MediaKap, MiniKap and MiniKros. Fundamental
technology is kept as trade secrets. Employees and vendors are covered by
suitable non-disclosure agreements.
MICROBIOLOGICAL SAMPLING AND TRANSPORT PRODUCTS
The Company is the assignee of the trademark right to Calgiswab.
MEDICAL DISPOSABLE DEVICES
Hydro-Med is the assignee of two U.S. patents. The patents are for "Apparatus
for Forming a Rolled Tubular Fabric Article" and "Surgical Extremity Drape".
Hydro-Med is also the assignee of trademark rights to Dry Docks and
Strap-Stroll.
A finding of invalidity or unenforceability of certain of the Company's patents,
may have a materially adverse effect on the Company's business.
GOVERNMENT REGULATIONS
The Food and Drug Administration (the "FDA") and the California Food and Drug
Bureau ("CFDB") regulate the manufacture and quality control procedures of
certain of the Company's products. The Company has been audited by the FDA and
all items noted during their audit have been addressed or released. Compliance
with FDA and CFDB regulations is a significant expense but the Company believes
that such expenses are costs of doing business in the industry and that the
Company's expenses are similar those of other companies in the business.
5
<PAGE>
HOLLOW FIBER MEMBRANE DEVICES
In addition to regulations enforced by the FDA and the CFDB, the Company is also
subject to regulations under the Environmental Protection Act, the Occupational
Safety and Health Act, and other present and potential supranational, foreign,
Federal, state and local regulations. Compliance with any of these has not had a
material effect on the capital expenditures, operations or competitive position
of the Company to date.
The Company cannot predict whether future changes in government regulations
might increase its cost of conducting business or affect the time required to
develop and introduce new products.
DEPENDENCE UPON FEW CUSTOMERS
The Company does not believe that its business would be adversely affected by
the loss of any individual customer or small group of customers. During the
years ending December 31, 1994 and 1995, no customer accounted for more 10% or
more of the Company's total combined sales.
SEASONAL ASPECTS
The Company's business is not subject to significant seasonal fluctuations in
sales.
COMPETITIVE FACTORS
HOLLOW FIBER MEMBRANE DEVICES
The Company's hollow fiber membrane devices compete with Gelman Sciences,
Millipore, and Nalge in the laboratory products area. OEM and private label
products are long-term supply contracts where competition for continuing
business is limited. Laboratory products are price and performance competitive
with other products for media sterilization. OEM and private label products
offer high surface area in compact housings in comparison with competing
products. Process products are offered as disposables in competition with
traditional tangential flow devices which are cleaned and re-used. Microgon
tangential flow products are attractive to users who have critical applications
where single-use will ensure optimum performance and/or simplify the validation
of the process for FDA approval. In the process area, Millipore and Amicon
division of W.R. Grace are the major competitors. It is estimated that
Microgon's market share is less than 5% in every market served. MICROBIOLOGICAL
SAMPLING AND TRANSPORT PRODUCTS
The Company competes with two major companies, Johnson & Johnson and Becton
Dickinson, in the sale of its swab products other than Calgiswab, which competes
only with a product marketed by Hardwood Products and Purfybr.
The primary competitive factors affecting the sale of microbiological products
are price and quality, and the Company believes that the price and quality of
its microbiological products compare favorably with products sold by other
companies having greater resources than the Company.
MEDICAL DISPOSABLE DEVICES
Hydro-Med has several competitors for its sterile video camera drape, the
largest of whom is considered to be the Xomed Company, a division of
Bristol-Meyers. Sterile extremity drapes for surgical procedures are produced by
several manufacturers. Companies such as Johnson & Johnson and Baxter Travenol,
who include surgical extremity drapes as part of an integrated "procedure pack",
both custom and standard, for specific types of procedures, (e.g., orthopedic
surgery or arthroscopic or cardiovascular surgical cases), dominate that market.
6
<PAGE>
Hydro-Med manufactures a rubber elastic bandage that does not require the need
for metal clips. Currently, the market is dominated by such competitors as
Becton Dickinson, producers of ACEJ bandages, Johnson & Johnson, producers of
Dyna-FlexJ and Kendall, producers of TensorJ, all of which have greater
resources than the Company.
RESEARCH AND DEVELOPMENT
The Company incurred research and development expenses of $186,078 in 1995 and
$51,279 in 1994. Research and development are particularly important for the
Company's hollow fiber membrane devices.
EMPLOYEES
On December 31, 1995, the Company had 62 employees, of which 43 were production
workers, 14 were manufacturing support and administrative personnel and 5 were
marketing and customer service representatives. The company believes it has good
relations with its employees.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's executive offices are located at 23022 La Cadena Dr., Laguna
Hills, California. The building is rented by Spectrum Medical Industries, Inc.,
an affiliate of the Company, controlled by Roy T. Eddleman with a portion sublet
to the Company. The space is used by the Company for storage and general,
administration and executive offices. The Company pays a monthly rent of $3,082
based upon square footage used by the Company. The Company's sub lease expires
on December 31, 1996.
In January 1995 the Company relocated its Houston, Texas administration office
to Laguna Hills, California and its production and warehouse space to Dallas and
locations it occupied in Los Angeles and Orange Counties, California. The
Houston location was closed.
<TABLE>
The following table summarizes the terms of the leases of other properties
leased by the Company.
<CAPTION>
Lessor & Location Lessee & Usage Sq. Feet Begin End Term Mths. Rental
- ----------------- -------------- -------- ----- --- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Belmont Capital Hydro-Med 5,029 1/1/95 12/31/97 36 $ 1,214
2913 Anode Lane Offices & Storage
Dallas, TX
Gick Family Partnership Microgon, Inc. 8,830 12/1/94 12/31/97 12 $4,400(1)
23152 Verdugo Dr. Light Manufacturing
Laguna Hills, CA R&D and Offices
Herschel Brown Spectrum Laboratories, 20,000 1/1/95 12/31/97 36 $4,583(2)
2930 Ladybird Lane Inc.
Dallas, Texas
<FN>
(1) Increases to $4,840 for 1996.
(2) Increases to $5,083 for 1997.
</FN>
</TABLE>
7
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
There is no material pending legal proceedings to which the Company is a party
or of which any of its property is the subject. The Company knows of no legal
proceedings contemplated by any governmental authority or agency.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Reference is made to Schedule 14C-2 filed with the Commission on October 19,
1995 concerning approval of the merger with Microgon, the amendment of the
Company's certificate of incorporation increasing the authorized shares to
25,000,000 and the adoption of the Company's 1995 Stock Option Plan allowing for
the issuance of options to purchase up to 2,000,000 shares of the Company's
Common Stock. Approval of outside stockholders was not solicited since
affiliates had sufficient shares to consent in writing without a meeting as
authorized by the California Corporation law.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock is currently traded on the over-the -counter market
with trading prices quoted in the National Quotation Bureau Incorporated "Pink
Sheets".
The 1995 and 1994 bid and ask quotations are the over-the-counter market
quotations obtained from a market maker as of the last day of each quarter
during the respective year. The quotations shown represent inter-dealer prices
without adjustment for retail markups, markdowns or commissions and do not
necessarily reflect actual transactions.
1995 Bid Asked
----
March 31 3/8 1/2
June 30 3/8 5/8
September 30 3/8 9/16
December 29 5/16 7/16
1994 Bid Asked
----
March 31 1/4 5/8
June 30 7/16 5/8
September 30 5/8 1
December 30 9/16 7/8
No dividends have been declared or paid by the Company since inception.
Additionally, the Company's financing agreements with the bank prohibit the
payment of dividends without the bank's approval. The Company intends to employ
all available funds for development of its business and, accordingly, does not
intend to pay cash dividends in the foreseeable future.
As of March 30, 1996, the approximate number of holders of record of the
Company's Common Stock was 950.
8
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
The following discussions relate to the Company, its wholly owned subsidiaries,
Hydro-Med Products ("Hydro-Med") and Microgon, Inc. ("Microgon") and its
partially owned subsidiary, Spectrum Europe B.V. ("Spectrum B.V.). During 1995,
the Company acquired Microgon under a transaction accounted for as a step
acquisition. The Company has consolidated the financial position and operations
of Spectrum B.V. for all periods presented. See Note 1 of Notes to the
Consolidated Financial Statements.
NET SALES
Combined sales for 1995 were $6,478,299 compared to combined sales of $4,786,753
for 1994, a net increase of 35.3%. Substantially all of the increase in sales is
attributable to the acquisition of Microgon in August 1995. Additionally, the
Company experienced minor sales increases in Hydro-Med and Spectrum B.V. The
increase in Hydro-Med sales of approximately 6% or $130,000 were attributable to
increased marketing efforts for the Company's bandage products. The increase in
Spectrum B.V. sales of approximately 23% or $370,000 were attributable to
increased penetration of European markets by Spectrum B.V. since that company's
establishment in 1993.
EXPORT SALES AND MAJOR CUSTOMERS
Foreign sales to customers in foreign countries, primarily Europe, amounted to
$1,963,007 and $1,591,566 in 1995 and 1994, respectively. This increase was
caused by the increased penetration of Spectrum B.V. into the European markets.
Major customers change from year to year depending upon the level of purchasers.
In 1995 and 1994, no one customer accounted for 10% or more of combined sales.
COST OF SALES
Combined gross margins were 32.03% for 1995 and 37.8% for 1994. The gross margin
decreased in 1995 primarily because of increases in cost of goods sold of the
Hydro-Med and Laboratories products.
SELLING EXPENSES
Combined selling expenses increased to $952,577 in 1995 from $544,423 in 1994,
an increase of 74.9%. In 1995, the Company began supporting its distribution
channel with existing sales staff rather than relying on factory or vendor
representatives for this support. While this resulted in a reduction in selling
expenses of approximately $210,000, this reduction was offset by an increase in
selling expenses of approximately $198,000 related to the acquisition of
Microgon and $190,000 associated with Spectrum B.V. The increase in expenses
resulted from the greater utilization of resources to combat the increased
competition in the European market. Selling expenses also increased as a result
of a change in product mix to selling more process products in 1995 which have
higher selling costs associated with them.
GENERAL AND ADMINISTRATIVE EXPENSES
Combined general and administrative expenses increased approximately $177,248 to
15% of net sales in 1995 from 14% of net sales in 1994. The increase in general
and administrative expenses relates to the acquisition of Microgon offset by a
slight decrease relating primarily to savings realized as a result of the
consolidation of certain facilities and reductions in administrative salaries.
9
<PAGE>
RESEARCH AND DEVELOPMENT
Research and development costs increased from $51,279 in 1994 to $186,078 in
1995 and increased as a percentage of net sales. The increase in research and
development expenses was due primarily to the acquisition of Microgon and an
increase in costs of research materials and salaries of researchers to develop
and test potential new products for Microgon and enhance the capability of
certain Hydro-Med product lines.
OTHER INCOME, EXPENSE
Other expense increased to approximately $162,000 in 1995 as compared to 1994.
The increase relates to interest incurred on borrowings to finance the Microgon
acquisition.
NET INCOME, LOSS
In 1995, the Company incurred a loss of $269,352 as compared to net losses of
$64,023 in 1994. The increase in the loss was the result of interrupted sales
efforts resulting from the consolidation of the Company's facilities and an
increase in selling expenses and research and development expenses without
corresponding increases in sales.
PROVISION FOR INCOME TAXES
The provision for income taxes in 1994 and 1995 relates primarily to state taxes
and taxes on earnings of the Company's foreign subsidiary.
LIQUIDITY
At December 31, 1995, the Company had cash, cash equivalents, and investments of
$127,176. Total working capital was $1,782,588. During 1995, the Company had
$199,000 cash used by operating activities and expended approximately $400,000
for property acquisitions and $3,600,000 for the purchase of Microgon. The
investment in property and the acquisition of Microgon were funded by borrowings
of $3,650,000 and the use of cash reserves existing at December 31, 1994.
Historically, the Company has relied on cash flows from operations and financing
from outside sources and/or affiliates to fund its activities and expects to do
so in the future. At December 31, 1995, the Company had outstanding borrowings
from a bank for $2,500,000, acquisition related borrowings of $487,000 and
borrowings from affiliates of $1,180,800. At December 31, 1995, the Company was
not in compliance with certain financial covenants relating to the $2,500,000
loan from the bank. Subsequent to December 31, 1995, the Company received
waivers for the covenant violations. The Company and its bank are discussing new
covenants which the Company can expect to reach and/or ways in which the Company
can be brought into compliance with existing covenants.
The Company believes that cash flow from operations combined with successful
renegotiation of covenants with its bank will be sufficient for the Company to
meet its obligations through December 1997.
10
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Spectrum Laboratories Industries, Inc.:
We have audited the accompanying consolidated balance sheet of Spectrum
Laboratories Industries, Inc. and subsidiaries (the Company) as of December 31,
1995 and the related consolidated statements of operations, shareholders' equity
and cash flows for the years ended December 31, 1995 and 1994. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Spectrum Laboratories, Inc. and
subsidiaries at December 31, 1995 and the results of their consolidated
operations and their consolidated cash flows for the years ended December 31,
1995 and 1994, in conformity with generally accepted accounting principles.
April 5, 1996
Costa Mesa, California
11
<PAGE>
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1995
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 82,472
Investments 44,704
Receivables - Trade, net of allowance for doubtful
accounts of $26,917 1,015,533
Due from affiliates (Note 8) 549,252
Inventories, net (Note 3) 1,486,261
Prepaid expenses and other current assets 19,199
Current portion of note receivable, affiliated entity (Note 8) 37,333
----------
Total current assets 3,234,754
PROPERTY AND EQUIPMENT, net (Note 4) 887,299
OTHER ASSETS:
Note receivable, affiliated entity (Note 8) 56,000
Deferred income taxes (Note 6) 378,935
Other assets 17,976
Goodwill (Note 2) 3,156,525
----------
Total other assets 3,609,436
----------
Total assets $7,731,489
==========
12
<PAGE>
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1995 (CONTINUED)
- -------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 278,842
Accrued salaries, vacation and commissions 213,973
Accrued professional fees 64,270
Accrued other 152,863
Income taxes payable 38,086
Due to affiliates (Note 8) 243,170
Current portion of long-term debt (Notes 2 and 7) 357,144
-----------
Total current liabilities 1,348,348
LONG-TERM LIABILITIES:
Long-term debt (Notes 2 and 7) 2,629,430
Long-term debt, affiliates (Notes 2 and 7) 1,180,175
Other long-term liabilities 62,142
-----------
Total long-term liabilities 3,871,747
MINORITY INTEREST (Note 1) (9,523)
SHAREHOLDERS' EQUITY (Note 5):
Common stock, par value $.01; 25,000,000 shares authorized;
12,834,394 shares outstanding 128,344
Additional paid-in capital 5,237,848
Accumulated deficit (2,825,119)
Unrealized gains on investments 12,920
Unrealized loss on foreign currency translation (33,076)
-----------
Total shareholders' equity 2,520,917
-----------
Total liabilities and shareholders' equity $ 7,731,489
===========
13
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
- --------------------------------------------------------------------------------
1995 1994
NET SALES (Notes 8 and 10) $ 6,478,299 $ 4,786,753
COSTS AND EXPENSES (Note 8):
Cost of sales 4,406,556 3,670,224
Selling 952,577 554,423
General and administrative 902,653 725,405
Research and development 186,078 51,279
Other expense (income), primarily interest 121,853 (41,307)
----------- -----------
Total costs and expenses 6,569,717 4,960,024
----------- -----------
LOSS BEFORE MINORITY INTEREST IN INCOME (LOSS)
OF SUBSIDIARY AND PROVISION FOR INCOME TAXES (91,418) (173,271)
MINORITY INTEREST IN INCOME (LOSS) OF
SUBSIDIARY (Note 1) 139,848 (149,371)
----------- -----------
LOSS BEFORE PROVISION FOR INCOME TAXES (231,266) (23,900)
PROVISION FOR INCOME TAXES (Note 6) 38,086 40,123
----------- -----------
NET LOSS $ (269,352) $ (64,023)
=========== ===========
NET LOSS PER COMMON SHARE $ (0.05) $ (0.03)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 5,014,328 2,200,000
=========== ===========
14
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Unrealized
Common stock Additional gains on
------------------------------- paid-in Accumulated investment
Shares Amount capital deficit securities
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1994 2,200,000 $ 22,000 $ 4,691,220 $ (2,491,744) $ -
Net loss (64,023)
Unrealized investment gains, net of tax 5,774
Spectrum B.V. 20,780
---------- --------- ----------- ------------ --------
BALANCE, December 31, 1994 2,200,000 22,000 4,712,000 (2,555,767) 5,774
Net loss (269,352)
Issuance of common stock in
connection with acquisition of
subsidiary (Note 2) 10,634,394 106,344 525,848
Unrealized investment gains, net of tax 7,146
Foreign currency translation loss
---------- --------- ----------- ------------ --------
BALANCE, December 31, 1995 12,834,394 $ 128,344 $ 5,237,848 $ (2,825,119) $ 12,920
========== ========= =========== ============ ========
</TABLE>
15
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
1995 1994
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (269,352) $ (64,023)
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 244,264 48,898
Gain on sale of securities 4,805
Minority interest in income (loss) of subsidiary 139,848 (149,371)
Deferred income taxes 35,364
Change in assets and liabilities, net of effect of acquisition:
Decrease (increase) in Receivable - trade, net 639,815 (399,504)
Increase in due from affiliates (530,585) (112,000)
Decrease in inventories, net 43,130 125,809
Decrease (increase) in prepaid expenses and other current assets 84,769 (9,714)
Decrease in other assets 1,667 12,727
Increase in accounts payable and accrued and other liabilities 278,443 (26,249)
Increase in income taxes payable 38,086
(Decrease) increase in due to affiliates (509,969) 634,520
Other (33,076)
---------- -------
Net cash provided by operating activities 131,845 96,457
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (376,731) (55,443)
Acquisition of investments
Decrease in investments, net (26,113) (2,976)
Cash paid for acquisition, net of cash acquired (Note 2) (3,708,353)
Consolidation of European subsidiary 20,780
---------- -------
Net cash used in investing activities (4,111,197) (37,639)
</TABLE>
16
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
1995 1994
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt $ (302,640) $ -
Proceeds relating to advances from affiliates and issuances of
long-term debt 3,705,502 77,314
------------- ----------
Net cash provided by financing activities 3,402,862 77,314
------------- ----------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (576,490) 136,132
CASH AND CASH EQUIVALENTS, beginning of year 658,962 522,830
------------- ----------
CASH AND CASH EQUIVALENTS, end of year $ 82,472 $ 658,962
============= ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -
Cash paid for:
Income taxes $ 18,871 $ 4,800
============= ============
Interest $ 242,242 $ 51,879
============= ===========
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
The Company recorded unrealized gains of $7,146 and $5,774 on its investment
portfolio for the years ended December 31, 1995 and 1994, respectively.
The Company recorded SMI's minority interest in the income (loss) of Spectrum
B.V. of $139,848 and $(149,371) for the years ended December 31, 1995 and
1994, respectively.
The Company acquired all the capital stock of Microgon, Inc. In conjunction with
the acquisition, liabilities were assumed as follows:
Fair value of assets acquired $4,450,662
Cash paid for capital stock 3,764,089
----------
Liabilities assumed $ 686,573
==========
In conjunction with the acquisition (Note 2), $686,573 of notes payable and
common stock valued at $632,192 were assumed and/or issued to the previous and
current shareholders
17
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Basis of Presentation - Spectrum Laboratories, Inc.
(Spectrum or the Company), its wholly-owned subsidiaries, Hydro-Med
Products, Inc. (Hydro-Med) and Microgon, Inc. (Microgon) (Note 2), and
its partially-owned subsidiary, Spectrum Europe B.V. (Spectrum B.V.),
are engaged in a single business segment: the development, manufacture
and sale of medical products. Spectrum's product lines consist of
microbiological sampling and transport systems. Hydro-Med's product
lines consist of surgical drapes, rubber elastic bandages, sterile
camera covers and a tamper-resistant container system for use in
harvesting bone and tissue for human transplantation. Microgon's product
lines consist of disposable cellulose nitrate and cellulose acetate
hollow fiber microfiltration modules. All products are for sale
primarily to the pharmaceutical, biotechnology and medical industries.
The Company operates primarily in the United States with sales in the
European market through Spectrum B.V. Spectrum Laboratories is 79% owned
by Spectrum Medical Industries, Inc. (SMI), an affiliated entity through
common ownership.
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of Spectrum, its wholly-owned
subsidiaries, Hydro-Med and Microgon, and its partially-owned
subsidiary, Spectrum B.V. Spectrum and SMI hold approximately 40% and
60% of the equity interest, respectively, of Spectrum B.V. For financial
reporting purposes, the assets, liabilities, results of operations and
cash flows of Spectrum B.V. are included in Spectrum's consolidated
financial statements as Spectrum exercises significant financial and
operational control over Spectrum B.V. through common ownership
interest. SMI's interest in Spectrum B.V. is reflected as a minority
interest in the accompanying consolidated financial statements. All
intercompany balances and transactions have been eliminated in
consolidation.
Use of Estimates - The preparation of the combined financial statements
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting years. Actual
results could differ from those estimates.
Credit Risk - The Company sells its products nationally and
internationally, primarily through distributors to medical equipment and
medical supply companies. The Company performs ongoing credit
evaluations of its customers and generally does not require collateral.
The Company maintains reserves for potential credit losses.
Cash and Cash Equivalents - Cash and cash equivalents were comprised of
demand deposit accounts with original maturities of 90 days or less.
Inventories - Inventories are stated at the lower of cost, determined
using the first-in, first-out method, or market value.
18
<PAGE>
Investments - The Company accounts for its investments under the
provisions of Statement of Financial Accounting Standards (SFAS) No.
115, Accounting for Certain Investments in Debt and Equity Securities.
The Company's investments, consisting of government bonds, have been
classified as available for sale in the consolidated balance sheet at
December 31, 1995. Any unrealized gains or losses related to available
for sale securities is recorded as a component of shareholders' equity,
net of tax.
Property and Equipment - Furniture, equipment and leasehold improvements
are stated at cost, net of accumulated depreciation and amortization.
Depreciation of equipment is provided using the straight-line method
over the estimated useful lives (generally five years) of the respective
assets. Leasehold improvements are amortized on a straight-line basis
over the lesser of the lease term or the estimated useful life of the
asset.
Goodwill - Goodwill represents the excess of the purchase price for
Microgon (Note 2) over the fair value of the net assets acquired.
Goodwill is being amortized on a straight-line basis over a 20 year
period. The Company measures the recoverability of goodwill annually by
comparing undiscounted expected future cash flows from the related
operations to the carrying value of goodwill. Accumulated amortization
of goodwill amounted to $66,045 at December 31, 1995.
Income Taxes - The Company accounts for income taxes under the provision
of SFAS No. 109, Accounting for Income Taxes. This statement requires
the recognition of deferred tax assets and liabilities for the future
consequences of events that have been recognized in the Company's
financial statements or tax returns. Measurement of the deferred items
is based on enacted tax laws. In the event the future consequences of
differences between financial reporting bases and tax bases of the
Company's assets and liabilities result in a deferred tax asset, SFAS
No. 109 requires an evaluation of the probability of being able to
realize the future benefits indicated by such asset. A valuation
allowance related to a deferred tax asset is recorded when it is more
likely than not that some portion or all of the deferred tax asset will
not be realized.
Revenue Recognition - The Company records revenue at the time the
related products are shipped.
Net Loss Per Common Share - Net loss per common share is computed using
the weighted average number of shares of common shares outstanding
divided by the net loss. Assumed exercise of outstanding options and the
assumed conversion of debt to affiliates into common stock have been
excluded due to their anti-dilutive nature.
19
<PAGE>
Translation of Foreign Currencies - Assets and liabilities of Spectrum B.V. are
translated into U.S. dollars at year-end rates of exchange, and income and
expenses are translated at average rates during the respective years. The
functional currency of this subsidiary is the guilder; therefore, translation
gains or losses are recorded as a separate component of shareholders' equity
Fair Value of Financial Instruments - SFAS No. 107, Disclosures About
Fair Value of Financial Instruments, requires management to disclose the
estimated fair value of certain assets and liabilities defined by SFAS
No. 107 as financial instruments. Financial instruments are generally
defined by SFAS No. 107 as cash, evidence of ownership interest in
equity, or a contractual obligation that both conveys to one entity a
right to receive cash or other instruments from another entity and
imposes on the other entity the obligation to deliver cash or other
financial instruments to the first entity. At December 31, 1995,
management believes that the carrying amount of cash and cash
equivalents, accounts receivable due from affiliates, accounts payable
and accrued expenses approximates fair value because of the short
maturity of these financial instruments. A portion of long-term debt
bears interest at a rate indexed to the prime rate and the remaining
long-term debt and notes payable to affiliated parties bears interest at
a rate comparable to prime at December 31, 1995; therefore, management
believes the carrying amount of the outstanding borrowings at December
31, 1995 approximates fair market value.
Recent Accounting Pronouncements - In March 1995, the Financial
Accounting Standards Board (FASB) issued SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, which becomes effective for fiscal years beginning after
December 15, 1995. SFAS No. 121 requires impairment losses to be
recognized for long-lived assets used in operation when indicators of
impairment are present and the undiscounted cash flows are not
sufficient to recover the assets' carrying amount. The Company must
adopt this statement beginning January 1, 1996, and its adoption is not
expected to have a significant effect on the Company's financial
position or results of operations.
In October 1995, the FASB issued SFAS No. 123 (SFAS No. 123), Accounting
for Stock-Based Compensation, which becomes effective for fiscal years
beginning after December 15, 1995. SFAS No. 123 established new
financial accounting and reporting standards for stock-based
compensation plans. Entities will be allowed to measure compensation
expense for stock-based compensation under SFAS No. 123 or APB Opinion
No. 25, Accounting for Stock Issued to Employees. Entities electing to
remain with the accounting in APB Opinion No. 25 will be required to
make pro forma disclosures of net income and earnings per share as if
the provisions of SFAS No. 123 had been applied. The Company will adopt
this statement in fiscal 1996 as required, and the impact of adoption of
this statement has not been quantified.
Reclassifications - Certain 1994 balances have been reclassified to
conform with the 1995 presentation.
20
<PAGE>
2. ACQUISITION
In April 1993, SMI and Microgon and certain preferred shareholders holding a
majority voting interest in Microgon (majority preferred shareholders) entered
into an investment and loan agreement (the Agreement). Under the terms of the
Agreement, the majority preferred shareholders were granted a put option to sell
their shares to Microgon, and Microgon had the right to purchase the shares in
exchange
for $5,815,770. The preferred shareholders' option was exercisable at
the earlier of certain events, as defined in the Agreement, or January
1, 1997. Microgon's option was exercisable after January 1, 1997. As
part of the Agreement, the majority preferred shareholders relinquished
control over the daily operations of Microgon and transferred authority
to SMI to acquire, merge or sell Microgon and to acquire or dispose of
significant assets or liabilities. The agreement also provided for the
payment by Microgon to certain of its executives, an incentive bonus of
$534,230, payable upon certain events, including the exercise of the
option. The agreement also provided for the issuance of a convertible
note payable to SMI from Microgon in exchange for proceeds of $500,000.
On August 1, 1994, SMI sold a portion ($94,500) of the remaining
outstanding note balance to two shareholders of Spectrum. Subsequently,
all the notes were converted into 824,617 shares of Series G preferred
stock of Microgon at $.60 per share.
On August 1, 1995, in connection with an amendment to this investment
and loan agreement (Amended Agreement) between Spectrum, SMI, Microgon
and the majority preferred shareholders, Microgon and its shareholders
agreed to accelerate the option and the majority preferred shareholders
agreed to exercise the option for a reduced purchase price of $3,628,951
and a reduced management bonus of $431,795. At the same time, Microgon
redeemed its Series B preferred stock from the majority shareholder in
SMI and Spectrum in exchange for $100,000 cash and a note payable for
$200,000. The remaining preferred shares outstanding, Series F and G,
were converted into an aggregate of 7,428,333 shares of common stock of
Microgon at a rate one to one for Series F and eight to one for Series
G. All other outstanding Microgon common shares were repurchased and
retired at .10 per share.
On August 1, 1995, all of the outstanding Microgon common stock was
exchanged for Spectrum common stock at a ratio of 1.43 to one for a
total of 10,634,394 shares of Spectrum common stock. The acquisition,
which was accounted for as a step acquisition as of August 1, 1995, was
valued at $5,082,854, consisting of the reduced purchase price
assumption of the liability for the management bonus, carryover basis
for the Series B redemption, issuance of Spectrum common shares (valued
at carryover basis), and capitalized accounting and legal fees. The
purchase price was paid through the issuance of subordinated notes
payable of $686,473, issuance of common stock with a carryover basis of
$632,192, and a cash payment of $3,764,089. The notes payable are due in
January 1997, bear interest at 9% annually and are guaranteed by the
majority shareholder in Spectrum. The acquisition was financed through
borrowings by Spectrum of $2,500,000 (Note 7) from a bank and $1,105,000
from two significant shareholders of Spectrum (Note 7).
21
<PAGE>
The following unaudited consolidated pro forma results of operations for
the years ended December 31, 1995 and 1994 assume the acquisition
occurred as of January 1, 1994. These unaudited consolidated pro forma
results have been prepared for comparative purposes only and do not
purport to be indicative of the results which would have occurred had
the acquisition been made as of that date or of results which may occur
in the future.
1995 1994
Net revenues $8,109,046 $ 7,825,007
========== ===========
Net loss $ (680,717) $ 276,216
========== ===========
Net (loss) income per common share $ (.05) $ .02
========== ===========
Weighted average number of common shares used in per
share computation 12,834,394 12,834,394
========== ===========
3. INVENTORIES
Inventories consist of the following at December 31, 1995:
Raw materials $ 810,558
Work in progress 82,117
Finished goods 787,115
-----------
1,679,790
Reserve for obsolescence (193,529)
-----------
Total $ 1,486,261
===========
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 1995:
Equipment $ 3,770,050
Furniture 225,561
Leasehold improvements 453,912
-----------
4,449,523
Less accumulated depreciation and amortization (3,562,224)
-----------
Total $ 887,299
===========
22
<PAGE>
5. SHAREHOLDERS' EQUITY
The Company has a Stock Option Plan (the Plan) providing for options to
purchase up to 2,000,000 shares of its common stock. The Plan provides
for the granting of options to qualified employees and consultants of
the Company at prices which are not less than 85% of the fair market
value of the shares as of the date of grant. The options become
exercisable as specified in the Plan, but expire not more than ten years
from the date of grant. At December 31, 1994, there were options for the
purchase of 16,667 shares outstanding, exercisable at $0.60 per share
expiring in 2004. During 1995, 240,000 additional options were granted,
exercisable at $.32 per share expiring December 31, 2000. At December
31, 1995, options to purchase 256,667 shares were exercisable.
No options have been exercised to date.
6. INCOME TAXES
The Company's income tax provision consists of the following:
1995 1994
Current:
Federal $ -- $ --
State 7,200
Foreign 30,886 7,700
------- -------
38,086 7,700
Deferred:
Federal 32,423
State
------- -------
32,423
------- -------
$38,086 $40,123
======= =======
23
<PAGE>
The reported provision for income taxes differs from the amount computed
by applying the statutory federal income tax rate of 35% to the
consolidated loss before provision for income taxes as follows:
1995 1994
Statutory federal income tax benefit $(80,943) $ (8,365)
Goodwill amortization 23,116
Non-deductible meals and entertainment 6,824 1,654
State income taxes, net 4,680 2,925
Loss without tax benefit 53,573 36,209
Effect of foreign taxes 30,886 7,700
-------- --------
Income tax provision $ 38,086 $ 40,123
======== ========
The components of the Company's net deferred income tax asset as of
December 31, 1995 are as follows:
Deferred tax liability:
Deferred state taxes $ (1,680)
Depreciation 20,497
-----------
(22,177)
Deferred tax assets:
Reserves not currently deductible 96,875
Operating loss carryforwards 3,328,354
Other 11,419
-----------
3,436,648
Valuation allowance (3,035,536)
-----------
Net deferred tax asset $ 378,935
===========
The Company's valuation allowance of $(3,035,536) ($2,618,080 of the
valuation allowance relates to Microgon) at December 31, 1995 results
from the uncertainty of the Company's ability to utilize net operating
loss and tax credit carryforwards to reduce future taxes. The valuation
allowance increased $234,699 during 1995.
24
<PAGE>
At December 31, 1995, the Company had net operating loss carryforwards for
federal income tax purposes of $9,509,584 ($7,700,000 available to offset income
of Microgon only) which expire at various dates from 1998 through 2009. In
addition, as a result of the acquisition of Microgon (Note 2), the utilization
of Microgon's approximate $7,700,000 federal net operating loss carryforward
will be
subject to limitations under Internal Revenue Code section 382. The
amount of Microgon's net operating loss available for use each year to
offset taxable income of Microgon will be approximately $230,000, and it
is possible that more than $5,000,000 of the Microgon loss may expire
without utilization. The utilization of Microgon's net operating loss
carryforward will be utilized first to reduce goodwill, then non-current
assets, and finally to reduce the Company's tax provision.
<TABLE>
7. LONG-TERM DEBT
Long-term debt to unaffiliated entities consists of the following at
December 31, 1995:
<S> <C>
Note payable to bank collateralized by substantially all of the assets of the
Company, guaranteed by the majority shareholder, due in monthly principal
installments of $29,762 through November 29, 2000, plus a final installment
equal to the entire unpaid principal balance and accrued interest on the
termination date. Interest is payable monthly at a bank's prime rate (8.5% at
December 31, 1995), plus .75 per annum. $ 2,500,000
9% subordinated acquisition notes payable, including accrued interest,
guaranteed by the majority shareholder, principal and accrued interest
due on January 1, 1997. 486,574
------------
2,986,574
Less current portion (357,144)
------------
$ 2,629,430
============
</TABLE>
Aggregate maturities of long-term debt as of December 31, 1995 are as
follows:
1996 $ 357,144
1997 843,717
1998 357,143
1999 357,143
2000 1,071,427
-----------
$ 2,986,574
===========
25
<PAGE>
The note payable to the bank includes certain financial covenants,
restricts the Company from purchasing property and making loans to
affiliates in excess of specified amounts, and prohibits the payment of
dividends without prior approval of the bank. The Company was not in
compliance with various covenants at December 31, 1995, for which it
received waivers. The Company is currently in the process of
renegotiating the various covenants under the note agreement to include
financial covenants that it expects can be met during 1996.
<TABLE>
Long-term debt, affiliates consist of the following at December 31,
1995:
<S> <C>
Convertible notes payable to shareholders, payable in five equal annual
installments aggregating $200,000 plus interest, beginning January 1, 2001,
with a final installment of $105,000 plus interest, due on January 1, 2006;
interest accrues at the rate of 8.75% per annum. The notes may be
converted to shares of common stock at a conversion price of $.31 per share
and contain antidilution provisions. $ 1,105,000
Notes payable to SMI with interest on the unpaid balance at the bank's prime
rate (8.5% at December 31, 1995) plus 2% per annum. Principal and interest
are due after January 1, 1997. 75,175
------------
$ 1,180,175
============
</TABLE>
Interest expense to affiliates amounted to $41,446 in 1995. There was no
interest paid to affiliates in 1994.
<TABLE>
8. AFFILIATED-ENTITIES TRANSACTIONS
The Company had additional transactions with affiliates as follows:
<CAPTION>
1995 1994
<S> <C> <C>
Rent paid to a company partially owned by a member of the
Board of Directors $ 36,000 $ 46,040
Legal fees to a firm which employs a member of the Board
of Directors 70,027 9,782
Purchases from a company controlled by the majority shareholder 687,539
Sales to a company controlled by the majority shareholder 189,687 5,694
Consulting fees paid to a company controlled by the majority
shareholder 91,133 56,633
Consulting fees received from affiliated companies 39,600
</TABLE>
26
<PAGE>
Companies controlled by, and affiliated with, the majority shareholder
share various facilities and services, including office space,
manufacturing, administrative and marketing staff assistance, and data
processing capabilities. The expenses and revenues associated with staff
assistance, services and data processing capabilities are allocated to
the respective companies based on time devoted to each company. Overhead
costs for shared manufacturing and assembly facilities are allocated
based on space utilized. In connection with the shared services and
facilities, the Company had amounts due from affiliates of $549,252 and
amounts due to affiliates of $243,170 at December 31, 1995.
The note receivable from an affiliated entity is receivable in monthly
installments of $3,111, plus interest at the bank's prime rate plus 1%
(8.5% at December 31, 1995) through June 30, 1998 and collateralized by
one of the Company's product lines.
9. COMMITMENTS
The Company rents manufacturing and office facilities under lease
agreements requiring payments of $204,732 in 1996 and $133,564 in 1997.
Rent expense under operating leases was $195,343 in 1995 and $98,127 in
1994, of which $36,000 and $46,040 were paid to an affiliated entity in
1995 and 1994, respectively.
10. FOREIGN SALES
Sales to customers in foreign countries, primarily Europe, amounted to
$1,963,007 and $1,591,566 in 1995 and 1994, respectively.
11. PROPOSED MERGER
The Company is currently investigating the possibility of acquiring the
outstanding stock of SMI in a leveraged transaction. No definitive
agreement has been reached and no financing has been obtained as of
April 5, 1995.
27
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
<TABLE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
Directors
Named below are directors serving until an Annual Meeting of Shareholders and
until their respective successors are elected and qualify.
<CAPTION>
Name Age Director Since Position
<S> <C> <C> <C>
Roy T. Eddleman 56 July 30, 1982 Chairman, CEO & Director
John J. Driscoll 47 July 30, 1982 Director,
Secretary
Jack Whitescarver 58 April 1, 1985 Director
Executive Officers of The Company
Roy T. Eddleman 56 July 30, 1982 Chairman & CEO
Jesus Martinez 56 ---- President
Wayne Schrader 37 ---- Chief Financial
Officer
</TABLE>
Business Experience of Directors and Executive Officers
Roy T. Eddleman was elected Chairman of the Board and Chief Executive Officer of
the Company on July 30, 1982. Mr. Eddleman has been engaged primarily as a
private investor and entrepreneur for more than five years. He owns interests
ranging from a minority investment to control in approximately 10 privately held
companies, the majority of which are engaged in the manufacture and sale of
products.
John J. Driscoll has been employed as an attorney in private practice for over
five years and is presently a partner of Gallet Dreyer & Berkey of New York, New
York.
Jack Whitescarver is the Deputy Director for the Office of AIDS Research at the
National Institutes of Health in Bethesda, Maryland and has been there more than
5 years.
28
<PAGE>
Jesus Martinez has been Chief Operating Officer and President of the Company
since September, 1995. Mr. Martinez held the position of Vice President of R&D
and Operations from August 1989 to September 1995. He has held senior management
positions at Baxter Healthcare Corporation, National Medical Care, Minntech
Corporation and is inventor or co-inventor of over twenty patents in medical
devices. Mr. Martinez holds graduate and undergraduate degrees in Engineering
Sciences and Medical Physiology from Emory University and has over 28 years of
extensive experience in membrane filtration devices for the medical, laboratory
and industrial markets.
Wayne Schrader, the chief financial officer, has been employed by the Company
since June 1995. Prior to being hired by Spectrum Laboratories, Mr. Schrader was
the controller of Shugart Corporation from 1986 to 1995. Mr. Schrader became
Chief Financial Officer in August 1995.
There are no family relationships between any of the Company's directors and
officers. There are no arrangements or understandings between any director and
any other person pursuant to which any person was elected or nominated as a
director.
The Company has no pension, retirement, annuity, savings or similar benefit
plans. Directors are not compensated for their services on the Company's Board
of Directors.
<TABLE>
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the annual compensation paid and accrued by the
Company during its last three fiscal years to executive officer to whom it paid
in excess of $100,000 including cash and issuance of securities:
<CAPTION>
ANNUAL COMPENSATION RESTRICTED LONG TERM
COMPENSATION
OTHER STOCK SAR'S LTIP ALL
NAME AND POSITION YEAR SALARY BONUS ----- AWARDS ----- ---- OTHER
- ----------------- ---- ------ ----- ------ ------
<S> <C> <C> <C> <C> <C>
Roy Eddleman 1995 $176,099 0 $91,133
Chief Executive Officer
1994 0 0 $116,633
1993 0 0 $250,190
Jesus Martinez President 1995 $84,180 $88,753 240,000
1994 $120,000 $20,000
1993 $110,000 $10,000
</TABLE>
"Other" is in all cases consulting. Information includes amounts paid by
Microgon.
29
<PAGE>
<TABLE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock at December 31, 1995 by (i) all persons
known by management to be beneficial owners of more than 5% of its Common Stock,
(ii) all nominees for directors and (iii) all officers and nominees for
directors of the Company as a group:
<CAPTION>
Amount and Nature of Beneficial Ownership (A)
Name Directly Owned Percent Indirectly Owned with Percent
with Sole Power of Class Shared Power of Voting of Class(1)
of Voting and and/or Disposition
Disposition
<S> <C> <C> <C> <C>
Roy T. Eddleman 901,907 7.0% 11,037,338 85.9%
32022 La Cadena Drive
Laguna Hills, California
Spectrum Medical Industries, Inc. 10,135,431 78.9% - -
23022 La Cadena Drive
Laguna Hills, California
Thomas Gerardi 901,907 7.0% - -
1126 Wilshire Boulevard
Los Angeles, CA 90017
Jack Whitescarver (C) - - - -
John J. Driscoll (C) - - - -
All directors and officers as a 901,907 7.0% - -
group (5 in number)
<FN>
(1) 12,834,394 shares outstanding as of March 31, 1996.
(A) Unless otherwise noted, all shares listed are owned of record
(B) Mr. Eddleman is the principal shareholder, executive officer and
director of Spectrum Medical Industries, Inc. As such, he may be deemed
to control investment power of the 10,135,431 shares of the Company's
Common Stock owned by Spectrum Medical Industries. Such shares are
included in the indirect beneficial holdings of Mr. Eddleman set forth
in the above table.
(C) In 1991 Messrs. Whitescarver and Driscoll each received options to
purchase 8,333 shares of the Company's Common Stock at an exercise price
of $0.60 per share. No options have been exercised to date. In 1995, Mr.
Driscoll was granted 50,000 options at an exercise price of $.32 per
share.
</FN>
</TABLE>
<TABLE>
The following table sets forth options granted to named executive officers:
<CAPTION>
Name No. of Securities Percent of Exercise Expiration Potential Realizable Value
Underlying Options Total Options Price Date at Assumed Annual Rates of
Stock Price Appreciation
<S> <C> <C> <C> <C> <C>
Roy T. Eddleman, -- -- -- -- --
CEO
Jesus Martinez, 240,000 30.7% .32 12/31/00 at 5% $103,200
President at 10% $127,200
</TABLE>
30
<PAGE>
<TABLE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1995 and 1994, the Company has had transactions with related parties as
follows:
<CAPTION>
Years ended December 31,
1995 1994
<S> <C> <C>
Rent paid to a company owned by the $36,000 $46,040
Board of Directors (the "Chairman")
Fees for legal service paid to a law $70,027 $9,782
firm which employs a member of the Board
of Directors
Purchases from companies controlled $687,539 0
by and affiliated with the Chairman
Sales to companies controlled and $189,687 $5,694
affiliated with the Chairman
Consulting fees paid to companies $91,133 $56,633
controlled by and affiliated with the
Chairman
Consulting fees received from affiliated 0 $39,600
companies
</TABLE>
31
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
3.1 Articles of Incorporation of Registrant (incorporated by
reference to Exhibit 4.1 file with Registrant's Registration
Statement on Form S-2. Registration No. 2-68999
3.2 Amendment to Article I of the Articles of Incorporation of
Registrant (incorporated by reference to Exhibit 3.2 filed
with Registrant's Report on Form 10-K for the fiscal year
ended December 31, 1982, commission File No. 0-9478)
3.3 Bylaws of Registrant (incorporated by reference to Exhibit 4.2
filed with Registrant's Registration Statement on Form S-2,
Registration No. 2-68999)
3.4 Amendment to Article III, section 2 of Registrant's Bylaws
(incorporated by reference to Exhibit 3.3 filed with
Registrant's Report on Form 10-K for the fiscal year ended May
31, 1982, Commission File No. 0-9478)
3.5 Amendment to Article IV, Section 6 and Section 7 of the
Registrant's Bylaws (incorporated by reference to Exhibit 3.4
filed with Registrant's Report on For 10-K for the fiscal year
ended May 31, 1982, Commission File No. 0-9478)
3.6 Articles of Amendment to Registrant's Articles of
Incorporation increasing authorized stock to 25,000,000 shares
(incorporated by reference to Registrant's Schedule 14C-2
Information Statement, Exhibit A, filed with the Commission on
October 19, 1996; Commission File NO. 0-9478
3.7 Certificate of Ownership of Microgon into Spectrum
Laboratories incorporated by reference to Exhibit 2B to the
Registrant's Form 8-K/A on October 15, 1996, Commission File
No. 0-9478
10.1 Agreement for Sale of Assets dated as of August 1, 1982
between Registrant and Glenco Scientific, Inc. (incorporated
by reference to Exhibit 10.7 filed with Registrant's report on
form 10-K for the fiscal year ended December 31, 1982,
Commission File No. 0-9478)
10.2 Agreement for Sale of Assets dated as of August 1, 1982
between Registrant and Spectrum Medical, Inc. (incorporated by
reference to Exhibit 10.8 filed with Registrant's Report on
Form 10-K for the fiscal year ended December 31, 1982,
commission File No. 0-9478)
10.3 Agreement for Sale of Assets Dated as of July 1, 1983 between
the Registrant and all the shareholders of Innometrics, Inc.
(incorporated by reference to Exhibit 10.8 filed with
Registrant's Report on Form 10-K for the fiscal year ended
December 31, 1983, Commission File No. 0-9478)
32
<PAGE>
10.4 Agreement and Plan of Reorganization dated March 31, 1983
between the Registrant and all the shareholder of Innometrics,
Inc. (incorporated by reference to Exhibit 10.8 filed with
Registrant's Report on Form 10-K for the fiscal year ended
December 31, 1983, Commission File No. 0-9478)
10.5 Sublease dated September 15, 1982, between Registrant and
Glenco Scientific, Inc. for facilities at 15413 Vantage
Parkway East, Houston, Texas (incorporated by reference to
Exhibit filed with Registrant's Report on Form 10-K for the
fiscal year ended December 31, 1983, Commission File No.
0-9478)
10.6 Registrants Stock Compensation Plan (incorporated by reference
to Exhibit 10.11 filed with Registrant's Report on Form 10-K
for the fiscal year ended December 31, 1983, Commission File
No. 0-9478)
10.7 Registrant's 1982 Stock Option Plan (incorporated by reference
to Exhibit 10.12 filed with Registrant's Report on Form 10-K
for the fiscal year ended December 31, 1983 Commission File
No. 0-9478)
10.8 Purchase Agreement dated as of July 21, 1983 between
Registrant and Biotic Technologies, Inc. (incorporated by
reference to Exhibit 10.13 filed with Registrants Report on
Form 10-K for the fiscal year ended December 31, 1983,
Commission File No. 0-9478)
10.9 Closing Agreement dated as of October 26, 1983 between
Registrant, Arden A. Kelton and Environmental Diagnostics,
Inc. (incorporated by reference to Exhibit 10.14 with
Registrant's Report on Form 10-K for the fiscal year ended
December 31, 1983, Commission File No. 0-9478)
10.10 Evaluation and Option Agreement dated August 17, 1984 between
Registrant and Instrumentation Laboratories, Inc.
(incorporated by reference to Exhibit 10.10 filed with
Registrant's Report on Form 10-K for the fiscal year ended
December 31, 1984, Commission File No. 0-9478)
10.11 Amendment to Investment and Loan Agreement dated August 1,
1995 among the Company, Microgon and certain preferred
shareholders of Microgon, incorporated by reference to Exhibit
2A to the Registrant's Form 8K/A filed on October 15, 1995,
Commission File No. 0-9478
10.12 Stock Option Plan adopted October 11, 1996 (incorporated by
reference to Exhibit B to Registrant's filing of Schedule
14-2, filed with the Commission on October 9, 1996.
(b) During the quarter ended December 31, 1995, the Company filed a current
report in Form 8K/A-1 dated October 15, 1995 reporting under Item 2
information about the acquisition of Microgon, Inc. and under Item 7 as the
audited financial statement of Microgon for the years ending December 31,
1994 and December 31, 1995, and Item 7(b) of the pro forma consolidated
statement of operations listed for the year ended December 31, 1994 and for
the six months ended June 30, 1994.
33
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SPECTRUM LABORATORIES, INC.
By: /s/ Wayne Schrader
-----------------------
Wayne Schrader
Chief Financial Officer
Date:
By: /s/ Roy T. Eddleman
-----------------------
Roy T. Eddleman, President
Chief Executive Officer and Director
Date:
By: /s/ John J. Driscoll
-----------------------
John J. Driscoll, Secretary and Director
Date:
34
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Balance Sheet and Consolidated statements of operations, equity and cash flows
for years ended Dec. 31, 1994 & 1995.
</LEGEND>
<CIK> 0000319013
<NAME> SPECTRUM LABORATORIES, INC.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1995
<PERIOD-START> Jan-1-1995
<PERIOD-END> Dec-31-1995
<CASH> 82,472
<SECURITIES> 44,704
<RECEIVABLES> 1,042,450
<ALLOWANCES> 26,917
<INVENTORY> 1,486,261
<CURRENT-ASSETS> 3,234,754
<PP&E> 4,449,523
<DEPRECIATION> 3,562,224
<TOTAL-ASSETS> 7,731,489
<CURRENT-LIABILITIES> 1,348,348
<BONDS> 0
<COMMON> 128,344
0
0
<OTHER-SE> 2,392,573
<TOTAL-LIABILITY-AND-EQUITY> 7,731,489
<SALES> 6,478,299
<TOTAL-REVENUES> 6,478,299
<CGS> 4,406,556
<TOTAL-COSTS> 5,359,133
<OTHER-EXPENSES> 1,088,731
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 121,853
<INCOME-PRETAX> (231,266)
<INCOME-TAX> 38,086
<INCOME-CONTINUING> (269,352)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (269,352)
<NET-INCOME> 0
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
