<PAGE>
U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
Commission File Number 0-9478
Spectrum Laboratories, Inc.
Incorporated pursuant to the laws of the State of California
Internal Revenue Service - Employer Identification Number 95-3557539
23022 La Cadena Drive, Laguna Hills, California 92653
Address of principal executive offices
Issuer's Telephone Number (714) 581-3500
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__
Number of shares of Common Stock outstanding as of October 31, 1997:
12,834,394
<PAGE>
Spectrum Laboratories, Inc.
Page
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Part I - FINANCIAL INFORMATION
Item 1. Financial Statements 3
Consolidated Balance Sheet as of September 30, 1997 3
Consolidated Statements of Operations for the Three and
Nine Months Ended September 30, 1997 and September 30, 1996 4
Consolidated Statements of Cash Flows for the Nine Months
ended September 30, 1997 and September 30, 1996 5
Notes to Consolidated Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition 7
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 9
Item 2. Changes in Securities 9
Item 3. Defaults Upon Senior Securities 9
Item 4. Submission of Matters to a Vote of Security Holders 9
Item 5. Other Information 9
Item 6. Exhibits and Reports on Form 8-K 9
Signature 10
2
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Spectrum Laboratories, Inc.
Consolidated Balance Sheet
As of September 30, 1997
(Dollars in thousands, except par value)
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,081
Accounts receivable 1,088
Due from affiliates 940
Inventories 1,022
Prepaid expenses and other current assets 91
------------
Total current assets 4,222
Property and equipment, net 872
Deferred income taxes 377
Goodwill 2,945
Other assets 165
------------
TOTAL ASSETS $ 8,581
============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 640
Accrued liabilities 751
Current portion of long-term debt 814
Due to affiliates 135
Income taxes payable 74
------------
Total current liabilities 2,414
LONG-TERM LIABILITIES
Long-term debt 2,556
Long-term debt, affiliates 553
------------
TOTAL LIABILITIES 5,523
MINORITY INTEREST 2,054
SHAREHOLDERS' EQUITY
Common stock, par value $.01: 25,000,000 shares
authorized, 12,834,394 issued and outstanding 128
Additional paid in capital 5,238
Retained earnings, accumulated deficit (4,316)
Unrealized loss on foreign currency translation (46)
------------
TOTAL SHAREHOLDERS' EQUITY 1,004
------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 8,581
============
3
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<TABLE>
Spectrum Laboratories, Inc.
Consolidated Statements of Operations
(In thousands, except for per share amounts)
(Unaudited)
Three Months Nine Months
Ended Sep 30, Ended Sep 30,
---------------------- ----------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NET SALES $ 1,779 $ 2,048 $ 6,135 $ 6,510
COSTS AND EXPENSES
Cost of sales 1,199 1,242 3,686 3,875
Selling 321 332 1,049 1,029
General and administrative 463 315 1,207 875
Research and development 125 79 451 259
Interest expense, net 91 100 284 259
Other (income) expense (27) (27)
---------- ---------- ---------- ----------
TOTAL COSTS AND EXPENSES 2,199 2,041 6,677 6,270
---------- ---------- ---------- ----------
GAIN ON SALE OF PRODUCT LINE 768
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE MINORITY INTEREST IN INCOME
OF SUBSIDIARY AND PROVISION FOR INCOME TAXES (420) 7 226 240
MINORITY INTEREST IN INCOME OF SUBSIDIARY (3) 5 7 26
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (417) 2 219 214
PROVISION (CREDIT) FOR INCOME TAXES (10) 17
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ (407) $ 2 $ 202 $ 214
========== ========== ========== ==========
BASIC NET INCOME (LOSS) PER COMMON SHARE $ (.03) $ - $ .02 $ .02
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 12,834 12,834 12,834 12,834
</TABLE>
4
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Spectrum Laboratories, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended Sep 30,
-----------------------
1997 1996
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 202 $ 214
Adjustments to reconcile net income to net
cash provided by (used for) operating activities:
Depreciation and amortization 377 273
Minority interest in income of subsidiary 7
Gain on sale of product line (768)
Change in assets and liabilities:
(Increase) decrease in trade receivables, net 95 (198)
Increase in due from affiliates (608)
Decrease in inventories, net 264 329
(Increase) decrease in prepaid expenses and other
current assets 14 (14)
Increase in other assets (8) (7)
Increase (decrease) in accounts payable and accrued
and other liabilities (177) 236
Increase (decrease) in income taxes payable 3 (8)
Increase (decrease) in due to affiliates (130) 575
Other (8)
---------- ----------
Net cash provided by (used for) operating activities (737) 1,400
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of product line 969
Acquisitions of property and equipment (18) (180)
Decrease in investments 44
---------- ----------
Net cash provided by (used for) investing activities 951 (136)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (3,325) (438)
Proceeds from issuance of long-term debt 3,600
---------- ----------
Net cash provided by (used for) financing activities 275 (438)
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 489 826
CASH AND CASH EQUIVALENTS, beginning of period 592 83
---------- ----------
CASH AND CASH EQUIVALENTS, end of period $ 1,081 $ 909
========== ==========
5
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NOTES TO CONSOLIDATED STATEMENTS
Note 1 - Basis of Presentation
The accompanying unaudited financial statements consolidate the accounts of
Spectrum Laboratories, Inc. ("Spectrum"), its wholly-owned subsidiaries, SLI
Acquisition Corp. and Hydro-Med Products, Inc. and its partially-owned
subsidiary, Spectrum Europe B.V. ("Spectrum B.V."), which are collectively
referred to as the "Company". All significant intercompany transactions
have been eliminated in consolidation. In the opinion of management, the
accompanying unaudited interim consolidated financial statements contain all
adjustments (consisting only of normal recurring accruals) necessary to
present fairly the financial position of the Company as of September 30,
1997 and the results of their operations and their cash flows for the three
and nine months ended September 30, 1997 and 1996. Certain information and
footnote disclosures normally included in the financial statements have been
condensed or omitted pursuant to rules and regulations of the Securities and
Exchange Commission, although the Company believes that the disclosures in
the unaudited interim financial statements are adequate to make the
information presented not misleading.
Note 2 - Inventories
Inventories are stated at the lower of cost, determined using the first-in,
first-out method, or net realizable value and are composed of the following:
Raw materials $ 611,453
Work in progress 71,177
Finished goods 524,327
-------------
1,206,957
Reserve for obsolescence (184,584)
-------------
$ 1,022,373
=============
Note 3 - Earnings per Share
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128).
The Company was required to adopt SFAS 128 in the second quarter of 1997 and
accordingly, the Company has applied this standard when computing earnings
per share. SFAS 128 replaces current EPS reporting requirements and
requires a dual presentation of basic and diluted EPS. Basic EPS excludes
dilution and is computed by dividing net income, available to common
shareholders, by the weighted average of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised and
converted into common stock. The increase in weighted average shares
outstanding that would result from the assumed exercise of stock options,
using the treasury stock method, would not change the earnings per share
amounts presented for any period.
Note 4 - Income Taxes
In the first nine months of 1997, the Company provided $17,000 for income
taxes. This tax provision primarily relates to federal alternative minimum
tax and state taxes. As of December 31, 1996, the Company had net operating
loss carryforwards for federal income tax purposes of $9,693,261
($8,100,000 available to offset income of Microgon, a company purchased in
1995 and merged into Spectrum, only), which expire at various dates from
1998 through 2009. The utilization of Microgon's $8,100,000 federal net
operating loss is limited to approximately $230,000 of Microgon income
annually. Any unused net operating loss is carried forward. As a result of
the limitation, it is possible that more than $5,000,000 of the Microgon
loss may expire without utilization. The Company has an approximate
$3,500,000 state net operating loss carryforward, which expires at various
dates beginning in 1998.
6
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion relates to the Company, its wholly owned
subsidiaries, SLI Acquisition Corp. ("SLI AC") and Hydro-Med Products
("Hydro-Med") and its partially owned subsidiary, Spectrum Europe B.V.
During 1995, the Company acquired Microgon, Inc. under a transaction
accounted for as a step acquisition and merged Microgon into the Company.
During 1996, SLI AC acquired the assets and liabilities of Cellco, Inc.
under a transaction accounted for as a purchase. The Company has
consolidated the financial position and operations of Spectrum B.V. for all
periods presented.
The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto contained elsewhere within this
Report on Form 10-QSB. Except for the historical information contained
herein, the following discussion may contain forward-looking statements that
involve risks and uncertainties. The actual future results of the Company
could differ materially from those discussed here. Factors that could cause
or contribute to such differences include, but are not limited to, those
discussed in this report and those factors discussed in the Company's Form
10-KSB for the year ended December 31, 1996.
Results of Operations
Net sales for the three months ended September 30, 1997, were $1,779,000, a
13.1% decrease from sales of $2,048,000 for the three months ended September
30, 1996, and $6,135,000 for the nine months ended September 30, 1997, a
5.8% decrease from sales of $6,510,000 for the same period of the previous
year. The decreases were primarily due to a decrease in sales by Spectrum
B.V. and in its medical disposable product line due to the sale of its
microbiological sampling and transport products business on March 31, 1997,
offset partially by sales from its cell culture product line which was
acquired from Cellco, Inc. in October 1996, and decreases caused by product
returns due to a quality problem and returns of customized product due to
lack of demand. Both of these returns are considered to be isolated events
and such types of returns are not expected to have significant adverse
effects on future financial results.
Gross margin as a percentage of net sales for the three months ended
September 30, 1997, was 32.6% compared to 39.4% for the three-month period
ended September 30, 1996, and 39.9% for the nine months ended September 30,
1997, compared to 40.5% for the nine months ended September 30, 1996. The
decreases for the three and nine-months periods were primarily attributable
to product returns which resulted in write-downs in inventory value.
Selling and marketing costs for the three and nine-month periods ended
September 30, 1997, were essentially flat compared to the same periods of
the previous year.
General and administrative expenses increased 47% and 38%, respectively, for
the three and nine-month periods ended September 30, 1997, over the same
periods of the previous year. The increases were primarily due to retention
of certain essential personnel as a result of the Cellco acquisition and to
the reallocation of shared costs of the Company and its parent company.
Research and development expenses increased 58% and 74%, respectively, for
the three and nine-month periods ended September 30, 1997, over the same
periods of the previous year. The increases are primarily attributable to
the product development costs related to the Company's cell culture product
line, acquired in October 1996, and the retention of certain essential
research personnel from the Cellco acquisition.
Interest expense was essentially flat for the three months ended September
30, 1997, compared to the same period of the previous year and was
approximately 10% higher for the nine months ended September 30, 1997, as
compared to the same period of the previous year as a result of interest
related to a higher bank loan.
On March 31, 1997, the Company sold its microbiological sampling and
transport business for approximately $969,000 resulting in a gain of
$768,000. Proceeds of the sale were received on April 11, 1997.
7
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Factors That May Affect Future Results
The Company's future operating results may be adversely affected by a number
of factors, including general economic conditions, dependence on constant
development of new products and technologies, the rapid technological change
in the biomedical field, dependence on major customers, dependence on
relationships with third parties concerning research activities, the ability
to protect its patents and proprietary information, and regulation by United
States governmental authorities.
The laboratory life science markets in which the Company competes are highly
competitive. The Company has a significant number of competitors, some of
which are larger and have greater financial and other resources than the
Company. The Company competes with many domestic and international
companies in its global markets. There can be no assurance that the
Company's products will continue to compete successfully with the products
of its competitors. The principal methods of competition in the markets in
which the Company competes are product specifications, performance, quality,
knowledge, reputation, technology, distribution capabilities, service and
price.
Liquidity and Capital Resources
During the first nine months of 1997, cash was generated by a net increase
in borrowings of $275,000 and $969,000 in proceeds from the sale of a
product line, These increases in cash were offset, to a large extent, by
cash used for operating activities of $737,000 which was primarily
attributable to a loss from operations and an increase in receivables from
its parent company, Spectrum Medical Industries, Inc.
As of September 30, 1997, the Company had cash and cash equivalents of
$1,081,000 and a current ratio of 1.75. The Company is required to make
monthly payments of approximately $85,000 (of which approximately $25,000 is
interest) as a result of a loan from City National Bank. The loan balance
at September 30, 1997 is $3,240,000. On October 10, 1997, the Loan
Agreement with City National Bank was amended to add a revolving credit line
against which additional borrowings may be made up to a maximum of $500,000.
As of November 10, 1997, no borrowings had been made against this revolving
credit line.
The Company believes that cash expected to be generated from operations and
the availability of the revolving credit line will be sufficient to meet its
obligations for the remainder of the year 1997.
8
<PAGE>
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Change in Securities
None
Item 3. Defaults upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and reports on Form 8-K
(a) Exhibit - October 10, 1997 First Amendment to Credit Agreement
between Spectrum Medical Industries, Inc., and Spectrum
Laboratories, Inc. (collectively "Borrower") and City National
Bank
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the quarter
ended September 30, 1997
9
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
SPECTRUM LABORATORIES, INC.
(Registrant)
/s/ Michael S. Shimada
- -------------------------
Signature
Michael S. Shimada
Chief Financial Officer
/s/ F. Jesus Martinez
- -----------------------
Signature
F. Jesus Martinez
President
10
<PAGE>
FIRST AMENDMENT TO CREDIT AGREEMENT
This First Amendment to Credit Agreement ("First Amendment") is
entered into as of October 10, 1997, by and between Spectrum
Medical Industries, Inc., a California corporation and Spectrum
Laboratories, Inc, a California corporation, (collectively
"Borrower") and City National Bank, a national banking association
("CNB").
RECITALS
A. Borrower and CNB are parties to that certain Credit
Agreement, dated as of February 28, 1997 ("Agreement").
B. Borrower and CNB desire to supplement and amend the
Agreement as hereinafter set forth.
NOW THEREFORE, the parties agree as follows:
1. DEFINITIONS. Capitalized terms used in this Amendment
without definition shall have the meanings set forth in the Loan
Agreement.
2. AMENDMENTS. The Agreement is amended as follows:
2.1 Section 1. DEFINITIONS is amended as follows:
2.1.1 Delete the definition of "NOTE" in its entirety and add
the following new definition:
""Notes" means the Notes referenced in Section 2."
2.1.2 Delete the definition of "TERMINATION DATE" in its
entirety and replace it with:
""TERMINATION DATE" means May 1, 1998. Notwithstanding
the foregoing, CNB may, at its option, terminate this Agreement
pursuant to Section 7.3; the date of any such termination will
become the Termination Date as that term is used in this
Agreement."
2.2 Section 2. LOANS. is amended as follows:
2.2.1 Add the following new sections 2.1A, 2.1A.1, 2.1A.2,
2.1A.3, and 2.7 as follows:
1
2.1A REVOLVING CREDIT LOANS. CNB agrees to make loans
("Revolving Credit Loans") to Borrower up to, but not including,
the Termination Date, at Borrower's request, up to the amount of
Five Hundred Thousand and No/100 dollars ($500,000.00)(the
"Revolving Credit Commitment"). The Revolving Credit Loans may be
repaid and reborrowed at any time up to the Termination Date;
provided, however, that the aggregate unpaid principal amount of
outstanding Revolving Credit Loans will at no time exceed the
Revolving Credit Commitment. Borrower will have a period of not
less than thirty (30) consecutive days during the twelve-month
period ending on the Termination Date during which time there will
be no outstanding Revolving Credit Loans. All Revolving Credit
Loans will be paid by Borrower to CNB on the Termination Date.
The Revolving Credit Loans will be evidenced by a promissory note
("Revolving Credit Note") in the form attached hereto as Exhibit
"B".
2.1A.1 INTEREST ON REVOLVING CREDIT LOANS. Each
Revolving Credit Loan will bear interest from disbursement until
due (whether at stated maturity, by acceleration or otherwise) at
a fluctuating rate equal to the Prime Rate plus one quarter
percent (0.25%) per annum. Interest will be payable monthly in
arrears on the first day of each month, starting on November 1,
1997, and on the date the Revolving Credit Loans are paid in full.
2.1A.2 REVOLVING COMMITMENT FEE. Borrower shall pay
CNB a non-refundable fee ("Revolving Commitment Fee") equal to one
quarter percent (1/4%) of the Revolving Credit Commitment at the
time the Revolving Credit Commitment is extended to Borrower.
2.1A.3 PROCEDURE FOR REVOLVING CREDIT LOANS. Each
Revolving Credit Loan may be made by CNB at the oral or written
request of anyone who is authorized in writing by Borrower to
request Revolving Credit Loans until written notice of the
revocation of such authority is received by CNB."
"2.7 CASH/SECURITIES COLLATERAL. Borrower agrees that the
aggregate principal amount of the Cash/Securities Collateral shall
at no time be less than One Million Sixty-Six Thousand and No/100
Dollars ($1,066,000.00)."
2.2.3 Section 2.1.3 ADDITIONAL TERM LOAN PAYMENT. is amended by
deleting the date "June 1, 1997" from both the first sentence and
the last sentence and replacing it with a new date of "December 1,
1997" in both the first sentence and in the last sentence.
2.3 Section 4. REPRESENTATION AND WARRANTIES. is amended as
follows:
At the end of Section 4.8 USE OF PROCEEDS. add the following
sentence: "Borrower will use the proceeds of the Revolving Credit
Loans for Borrower's general working capital needs."
2
<PAGE>
3. CONDITIONS PRECEDENT. This Amendment shall become effective
upon the fulfillment of all of the following conditions to CNB's
satisfaction:
3.1 CNB shall have received this Amendment duly executed by
Borrower;
3.2 CNB shall have received the Revolving Credit Note duly
executed by Borrower; and
3.3 CNB shall have received the non-refundable Revolving
Commitment Fee of $1,250.00.
4. EXISTING AGREEMENT. Except as expressly amended herein, the
Loan Agreement shall remain in full force and effect, and in all
other respects is affirmed.
5. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, and all such counterparts taken together shall be
deemed to constitute one and the same instruments.
6. GOVERNING LAW. This Amendment and the rights and obligations
of the parties hereto shall be construed in accordance with, and
governed by the laws of the State of California.
IN WITNESS WHEREOF, the parties have executed this Amendment as
of the day and year first above written.
SPECTRUM MEDICAL INDUSTRIES, INC.,
a California corporation
By: /s/ Roy T. Eddleman
-------------------------
Roy T. Eddleman, Chairman
SPECTRUM LABORATORIES, INC.,
a California corporation
By: /s/ Roy T. Eddleman
-------------------------
Roy T. Eddleman, Chairman
CITY NATIONAL BANK, a national banking association
By: /s/ Ben A. Sottile
-------------------------
Ben A. Sottile, Vice President
3
<PAGE>
GUARANTORS CONSENT
By: /s/ Roy T. Eddleman
-------------------------
Roy T. Eddleman
Spectrum Molecular Separations, Inc.
By: /s/ Roy T. Eddleman
-------------------------
Roy T. Eddleman
Title: Chairman and Chief Executive Officer
Hydro-med Products, Inc.
By: /s/ Roy T. Eddleman
-------------------------
Roy T. Eddleman
Title: Chairman and Chief Executive Officer
SLI Acquisition Corp.
By: /s/ Roy T. Eddleman
-------------------------
Roy T. Eddleman, Chairman
Title: Chairman and Chief Executive Officer
Spectrum Europe B.V.
By: /s/ Roy T. Eddleman
-------------------------
Roy T. Eddleman
Title: Chairman and Chief Executive Officer
4
<PAGE>
EXHIBIT B
REVOLVING CREDIT NOTE
$500,000.00 La Mirada, California
October 10, 1997
For Value Received, the undersigned, Spectrum Medical Industries,
Inc., a California corporation and Spectrum Laboratories, Inc., a
California corporation ("Borrower), promises to pay on the
Termination Date to the order of City National Bank, a national
banking association ("CNB"), at its Office located at 14241 East
Firestone Blvd., La Mirada, CA 90638-5568, the principal amount of
Five Hundred Thousand and no/100 Dollars ($500,000.00) or so much
thereof as may be advanced and be outstanding, with interest
thereon to be computed on each Revolving Credit Loan from the date
of its disbursement at a rate computed on the basis of a 360-day
year, actual days elapsed, at the rates, times and in accordance
with the terms of that certain Credit Agreement between Borrower
and CNB, dated as of February 28, 1997, as may be amended from
time to time (the "Credit Agreement"). Capitalized terms not
defined herein shall have the meanings given them in that certain
Credit Agreement.
All or any portion of the principal of this Revolving Credit
Note ("Note") may be borrowed, repaid and reborrowed from time to
time prior to the Termination Date, provided at the time of any
borrowing no default exists under this Note and no Event of
Default or Potential Event of Default exists under the terms and
conditions of the Credit Agreement and provided, further that the
total borrowings outstanding at any one time shall not exceed the
Revolving Credit Commitment. Each borrowing and repayment of a
Revolving Credit Loan shall be noted in the books and records of
CNB. The excess of borrowings over repayments as noted on such
books and records shall constitute presumptive evidence of the
principal balance due hereon from time to time and at any time.
If payment on this Note becomes due and payable on a non-
business day, the maturity thereof shall be extended to the next
business day and, with respect to payments of principal or
interest thereon shall be payable during such extension at the
then applicable rate. Upon the occurrence of one or more of the
Events of Default specified in the Credit Agreement, all amounts
remaining unpaid on this Note may become or be declared to be
immediately payable as provided in the Credit Agreement, without
presentment, demand or notice of dishonor, all of which are
expressly waived. Borrower agrees to pay all costs of collection
of this Note and reasonable attorneys' fees (including attorneys'
fees allocable to CNB's in-house counsel) in connection therewith
irrespective of whether suit is brought thereon.
This is the Revolving Credit Note referred to in the Credit
Agreement and is entitled to the benefits thereof.
<PAGE>
Upon CNB's written notice to Borrower of the occurrence of an
Event of Default, the outstanding principal balance (and interest,
to the extent permitted by law) shall bear additional interest
from the date of such notice at the rate of Five Percent (5.0%)
per annum higher than the interest rate as determined and computed
above, and continuing thereafter until the Event of Default is
cured.
This Note shall be governed by the laws of the State of
California. If this Note is executed by more than one Borrower,
all obligations are joint and several.
"Borrower"
Spectrum Medical Industries, Inc.,
a California corporation
BY:
-------------------------------
Roy T. Eddleman, Chmn./CEO
Spectrum Laboratories, Inc.,
a California corporation
By:
--------------------------------
Roy T. Eddleman, Chmn./CEO
2
<PAGE>
REVOLVING CREDIT NOTE
$500,000.00 La Mirada, California
October 10, 1997
For Value Received, the undersigned, Spectrum Medical Industries,
Inc., a California corporation and Spectrum Laboratories, Inc., a
California corporation ("Borrower), promises to pay on the
Termination Date to the order of City National Bank, a national
banking association ("CNB"), at its Office located at 14241 East
Firestone Blvd., La Mirada, CA 90638-5568, the principal amount of
Five Hundred Thousand and no/100 Dollars ($500,000.00) or so much
thereof as may be advanced and be outstanding, with interest
thereon to be computed on each Revolving Credit Loan from the date
of its disbursement at a rate computed on the basis of a 360-day
year, actual days elapsed, at the rates, times and in accordance
with the terms of that certain Credit Agreement between Borrower
and CNB, dated as of February 28, 1997, as may be amended from
time to time (the "Credit Agreement"). Capitalized terms not
defined herein shall have the meanings given them in that certain
Credit Agreement.
All or any portion of the principal of this Revolving Credit
Note ("Note") may be borrowed, repaid and reborrowed from time to
time prior to the Termination Date, provided at the time of any
borrowing no default exists under this Note and no Event of
Default or Potential Event of Default exists under the terms and
conditions of the Credit Agreement and provided, further that the
total borrowings outstanding at any one time shall not exceed the
Revolving Credit Commitment. Each borrowing and repayment of a
Revolving Credit Loan shall be noted in the books and records of
CNB. The excess of borrowings over repayments as noted on such
books and records shall constitute presumptive evidence of the
principal balance due hereon from time to time and at any time.
If payment on this Note becomes due and payable on a non-
business day, the maturity thereof shall be extended to the next
business day and, with respect to payments of principal or
interest thereon shall be payable during such extension at the
then applicable rate. Upon the occurrence of one or more of the
Events of Default specified in the Credit Agreement, all amounts
remaining unpaid on this Note may become or be declared to be
immediately payable as provided in the Credit Agreement, without
presentment, demand or notice of dishonor, all of which are
expressly waived. Borrower agrees to pay all costs of collection
of this Note and reasonable attorneys' fees (including attorneys'
fees allocable to CNB's in-house counsel) in connection therewith
irrespective of whether suit is brought thereon.
This is the Revolving Credit Note referred to in the Credit
Agreement and is entitled to the benefits thereof.
<PAGE>
Upon CNB's written notice to Borrower of the occurrence of an
Event of Default, the outstanding principal balance (and interest,
to the extent permitted by law) shall bear additional interest
from the date of such notice at the rate of Five Percent (5.0%)
per annum higher than the interest rate as determined and computed
above, and continuing thereafter until the Event of Default is
cured.
This Note shall be governed by the laws of the State of
California. If this Note is executed by more than one Borrower,
all obligations are joint and several.
"Borrower"
Spectrum Medical Industries, Inc.,
a California corporation
BY:/s/ Roy T. Eddleman
-------------------------------
Roy T. Eddleman, Chmn./CEO
Spectrum Laboratories, Inc.,
a California corporation
By:/s/ Roy T. Eddleman
--------------------------------
Roy T. Eddleman, Chmn./CEO
2
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