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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
For the Fiscal Year Ended January 2, 1999
Commission File No. 0-9478
SPECTRUM LABORATORIES, INC.
(Name of small business issuer in its charter)
Delaware 95-4718363
------------------------------- -------------------
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
23022 La Cadena Drive
Laguna Hills, California 92653
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (949) 581-3500
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 X No
--- ---
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB [ X ].
State issuer's revenues for its most recent fiscal year: $12,489,701
The aggregate market value of voting stock held by nonaffiliates of the
registrant is $12,532 as of February 28, 1999, based on the $.14 per share
closing price for the Common Stock in the over-the-counter market on such date,
representing 89,515 shares held by nonaffiliates.
Number of shares of Common Stock outstanding as of February 28, 1999: 5,311,968
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TABLE OF CONTENTS
FORM 10-KSB ANNUAL REPORT
FOR THE YEAR ENDED JANUARY 2, 1999
SPECTRUM LABORATORIES, INC.
Item No. Page
- -------- ----
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 Operations ..................................8
7. Financial Statements ........................................10
8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ..................................11
PART III
9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act...........11
10. Executive Compensation........................................13
11. Security Ownership of Certain Beneficial Owners and
Management..................................................14
12. Certain Relationships and Related Transactions................15
13. Exhibits and Reports on Form 8-K..............................16
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THIS ANNUAL REPORT FORM 10-KSB CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS, THE
REALIZATION OF WHICH MAY BE IMPACTED BY CERTAIN IMPORTANT FACTORS WHICH ARE
DISCUSSED IN "ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS," UNDER ITEM 6,
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
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Spectrum Laboratories, Inc. (the Company or Spectrum) was incorporated in
California on June 5, 1980 under the name Immutron, Inc. On November 23, 1982,
the Company changed its name to Spectrum Laboratories, Inc. In September 1998,
Spectrum Medical Industries, Inc. (SMI) was merged into the Company and the
Company was reincorporated in Delaware. Spectrum Chromatography, Inc. and
Spectrum Europe B.V., formerly subsidiaries of SMI, are now wholly-owned
subsidiaries of the Company.
BUSINESS
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The Company is a leader in the development and commercialization of proprietary
tubular membranes and membrane devices for existing and emerging life sciences
applications. These products are used by life science research laboratories for
emerging applications for molecular/biological separations, fluid purification
and cell expansion/bioreactors. The Company's platform technology allows it to
create membranes and devices to meet a wide range of performance criteria and to
integrate the devices into systems for life sciences applications. The Company's
fundamental strengths are based on the control of material, membrane
characteristics, surface modification, device properties, biological utility,
and cell maintenance know-how.
The Company's proprietary products are used for research by OEM manufacturers
and for Process Separations. Most laboratory products are sold through
laboratory distributors. OEM and private label products are sold primarily to
manufacturers. They include re-sale versions of the Company's laboratory
products as well as specially designed membrane products. Process or scale-up
separation products are sold to pharmaceutical and diagnostic manufacturers for
process development and manufacturing. The Process Separation business also
includes the necessary systems for operating the separation application. Both
OEM and Process customers are serviced directly by the Company. The Company's
products and trademarks, Spectra/Por, Cellmax and KrosFlo are well-known and
used throughout the world for purification of proteins, cells expansion and
capsulation and diagnostic particles separation. Company personnel work closely
with existing and potential customers to develop new Mass Transfer Membranes
(MTM) products, applications and devices for the research markets.
In addition, the Company has entered into strategic partnerships, licensing
agreements and collaborative arrangements with leading corporations and research
scientists. Some of these ventures include:
The Company will market Cellmax rapid drug screening and testing technology
developed at the National Cancer Institute and Rhode Island Hospital. This
fast-track drug screening and testing method greatly reduces the use of animals
in new drug discovery, drug efficacy screening and drug dosing.
The Company markets, sells and develops MTM perfusion systems for human cell
expansion. The perfusion systems are sold under the trade name CELLMAX(R) and
have been successfully used to expand and maintain mammalian cells including
human cell lines. The Company is funding a grant to the University of California
to further develop this technology.
The Company has a joint venture with Stanford Research International, Edison
Technologies, Inc. and EPRI. This new venture, Facilichem, Inc., was established
to commercialize new membrane systems for major industrial separations while
greatly reducing current costs. The new systems will be marketed for waste
stream separators for environmental markets, chiral molecule separations for
pharmaceutical use and food and beverage separation, providing the addition and
removal of trace substances which contribute to and/or improve flavor and taste.
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Facilichem, Inc. was awarded a two-million dollar grant in November 1998, by the
ATP to commercialize its proprietary separation systems. Spectrum is the
supplier of membranes to Facilichem, Inc.
The Company's MTM devices, loaded with hepatocytes (liver cells) have been used
successfully as liver-assist devices for patients suffering from acute liver
failure. The device provides a life sustaining "bridge" to patients suffering
from fulminant liver failure who are candidates for a liver transplant or until
their own liver regenerates and recovers. By providing MTM's devices and systems
to clinical scientists, the Company believes that its products will be part of
applications and protocols for therapies undergoing the regulatory approval
process controlling such therapies. The Company is in discussions to develop a
strategic partnership for this technology.
PRODUCTS
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TUBULAR MEMBRANES FOR DIALYSIS, FILTRATION AND CELL CULTURE
The Company manufactures and markets many types of porous membranes used to
concentrate, separate and purify dissolved or suspended molecules. The Company
is a market leader in the manufacture of hollow fiber membrane products whose
applications 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.
The Company is also the market leader in supplying dialysis membranes for
protein concentration to the research laboratory market. The purification and
separation of components in fluid streams is a key element in biomedical
research, molecular biology and clinical diagnostics.
On October 1, 1996, the Company purchased certain assets of Cellco, Inc.,
providing artificial capillary systems to academic, pharmaceutical, laboratory
and clinical research markets involved in the expansion and maintenance of human
and animal cells. These are closed systems that minimize the possible
contamination encountered with other culture devices.
OPERATING ROOM (OR) DISPOSABLES
Disposable OR products consist of hollow fiber filters for laproscopic
procedures, sterile surgical drapes for orthopedic and arthroscopic surgical
procedures, sterile camera covers, rubber elastic bandages (sterile and
non-sterile), Esmarch Elastic 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
- -----------------------------------
LABORATORY PRODUCTS
The Company has over 400 active customers worldwide, comprised of pharmaceutical
and diagnostic manufacturers, medical device manufacturers, laboratories,
laboratory distributors and research institutions for its hollow fiber membrane
and dialysis products. Approximately 17% of its sales are from non-U.S.
customers for fiscal years 1997 and 1998. Spectrum's cell culture products are
sold to over 150 active customers worldwide, comprised of academic, research,
pharmaceutical, laboratory, and clinical research companies and institutes.
Domestic sales are made with a direct sales force and foreign sales are made
through direct sales and laboratory products distributors.
OPERATING ROOM (OR) DISPOSABLES
The three major product groups are: Operating Room Equipment Drapes, Orthopedic
Soft Goods and Esmarch Bandages.
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The products are distributed through a number of channels including important
National and Regional Catalog Houses, OEM & Private Label Accounts, Regional OR
Specialty Distributors, Custom Procedure Tray Manufacturers, Direct Sales to
Institutions and International Distributors. Nearly all Operating Room Equipment
Drapes are sold in sterile ready-to-use format. OR Drapes are sold primarily
through OEM & Private label accounts, through Regional OR Specialty Distributors
and through Regional and National Catalog Houses. Over the past two and one half
years, the importance of OR Specialty Distributor sales has declined while the
proportion of OEM, Private Label and Catalog House sales has increased. OR
drapes constitute nearly all international sales and approximately half of
direct sales. Orthopedic Soft Goods are primarily sold through Regional and
National Catalog Houses and Procedure Tray Manufacturers. Approximately
one-third of Orthopedic Soft Goods sales are in non-sterile, bulk format
primarily to Tray Manufacturers. Essentially no Soft Goods and Esmarch Bandages
are sold internationally. Esmarch Elastic Bandages are sold through Catalog
Houses, Regional OR Specialty Distributors and Procedure Tray Manufacturers.
The Company has over 200 active customers, the most active of which are over 100
hospitals and over 75 hospital supply dealers. Export and OEM accounts are
currently confined to a select few products, mostly for orthopedics. The Company
does not employ its own sales force but uses stocking distributors capable of
supplying product delivery on a local level.
RAW MATERIALS AND SUPPLIES
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TUBULAR MEMBRANES FOR DIALYSIS, FILTRATION AND CELL CULTURE
The Company purchases common raw polymers and a variety of casting solvents from
several approved suppliers. The Company uses these materials to formulate and
manufacture several different kinds of proprietary membranes for specific
separation and purification processes in the Life Sciences field. Additionally,
the Company purchases commercially available membranes for certain applications
from several qualified suppliers. The Company has never experienced any
difficulty in obtaining the necessary raw materials and supplies to conduct its
business. Many membranes are assembled into housings that are molded from
commonly available plastic resins by third party molders using molds owned by
the Company. Membranes are often affixed to the housings by means of proprietary
potting resins supplied by two independent suppliers that are covered by an
industry cooperative disaster recovery plan. The plan allows the suppliers to
manufacture the resins in the event of an interruption of supply. Membranes are
also pre-assembled into ready-to-use devices or marketed as pre-packaged
finished products to research laboratories.
Spectrum is dependent on a limited number of suppliers for hollow fiber membrane
products but has not experienced any difficulty in obtaining necessary supplies.
OPERATING ROOM (OR) DISPOSABLES
The principal raw materials used 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. The Company is dependent on a limited
number of suppliers for plastic film but has not experienced any difficulty in
obtaining necessary supplies, and none are presently anticipated.
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PATENTS AND TRADEMARKS
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The Company holds a number of trademark registrations for its products, some of
which are closely identified with the Company, such as the Spectra/Por
trademark. The Company also owns or licenses numerous issued patents and pending
patents that expire at various dates through the year 2019. Some of the
Company's patents or patent estates include: hollow fiber syringe tip filter,
rapid drug screening, membrane surface modification chemistries, liquid phase
separation membranes, apparatus for forming a rolled tubular fabric article,
surgical extremity drape and a video camera drape. The Company acquired the
rights to the Cellmax trademark and all related patents, including a patent for
serum-free production of packaged viral vector. Fundamental core technology is
kept as trade secrets. Employees and vendors are covered by non-disclosure
agreements.
A finding of invalidity or unenforceability of certain of the Company's patents
could have a materially adverse effect on the Company's business.
GOVERNMENT REGULATIONS
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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. 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 to
those of other companies in the business.
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 operates and adheres voluntarily to the
strict provisions of its ISO 9001 certification status.
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 1998
and 1997 fiscal years, two dealers accounted for 10% or more of the Company's
total sales which were approximately 17% and 15% in 1998 and 1997, respectively
for one dealer, and were approximately 12% in both 1998 and 1997 for another.
The Company's sales to dealers are proprietary branded products which would be
resourced from other dealers or directly from the Company if a specific dealer
or dealers fail to supply the Company's products.
SEASONAL ASPECTS
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The Company's business is not subject to significant seasonal fluctuations in
sales.
COMPETITIVE FACTORS
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The Company's ability to sell its products are subject to competitive factors
that include price, quality, timely delivery and competition from companies with
greater resources. The Company's membrane and membrane devices compete with AG
Technologies, Pall Corporation, Sartorius GMBH, and Millipore Corporation in the
laboratory products area. 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, single use in
competition with traditional tangential flow devices which are cleaned and
re-used. 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.
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OPERATING ROOM (OR) DISPOSABLES
There are distinctly different competitors among its medical disposable product
lines. Significant consolidation has taken place recently in the OR Equipment
Drape business. The major competitors offering a full line of OR Equipment
Drapes include Microtek Medical, Medical Technique Instruments, MTI, Zeiss,
Advance Medical Designs and Deka Medical. Each manufacturer has niches in either
a specific type of equipment drape or specific accounts with the exception of
Microtek which, with over 50% of the market share, is the market leader with a
strong presence in all niches and a direct sales force. The Company has been
most effective in competing with its Video Camera Drape line particularly on the
basis of quality and price. Orthopedic Soft Goods are similarly consolidating
but remains very fragmented. Major competitors include Alba, Balfour, Technol
and DeRoyal Industries among others. Esmarch Elastic Bandage is produced by a
small number of non-medical rubber producers who then sell bulk non-sterile
product to medical device firms for packaging and sterilization. As a result,
there are numerous competitors distributing Esmarch Bandages but the range of
offerings is relatively limited with competition being primarily driven by
price.
Companies such as Johnson & Johnson and Baxter Healthcare Corporation dominate
the market with products that 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).
The Company 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 ACE(R) bandages, Johnson & Johnson, producers of
Dyna-Flex(R) and Kendall, producers of Tensor(R), all of which have greater
resources than the Company.
RESEARCH AND PRODUCT DEVELOPMENT
The Company incurred research and product development expenses of $779,802 in
1998 and $798,673 in 1997. Research and product development functions are
particularly important for the Company's future growth.
EMPLOYEES
On January 2, 1999, the Company had 107 employees, of which 70 were in
production and manufacturing support, 16 were administrative personnel, 15 were
marketing and customer service representatives and 6 were in research and
product development. 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. All facilities used by the Company are leased, in good
condition and are adequate for the Company's present operating requirements. The
Company plans to relocate to another facility located in Rancho Dominguez,
California in 1999. This facility will replace the Company's present California
locations. Production and administrative facilities are located in California
and Texas. The Company has a sales and distribution facility in The Netherlands.
The Carson and Long Beach, California facilities are owned by the majority
shareholder of the Company. Total rent paid in 1998 for these two facilities was
approximately $300,000.
Information regarding the Company's major facilities is as follows:
<TABLE>
<CAPTION>
Lease Monthly
Location Principal Usage Sq. Feet Term. Date Rental
- ----------------------- --------------- -------- ---------- ---------
<S> <C> <C> <C> <C>
Laguna Hills, CA Administrative 10,696 12/99 $ 7,260
Laguna Hills, CA Manufacturing 8,830 mo-mo 8,830
Carson, CA Manufacturing 33,590 mo-mo 15,000
Long Beach, CA Warehouse 15,504 mo-mo 7,752
Dallas, TX Manufacturing 20,000 12/99 5,417
Houston, TX Manufacturing 9,975 08/03 4,090
Gaithersburg, MD Laboratory 1,460 01/03 2,050
Breda, The Netherlands Sales 1,400 12/99 2,150
</TABLE>
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ITEM 3. LEGAL PROCEEDINGS
There are 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
None.
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 Over the Counter (OTC) Bulletin Board.
The following table sets forth the high and low market prices for the last two
years. The quotations shown represent inter-dealer prices without adjustment for
retail markups, markdowns or commissions and do not necessarily reflect actual
transactions.
1998 High Low
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First Quarter $ 5 $ 1 1/4
Second Quarter 4 3/8 1 7/8
Third Quarter 4 3/8 1 1/4
Fourth Quarter 1/4 1/16
1997
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First Quarter 6 1/4 1 7/8
Second Quarter 5 1 7/8
Third Quarter 5 1 7/8
Fourth Quarter 5 1 7/8
The above market prices, for all quarters prior to the fourth quarter of 1998,
have been retroactively adjusted for the 1 for 10 reverse stock split which
occurred in September 1998.
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 January 2, 1999, the number of holders of record of the Company's Common
Stock was 802.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion relates to the Company and its majority-owned
subsidiaries, SLI Acquisition Corp. (SLIAC), Spectrum Europe B.V. (Spectrum
B.V.) and Spectrum Chromatography, Inc. (Chromatography).
In September 1998, Spectrum Medical Industries, Inc. (SMI), which formerly owned
approximately 80% of the Company, was merged into the Company. As a result, the
operating results of all periods presented include the operations of SMI and
those of Chromatography, which was formerly a subsidiary of SMI and is now a
subsidiary of the Company.
RESULTS OF OPERATIONS - FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997
Sales for 1998 of $12,489,701 were 7% lower than 1997 sales of $13,483,095. The
decrease was primarily due to a lower demand in the Asian and European markets
and a decrease in medical disposable products in the Canadian market due to
competition and reduced demand. Sales for 1998 as compared to 1997 were not
significantly affected by changes in selling prices.
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Cost of sales as a percentage of sales was 48% for 1998 and 50% for 1997. The
improvement in 1998 was primarily attributable to change in product mix, cost
reduction efforts and, in 1997, inventory write-downs resulting from product
returns due to a quality problem and returns of customized product due to lack
of demand. The product line relating to the quality problem was subsequently
sold.
Selling and general and administrative expenses were, respectively, 7% and 16%
lower in 1998 as compared to 1997 and primarily resulted from decreased
personnel and other cost reduction measures.
Compensation expense related to stock options reflects compensation expense
resulting from the issuance of stock options to an employee at an exercise price
deemed to be below market value.
The decrease in other expense was primarily due to lower interest expense as a
result of average lower debt than during the previous year.
The gain on sale of product lines was the result of the sales of the Company's
microbiological sampling and transport product line and microscope drapes
product line.
The income tax provision as a percentage of income before the tax provision is
lower than expected primarily because SMI, prior to its merger into the Company,
was an S corporation and, hence, paid no federal income taxes and had a low
state income tax rate.
The Company has applied a valuation allowance on its net deferred tax assets
which exceeds the recoverability of those assets from estimated future taxable
income for the next two years. This valuation allowance could change
substantially in future years due to changes in estimates of future taxable
income and changes in the components of the deferred tax assets. Accordingly,
income taxes as a percentage of income before taxes could vary significantly in
future years.
The Company has $4,256,000 of valuation allowance on net deferred tax assets
associated with business combinations that if the allowance is revised in the
future there will be an adjustment to goodwill recorded in the combinations.
LIQUIDITY AND CAPITAL RESOURCES
In fiscal 1998 the Company generated approximately $890,000 of cash from
operating activities. Net income before the non-cash expenses of depreciation,
amortization and compensation is the primary source of these cash flows. The
trends of decreasing accounts receivable and accounts payable are not likely to
continue every year as had been the trend in fiscal 1998 and 1997.
The Company used cash in 1998 and 1997 primarily to buy equipment and other
assets which was offset in 1998 with the collection of loans to the majority
stockholder and in 1997 with the proceeds from the sale of product lines.
The Company has been using cash to pay down long-term debt. There were
distributions to stockholders of SMI as an S corporation that will not continue
in the future due to the change in tax status to a C corporation. The Company
also sold 267,146 shares of common stock in 1998 for $750,000 to two directors
and the majority stockholder.
During 1998, the Company restructured its loan agreement with a bank. The
Company is in violation of one covenant in this loan agreement and has obtained
a waiver of this violation. The loan agreement prohibits the payment of cash
dividends without prior approval. The Company does not intend to pay cash
dividends in fiscal 1999.
The Company believes that cash on hand and cash expected to be generated from
operations will be sufficient to meet cash requirements for the 1999 fiscal
year.
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YEAR 2000 MATTERS
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
hardware or computer programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the Year 2000. The Company is in
the process of converting from existing hardware and accounting software to
hardware and software programs that are Year 2000 compliant. Management is of
the opinion that the year 2000 issue will not pose significant operational
problems for its computer systems. The Company has had formal communications
with substantially all of its significant suppliers and large customers to
determine the extent to which the Company's interface systems are vulnerable to
those third parties' failure to remediate their own Year 2000 issue. Although
the results of these communications did not indicate that any problems were
expected, there can be no guarantee that the systems of other companies on which
the Company's operations rely will be timely converted and would not have an
adverse effect on the Company's ability to obtain products and services from
vendors or collect receivables from customers.
The Company will utilize both internal and external resources to reprogram, or
replace, and test the software and equipment for Year 2000 modifications and
anticipates completing these modifications no later than September 1999. The
total cost of the Year 2000 project is estimated at $50,000, is being funded
through operating cash flows, and the costs are being expensed as incurred.
Approximately $1,000 had been expended as of January 2, 1999.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived from assumptions of future events, including the continued
availability of certain resources, third-party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes and hardware, and
similar uncertainties.
Management is of the opinion that the year 2000 issue will not pose significant
operational problems for the Company. However, should these conversions by the
Company and by its significant suppliers and customers not be successfully
completed on a timely basis, a potential worst-case effect on the Company could
be a significant disruption of operations, including, among other things, an
inability to obtain materials from vendors, make timely shipments to customers,
a temporary inability to process transactions, send invoices to its customers,
or engage in similar normal business activities. The Company does not have a
contingency back-up plan in case such conversions are not completed on a timely
basis.
ITEM 7. FINANCIAL STATEMENTS
The financial statements in response to this Item are submitted in a separate
section of this Report. The Index to the financial statements is as follows:
INDEPENDENTS AUDITORS' REPORTS F-1
FINANCIAL STATEMENTS
Consolidated balance sheet F-3
Consolidated statements of income F-4
Consolidated statements of stockholders' equity F-5
Consolidated statements of cash flows F-6
Notes to consolidated financial statements F-7
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ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
1. On December 17, 1998, the accounting firm of Deloitte & Touche LLP was
dismissed as the Company's independent accountant.
2. The accountant's reports for the Company's past two fiscal years did not
contain an adverse opinion or a disclaimer of opinion, and were not
qualified or modified as to uncertainty, audit scope, or accounting
principles.
3. The decision to change was not recommended or approved by the board of
directors.
4. During the Company's two most recent fiscal years and the subsequent
interim period preceding the dismissal, there have been no disagreements
with the former accountant on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure.
5. On December 22, 1998, the firm of McGladrey & Pullen, LLP was engaged as
the Company's independent accountant.
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 qualified.
<TABLE>
<CAPTION>
Name Age Director Since Position
- ---- --- -------------- --------
<S> <C> <C> <C>
Roy T. Eddleman 59 July 30, 1982 Chairman, CEO & Director
John J. Driscoll, J.D. (1) 49 July 30, 1982 Secretary & Director
Jack Whitescarver, Ph.D. 61 April 1, 1985 Director
Thomas V. Girardi, J.D. 59 January 2, 1999 Director
Jay Henis, Ph.D. 60 January 2, 1999 Director
Walter J. Lack, J.D. 51 January 2, 1999 Director
(1) Audit committee member
Executive Officers of The Company
- ---------------------------------
Roy T. Eddleman 59 July 30, 1982 Chairman & CEO
F. Jesus Martinez 59 ---- President & COO
Malcolm Morrison, Ph.D. 56 ---- Vice President Operations
Larry D. Womack 59 ---- Vice President Finance
</TABLE>
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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 twenty years.
John J. Driscoll has been employed as an attorney in private practice for over
eight years.
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
seven years.
Thomas Girardi has been employed as an attorney in private practice for over
twenty years.
Jay Henis is a practicing scientist and for eight years has been President and
CEO of Henis Technologies, Inc. He is also President and CEO of Orex
Pharmaceuticals.
Walter Lack has been employed as an attorney in private practice for over twenty
years. Walter Lack is also a Director of HCCH Insurance Holdings, Inc. and
Microvision, Inc.
F. 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.
Dr. Malcolm Morrison has been employed by the Company since January 1985. Prior
to becoming Vice President Operations in October, 1998, he was Director of
Quality Assurance and Regulatory Affairs. From 1985 to September 1998, Dr.
Morrison was Manager of Quality Assurance and Regulatory Affairs.
Larry Womack joined the Company as Controller in June 1997 and became Vice
President Finance and Chief Financial Officer in February, 1999. He was formerly
employed, for four years, by Unique Stamping & Coating, Inc. and was Vice
President Finance.
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 had no pension, retirement, annuity, savings or similar benefit
plans in 1998. Directors are not compensated for their services on the Company's
Board of Directors.
12
<PAGE>
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 officers who were paid
in excess of $100,000 including cash and issuance of securities:
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
--------------------------------- --------------------------------
RESTRICTED STOCK
NAME AND POSITION YEAR SALARY BONUS STOCK AWARDS OPTIONS # LTIP ALL OTHER(2)
- ----------------- ---- -------- ----- ------------ --------- ---- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Roy T. Eddleman 1998 $160,000 $ 560,951
Chief Executive Officer 1997 $160,000 616,960
1996 $160,000 $75,000 582,000
F. Jesus Martinez 1998 $145,000 265,599
President 1997 $145,000 $61,751 (1)
1996 $145,000 $55,000
</TABLE>
(1) Includes a payment of $13,626 which was made in connection with the sale of
Microgon, Inc. to the Company.
(2) Consulting fees for services rendered in connection with product design and
royalties of 7% on sales of certain products, as follows:
Year Consulting Royalties
---- ---------- ---------
1998 $ 211,500 $ 349,451
1997 282,000 334,960
1996 282,000 300,000
The following table sets forth stock options granted to executive officers of
the Company during the year ended January 2, 1999:
<TABLE>
<CAPTION>
No. of Securities Percent of Exercise Expiration
Name Underlying Options Total Options Price Date
- ----------------- ------------------ ------------- -------- -----------
<S> <C> <C> <C> <C>
F. Jesus Martinez 265,599 68.9% $1.20 08/10/09
President
</TABLE>
The following table sets forth information relating to stock options held by the
Company's executive officers as of January 2, 1999:
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised
Unexercised Options In-the-Money Options
Name Exercisable/Unexercisable Exercisable/Unexercisable
- ----------------- ------------------------------- -------------------------
<S> <C> <C>
F. Jesus Martinez 174,863/90,736 $217,000/$113,000
President
</TABLE>
13
<PAGE>
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 January 2, 1999 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:
<TABLE>
<CAPTION>
Amount and Nature Percent
Name and Address of Beneficial Ownership (1) of Class
- ------------------------------- --------------------------- ---------
<S> <C> <C>
Roy T. Eddleman 4,320,128 81.3
23022 La Cadena Drive
Laguna Hills, CA 92653
Thomas V. Girardi, J.D. 800,002 15.1
1126 Wilshire Blvd.
Los Angeles, CA 90017
John J. Driscoll, J.D. 3,750 (A) .1
One Chase Manhattan Plaza
New York, NY 10005
Jack Whitescarver, Ph.D. 2,500 (A) -
4301 Massachusetts Ave. NW #6002
Washington, D.C. 20016
Jay Henis, Ph.D. 2,500 (A) -
501 Marford Drive
St. Louis, MO 63141
Walter J. Lack, J.D. 102,323 1.9
10100 Santa Monica Blvd.
Los Angeles, CA 90067
F. Jesus Martinez 181,503 (A) 3.3
23022 La Cadena Drive
Laguna Hills, CA 92653
All directors and officers as a 5,412,706 (B) 98.4
group (9 in number)
</TABLE>
(1) All amounts are amounts of ownership of common stock of the Company unless
otherwise indicated
(A) Entire amount is amount of exercisable stock options
(B) Includes 190,253 exercisable stock options
14
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
<TABLE>
The Company had transactions with related parties as follows:
<CAPTION>
1998 1997
<S> <C> <C>
Expenses (income) related to transactions with the
Company's majority shareholder:
Rental of facilities owned by the shareholder (1) $300,748 $467,207
Royalties (2) 349,451 334,960
Consulting services (3) 211,500 282,000
Interest income on advances (4) (18,444) (21,909)
Expenses for legal services to a firm which
employs a member of the Board of Directors 40,000 63,986
</TABLE>
The majority shareholder has personally guaranteed the Company's bank loan up to
$3,100,000.
(1) See Item 2 - Description of Property
(2) 7% fee on sales of certain products by the Company
(3) $23,000 per month. Charge for consulting services was terminated in
September 1998.
(4) 4% interest charges on outstanding balance
15
<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 filed 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 Form 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)
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)
16
<PAGE>
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)
10.13 City National Bank loan agreement dated as of February 28,
1997, between Registrant, Spectrum Medical Industries, Inc.,
and City National Bank (incorporated by reference to Exhibit
10.13 filed with Registrant's report on Form 10-KSB for fiscal
year ended December 31, 1996, Commission File No. 0-9478)
10.14 Registrant's purchase agreement of Cellco, Inc. (incorporated
by reference to Exhibit 10.14 with Registrant's Form 8-K dated
November 1, 1996, Commission File No. 0-9478)
10.15 First amendment, dated October 10, 1997, to the City National
Bank loan agreement dated as of February 28, 1997, between
Registrant, Spectrum Medical Industries, Inc., and City
National Bank (incorporated by reference to Exhibit 10.15
filed with Registrant's report on Form 10-KSB for fiscal year
ended January 3, 1998, Commission File No. 0-9478)
17
<PAGE>
10.16 Second amendment, dated May 7, 1998, to the City National Bank
loan agreement dated as of February 28, 1997, between
Registrant, Spectrum Medical Industries, Inc., and City
National Bank (incorporated by reference to Exhibit 10.16
filed with Registrant's report on Form 10-KSB for fiscal year
ended January 3, 1998, Commission File No. 0-9478)
10.17 Third amendment, dated July 17, 1998, to the City National
Bank loan agreement dated as of February 28, 1997, between
Registrant, Spectrum Medical Industries, Inc., and City
National Bank
10.18 Credit agreement, dated as of December 22, 1998, between
Registrant and City National Bank
10.19 Incentive Agreement dated August 10, 1998, between Spectrum
Medical Industries, Inc., the Registrant and F. Jesus Martinez
and Roy T. Eddleman
16 Letter on change in certifying accountant
21 Subsidiaries of the Registrant
27 Financial Data Schedule for the year ended January 2, 1999
(b) Reports on 8-K
- ------------------
Reports on Form 8-K filed during the quarter ended January 2, 1999 were as
follows:
Items Reported Date of Report
- ------------------------------------------- ----------------
Merger of Spectrum Medical Industries, Inc.
into Spectrum Laboratories, Inc. October 30, 1998
Dismissal of Company's former independent
accountant December 17, 1998
Letter from former independent accountant
indicating agreement with comments made
by the Company regarding dismissal December 17, 1998
Engagement of Company's new independent
accountant December 22, 1998
18
<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, on April 21, 1999.
SPECTRUM LABORATORIES, INC.
By: /s/ Roy T. Eddleman
---------------------------------
Roy T. Eddleman
Chairman and Chief Executive Officer
By: /s/ John J. Driscoll
---------------------------------
John J. Driscoll
Director
By: /s/ Jay Henis
---------------------------------
Jay Henis
Director
By: /s/ Jack Whitescarver
---------------------------------
Jack Whitescarver
Director
By: /s/ F. Jesus Martinez
---------------------------------
F. Jesus Martinez
President and Chief Operating Officer
By: /s/ Larry D. Womack
---------------------------------
Larry D. Womack
Vice President Finance,
Chief Financial Officer
19
<PAGE>
SPECTRUM LABORATORIES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1999
<PAGE>
C O N T E N T S
Page
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORTS F-1
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
Consolidated balance sheet F-3
Consolidated statements of income F-4
Consolidated statements of stockholders' equity F-5
Consolidated statements of cash flows F-6
Notes to consolidated financial statements F-7
- --------------------------------------------------------------------------------
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Spectrum Laboratories, Inc.
Laguna Hills, California
We have audited the accompanying consolidated balance sheet of Spectrum
Laboratories, Inc. and subsidiaries as of January 2, 1999 and the related
consolidated statements of income, stockholders' equity and cash flows for the
year then ended. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Spectrum
Laboratories, Inc. and subsidiaries as of January 2, 1999 and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
McGladrey & Pullen, LLP
Anaheim, California
March 17, 1999, except for Note 5
which is dated April 19, 1999
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Spectrum Laboratories, Inc.
Irvine, California
We have audited the accompanying consolidated statements of income,
shareholders' equity, and cash flows of Spectrum Laboratories, Inc. and
subsidiaries (Note 1) (the Company) for the year ended January 3, 1998. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, Spectrum Laboratories, Inc. and subsidiaries' results of
their consolidated operations and their consolidated cash flows for the year
ended January 3, 1998, in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Costa Mesa, California
March 27, 1998
(April 19, 1999, as to the caption Reorganization in Note 1)
F-2
<PAGE>
<TABLE>
SPECTRUM LABORATORIES, INC.
CONSOLIDATED BALANCE SHEET
- --------------------------------------------------------------------------------------------
<CAPTION>
JANUARY 2,
ASSETS 1999
------------
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 855,000
Accounts receivable, less allowance for doubtful accounts of $125,000 1,519,000
Inventories 1,696,000
Prepaid expenses 123,000
Deferred taxes 377,000
------------
Total current assets 4,570,000
EQUIPMENT AND LEASEHOLD IMPROVEMENTS 2,233,000
GOODWILL, net of accumulated amortization of $558,000 2,699,000
OTHER ASSETS 406,000
------------
Total assets $ 9,908,000
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 1,047,000
Accounts payable 767,000
Accrued expenses and other current liabilities:
Compensation 274,000
Other 507,000
------------
Total current liabilities 2,595,000
------------
LONG-TERM DEBT, net of current maturities 1,620,000
------------
MINORITY INTEREST 2,000,000
------------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 25,000,000 shares authorized;
5,311,968 shares issued and outstanding 53,000
Preferred stock, par value $.01; 10,000,000 shares authorized;
none issued or outstanding -
Additional paid-in capital 8,016,000
Accumulated deficit (4,376,000)
------------
Total stockholders' equity 3,693,000
------------
Total liabilities and stockholders' equity $ 9,908,000
============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
SPECTRUM LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
- ---------------------------------------------------------------------------------------
<CAPTION>
FISCAL YEARS ENDED
-------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
NET SALES $ 12,490,000 $ 13,483,095
-------------- --------------
COSTS AND EXPENSES
Cost of sales 6,021,000 6,749,703
Selling 1,772,000 1,899,221
General and administrative 3,337,000 3,988,283
Research and development 780,000 798,673
Compensation expense related to stock options 217,000 -
Other expense, primarily interest 251,000 332,003
-------------- --------------
Total costs and expenses 12,378,000 13,767,883
-------------- --------------
Gain on the sales of product lines - 803,059
-------------- --------------
Income before provision for income taxes 112,000 518,271
Provision for income taxes 14,000 61,399
-------------- --------------
Net income $ 98,000 $ 456,872
============== ==============
Earnings per share
Basic $ 0.02 $ 0.09
============== ==============
Diluted $ 0.02 $ 0.09
============== ==============
Weighted average shares outstanding:
Basic 4,928,790 4,815,458
============== ==============
Diluted 4,985,158 4,921,570
============== ==============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
SPECTRUM LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Accumulated
Compre- Common stock Additional other com-
hensive ---------------------- paid-in Accumulated prehensive
income Shares Amount capital deficit income(loss) Total
---------- ----------- --------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 4,815,458 $ 48,155 $ 3,766,630 $ (1,055,849) $ (37,918) $ 2,721,018
Comprehensive income:
Net income $ 456,872 - - - 456,872 - 456,872
Foreign currency
translation loss (1,067) - - - - (1,067) (1,067)
----------
Comprehensive income $ 455,805
==========
Distributions to
stockholders - - 30,634 (437,634) - (407,000)
----------- --------- ------------ ------------- ------------ ------------
Balance, January 3, 1998 4,815,458 48,155 3,797,264 (1,036,611) (38,985) 2,769,823
Comprehensive income:
Net income $ 98,000 - - - 98,000 - 98,000
Foreign currency
translation gain, net
of reclassification
adjustment 38,985 - - - - 38,985 38,985
----------
Comprehensive income $ 136,985
==========
Stock issued for cash 267,146 2,645 747,355 - - 750,000
Stock issued in exchange
for debt and accrued
interest 229,364 2,200 709,000 - - 711,200
Compensation expense
related to stock options - - 217,000 - - 217,000
Cash distributions to
stockholders - - 72,381 (964,389) - (892,008)
Distributions to
stockholders - - 2,473,000 (2,473,000) - -
----------- --------- ------------ ------------- ------------ ------------
Balance, January 2, 1999 5,311,968 $ 53,000 $ 8,016,000 $ (4,376,000) $ - $ 3,693,000
=========== ========= ============ ============= ============ ============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
SPECTRUM LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------------------------
<CAPTION>
FISCAL YEARS ENDED
-------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 98,000 $ 456,872
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 714,000 629,064
Gain on sale of product lines - (803,059)
Noncash compensation 217,000 -
Change in assets and liabilities:
Decrease in accounts receivable 80,000 311,288
(Increase) decrease in inventories (183,000) 428,777
Decrease in prepaid expenses 43,000 8,732
Decrease in other assets - 4,040
(Decrease) in accounts payable (253,000) (174,299)
Increase (decrease) in accrued expenses 156,000 (274,385)
Other 20,000 (26,969)
-------------- --------------
Net cash provided by operating activities 892,000 560,061
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of equipment and leasehold improvements (407,000) (205,605)
Increase in other assets (200,000) -
Repayment of (advances to) stockholder receivable 306,000 (21,910)
Proceeds from sale of product lines - 1,097,400
-------------- --------------
Net cash provided by (used in) investing activities (301,000) 869,885
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of long-term debt 275,000 4,076,000
Proceeds from the sale of common stock 750,000 -
Principal payments of long-term debt (1,003,515) (4,569,485)
Distributions to stockholders (892,008) (407,000)
-------------- --------------
Net cash (used in) financing activities (870,523) (900,485)
-------------- --------------
Net increase (decrease) in cash and cash equivalents (279,523) 529,461
Cash and cash equivalents
Beginning of year 1,134,523 605,062
-------------- --------------
End of year $ 855,000 1,134,523
============== ==============
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
SPECTRUM LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS AND BASIS OF PRESENTATION - The consolidated
financial statements include the accounts of Spectrum Laboratories,
Inc. (Spectrum) and its subsidiaries (collectively, the Company), SLI
Acquisition Corp. (SLIAC), Spectrum Europe B.V. (Spectrum B.V.) and
Spectrum Chromatography (Chromatography). The Company is engaged
primarily in the manufacture and sale of medical laboratory equipment
and supplies and disposable products. All products are for sale
primarily to the pharmaceutical biotechnology and medical industries.
REORGANIZATION - On September 30, 1998, Spectrum Medical Industries,
Inc. (Medical), which formerly owned 79.9% of Spectrum Laboratories,
Inc. merged with Spectrum Laboratories, Inc. which will continue as
the legal successor. The merger is a combination of two companies
under common control and has been accounted for in a manner similar to
a pooling of interests. The consolidated financial statements of
Spectrum Laboratories, Inc. for the year ended January 3, 1998 are
those of Spectrum Medical Industries, Inc. and subsidiaries and have
been restated to reflect the effects of the merger with Spectrum
Laboratories, Inc., which were not material to such consolidated
financial statements. In connection with this reorganization, Medical
distributed its 79.9% ownership in Spectrum, 1,013,543 shares, to the
stockholders of Medical and the Company effected a one-for-ten reverse
stock split and reincorporated in Delaware. This reverse stock split
has been accounted for as if it occurred as of the beginning of the
earliest year presented in these consolidated financial statements.
Accordingly, stock options and corresponding exercise prices have been
adjusted to reflect the reverse split.
FISCAL YEAR - The Company's fiscal year ends on the Saturday nearest
December 31. The years ended January 2, 1999 (fiscal year 1998) and
January 3, 1998 (fiscal year 1997) both consist of approximately 52
weeks.
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial
statements include the accounts of Spectrum and its wholly owned
subsidiaries and majority-owned subsidiary, SLIAC. All intercompany
balances and transactions have been eliminated in consolidation.
USE OF ESTIMATES - The preparation of the 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 revenue 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 - The Company classifies all highly liquid
investments with original maturities of 90 days or less at the time of
purchase as cash and cash equivalents. The Company, periodically
throughout the year, has amounts on deposit that exceed the insured
limits.
F-7
<PAGE>
SPECTRUM LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
INVENTORIES - Inventories are stated at the lower of cost (using the
first-in first-out method) or market value.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS - Furniture, equipment and
leasehold improvements are recorded 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. Amortization
of leasehold improvements is included with depreciation expense. No
depreciation is being provided for the artwork, which is carried at
its historical cost.
GOODWILL - Goodwill represents the excess of the purchase price over
the fair value of net assets acquired resulting from prior
acquisitions and is amortized on a straight-line basis over lives up
to 20 years. The Company evaluates the recoverability of goodwill
annually by comparing undiscounted expected future cash flows from the
related operations to the carrying value of goodwill.
DETERMINING IMPAIRMENT ON LONG-LIVED ASSETS - The Company recognizes
impairment losses for long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows
are not sufficient to recover the assets' carrying amount. There was
no impairment of the value of such assets for the fiscal years 1998 or
1997.
INCOME TAXES - Deferred taxes are provided on a liability method
whereby deferred tax assets are recognized for deductible temporary
differences and tax credit carryforwards and deferred tax liabilities
are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets
and liabilities and their tax bases. Deferred tax assets are reduced
by a valuation allowance when, in the opinion of management, it is
more likely than not that some portion or all of the deferred tax
assets will not be realized. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date
of enactment.
EARNINGS PER SHARE - Basic earnings per share is computed by dividing
the net income attributable to the common stockholders by the weighted
average number of common shares outstanding during the period. There
is no adjustment in the net income attributable to common
stockholders. Diluted earnings per share reflects the potential
dilution that could occur from common shares issuable through stock
options (56,368 and 106,112 shares in the fiscal years 1998 and 1997,
respectively). During 1998 4,864 options were excluded from diluted
common shares as they were antidilutive.
REVENUE RECOGNITION - The Company records revenue at the time the
related products are shipped.
PRODUCT RETURNS AND WARRANTIES - The Company records a provision for
estimated product returns and warranties at the time the revenue is
recognized.
F-8
<PAGE>
SPECTRUM LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
RESEARCH AND DEVELOPMENT - The Company expenses research and
development costs as incurred.
ADVERTISING COSTS - Costs associated with advertising and promoting
products are expensed as incurred. Advertising and promotion expense
was approximately $68,000 and $147,000 during fiscal years 1998 and
1997.
REMEASUREMENT OF FOREIGN CURRENCIES - Monetary assets and liabilities
of Spectrum B.V. are remeasured into U.S. dollars at year-end exchange
rates and nonmonetary assets and stockholders' equity are remeasured
using historical rates of exchange. Income and expenses are remeasured
at average rates during the respective years. The functional currency
of this subsidiary is the U.S. dollar; therefore, remeasurement gains
or losses are included in income. Remeasurement gains (losses)
included in fiscal years 1998 and 1997 were ($31,000) and $0,
respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS - Management believes that the
carrying amount of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses approximates fair value because
of the short maturity of these financial instruments. Long-term debt
bears interest at a rate indexed to the prime rate and, therefore,
management believes the carrying amount of the outstanding borrowings
at January 2, 1999 and January 3, 1998 approximates fair market value.
ACCOUNTING FOR STOCK-BASED COMPENSATION - The Company accounts for
stock-based employee compensation under the requirements of Accounting
Principles Board (APB) Opinion No. 25, which does not require
compensation to be recorded if the consideration to be received is at
least equal to fair value at the measurement date. Nonemployee
stock-based transactions are accounted for under the requirements of
the Financial Accounting Standards Board's (FASB) Statement of
Financial Accounting Standards (SFAS) 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, which requires compensation to be recorded based on the
fair value of the securities issued or the services received,
whichever is more reliably measurable.
SEGMENT INFORMATION - Effective January 4, 1998, the Company adopted
FASB Statement No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE
AND RELATED INFORMATION. Statement No. 131 superseded FASB Statement
No. 14, FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS ENTERPRISE.
Statement No. 131 establishes standards for the way that public
business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report
selected financial information about operating segments in interim
financial reports. Statement No. 131 also establishes standards for
related disclosures about products and services, geographic areas and
major customers. The adoption of Statement No. 131 did not affect
results of operations or financial position, but did affect the
disclosure of product information.
F-9
<PAGE>
SPECTRUM LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2. INVENTORIES
Inventories consist of the following at January 2, 1999:
Raw materials $ 962,000
Work in process 26,000
Finished goods 708,000
-------------
Total $ 1,696,000
=============
NOTE 3. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following at
January 2, 1999:
Machinery, equipment and tooling $ 5,085,000
Office furniture and equipment 1,605,000
Artwork, at cost 974,000
Leasehold improvements 1,342,000
-------------
9,006,000
Less accumulated depreciation and amortization (6,773,000)
-------------
Total $ 2,233,000
=============
Depreciation and amortization expense of equipment and leasehold
improvements for fiscal years 1998 and 1997 was $424,000 and $433,610,
respectively.
F-10
<PAGE>
SPECTRUM LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4. INCOME TAXES
The Company's provision for income taxes consists of the following:
1998 1997
------------- -------------
Current:
Federal $ - $ 25,000
State (14,000) 44,520
Foreign 28,000 (8,121)
------------- -------------
14,000 61,399
Deferred:
Federal - -
State - -
------------- -------------
$ 14,000 $ 61,399
============= =============
The reported provision for income taxes differs from the amount
computed by applying the statutory federal income tax rate of 35% to
the consolidated income before provision for income taxes as follows:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Statutory federal income tax provision $ 39,000 $ 181,395
Nondeductible amortization of intangibles 75,000 54,784
State income taxes, net 23,000 32,991
S corporation income exclusion (308,000) (226,357)
Change in valuation allowance 183,000 53,852
Tax rate benefit - (39,902)
Other 2,000 4,636
------------- -------------
Income tax provision $ 14,000 $ 61,399
============= =============
</TABLE>
Medical, with the consent of its stockholders, had previously elected
to be taxed under sections of the federal and California income tax
laws which provide that, in lieu of corporate income taxes, the
stockholders separately account for their pro-rata share of the
Company's items of income, deductions, losses and credits. No
significant effect on deferred taxes resulted following the merger and
dissolution of Medical.
F-11
<PAGE>
SPECTRUM LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4. INCOME TAXES (Continued)
The components of the Company's net deferred income tax assets as of
January 2, 1999 are as follows:
State income taxes $ 10,000
Equipment and leasehold improvements 254,000
Intangibles 570,000
Compensation relating to nonqualified stock options 87,000
Reserves not currently deductible 277,000
Operating loss carryforwards 3,366,000
Other 69,000
------------
4,633,000
Valuation allowance (4,256,000)
------------
Net deferred tax assets $ 377,000
============
The Company's valuation allowance of $4,256,000 at January 2, 1999
results from the uncertainty of the Company's ability to utilize net
operating loss and tax credit carryforwards to reduce future taxes.
At January 2, 1999, the Company had net operating loss carryforwards
for federal income tax purposes available to offset future taxable
income. Certain of these loss carryforwards are available to offset
separate taxable income of one of the companies and are limited to
approximately $298,000 of that entity's 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 entity's net operating
loss may expire utilization. Loss carryforwards for tax purposes
expire in amounts and by fiscal year as follows: 1999 $696,000; 2000
$141,000; 2001 $250,000; 2002 $0; 2003 $0; 2004 $909,000; 2005
$2,279,000; 2006 $2,836,000; 2007 $1,821,000; 2008 $274,000; 2009 $0;
2010 $230,000; 2011 $0; 2012 $163,000; 2018 $300,000 (total
$9,899,000). The Company also has net operating loss carryforwards for
state purposes which expire in amounts and by fiscal year as follows:
2000 $49,000 and 2002 $6,000 (total $55,000).
F-12
<PAGE>
SPECTRUM LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5. LONG-TERM DEBT
At January 2, 1999, the Company has a credit agreement with a bank
which provides for two term loans. One of the term loans has an
outstanding balance at January 2, 1999 of $2,340,000, bears interest
subject to the bank's yield maintenance agreement (9.14% at January 2,
1999) and requires monthly principal installments of $60,000 plus
interest through March 1, 2002, when all principal and interest is
due. The other term loan has an outstanding balance at January 2, 1999
of $327,000, bears interest at prime plus .25% (8.0% at January 2,
1999) and requires monthly principal installments of $8,530 plus
interest through June 1, 1999, when all principal and interest is due.
The agreement is secured by substantially all assets, requires
maintenance of a time deposit of $100,000, and is personally
guaranteed by the majority stockholder up to $3,100,000. The agreement
also requires the maintenance of certain financial and nonfinancial
loan covenants. The Company was in violation of one such covenant at
January 2, 1999, which was waived by the bank on April 19, 1999.
Future maturities of long-term debt by fiscal year are as follows:
1999 $1,047,000; 2000 $720,000; 2001 $720,000; and 2002 $180,000.
NOTE 6. STOCK OPTION PLAN
The Company has a stock option plan that provides for issuance of
options to purchase up to 200,000 shares of its common stock. The plan
provides for the granting of options to qualified employees and
consultants of the Company at prices that are not less than the fair
market value of the shares as of the date of grant. The options become
exercisable as specified in the plan, expire not more than ten years
from the date of grant and become exercisable over a four-year period
(25% per year). No options have been exercised to date. In addition,
during 1998, the Company granted nonqualified stock options to
purchase 5% of the outstanding stock to an officer at $1.20 per share.
At the date of grant, 60% of these options vested immediately and the
remaining 40% vest over two to four years.
F-13
<PAGE>
SPECTRUM LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6. STOCK OPTION PLAN (Continued)
A summary of the status of the plan and the nonqualified options and
changes during fiscal years ended 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
Weighted
average
Number of exercise
shares price
------------ -------
<S> <C> <C>
OUTSTANDING, December 31, 1996 92,800 $ 3.20
Granted (weighted average fair value of $1.10) 37,800 2.10
Terminated (32,400) 2.60
------------ -------
OUTSTANDING, January 3, 1998 98,200 2.90
Granted at fair value (weighted average fair value
of $1.36) 70,050 2.13
Granted below fair value (weighted average fair
value of $2.09) 265,599 1.20
Terminated (48,600) 2.80
------------ -------
OUTSTANDING, January 2, 1999 385,249 $ 1.60
============ =======
</TABLE>
At January 2, 1999, 80,350 shares were available for future grants
under the plan.
A further summary of options outstanding at January 2, 1999 is as
follows:
<TABLE>
<CAPTION>
Weighted
average
Weighted remaining Weighted
average contractual average
Range of Number exercise life in Number exercise
exercise prices of options price years of options price
--------------- ---------- -------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C>
$ 1.20 265,599 $ 1.20 - 174,863 $ 1.20
2.44 50,000 2.44 4.20 - 2.44
3.20 24,700 3.20 7.00 18,525 3.20
4.37 5,000 4.37 7.00 2,500 4.37
2.80 1,500 2.80 7.75 750 2.80
7.50 600 7.50 7.75 300 7.50
1.87 to $ 2.20 18,600 2.15 7.79 7,375 2.15
2.50 1,000 2.50 8.25 - 2.50
1.25 18,250 1.25 8.75 - 1.25
------- -------
385,249 204,313
======= =======
</TABLE>
F-14
<PAGE>
SPECTRUM LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6. STOCK OPTION PLAN (Continued)
SFAS No. 123 requires the disclosure of pro forma net income and
earnings per share had the Company adopted the fair value method as of
the beginning of fiscal year 1995. Under SFAS No. 123, the fair value
of stock-based awards to employees is calculated through the use of
option-pricing models, even though such models were developed to
estimate the fair value of freely tradable, fully transferable options
with vesting restrictions which significantly differ from the
Company's stock option awards. These models also require subjective
assumptions, including future stock price volatility and expected time
to exercise, which greatly affect the calculated value. The Company's
calculations were made using the Black-Scholes option-pricing model
with the following weighted average assumptions: expected life, 48
months following complete vesting; stock volatility, ranging up to
115% in 1998 and 92% in 1997; risk-free interest rates ranging from
4.9% to 5.6% in 1998 and 5.8% in 1997; and no dividends expected term.
The calculations are based on a single-option valuation approach and
forfeitures are recognized as they occur. If the computed fair value
of awards had been amortized to expense over the vesting period of the
awards, pro forma net income (loss) of the Company would have been
approximately ($77,000) [($0.02) per basic and diluted share] in
fiscal year 1998 and $390,000 ($.08 per basic and diluted share) in
fiscal year 1997. The effects of applying SFAS No. 123 are not
indicative of future amounts since, among other reasons, the
requirements of the Statement have been applied only to options
granted after December 15, 1994.
NOTE 7. RELATED PARTY TRANSACTIONS
ADVANCES TO MAJORITY STOCKHOLDER - Advances to the majority
stockholder consisted of unsecured cash advances. These advances bore
interest at 4%. Interest income of $18,000 and $21,909 was earned on
the advances during 1999 and 1998, respectively. These advances were
repaid during 1999.
ROYALTY AGREEMENT - The Company is committed under a royalty agreement
to pay the majority stockholder royalties of 7% of the net sales of
certain products, as defined through the life of the defined products.
During 1998 and 1997, the Company incurred royalty expenses of
$349,000 and $334,960, respectively, under this agreement.
CONSULTING AGREEMENT - The Company is committed under a consulting
agreement to pay the majority stockholder consulting fees for services
rendered in connection with product design and development. During
1998 and 1997, the Company incurred expenses of $212,000 and $282,000,
respectively, under this agreement.
LEASES - The Company leases office, manufacturing and warehouse
facilities from the majority stockholder under operating leases which
were to expire on various dates through 2008. The majority stockholder
and the Company have canceled these leases and the Company is now
leasing them on a month-to-month basis. Rent expense under these
leases was $301,000 and $314,785 in 1998 and 1997, respectively.
F-15
<PAGE>
SPECTRUM LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7. RELATED PARTY TRANSACTIONS (Continued)
LEGAL SERVICES - During 1998 and 1997, the Company incurred expenses
of $40,000 and $63,968, respectively, for legal services to a firm
which employs a member of the Board of Directors.
NOTE 8. COMMITMENTS AND RENT EXPENSE
LEASE COMMITMENTS AND RENT EXPENSE - The Company is obligated under
the terms of various operating lease agreements for manufacturing,
warehouse and office facilities. Certain of these leases provide for
rent escalation adjustments. Rent expense, including amounts paid to
the majority stockholder, was $649,000 and $651,700 in fiscal years
1998 and 1997, respectively. Minimum future rental payments under
these operating lease agreements for the years ending December 31 are
as follows: 1999 $842,000; 2000 $408,000; 2001 $414,000; 2002
$420,000; 2003 $380,000; and thereafter $537,000 (total $3,001,000 of
which $273,000 is with the majority stockholder).
CONTRACT RESEARCH AND DEVELOPMENT - The Company has agreed to work on
a specific research and development project with an unrelated company.
The Company anticipates that it will incur approximately $400,000
during the years ending December 31, 1999 and 2000 in connection with
research and development.
NOTE 9. GEOGRAPHIC INFORMATION
During fiscal years 1998 and 1997, the Company had sales to customers
located outside the United States. Foreign sales by country for fiscal
years ended 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
United States $ 9,336,000 $ 10,079,095
Japan 808,000 1,175,000
Other countries, each of which represent less than
5% of total net sales 2,346,000 2,229,000
------------- -------------
$ 12,490,000 $ 13,483,095
============= =============
</TABLE>
There were no significant assets held abroad at January 2, 1999 or
January 3, 1998.
F-16
<PAGE>
SPECTRUM LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10. MAJOR CUSTOMER
Net sales for fiscal years 1998 and 1997 includes sales to the
following major customers (each of which accounted for 10% or more of
the total sales of the Company) together with the receivables due from
those customers as of January 2, 1999 and January 3, 1998:
1998 1997
------------------------- -------------------------
Trade Trade
Accounts Accounts
Net Sales Receivable Net Sales Receivable
------------ ---------- ------------ ----------
Customer A $ 2,078,000 $ 215,000 $ 1,958,000 $ 226,000
Customer B 1,529,000 119,000 1,556,000 166,000
------------ ---------- ------------ ----------
$ 3,607,000 $ 334,000 $ 3,514,000 $ 392,000
============ ========== ============ ==========
NOTE 11. GAIN ON SALE OF PRODUCT LINES
In March 1997, the Company sold its microbiological sampling and
transports product line, including related inventory and production
equipment, for approximately $969,000, resulting in a gain of
$768,488. In November 1997, the Company sold its microscope drapes
product line, including related inventory and production equipment,
for approximately $128,000, resulting in a gain of $34,571.
NOTE 12. MINORITY INTEREST
On October 1, 1996, a subsidiary of the Company, SLIAC, entered into
an Asset Purchase Agreement with Cellco, a Delaware corporation, and
acquired the operating assets and liabilities of Cellco in exchange
for 10,000 shares of the subsidiary's preferred stock valued at
$2,000,000. The preferred stockholders of the subsidiary have the
right to put their stock to SLIAC at any time from October 1, 2000 to
September 30, 2001 for a price of $2,000,000. In the event the
subsidiary is combined with the Company and the combined company
completes an underwritten offering, the preferred stockholders have
the right to exchange such stock for 7% of the newly combined company.
The preferred shares are nonvoting and have preference over common
stockholders as to dividends and liquidation.
F-17
<PAGE>
SPECTRUM LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Cash paid for:
Income taxes $ 50,000 $ 83,528
========== ==========
Interest $ 294,000 $ 454,384
========== ==========
Supplemental schedule of noncash investing and
financing activities:
Stockholder's contribution of additional capital
from the proceeds of stockholder distributions $ 72,000 $ 31,000
========== ==========
Stock issued in exchange for debt $ 552,000 $ -
========== ==========
Stock issued in exchange for accrued interest $ 159,000 $ -
========== ==========
Note payable to majority stockholder offset against
advances to majority stockholder $ 134,000 $ -
========== ==========
Accrued royalties to majority stockholder offset against
advances to majority stockholder $ 74,000 $ -
========== ==========
Contribution of 21% ownership in Chromatography
by majority stockholder in exchange for advances to
majority stockholder $ 46,000 $ -
========== ==========
</TABLE>
NOTE 14. PRODUCT GROUP INFORMATION
The Company's product groups are based on specific product
characteristics and are grouped into laboratory products and operating
room disposable products. Laboratory products consist primarily of:
(1) membranes used to concentrate, separate and purify dissolved or
suspended molecules that are sold primarily to laboratories and (2)
hollow fiber membrane devices that allow components retained by a
membrane to be concentrated including filters utilized for micro and
ultrafiltration separations sold to biotech and pharmaceutical
companies. Operating room disposable products consist of sterile
plastic surgical drapes and cloth bandages that are sold primarily to
hospitals.
F-18
<PAGE>
SPECTRUM LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 14. PRODUCT GROUP INFORMATION (Continued)
Revenue by product group is as follows:
1998 1997
------------- -------------
Laboratory products $ 10,867,000 $ 11,395,095
Operating room disposable products 1,623,000 2,088,000
------------- -------------
$ 12,490,000 $ 13,483,095
============= =============
NOTE 15. VALUATION AND QUALIFYING ACCOUNT INFORMATION
Following is information regarding the Company's allowance for
doubtful accounts:
Balance at Provision
beginning charged to Charge- Balance at
of year expense offs end of year
---------- ---------- ---------- ----------
Fiscal year:
1998 $ 198,000 $ 55,000 $ 128,000 $ 125,000
========== ========== ========== ==========
1997 $ 97,000 $ 117,000 $ 16,000 $ 198,000
========== ========== ========== ==========
F-19
<PAGE>
Exhibit 10.17
CITY NATIONAL BANK
THIRD AMENDMENT TO CREDIT AGREEMENT
This Third Amendment to Credit Agreement is entered into as of July 17,
1998, by and between Spectrum Medical Industries, Inc., a California corporation
and Spectrum Laboratories, Inc., a California corporation ("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, as amended by that certain First Amendment to Credit
Agreement dated as of October 10, 1997, and that certain Second Amendment to
Credit Agreement dated as of May 7, 1998, (the Credit Agreement, as herein
amended, hereinafter the "Credit Agreement").
B. Borrower and CNB desire to supplement and amend the Credit 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 Credit Agreement.
2. AMENDMENTS. The Credit Agreement is amended as follows:
2.1 Delete the definition of "Termination Date" in its entirety and
replace it with:
"TERMINATION DATE" means October 1,1998. Notwithstanding the
foregoing, CNB may, as 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 2.1.3 "ADDITIONAL TERM LOAN PAYMENT" is amended by
deleting the date "JULY 1, 1998" from both the first sentence and the
last sentence and replacing it with a new date "OCTOBER 1, 1998" in
both the first sentence and the last sentence".
2.3 Section 2 LOANS. is amended as follows:
Delete the following sections 2.lA, 2.1A.l, 2.1A.2, 2.lA.3
3. EXISTING AGREEMENT. Except as expressly amended herein, the Credit
Agreement shall remain in full force and effect, and in all other respects is
affirmed.
1
<PAGE>
4. CONDITIONS PRECEDENT. This Amendment shall become effective upon the
fulfillment of all of the following conditions to CNB's satisfaction:
4.1 CNB shall have received this Amendment duly executed by Borrower
and acknowledged by the Guarantors.
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 instrument.
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.
"Borrower" Spectrum Medical Industries, Inc.,
a California corporation
By: /s/ Roy T. Eddleman
-----------------------------------
Roy T. Eddleman, Chairman/CEO
Spectrum Laboratories, Inc., a
California corporation
By: /s/ Roy T. Eddleman
------------------------------------
Roy T. Eddleman, Chairman/CEO.
"CNB" City National Bank, a national
banking association
By: /s/ Richard Fein
------------------------------------
Richard Fein, Vice President
2
<PAGE>
CONSENT OF GUARANTORS:
The undersigned have previously guaranteed the indebtedness of
SPECTRUM MEDICAL INDUSTRIES, INC., a California corporation and SPECTRUM
LABORATORIES, INC., a California corporation owed to CNB. The undersigned
confirm that their respective guaranties and the security given in connection
therewith, if any, shall continue in full force and effect and that each
guaranty shall be a separate and distinct obligation and] apply to the
indebtedness arising from the Credit Agreement as amended herein, subject to the
overall limitation as to the amount guaranteed.
/s/ Roy T. Eddleman
-----------------------------------------
Roy T. Eddleman
Spectrum Molecular Separations, Inc., a
Delaware corporation
By: /s/ Roy T. Eddleman
-----------------------------------------
Roy T. Eddleman, Chairman/CEO.
Hydro-Med Products, Inc., a
Texas corporation
By: /s/ Roy T. Eddleman
-----------------------------------------
Roy T. Eddleman, Chairman/CEO.
SLI Acquisition Corp., a
Delaware corporation
By: /s/ Roy T. Eddleman
-----------------------------------------
Roy T. Eddleman, Chairman/CEO.
Spectrum Europe B.V., a
Netherlands corporation
By: /s/ Roy T. Eddleman
-----------------------------------------
Roy T. Eddleman, Chairman/CEO.
3
<PAGE>
Exhibit 10.18
CREDIT AGREEMENT
This Credit Agreement (the Agreement"), dated as of December 22, 1998, is
between CITY NATIONAL BANK ("CNB") and SPECTRUM LABORATORIES, INC., a Delaware
corporation ("Borrower"), successor by merger with Spectrum Medical Industries,
Inc. a California corporation ("SMI"), and Spectrum Laboratories, Inc., a
California corporation ("SLI"), and supersedes and replaces in its entirety that
certain Credit Agreement dated as of February 28, 1997 between, SMI and SLI, as
borrowers, and CNB.
1. DEFINITIONS. As used in this Agreement, these terms have the following
meanings:
"ACCOUNT" or "ACCOUNTS" mean any right to payment for goods sold or
leased or for services rendered which is not evidenced by an instrument or
chattel paper, whether or not it has been earned by performance.
"AFFILIATE" means any Person directly or indirectly controlling,
controlled by, or under common control with, Borrower, and includes any employee
stock ownership plan of Borrower or an Affiliate. "Control" means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of that Person, whether through the
ownership of voting securities, by contract or otherwise.
"BUSINESS DAY" means a day that CNB's Head Office is open and conducts
a substantial portion of its business.
"CASH FLOW FROM OPERATIONS" will be determined on a consolidated basis
for Borrower and the Subsidiaries and means the sum of(a) net income after taxes
and before extraordinary items in accordance with GAAP earned (i) with respect
to Section 5.10.3(a), over the six-month period ending January 2,1999, (ii) with
respect to Section 5.10.3(b), over the nine-month period ending April 3, 1999,
and (iii) with respect to Section 5.10.3(c), over the twelve month period ending
on the date of determination, plus (b) amortization of intangible assets, plus
(c) interest expense, plus (d) depreciation expensed (i) with respect to Section
5.10.3(a), during the six-month period ending January 2, 1999, (ii) with respect
to Section 5.10.3(b), during the nine-month period ending April 3, 1999, and
(iii) with respect to Section 5.10.3(c), during the twelve month period ending
on the date of determination.
"CODE" means the California Uniform Commercial Code, except where the
Uniform Commercial Code of another state governs the perfection of a security
interest in Collateral located in that state.
"COLLATERAL" means the property securing the Obligations, including,
without limitation, the pledge by Borrower to CNB of a time deposit maintained
by Borrower at CNB in a principal amount of not less than $100,000.00.
"CASH/SECURITIES COLLATERAL" means time deposits, money market mutual
funds or securities acceptable to CNB owned by Roy Eddleman which are pledged as
Collateral securing the Obligations, and which will be held under the account
name of CNB.
"CURRENT ASSETS" will be determined on a consolidated basis for
Borrower and the Subsidiaries in accordance with GAAP excluding, however, loans
to stockholders, management or employees, amounts due from Subsidiaries or
Affiliates, deferred costs, and other intangible assets.
"CURRENT LIABILITIES" will be determined on a consolidated basis for
Borrower and the Subsidiaries in accordance with GAAP and will include without
limitation (a) all payments on Subordinated Debt required to be made within one
(1) year after the date on which the determination is made; and (b) all
indebtedness payable to stockholders, Affiliates, Subsidiaries or officers
regardless of maturity, unless such indebtedness has been subordinated, on terms
satisfactory to CNB, to the Obligations.
"DEBT" means, at any date, the aggregate amount of without
duplication, (a) all obligations of Borrower or any Subsidiary for borrowed
money; (b) all obligations of Borrower or any Subsidiary evidenced by bonds,
debentures, notes or other similar instruments; (c) all obligations of Borrower
or any Subsidiary to pay the deferred purchase price of property or services;
(d) all capitalized lease obligations of Borrower or any Subsidiary; (e) all
obligations or liabilities of others secured by a lien on any asset of Borrower
or any Subsidiary, whether or not such obligation or liability is assumed; (f)
all obligations guaranteed by Borrower or any Subsidiary; (g) all obligations of
Borrower or any Subsidiary, direct or indirect, for letters of
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credit; and (h) any other obligations or liabilities which are required by
generally accepted accounting principles to be shown as debt on the balance
sheet of Borrower or any Subsidiary.
"DEBT SERVICE" means (a) the aggregate amount of Current Maturity of
Long Term Debt plus (b) all interest incurred on borrowed money during the
twelve month period ending on the date of determination. "Current Maturity of
Long Term Debt" means that portion of Borrower's consolidated long term
liabilities, determined in accordance with GAAP, which shall, by the terms
thereof, become due and payable within one (1) year following the date of the
balance sheet upon which such calculations are based; PROVIDED, HOWEVER, with
respect to Term Loan B, the outstanding principal balance in excess of
$102,000.00 will not be considered Current Maturity of Long Term Debt.
"GAAP" means generally accepted accounting principles and practices,
consistently applied.
"INVENTORY" means goods held for sale or lease in the ordinary course
of business, work in process and any and all raw materials used in connection
with the foregoing.
"LIQUID ASSETS" means cash, cash equivalents, marketable securities
and other such highly liquid assets as defined by GAAP.
"LOAN" or "LOANS" means one or more of the Loans extended by CNB to
Borrower under Section 2.
"LOAN DOCUMENTS" means, individually and collectively, this Agreement,
any Note, guaranty, security or pledge agreement, financing statement and all
other contracts, instruments, addenda and documents executed in connection with
or related to the extension(s) of credit, and any Collateral and Cash/Securities
Collateral therefor, which is the subject of this Agreement.
"NOTES" means the Notes referenced in Section 2.
"OBLIGATIONS" means all present and future liabilities and obligations
of Borrower to CNB hereunder and all other liabilities and obligations of
Borrower to CNB of every kind, now existing or hereafter owing, matured or
unmatured, direct or indirect, absolute or contingent, joint or several,
including any extensions and renewals thereof and substitutions therefor.
"PERSON" means any individual or entity.
"POTENTIAL EVENT OF DEFAULT" means any condition that with the giving
of notice or passage of time or both would, unless cured or waived, become an
Event of Default.
"PRIME RATE" means the rate most recently announced by CNB at its
principal office in Beverly Hills, California as its "Prime Rate." Any change in
the interest rate resulting from a change in the Prime Rate will be effective on
the day on which each change in the Prime Rate is announced by CNB.
"SLI ACQUISITION CORP. PREFERRED STOCK" means the convertible
preferred stock issued to former Cellco Incorporated shareholders by SLI
Acquisition Corp. to complete the purchase transaction of Cellco Incorporated.
The preferred stock is classified as a minority interest according to GAAP,
however, it shall be included as preferred stock for the purposes of this
Agreement until such date that either (i) it is converted to common stock, at
which time it will be classified as common stock, or (ii) the Put Option is
exercised by the preferred shareholders, at which time it will be classified as
a Debt of Borrower. "Put Option" means the option held by holders of the SLI
Acquisition Corp. preferred stock to sell their preferred stock to SLI
Acquisition Corp. for a sum of $2,000,000 at any time from October 1, 2000 to
September 30, 2001.
"SUBORDINATED DEBT" means Debt of Borrower or any Subsidiary, the
repayment of which is subordinated to the Obligations on terms satisfactory to
CNB.
"SUBSIDIARY" means any corporation, the majority of whose voting
shares are at any time owned, directly or indirectly by Borrower and/or by one
or more Subsidiaries.
"TANGIBLE NET WORTH" means the total of all assets appearing on a
balance sheet prepared in accordance with GAAP for Borrower and the Subsidiaries
on a consolidated basis, minus (a) all intangible assets, including, without
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limitation, unamortized debt discount, Affiliate, employee and officer
receivables or advances, goodwill, research and development costs, patents,
trademarks, the excess of purchase price over underlying values of acquired
companies, any covenants not to compete, deferred charges, copyrights,
franchises, art works and appraisal surplus; minus (b) all obligations which are
required by GAAP to be reflected as a liability on the consolidated balance
sheet of Borrower and the Subsidiaries; minus (c) the amount, if any, at which
shares of stock of a non-wholly owned Subsidiary appear on the asset side of
Borrower's consolidated balance sheet, as determined in accordance with GAAP;
minus (d) minority interests; minus (e) deferred income and reserves not
otherwise reflected as a liability on the consolidated balance sheet of Borrower
and the Subsidiaries; plus (f) Cash/Securities Collateral.
"TOTAL SENIOR LIABILITIES" means, as of any date of determination, the
amount of all obligations that should be reflected as a liability on a
consolidated balance sheet of Borrower and the Subsidiaries prepared in
accordance with GAAP, less Subordinated Debt.
2. LOANS.
2.1 THE TERM LOAN A. CNB agrees to make, upon Borrower's request, a
term loan ("Term Loan A") to Borrower in the principal amount of Two Million
Three Hundred Forty Thousand and No/l00 Dollars ($2,340,000.00). The Term Loan A
will be evidenced by a promissory note ("Term Note") in the form attached hereto
as Exhibit "A"
2.1.1 INTEREST ON TERM LOAN A. The Term Loan A will bear
interest from disbursement until due (whether at stated maturity, by
acceleration or otherwise) at a fixed rate equal to nine and 14/100 percent
(9.14%) per annum subject to provisions in CNB's Yield Maintenance Agreement, a
copy of which is attached as Exhibit "C". Interest will be payable monthly in
arrears on the first day of each month, starting on February 1, 1999, and on the
date the Term Loan A is paid in full.
2.1.2 PAYMENT OF TERM LOAN A. The principal amount of the
Term Loan A will be repaid by Borrower to CNB in thirty-nine (39) consecutive
monthly installments, consisting of thirty-eight (38) installments each in the
amount of $60,000.00, and a final installment in the amount of $60,853.07,
commencing on January 1, 1999, and continuing on the first day of each month up
to and including March 1, 2002, on which date all principal and accrued interest
will be due and payable in full.
2.2 THE TERM LOAN B. CNB agrees to make, upon Borrower's request, a
term loan ("Term Loan B") to Borrower in the principal amount of Three Hundred
Twenty Six Thousand Six Hundred Forty Five and 44/100 Dollars ($326,645.44). The
Term Loan B will be evidenced by a promissory note ("Term Note") in the form
attached hereto as Exhibit "B"
2.2.1 INTEREST ON TERM LOAN B. The Term Loan B 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 of one percent (0.25%) per annum. Interest will be payable monthly
in arrears on the first day of each month, starting on February 1,1999, and on
the date the Term Loan B is paid in full.
2.2.2 PAYMENT OF TERM LOAN B. The principal amount of the
Term Loan B will be repaid by Borrower to CNB in five (5) consecutive monthly
installments, consisting of four (4) installments each in the amount of
$8,530.00, and a final installment in the amount of $294,540.62, commencing on
February 1, 1999, and continuing on the first day of each month up to and
including June 1, 1999, on which date all principal and accrued interest will be
due and payable in full.
2.3 OPTIONAL PREPAYMENTS. Borrower may prepay any Loans provided that
on each prepayment, Borrower will pay the accrued interest on the prepaid
principal, to the date of such prepayment plus any amounts due under CNB's Yield
Maintenance Agreement. All prepayments will be applied to principal installments
in the inverse order of their maturities.
2.4 LOANS AND PAYMENTS. All payments will be in United States Dollars
and in immediately available funds. Interest will be computed on the basis of a
360-day year, actual days elapsed. All payments of principal, interest, fees and
other charges on the Loans will be made directly to CNB at the address specified
at the end of this agreement CNB is authorized to note the date, amount and
interest rate of each Loan and each payment of principal and interest on CNB's
books and records, which notations will constitute presumptive evidence of the
accuracy of the information noted. Any Loan will
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be conclusively presumed to have been made to or for the benefit of Borrower
when CNB, in its sole discretion, believes that the request therefor has been
made by authorized persons (whether in fact that is the case), or when the Loan
is deposited to the credit of Borrower's account with CNB, regardless of whether
any Person other than Borrower may have authority to draw against such account.
2.5 DEFAULT INTEREST RATE. From and after written notice by CNB to
Borrower of the occurrence of an Event of Default (and without constituting a
waiver of such Event of Default), each Loan (and interest thereon to the extent
permitted by law) will bear additional interest at a fluctuating rate equal to
five percent (5.0%) per annum higher than the respective interest rate
applicable to each Loan until the Event of Default has been cured. All interest
provided for in this Section will be compounded monthly and payable on demand.
2.6 GUARANTIES. Roy T. Eddleman, an unmarried man, Spectrum Europe
B.V., a Netherlands company, SLI Acquisition Corp., a Delaware corporation,
Hydro-Med Products, Inc., a Texas corporation, and Spectrum Molecular
Separations, Inc. dba Spectrum Chromatography, a Delaware corporation (if more
than one, each a "Guarantor" and collectively, "Guarantors") will guarantee full
repayment of Borrower's Obligations to CNB, and will execute and deliver to CNB
their Continuing Guaranties ("Guaranties") in the form customarily used 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 Two Hundred Twenty One Thousand Dollars ($1,221,000.00).
3. CONDITIONS PRECEDENT.
3.1 EXTENSION OF CREDIT. The obligation of CNB to make any Loan or
other extension of credit hereunder is subject to CNB's receipt of each of the
following, in form and substance satisfactory to CNB, and duly executed as
required by CNB:
3.1.1 All Loan Documents required by CNB, including but not
limited to such documents necessary to perfect CNB's first priority security
interest in the Collateral and in the Cash/Securities Collateral, and evidence
of such perfection;
3.1.2 Evidence that any insurance required by this Agreement
or any other Loan Document is in effect; and
3.1.3 Where Borrower or any party signing a Loan Document is
a business entity, such authorization documents as CNB may require, in form and
substance satisfactory to CNB.
3.2 CONDITIONS TO EACH EXTENSION OF ALL LOANS. The obligation of CNB
to make any Loan or other extension of credit hereunder will be subject to the
fulfillment of each of the following conditions to CNB's satisfaction:
3.2.1 The representations and warranties of Borrower set
forth in Section 4 of this Agreement and in all other Loan Documents will be
true and correct on the date of the making of each Loan or other extension of
credit with the same effect as though such representations and warranties had
been made on and as of such date;
3.2.2 There will be no Event of Default or Potential Event of
Default under this Agreement or any of the Loan Documents; and
3.2.3 All other documents and legal matters in connection
with the transactions described in this Agreement will be satisfactory in form
and substance to CNB.
4. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants (and
each request for a Loan or other extension of credit will be deemed a
representation and warranty made on the date of such request) that:
4.1 CORPORATE EXISTENCE, POWER AND AUTHORIZATION. Borrower and each
Subsidiary is duly organized, validly existing and in good standing under the
laws of the state of its organization, and is duly qualified to conduct business
in each jurisdiction in which its business is conducted. The execution, delivery
and performance of all Loan Documents
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executed by Borrower are within Borrower's powers and have been duly authorized
by the Board of Directors of Borrower and do not require any consent or approval
of the stockholders of Borrower.
4.2 BINDING AGREEMENT. The Loan Documents constitute the valid and
legally binding obligations of Borrower, enforceable against Borrower in
accordance with their terms.
4.3 ANCILLARY DOCUMENTS. To the extent that any security agreement,
subordination agreement or Guaranty is required to be executed by a Subsidiary
or Affiliate, the representations and warranties set forth in Sections 4.1 and
4.2 are also true and correct with respect to any such Subsidiary or Affiliate
and such document.
4.4 OTHER AGREEMENTS. The execution and performance of the Loan
Documents will not violate any provision of law or regulation (including,
without limitation, Regulations X and U of the Federal Reserve Board) or any
order of any governmental authority, court, or arbitration board or the Articles
of Incorporation or By-laws of Borrower, or result in the breach of, constitute
a default under, contravene any provisions of, or result in the creation of any
security interest, lien, charge or encumbrance upon any of the assets of
Borrower pursuant to any indenture or agreement to which Borrower or any of its
properties is bound, except liens and security interests in favor of CNB.
4.5 LITIGATION. There is no litigation, tax claim, investigation or
proceeding pending, threatened against or affecting Borrower, any Subsidiary,
any Guarantor or any of their respective properties which, if adversely
determined, would have a material adverse effect on the business, operations or
condition, financial or otherwise, of Borrower, any Subsidiary or any
Guarantor.
4.6 FINANCIAL CONDITION. Borrower's most recent financial statements,
copies of which have been delivered to CNB, have been prepared in accordance
with GAAP and are true, complete and correct and fairly present the financial
condition of Borrower and the Subsidiaries, including operating results, as of
the accounting period referenced therein. There has been no material adverse
change in the financial condition or business of Borrower or any Subsidiary
since the date of such financial statements. Neither Borrower nor any Subsidiary
has any material liabilities for taxes or long-term leases or commitments,
except as disclosed in the financial statements.
4.7 NO VIOLATIONS. Borrower is not, nor is any Subsidiary, in
violation of any law, ordinance, rule or regulation to which it or any of its
properties is subject.
4.8 USE OF PROCEEDS. Borrower will use the proceeds of Term Loan A
solely for repayment in full of loan #26916 owed by SMI and SLI to CNB, and the
proceeds of Term Loan B solely for repayment in full of loan #28528 owed by SMI
and SLI to CNB.
4.9 ERISA. Borrower is in compliance in all material respects with all
applicable provisions of the Employee Retirement Income Security Act of 1974
("ERISA"). No Reportable Event (as defined in ERISA and the regulations issued
thereunder [other than a "Reportable Event" not subject to the provision for
thirty (30) day notice to the Pension Benefit Guaranty Corporation ("PBGC")
under such regulations]) has occurred with respect to any benefit plan of
Borrower nor are there any unfunded vested liabilities under any benefit plan of
Borrower. Borrower has met its minimum funding requirements under ERISA with
respect to each of its plans and has not incurred any material liability to the
PBGC in connection with any such plan.
4.10 CONSENTS. No consent, license, permit, or authorization of,
exemption by, notice to, report to, or registration, filing or declaration with,
any governmental authority or agency is required in connection with the
execution and performance by Borrower of the Loan Documents or the transactions
contemplated hereunder.
4.11 REGULATION U. Borrower is not engaged principally, or as one of
its principal activities, in the business of extending credit for the purpose of
purchasing or carrying margin stock (within the meaning of Regulations U or X of
the Federal Reserve Board). No part of the proceeds of the Loans will be used by
Borrower to purchase or carry any such margin stock or to extend credit to
others for the purpose of purchasing or carrying such margin stock.
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4.12 ENVIRONMENTAL MATTERS.
4.12.1 The operations of Borrower and each Subsidiary comply
in all material respects with all applicable federal, state and local
environmental, health and safety statutes, regulations and ordinances, and fully
comply with all terms of all required permits and licenses;
4.12.2 Borrower and each Subsidiary have received no notices
of any threatened or pending governmental or private civil, criminal or
administrative proceeding regarding any environmental or health and safety
statute, regulation or ordinance and have not been subject to any federal, state
or local investigations, inspections or orders regarding any environmental or
health and safety statute, regulation or ordinance;
4.12.3 Neither Borrower nor any Subsidiary knows of any facts
or conditions which may exist which may subject Borrower or any Subsidiary to
liability or contingent liability and neither Borrower nor any Subsidiary is
presently liable or contingently liable for any removal, remedial, response or
other costs or damages in connection with any release into the environment of
toxic or hazardous substances or waste included on any federal, state or local
hazardous chemical or substance lists under any federal, state or local statute,
regulation or ordinance.
4.12.4 Borrower will, at all times, defend and indemnify and
hold CNB (which for purposes of this Section 4.12 and Section 8.8 includes CNB's
parent company and subsidiaries and all of their respective shareholders,
directors, officers, employees, agents, representatives, successors, attorneys,
and assigns) harmless from and against any liabilities, claims, demands, causes
of action, losses, damages, expenses (including without limitation reasonable
attorneys' fees, [which attorneys may be employees of CNB, or may be outside
counsel]) costs, settlements, judgments or recoveries (collectively, "Claims")
directly or indirectly arising out of or attributable to the use, generation,
manufacture, production, storage, release, threatened release, discharge,
disposal, or presence of a hazardous substance on, under or about Borrower's
property or operations or property leased to or used by Borrower. For these
purposes, the term "hazardous substances" means any substance which is or
becomes designated as "hazardous" or "toxic" under any Federal, state, or local
law. Any obligation or liability of Borrower to CNB under this Section will
survive the expiration or termination of this Agreement and the repayment of all
Loans and the payment or performance of all other Obligations of Borrower to
CNB.
5. AFFIRMATIVE COVENANTS. Borrower agrees that until payment in full of
all Obligations, Borrower will comply with the following covenants:
5.1 BOOKS AND RECORDS. Borrower will maintain, in accordance with
sound accounting practices, accurate records and books of account showing, among
other things, all Inventory and Accounts, the proceeds of the sale or other
disposition thereof and the collections therefrom. Borrower will not change the
accounting method used to determine Borrower's Inventory cost without
notification to CNB. CNB may, at any reasonable time, inspect, audit, and make
extracts from, or copies of, all books, records and other data, inspect any of
Borrower's properties and confirm balances due on Accounts by direct inquiry to
Account Debtors (defined as those Persons obligated on the Accounts). Borrower
will furnish CNB with all information regarding the business or finances of
Borrower promptly upon CNB's request.
5.2 FINANCIAL STATEMENTS. Borrower will furnish to CNB on a continuing
basis:
5.2.1 Within forty-five (45) days after the end of each
quarterly accounting period of each fiscal year, a financial statement for
Borrower and the Subsidiaries consisting of not less than a balance sheet,
income statement, reconciliation of net worth and statement of cash flows, with
notes thereto, prepared in accordance with GAAP, which financial statement may
be internally prepared;
5.2.2 Within ninety (90) days after the end of each fiscal
year, a copy of the annual financial statements for such year for Borrower and
the Subsidiaries including therein a balance sheet, income statement,
reconciliation of net worth and statement of cash flows, with notes thereto,
audited by an independent certified public accountant acceptable to CNB, and
certified by such accountant to have been prepared in accordance with GAAP and
accompanied by Borrower's certification as to whether any event has occurred
which constitutes an Event of Default or Potential Event of Default, and if so,
stating the facts with respect thereto;
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5.2.3 Within forty-five (45) days after the end of each
fiscal quarter, a listing and aging of all accounts receivable and accounts
payable;
5.2.4 Within ten (10) days after filing, a copy of the
Federal Income Tax Return of Borrower and each Guarantor;
5.2.5 Prior to the end of each of Borrower's fiscal years,
for the next fiscal year, a detailed and comprehensive statement of projected
cash flows, a projected balance sheet and a projected income statement, prepared
in accordance with FASB 95, together with a business plan and written analysis
of the business and prospects of Borrower;
5.2.6 Within forty-five (45) days after the end of each
fiscal quarter, Borrower will provide CNB with brokerage and bank statements for
Roy T. Eddleman showing all Liquid Assets; and
5.2.7 Such additional information, reports and/or statements
as CNB may, from time to time, reasonably request.
5.3 FINANCIAL STATEMENTS OF GUARANTORS. Not later than ninety (90)
days after Borrower's fiscal year end of each year, Borrower will provide CNB
with the financial statement, in form and substance satisfactory to CNB, of each
Guarantor certified by such Guarantor to be true and correct.
5.4 TAXES AND PREMIUMS. Borrower will, and will cause each Subsidiary
to, pay and discharge all taxes, assessments, governmental charges and real and
personal property taxes, including, but not limited to, federal and state income
taxes, employee withholding taxes and payroll taxes, and all premiums for
insurance required under this Agreement, prior to the date upon which penalties
are attached thereto.
5.5 INSURANCE.
5.5.1 Borrower will, and will cause each Subsidiary to,
provide and maintain the insurance required under the Loan Documents;
5.5.2 In addition to the insurance required above, Borrower
will, and will cause each Subsidiary to, maintain insurance of the types and in
amounts customarily carried in its lines of business, including, but not limited
to, fire, public liability, property damage, and worker's compensation, such
insurance to be carried with companies and in amounts satisfactory to CNB, and
will deliver to CNB from time to time, upon CNB's request, schedules setting
forth all insurance then in effect; and
5.5.3 If Borrower fails to provide, maintain, or furnish to
CNB the policies required by this Section, CNB may immediately procure such
insurance or other insurance necessary to protect CNB's interest, and Borrower
will pay all premiums thereon promptly upon demand by CNB, together with
interest, at the highest rate provided for any of the Loans extended under
Section 2 above, from the date of expenditure, and if not paid within ten (10)
days of CNB's demand therefor (and without constituting a waiver of an Event of
Default), at a rate five percent (5%) per year higher than such interest rate
until such amount (and interest thereon, to the extent permitted by law), is
paid in full.
5.6 NOTICE. Borrower will promptly advise CNB in writing of (a) the
opening of any new, or the closing of any existing, places of business, each
location at which Inventory or Equipment is or will be kept, and any change to
Borrower's name, trade name or other name under which it does business or of any
such new or additional name; (b) the occurrence of any Event of Default or
Potential Event of Default; (c) any litigation pending or threatened against
Borrower, any Subsidiary or any Guarantor where the amount or amounts in
controversy exceed $50,000.00; (d) any unpaid taxes of Borrower, any Subsidiary
or any Guarantor, which are more than fifteen (15) days delinquent; and (e) any
other matter that might materially or adversely affect Borrower's, any
Subsidiary's or any Guarantor's financial condition, property or business.
5.7 FAIR LABOR STANDARDS ACT. Borrower will, and will cause each
Subsidiary to, comply with the requirements of, and all regulations promulgated
under, the Fair Labor Standards Act of 1938 (29 U.S.C. Code ss. 201 et seq.).
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5.8 CORPORATE EXISTENCE. Borrower will, and will cause each Subsidiary
to, maintain its corporate existence and all of its rights, privileges and
franchises necessary or desirable in the normal course of its business.
5.9 COMPLIANCE WITH LAW. Borrower will, and will cause each Subsidiary
to, comply with all requirements of all applicable laws, rules, regulations,
orders of any governmental agency and all material agreements to which they are
a party.
5.10 FINANCIAL TESTS. Borrower will maintain:
5.10.1 Tangible Net Worth plus Subordinated Debt plus SLI
Acquisition Corp. Preferred Stock of not less than $1,800,000.00, plus ninety
percent (90%) of net private placement proceeds raised after October 1, 1999,
plus seventy-five percent (75%) of net income of Borrower for each fiscal year
after the date of this Agreement, at all times;
5.10.2 A ratio of Total Senior Liabilities to Tangible Net
Worth plus Subordinated Debt of not more than 3.5 to 1 at all times;
5.10.3 A ratio of Cash Flow from Operations to Debt Service
of not less than 1.1 to 1 (a) for the six-month period ending January 2, 1999,
(b) for the nine-month period ending April 3, 1999, and (c) thereafter, during
the twelve months preceding the date of determination.
5.11 YEAR 2000 COMPLIANCE. Borrower has adopted a plan, appropriate to
its business or industry, to insure that its computer software is Year 2000
Compliant. Borrower has or intends to develop an action plan to deal with
significant disruption in its business which might be anticipated in the event
of foreseen or unforeseen failures of its computer systems or its production and
manufacturing equipment to be Year 2000 Compliant.
6. NEGATIVE COVENANTS. Borrower agrees that until payment in full of all
Obligations, Borrower will not, nor will it permit any Subsidiary to, do any of
the following, without CNB's prior written consent:
6.1 BORROWING. Create, incur, assume or permit to exist any Debt,
except Debt to CNB, the Subordinated Debt, and trade Debt incurred in the
ordinary course of business.
6.2 SALE OF ASSETS. Sell, lease or otherwise dispose of any of
Borrower's or any Subsidiary's assets, other than in the ordinary course of
business.
6.3 LOANS. Make loans or advances to any Person except credit extended
to employees or to customers in the ordinary course of its business.
6.4 CONTINGENT LIABILITIES. Assume, guarantee, endorse, contingently
agree to purchase or otherwise become liable for the obligation of any Person
including Borrower, a Subsidiary, or Affiliate, except (a) by the endorsement of
negotiable instruments for deposit or collection or similar transactions in the
ordinary course of business, and (b) contingent liabilities in favor of CNB.
6.5 INVESTMENTS. Purchase or acquire the obligations or stock of, or
any other interest in, any partnership, joint venture or corporation, except (a)
direct obligations of the United States of America; and (b) investments in
certificates of deposit issued by, and other deposits with, commercial banks
organized under the United States or a State thereof having capital of at least
One Hundred Million Dollars ($100,000,000.00).
6.6 MORTGAGES, LIENS, ETC. Mortgage, pledge, hypothecate, grant or
contract to grant any security interest of any kind in any property or assets,
to anyone except CNB.
6.7 INVOLUNTARY LIENS. Permit any involuntary liens to arise with
respect to any property or assets including but not limited to those arising
from the levy of a writ of attachment or execution, or the levy of any state or
federal tax lien which lien will not be removed within a period of thirty (30)
days.
6.8 SALE AND LEASEBACK. Enter into any sale-leaseback transaction.
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6.9 MERGERS AND ACQUISITIONS. Enter into any merger or consolidation,
or acquire all or substantially all the assets of any Person, except a
Subsidiary may be merged into or consolidated with another Subsidiary or with
Borrower.
6.10 REDEMPTIONS, DIVIDENDS AND DISTRIBUTIONS. Redeem or repurchase
stock or partnership interests, declare or pay any dividends or make any other
distribution, whether of capital, income or otherwise, and whether in cash or
other property, except that any Subsidiary may declare distributions to
Borrower; provided, however, if Borrower for any tax year elects to file as a
Sub-Chapter S corporation under the federal and state income tax laws,
distributions may be made to Borrower's shareholders during any current or
subsequent tax year in proportion to their holdings, in an aggregate amount
equal to that payable by an individual in the highest tax bracket upon
Borrower's taxable income computed as if Borrower were a tax-paying entity.
6.11 EVENT OF DEFAULT. Permit a default to occur under any document or
instrument evidencing Debt incurred under any indenture, agreement or other
instrument under which such Debt may be issued, or any event to occur under any
of the foregoing which would permit any holder of the Debt outstanding
thereunder to declare the same due and payable before its stated maturity,
whether or not such acceleration occurs or such default be waived.
7. EVENTS OF DEFAULT.
7.1 EVENTS OF DEFAULT. The occurrence of any of the following will
constitute an Event of Default:
7.1.1 Borrower fails to pay when due any installment of
principal or interest or any other amount payable under the Loan Documents;
7.1.2 Any Person, or any Subsidiary of any Person, which is a
party to any Loan Document fails to perform or observe any of the terms,
provisions, covenants, conditions, agreements or obligations contained in the
Loan Documents;
7.1.3 The entry of an order for relief or the filing of an
involuntary petition with respect to Borrower, any Subsidiary or any Guarantor
under the United States Bankruptcy Code, the appointment of a receiver, trustee,
custodian or liquidator of or for any part of the assets or property of
Borrower, any Subsidiary or any Guarantor, or Borrower, any Subsidiary or any
Guarantor makes a general assignment for the benefit of creditors;
7.1.4 Any financial statement, representation or warranty
made or furnished by Borrower, any Subsidiary or any Guarantor in connection
with the Loan Documents proves to be in any material respect incorrect;
7.1.5 CNB's security interest in or lien on any portion of
any Collateral and Cash/Securities Collateral becomes impaired or otherwise
unenforceable;
7.1.6 Any Person obtains an order or decree in any court of
competent jurisdiction enjoining or prohibiting Borrower or CNB or either of
them from performing this Agreement, and such proceedings are not dismissed or
such decree is not vacated within ten (10) days after the granting thereof;
7.1.7 Borrower or any Subsidiary neglects, fails or refuses to
keep in full force and effect any governmental permit or approval which is
necessary to the operation of its business;
7.1.8 All or substantially all of the property of Borrower,
any Guarantor or any Subsidiary is condemned, seized or otherwise appropriated;
7.1.9 Roy T. Eddleman fails to maintain verifiable Liquid
Assets including Cash/Securities Collateral of at least $1,600,000.00 at all
times.
7.1.10 The occurrence of (a) a Reportable Event as defined in
ERISA which CNB determines in good faith constitutes grounds for the institution
of proceedings to terminate any pension plan by the PBGC, (b) an appointment of
a trustee to administer any pension plan of Borrower, or (c) any other event or
condition which might constitute grounds
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under ERISA for the involuntary termination of any pension plan of Borrower,
where such event set forth in (a), (b) or (c) results in a significant monetary
liability to Borrower;
7.1.11 Any obligee of Subordinated Debt fails to comply with
the provisions of the documents evidencing such Subordinated Debt or any
Subordination Agreement; or
7.1.12 Any Guarantor dies, becomes incapacitated, or revokes
his or its Guaranty, or such Guaranty becomes otherwise unenforceable with
respect to future advances.
7.2 NOTICE OF DEFAULT AND CURE OF POTENTIAL EVENTS OF DEFAULT. Except
with respect to the Events of Default specified in Sections 7.1.1, 7.1.3, or
7.1.5 above, and subject to the provisions of Section 7.4, CNB will give
Borrower at least ten (10) days' written notice of any event which constitutes
or, with the lapse of time would become an Event of Default, during which time
Borrower will be entitled to cure same.
7.3 CNB'S REMEDIES. Upon the occurrence of an Event of Default, at the
sole and exclusive option of CNB, and upon written notice to Borrower, CNB may
(a) declare the principal of and accrued interest on the Loans, and all other
Obligations immediately due and payable in full, whereupon the same will
immediately become due and payable; (b) terminate this Agreement as to any
future liability or obligation of CNB, but without affecting CNB's rights and
security interest in the Collateral and Cash/Securities Collateral and without
affecting the Obligations owing by Borrower to CNB; and/or (c) exercise its
rights and remedies under the Loan Documents and all rights and remedies of a
secured party under the Code and other applicable laws with respect to all of
the Collateral and Cash/Securities Collateral.
7.4 ADDITIONAL REMEDIES. Notwithstanding any other provision of this
Agreement, upon the occurrence of any event, action or inaction by Borrower, or
if any action or inaction is threatened which CNB reasonably believes will
materially affect the value of the Collateral and Cash/Securities Collateral,
CNB may take such legal actions as it deems necessary to protect the Collateral
and Cash/Securities Collateral, including but not limited to, seeking injunctive
relief and the appointment of a receiver, whether or not an Event of Default or
Potential Event of Default has occurred under this Agreement.
8. MISCELLANEOUS.
8.1 REIMBURSEMENT OF COSTS AND EXPENSES. Borrower will reimburse CNB
for all costs and expenses relating to this Agreement including, but not limited
to, filing, recording or search fees, audit or verification fees, appraisals of
the Collateral and other out-of-pocket expenses, and reasonable attorneys' fees
and expenses expended or incurred by CNB (or allocable to CNB's in-house
counsel) in documenting or administering the Loan Documents or collecting any
sum which becomes due CNB under the Loan Documents, irrespective of whether suit
is filed, or in the protection, perfection, preservation or enforcement of any
and all rights of CNB in connection with the Loan Documents, including, without
limitation, the fees and costs incurred in any out-of-court work-out or a
bankruptcy or reorganization proceeding.
All amounts due under this Section 8.1 will bear interest at
the highest rate provided for any of the Loans extended under Section 2 above,
from the date of expenditure (or allocation), and if not paid within ten (10)
days of CNB's demand therefor (and without constituting a waiver of an Event of
Default), at a rate five percent (5%) per year higher than such interest rate
until such amount (and interest thereon, to the extent permitted by law), is
paid in full.
8.2 DISPUTE RESOLUTION.
8.2.1 MANDATORY ARBITRATION. At the request of CNB or
Borrower, any dispute, claim or controversy of any kind (whether in contract or
tort, statutory or common law, legal or equitable) now existing or hereafter
arising between CNB and Borrower and in any way arising out of, pertaining to or
in connection with: (1) this Agreement, and/or any renewals, extensions, or
amendments thereto; (2) any of the Loan Documents; (3) any violation of this
Agreement or the Loan Documents; (4) all past, present and future loans; (5) any
incidents, omissions, acts, practices or occurrences arising out of or related
to this Agreement or the Loan Documents causing injury to either party whereby
the other party or its agents, employees or representatives may be liable, in
whole or in part, or (6) any aspect of the past, present or future relationships
of the parties, will be resolved through final and binding arbitration conducted
at a location determined by the arbitrator in Los Angeles County, California,
and administered by the American Arbitration Association ("AAA") in accordance
with the
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California Arbitration Act (Title 9, California Code of Civil Procedure Section
1280 et. seq.) and the then existing Commercial Rules of the AAA. Judgment upon
any award rendered by the arbitrator(s) may be entered in any state or federal
court having jurisdiction thereof
8.2.2 REAL PROPERTY COLLATERAL. Notwithstanding the provisions
of subsection 8.2.1, no controversy or claim will be submitted to arbitration
without the consent of all the parties if, at the time of the proposed
submission, such controversy or claim arises from or relates to an obligation
owed to CNB which is secured in whole or in part by real property collateral. If
all parties do not consent to submission of such a controversy or claim to
arbitration, the controversy or claim will be determined as provided in
subsection 8.2.3.
8.2.3 JUDICIAL REFERENCE. At the request of any party, a
controversy or claim which is not submitted to arbitration as provided and
limited in subsections 8.2.1 and 8.2.2 will be determined by a reference in
accordance with California Code of Civil Procedure Sections 638 et. seq. If such
an election is made, the parties will designate to the court a referee or
referees selected under the auspices of the AAA in the same manner as
arbitrators are selected in AAA-sponsored proceedings. The presiding referee of
the panel, or the referee if there is a single referee, will be an active
attorney or retired judge. Judgment upon the award rendered by such referee or
referees will be entered in the court in which such proceeding was commenced in
accordance with California Code of Civil Procedure Sections 644 and 645.
8.2.4 PROVISIONAL REMEDIES, SELF HELP AND FORECLOSURE. No
provision of this Agreement will limit the right of any party to: (1) foreclose
against any real property collateral by the exercise of a power of sale under a
deed of trust, mortgage or other security agreement or instrument, or applicable
law, (2) exercise any rights or remedies as a secured party against any personal
property collateral pursuant to the terms of a security agreement or pledge
agreement, or applicable law, (3) exercise self help remedies such as setoff, or
(4) obtain provisional or ancillary remedies such as injunctive relief or the
appointment of a receiver from a court having jurisdiction before, during or
after the pendency of any arbitration or referral. The institution and
maintenance of an action for judicial relief or pursuit of provisional or
ancillary remedies, or exercise of self help remedies will not constitute a
waiver of the right of any party, including the plaintiff, to submit any dispute
to arbitration or judicial reference.
8.2.5 POWERS AND QUALIFICATIONS OF ARBITRATORS. The
arbitrator(s) will give effect to statutes of limitation, waiver and estoppel
and other affirmative defenses in determining any claim. Any controversy
concerning whether an issue is arbitratable will be determined by the
arbitrator(s). The laws of the State of California will govern. The arbitration
award may include equitable and declaratory relief. All arbitrator(s) selected
will be required to be a practicing attorney or retired judge licensed to
practice law in the State of California and will be required to be experienced
and knowledgeable in the substantive laws applicable to the subject matter of
the controversy or claim at issue.
8.2.6 DISCOVERY. The provisions of California Code of Civil
Procedure Section 1283.05 or its successor section(s) are incorporated herein
and made a part of this Agreement. Depositions may be taken and discovery may be
obtained in any arbitration under this Agreement in accordance with said
section(s).
8.2.7 MISCELLANEOUS. The arbitrator(s) will determine which is
the prevailing party and will include in the award that party's reasonable
attorneys' fees and costs (including allocated costs of in-house legal counsel).
Each party agrees to keep all controversies and claims and the arbitration
proceedings strictly confidential, except for disclosures of information
required in the ordinary course of business of the parties or by applicable law
or regulation.
8.3 CUMULATIVE RIGHTS AND NO WAIVER. All rights and remedies granted
to CNB under the Loan Documents are cumulative and no one such right or remedy
is exclusive of any other. No failure or delay on the part of CNB in exercising
any power, right or remedy under any Loan Document will operate as a waiver
thereof, and no single or partial exercise or waiver by CNB of any such power,
right or remedy will preclude any further exercise thereof or the exercise of
any other power, right or remedy.
8.4 APPLICABLE LAW. This Agreement will be governed by California law.
8.5 LIEN AND RIGHT OF SETOFF. Borrower grants to CNB a continuing lien
for all Obligations of Borrower to CNB upon any and all moneys, securities and
other property of Borrower and the proceeds thereof, now or hereafter held or
received by or in transit to CNB from or for Borrower, whether for safekeeping,
custody, pledge, transmission, collection or
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otherwise, and also upon any and all deposits (general or special) and credits
of Borrower with, and any and all claims of Borrower against CNB at any time
existing. Upon the occurrence of any Event of Default, CNB is authorized at any
time and from time to time, without notice to Borrower or any other Person, to
setoff, appropriate and apply any or all items hereinabove referred to against
all Obligations of Borrower whether under this Agreement or otherwise, and
whether now existing or hereafter arising.
8.6 NOTICES. Any notice required under any Loan Document will be given
in writing and will be deemed to have been given when personally delivered or
when sent by the U.S. mail, postage prepaid, certified, return receipt
requested, to the address listed at the end of this Agreement or such other
address which a party may provide to the other.
8.7 COUNTERPARTS. This Agreement may be signed in any number of
counterparts which, when taken together, will constitute but one agreement.
8.8 INDEMNIFICATION. Borrower will, at all times, defend and indemnify
and hold CNB harmless from and against any and all Claims (as that term is
defined in Section 4.12.4) arising out of or resulting from (a) any breach of
the representations, warranties, agreements or covenants made by Borrower
herein; (b) any suit or proceeding of any kind or nature whatsoever against CNB
arising from or connected with the transactions contemplated by the Loan
Documents or any of the rights and properties assigned to CNB hereunder; and/or
(c) any suit or proceeding that CNB may deem necessary or advisable to
institute, in the name of CNB, Borrower or both, against any other Person, for
any reason whatsoever to protect the rights of CNB hereunder or under any of the
documents, instruments or agreements executed or to be executed pursuant hereto,
including attorneys' fees and court costs and all other costs and expenses
incurred by CNB (or allocable to CNB's in-house counsel), all of which will be
charged to and paid by Borrower and will be secured by the Collateral and
Cash/Securities Collateral. Any obligation or liability of Borrower to CNB under
this Section will survive the expiration or termination of this Agreement and
the repayment of all Loans and the payment or performance of all other
Obligations of Borrower to CNB.
8.9 ASSIGNMENTS. The provisions of this Agreement are hereby made
applicable to and will inure to the benefit of CNB's successors and assigns and
Borrower's successors and assigns; provided, however, that Borrower may not
assign or transfer its rights or Obligations under this Agreement without the
prior written consent of CNB.
8.10 ACCOUNTING TERMS. Except as otherwise stated in this Agreement,
all accounting terms and financial covenants and information will be construed
in conformity with, and all financial data required to be submitted will be
prepared in conformity with, GAAP as in effect on the date hereof.
8.11 SEVERABILITY. Any provision of the Loan Documents which is
prohibited or unenforceable in any jurisdiction, will be, only as to such
jurisdiction, ineffective to the extent of such prohibition or unenforceability,
but all the remaining provisions of the Loan Documents will remain valid.
8.12 COMPLETE AGREEMENT. This Agreement, together with the other Loan
Documents, constitutes the entire agreement of the parties and supersedes any
prior or contemporaneous oral or written agreements or understandings, if any,
which are merged into this Agreement. This Agreement may be amended only in a
writing signed by Borrower and CNB.
*****
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8.13 JOINT AND SEVERAL. Should more than one Person sign this
Agreement, the obligations of each signer will be joint and several.
This Agreement is executed as of the date stated at the top of the first page.
"BORROWER" Spectrum Laboratories, Inc.,
a Delaware corporation
By: /s/ Roy T. Eddleman
----------------------------------------
Roy T. Eddleman, Chief Executive Officer
Address:
--------
23022 La Cadena Drive
Laguna Hills, CA 92653-1362
Attention: Roy T. Eddleman
Telephone Number: (310) 476-0950
"CNB" CITY NATIONAL BANK,
a national banking association
By: /s/ Rick Fein
----------------------------------------
Rick Fein, Vice President
Address:
--------
14241 E. Firestone Blvd., Suite 215
La Mirada, CA 90638
Attention: Rick Fein, Vice President
Telephone Number: (310) 483-5945
with a copy of all Notices to:
City National Bank, Legal Department
400 North Roxbury Drive
Beverly Hills, California 90210-5021
Attention: General Counsel
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<PAGE>
EXHIBIT A
TERM NOTE A
(Any Interest Rate)
$2,340,000.00 Irvine, California
December 22, 1998
FOR VALUE RECEIVED, the undersigned, SPECTRUM LABORATORIES, INC., a
Delaware corporation ("Borrower"), promises to pay to the order of CITY NATIONAL
BANK, a national banking association ("CNB"), at its Office located at 9
Executive Circle, Irvine, California 92614 the principal amount of TWO MILLION
THREE HUNDRED FORTY THOUSAND DOLLARS ($2,340,000.00), plus interest on the
unpaid principal balance, 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 December 22, 1998, as may
be amended from time to time (the "Credit Agreement"). Principal is payable in
thirty-nine (39) consecutive monthly installments, consisting of thirty-eight
(38) installments each in the amount of $60,000.00, and a final installment in
the amount of $60,853.07 commencing January 1, 1999, and continuing on the first
day of each month up to and including March 1, 2002, on which day the balance of
principal and interest thereon unpaid shall become due and payable.
Capitalized terms not defined herein will have the meanings given them in the
Credit Agreement.
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 Term 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 Term Note A referred to in the Credit Agreement and is
entitled to the benefits thereof.
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 Laboratories, Inc., a
Delaware corporation
By: EXHIBIT PLEASE DO NOT SIGN
----------------------------------------
Roy T. Eddleman, Chief Executive Officer
<PAGE>
EXHIBIT B
TERM NOTE B
(Any Interest Rate)
$326,645.44 Irvine, California
December 22, 1998
FOR VALUE RECEIVED, the undersigned, SPECTRUM LABORATORIES, INC., a
Delaware corporation ("Borrower"), promises to pay to the order of CITY NATIONAL
BANK, a national banking association ("CNB"), at its Office located at 9
Executive Circle, Irvine, California 92614 the principal amount of THREE HUNDRED
TWENTY SIX THOUSAND SIX HUNDRED FORTY FIVE AND 44/100 DOLLARS ($326,645.44),
plus interest on the unpaid principal balance, 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
December 22, 1998, as may be amended from time to time (the "Credit Agreement").
Principal is payable in five (5) consecutive monthly installments, consisting of
four (4) installments each in the amount of $8,530.00, and a final installment
in the amount of $294,540.62 commencing February 1, 1999, and continuing on the
first day of each month up to and including June 1, 1999, on which day the
balance of principal and interest thereon unpaid shall become due and payable.
Capitalized terms not defined herein will have the meanings given them in the
Credit Agreement.
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 Term 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 Term Note B referred to in the Credit Agreement and is
entitled to the benefits thereof.
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 Laboratories, Inc., a
Delaware corporation
By: EXHIBIT PLEASE DO NOT SIGN
----------------------------------------
Roy T. Eddleman, Chief Executive Officer
<PAGE>
EXHIBIT C
YIELD MAINTENANCE AGREEMENT
During the first thirty (30) months of Term Loan A, Borrower shall have the
right to prepay the principal of the Term Loan A, in whole or in part, on the
first day of a calendar month, which prepayment must be preceded by not less
than thirty (30) days prior written notice to CNB of Borrower's intention to
make such prepayment, the amount thereof, and the day upon which such prepayment
will be made, and there shall be paid to CNB concurrently with such prepayment
all then accrued interest and any and all other amounts then due hereunder,
TOGETHER WITH A PREPAYMENT CHARGE equal to the greater of:
(1) One percent (1%) of the principal balance being prepaid; or
(2) An amount obtained by:
(a) first computing a "Future Value", which shall be
equal to the product of:
(i) the excess, if any, expressed as a decimal, of
(A) the interest rate at the time of such prepayment, over (B) the Yield Rate,
as that term is hereinafter defined, multiplied by,
(ii) the quotient obtained by dividing (a) the
number of days after such prepayment date through and including the Maturity
Date by (b) 365, and multiplied by
(iii) the amount of principal balance to be prepaid,
and then,
(b) determining the present value, as of the date of
prepayment of a future payment in an amount equal to the Future Value paid on
the Maturity Date, discounted at a discount rate equal to the Yield Rate.
The "Yield Rate", as used herein, shall be the yield to maturity of that U.S.
Treasury Bond or Note (as reported in the edition of the Wall Street Journal, or
similar publication which is dated on the fifth (5th) business day preceding the
proposed repayment date), the due date of which is closest to (either before,
after or on) the Maturity Date of the Note. However, if the period between the
Maturity Date and the closest due date of the U.S. Treasury Bond or Note exceeds
six (6) months, the average of the yields to maturity of the two (2) U.S.
Treasury Bonds or Notes, with due dates next preceding and following the
Maturity Date, shall be used to compute such difference; and if there are two
(2) or more U.S. Treasury Bonds or Notes with the same due dates, that one whose
yield to maturity is closest to the Interest Rate shall be used to compute such
difference. The Yield Rate shall be rounded to the nearest one-hundredth of one
percent (0.01%).
On or after the commencement of the thirty-first (31st) month of the Term Loan
A, Borrower shall have the right to prepay the principal of the Term Loan A, in
whole or in part, without any prepayment charge, on the first (1st) day of a
calendar month, which prepayment must be preceded by not less than thirty (30)
days prior written notice to CNB of Borrower's intention to make such
prepayment, the amount thereof, and the date upon which such prepayment will be
made, and there shall be paid to CNB concurrently therewith, all then accrued
interest and any and all other amounts then due thereunder.
<PAGE>
Exhibit 10.19
INCENTIVE AGREEMENT
THIS AGREEMENT is made effective as of August 10, 1998 by and between
SPECTRUM MEDICAL INDUSTRIES, INC., SPECTRUM LABORATORIES, INC, each a California
corporation (jointly referred to hereinafter as "SPECTRUM") and F. Jesus
Martinez ("MARTINEZ"), residing at 26541 Sotelo, Mission Viejo, CA 92692 and Roy
T. Eddleman, Chairman and CEO of SPECTRUM ("EDDLEMAN"), residing at 417 Amapola
Lane, Los Angeles, CA 90077-3411.
RECITALS
To retain MARTINEZ as an employee of SPECTRUM, SPECTRUM desires to
grant to MARTINEZ certain employment incentives, and MARTINEZ is willing to
remain in the employ of SPECTRUM on the terms and conditions set forth herein.
DEFINITION. The "EVENT" is defined as the sale or acquisition or
merger of SPECTRUM with another entity, regardless whether or not SPECTRUM
remains the surviving entity. The merger of SPECTRUM MEDICAL INDUSTRIES, INC.,
and SPECTRUM LABORATORIES. INC., or any of SPECTRUM LABORATORIES, INC., or any
of SPECTRUM's wholly owned subsidiaries or vice versa is excluded from to
definition of the "EVENT".
NOW, THEREFORE, in consideration of the promises and the mutual
covenants and conditions contained herein, MARTINEZ and EDDLEMAN agree as
follows:
1. Effective as of the date specified herein above, SPECTRUM and
EDDLEMAN agree to grant MARTINEZ an option for MARTINEZ to
acquire undiluted three percent interest (undiluted 3%) in
SPECTRUM of the issued and outstanding shares of SPECTRUM at a
price of $0.12 per share per current fair market price vested
immediately. The option can be exercised at anytime over a
ten(10) year period in whole or in part. Said option shall
contain a cashless exercise provision. Upon exercise of the
option SPECTRUM and EDDLEMAN shall complete the process to
make MARTINEZ the registered owner of such shares of common
stock of SPECTRUM, including any other class or classes of
stock that have rights of conversion to common shares of
SPECTRUM. MARTINEZ hereby acknowledges that he shall be
responsible for any tax consequences to him after the transfer
of ownership of shares as stipulated above.
2. Effective as the date hereof, SPECTRUM and EDDLEMAN further
agree to grant MARTINEZ an option for MARTINEZ to acquire
undiluted one percent interest
<PAGE>
(undiluted 1.0%) in SPECTRUM of the issued and outstanding
shares of SPECTRUM at a price of $0.12 per share (current fair
market price), for each two (2) years that MARTINEZ remain in
the employ of SPECTRUM. Such option vests on the second
anniversary of this agreement for an undiluted one percent
(1%) and on the fourth anniversary for an additional one
percent (1%). The option is for a period of ten (10) years.
The option can be exercised at any time over a ten (10) year
period in whole or in part. Said option shall contain a
cashless exercise provision. Upon exercise of the option
SPECTRUM and EDDLEMAN shall complete the process to make
MARTINEZ the registered owner of such shares of common stock
of SPECTRUM, including any other class or classes of stock
that have rights of conversion to common shares of SPECTRUM.
MARTINEZ hereby acknowledges that he shall be responsible for
any tax consequences to him after to transfer of ownership of
shares as stipulated above.
3. Effective as of to hereof, SPECTRUM and EDDLEMAN further agree
to make a "payment-in-kind" equal to five percent (5.0%) of
the net sales proceeds in the event SPECTRUM is acquired by or
merges with another entity as long as MARTINEZ is employed by
the SPECTRUM. Such "payment-in-kind" to MARTINEZ shall be made
in the same United Status currency or common stock of the
acquiring entity, or a combination thereof, on the same date
as the effective date of the EVENT. In the event of such
payment, all unexercised options are canceled and MARTINEZ,
shall sell all shares acquired upon exercise of the options
back to SPECTRUM for $.12 per share, the exercise price of the
option.
4. Effective as of the date specified herein above, SPECTRUM and
EDDLEMAN further agree that MARTINEZ shall not be terminated
prior to the effective dare of the "EVENT" if an "EVENT" is
forthcoming, for any reason other than "cause" as defined
below. For purposes of this AGREEMENT, termination for "cause"
shall mean (a) termination for dishonesty relating to
SPECTRUM's funds or assets, (b) conviction of a felony
involving SPECTRUM, (c) willful unauthorized disclosure of a
trade secret or other confidential information of SPECTRUM,
(d) habitual insobriety or drug addiction, or (e) continuation
of
-2-
<PAGE>
conduct which materially damages SPECTRUM after notice and an
opportunity to cure.
IN WITNESS WHEREOF, the parties have executed this AGREEMENT as of
the day and year first above written.
For "SPECTRUM" For "MARTINEZ"
SPECTRUM MEDICAL INDUSTRIES, INC. F. Jesus Martinez
and SPECTRUM LABORATORIES, INC. 26541 Sotelo
Laguna Hills, CA 92653-1362 Mission Viejo, CA 92692
By: /s/ Roy T. Eddleman By: /s/ F. Jesus Martinez
----------------------------- -----------------------------
Roy T. Eddleman, Chairman and CEO F. Jesus Martinez
For "EDDLEMAN"
Roy T. Eddleman
417 Amapola Lane
Los Angeles, CA 90077-3411
/s/ Roy T. Eddleman
- --------------------------------
Roy T. Eddleman
-3-
<PAGE>
DELOITTE &
TOUCHE
- ----------------
------------------------------------
Deloitte & Touche LLP Telephone (714) 436-71
Suite 1200 Facsimile (714) 436-72
695 Town Center Drive
Costa Mesa. California 92626-1924
December 23, 1998
Securities end Exchange Commission
Mail Stop 9-5
450 5th Street, N.W.
Washington, DC- 20549
Ladies and Gentlemen:
We have read and agree with the comments in Item 4 of Form 8-K of Spectrum
Laboratories, Inc., dated December 17, 1998.
Yours truly,
/s/ Deloitte & Touche LLP
- ----------------
DELOITTE TOUCHE
TOHMATSU
- ----------------
Exhibit 21
Subsidiaries of Spectrum Laboratories, Inc.
Company Incorporated in
------- ---------------
SLI Acquisition Corp. Delaware
Spectrum Molecular Separations, Inc. Texas
dba Spectrum Chromatography, Inc.
Spectrum Europe, B.V. The Netherlands
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<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JAN-03-1998
<PERIOD-END> JAN-02-1999
<CASH> 855,000
<SECURITIES> 0
<RECEIVABLES> 1,644,000
<ALLOWANCES> 125,000
<INVENTORY> 1,696,000
<CURRENT-ASSETS> 4,570,000
<PP&E> 9,006,000
<DEPRECIATION> 6,773,000
<TOTAL-ASSETS> 9,908,000
<CURRENT-LIABILITIES> 2,595,000
<BONDS> 1,620,000
0
0
<COMMON> 53,000
<OTHER-SE> 3,640,000
<TOTAL-LIABILITY-AND-EQUITY> 9,908,000
<SALES> 12,490,000
<TOTAL-REVENUES> 12,490,000
<CGS> 6,021,000
<TOTAL-COSTS> 6,021,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 55,000
<INTEREST-EXPENSE> 326,000
<INCOME-PRETAX> 112,000
<INCOME-TAX> 14,000
<INCOME-CONTINUING> 98,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 98,000
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
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