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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 1, 2000
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.)
18617 Broadwick Street
Rancho Dominguez, California 90220
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (310) 885-4600
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: $13,083,000
The aggregate market value of voting stock held by nonaffiliates of the
registrant is $280,182 as of February 29, 2000, based on the $3.13 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 29, 2000: 5,311,968
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TABLE OF CONTENTS
FORM 10-KSB ANNUAL REPORT
FOR THE YEAR ENDED JANUARY 1, 2000
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 ............ 12
10. Executive Compensation ....................................... 14
11. Security Ownership of Certain Beneficial Owners
and Management ............................................... 14
12. Certain Relationships and Related Transactions ............... 16
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
- -------
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 products also
include the necessary systems for operating the separation application. Both OEM
and Process products are sold 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,
encapsulation 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 is marketing 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 has a joint venture with Stanford Research International, Edison
Technologies, Inc. and EPRI. This venture, Facilichem, Inc., was established to
commercialize new membrane systems for major industrial separations while
greatly reducing current costs. The systems will be marketed for waste stream
separators for environmental markets, chiral molecule separations for
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pharmaceutical use and food and beverage separation, providing the addition and
removal of trace substances which contribute to and/or improve flavor and taste.
Facilichem, Inc. was awarded a two-million dollar grant in November 1998, by the
Advanced Technology Program of the National Institute of Standards and
Technology (ATP) to commercialize its proprietary separation systems. Spectrum
is the supplier of membranes to Facilichem, Inc.
In 1999, the Company acquired an exclusive license from Monsanto Co. for
Supported Polymeric Liquid Membrane (SPLM). The Company is developing and plans
to market laboratory and industrial products using this technology for the
preferential extraction of organic compounds from dilute aqueous solutions and
removal and mitigation of environmental pollutants from potable water.
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
- -----------------------------------
TUBULAR MEMBRANES FOR DIALYSIS, FILTRATION AND CELL CULTURE
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 1999 and 1998. Spectrum's cell culture and process
filtration products are sold to over 150 active customers worldwide, comprised
of academic, research, pharmaceutical, laboratory, and clinical research
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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.
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 and 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 three and one
half years, the importance of OR Specialty Distributor sales has declined while
OEM, Private Label and Catalog House sales have 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, Procedure Tray Manufacturers and Private
Label.
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
- --------------------------
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 not experienced 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
- ----------------------
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
- ----------------------
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 adheres 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 1999
and 1998 fiscal years, two dealers accounted for 10% or more of the Company's
total sales which were approximately 15% and 17% in 1999 and 1998, respectively
for one dealer, and were approximately 11% in 1999 and 12% in 1998 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 is 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
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applications where single use will ensure optimum performance and/or simplify
the validation of the process for FDA approval.
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. 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 approximately
$662,000 in 1999 and $780,000 in 1998. Research and product development
functions are particularly important for the Company's future growth.
EMPLOYEES
- ---------
On January 1, 2000, the Company had 109 employees, of which 106 were full-time
employees.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's executive offices are located at 18617 Broadwick Street, Rancho
Dominguez, California. All facilities used by the Company are leased, in good
condition and are adequate for the Company's present operating requirements.
Production and administrative facilities are located in California and Texas.
The Company has a sales and distribution facility in The Netherlands.
Information regarding the Company's major facilities is as follows:
Lease Monthly
Location Principal Usage Sq. Feet Term. Date Rental
- ---------------------- ------------------ -------- ---------- --------
Rancho Dominguez, CA Administration
and Manufacturing 55,000 7/05 $ 27,750
Laguna Hills, CA Manufacturing 8,830 mo-mo 8,830
Dallas, TX Manufacturing 20,000 12/00 5,417
Houston, TX Manufacturing 9,975 08/03 4,090
Breda, The Netherlands Sales 1,400 12/02 2,035
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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.
1999 High Low
----
First Quarter $ 1/16 $ 1/16
Second Quarter 1/8 1/16
Third Quarter 2 1
Fourth Quarter 3 1/8 1 1/16
1998
----
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
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 1, 2000, the number of holders of record of the Company's Common
Stock was 776.
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.
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RESULTS OF OPERATIONS - FISCAL YEAR 1999 COMPARED TO FISCAL YEAR 1998
Research and development expenses decreased in 1999 as compared to 1998 by
approximately 15% and was primarily attributable to the close-down, in late
1998, of a research facility in Maryland that was no longer required.
Selling expenses decreased in 1999 as compared to 1998 by approximately 19%
primarily due to cost reduction measures implemented in late 1998.
General and administrative expenses in 1999 were essentially level with those in
1998. Cost reductions in late 1998 were significantly offset in 1999 due to
relocation costs as the Company moved and consolidated two of its California
locations into a new California facility.
Interest expense decreased in 1999 as compared to 1998 due to debt reduction.
There was an income tax credit for 1999 primarily as a result of the
re-evaluation of the estimated required valuation allowance on deferred tax
assets as discussed below. The 1998 income tax provision, as a percentage of
income before the provision for income taxes, 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 exceed the recoverability of those assets from estimated future taxable
income for the next three 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 income taxes could vary
significantly in future years.
In assessing the realizability of deferred tax assets, management has estimated
that it is more likely than not that approximately $2,200,000 will not be
realized. Approximately $1,500,000 of the valuation allowance represents a
portion of net operating loss carryforwards attained through a prior business
acquisition. Tax law limits the use of an acquired entity's net operating loss
carryforwards to subsequent taxable income of the consolidated entity. During
1999, the Company realized approximately $1,225,000 of the total operating loss
carryforwards acquired. The realization of this amount was recorded as an offset
to the goodwill recorded in connection with this prior acquisition. The
remaining portion of net deferred tax assets realized during 1999 represents
management's best estimate of projected tax liability over the next three years.
However, there can be no assurance that the Company will meet its expectations
of future taxable income. Management will continue to evaluate the realizability
of the deferred tax assets by assessing the need for and amount of a valuation
allowance.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1999, the Company generated approximately $1,079,000 of cash from
operating activities. Net income before non-cash expenses of depreciation and
amortization was the primary source of these cash flows. Cash decreased, for the
year, by approximately $305,000 primarily as a result of pay-down on bank debt
and expenditures for equipment and leasehold improvements. A significant portion
of the capital expenditures was related to the relocation, during 1999, of two
of the Company's California facilities into one facility in California.
During 1999, 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. One of the loans under the loan agreement, with a
balance of approximately $233,000 at January 1, 2000, matures on July 1, 2000.
The Company expects to request an extension of the maturity date but, while such
requests have been granted in the past, there is no assurance that such request,
if made, will be granted. The loan agreement prohibits the payment of cash
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dividends without prior approval. The Company does not intend to pay cash
dividends in fiscal 2000.
The Company believes that cash on hand and cash expected to be generated from
operations will be sufficient to meet cash requirements for the fiscal year
2000.
In October 1996, a subsidiary of the Company, SLI Acquisition Corp. (SLIAC),
acquired certain assets and liabilities of Cellco, Inc., a Delaware corporation,
in exchange for 10,000 shares of SLIAC's preferred stock valued at $2,000,000.
At January 1, 2000, there is $1,755,000 of the preferred stock still
outstanding. Beginning October 1, 2000, and continuing until September 30, 2001,
the holders of the preferred stock have the right to put their stock to SLIAC
for an aggregate price of $1,755,000. In the event SLIAC 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. If the preferred stockholders convert their stock wholly, or
in a substantial portion, to a cash payment, the Company would most probably be
required to obtain additional funds from outside sources and there is no
assurance that such financing, if necessary, could be obtained.
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. In anticipation of
this problem, the Company instituted procedures to make the necessary changes to
our computer hardware and software programs. Such changes were completed during
the third quarter of fiscal 1999.
As of the time of the preparation of this report, we had not experienced any
significant Year 2000 problems nor are aware of any such problems being
experienced by any of our major suppliers or customers. As a result, we do not
expect any material adverse effects on our business or operations, based on
information available to us as of the time of this report. However, there is no
assurance that problems, unknown to us at this time, could not occur at a later
time. Although we believe that such potential future problems are unlikely, they
could, if they do occur, result in a material, adverse impact on the Company's
business, financial condition and the results of its operations.
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' REPORT F-1
FINANCIAL STATEMENTS
Consolidated balance sheet F-2
Consolidated statements of income F-3
Consolidated statements of stockholders' equity F-4
Consolidated statements of cash flows F-5
Notes to consolidated financial statements F-6
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ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
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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.
Name Age Director Since Position
- ---- --- -------------- --------
Roy T. Eddleman 60 July 30, 1982 Chairman, CEO & Director
John J. Driscoll, J.D. 50 July 30, 1982 Secretary & Director
Jack Whitescarver, Ph.D. 62 April 1, 1985 Director
Thomas V. Girardi, J.D. 60 January 2, 1999 Director
Jay Henis, Ph.D. 61 January 2, 1999 Director
Walter J. Lack, J.D. 52 January 2, 1999 Director
Executive Officers of The Company
- ---------------------------------
Roy T. Eddleman 60 July 30, 1982 Chairman & CEO
F. Jesus Martinez 60 ---- President & COO
Malcolm Morrison, Ph.D. 57 ---- Vice President Operations
Robert J. Sudol 52 ---- Vice President Marketing
& Sales
Larry D. Womack 60 ---- Vice President Finance
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
ten 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
eight years.
Thomas Girardi has been employed as an attorney in private practice for over
twenty years.
Jay Henis is a practicing scientist and for nine years has been President and
CEO of Henis Technologies, Inc. He is also President and CEO of Orex
Pharmaceuticals.
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Walter Lack has been employed as an attorney in private practice for over twenty
years. He is also a Director of HCCH Holdings, Inc., Microvision, Inc. and
Supergen, 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.
Robert Sudol joined the Company in June 1998 as Vice President/General Manager
for Hospital Products. He became Vice President Marketing and Sales in October
1999. Previously he was President of Cyberdent, Inc. for one and one half years
and Vice President of American CareSource for two and one half years.
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 1999. Directors are not compensated for their services on the Company's
Board of Directors.
13
<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 OPTIONS
NAME AND POSITION YEAR SALARY BONUS STOCK AWARDS # LTIP ALL OTHER(2)
- ----------------------- ---- -------- ----------- ------------- ------------- ---- ------------
<S> <C> <C> <C> <C> <C>
Roy T. Eddleman 1999 $160,000 $125,000 $ 335,337
Chief Executive Officer 1998 $160,000 560,951
1997 $160,000 616,960
F. Jesus Martinez 1999 $145,000
President 1998 $145,000 265,599
1997 $145,000 $61,751 (1)
</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
---- -------------- --------------
1999 $ - $ 335,337
1998 211,500 349,451
1997 282,000 334,960
The following table sets forth information relating to stock options held by the
Company's executive officers as of January 1, 2000:
Number of Securities Underlying Value of Unexercised
Unexercised Options In-the-Money Options
Name Exercisable/Unexercisable Exercisable/Unexercisable
- ------------------ ------------------------- -------------------------
F. Jesus Martinez 214,703/50,896 $266,000/$63,000
President
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 1, 2000 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:
Amount and Nature Percent
Name and Address of Beneficial Ownership (1) of Class
- -------------------------------- ------------------------------- ---------
Roy T. Eddleman 4,320,128 81.3
18617 Broadwick Street
Rancho Dominguez, CA 90220
14
<PAGE>
Thomas V. Girardi, J.D. 800,002 15.1
1126 Wilshire Blvd.
Los Angeles, CA 90017
John J. Driscoll, J.D. 5,000 (A) .1
Park Avenue Tower
65 East 55th Street
New York, NY 10022
Jack Whitescarver, Ph.D. 3,750 (A) .1
4301 Massachusetts Ave. NW #6002
Washington, D.C. 20016
Jay Henis, Ph.D. 3,750 (A) .1
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 221,343 (A) 4.0
18617 Broadwick Street
Rancho Dominguez, CA 92220
All directors and officers as a 5,461,446 (B) 98.4
group (10 in number)
(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 238,993 exercisable stock options
15
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company had transactions with related parties as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Expenses (income) related to transactions with the
Company's majority shareholder:
Rental of facilities owned by the shareholder(1) $218,968 $300,748
Royalties (2) 335,337 349,451
Consulting services (3) -- 211,500
Interest income on advances (4) (2,713) (18,444)
Expenses for legal services to a firm which
employs a member of the Board of Directors -- 40,000
</TABLE>
The majority shareholder has personally guaranteed the Company's bank
loan up to $3,100,000.
(1) These leases terminated on December 31, 1999
(2) 7% fee on sales of certain products by the Company
(3) $23,500 per month. Charge for consulting services was terminated
in September 1998.
(4) 4% interest charges on outstanding balance
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)
16
<PAGE>
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)
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)
17
<PAGE>
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)
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 (incorporated by reference to Exhibit 10.17
filed with Registrant's report on Form 10-KSB for fiscal year
ended January 2, 1999, Commission File No.
0-9478)
10.18 Credit agreement, dated as of December 22, 1998, between
Registrant and City National Bank (incorporated by reference
to Exhibit 10.18 filed with Registrant's report on Form 10-KSB
for fiscal year ended January 2, 1999, Commission File No.
0-9478)
10.19 Incentive Agreement dated August 10, 1998, between Spectrum
Medical Industries, Inc., the Registrant and F. Jesus Martinez
and Roy T. Eddleman (incorporated by reference to Exhibit
10.19 filed with Registrant's report on Form 10-KSB for fiscal
year ended January 2, 1999, Commission File No. 0-9478)
10.20 Sublease agreement dated January 19, 1999 between Millipore
Corporation and Spectrum Laboratories, Inc.
10.21 First amendment, dated July 14, 1999, to the credit agreement,
dated December 22, 1998, between the Company and City National
Bank
18
<PAGE>
16 Letter on change in certifying accountant (incorporated by
reference to Exhibit 16 filed with Registrant's report on Form
10-KSB for fiscal year ended January 2, 1999, Commission File
No. 0-9478)
21 Subsidiaries of the Registrant (incorporated by reference to
Exhibit 21 filed with Registrant's report on Form 10-KSB for
fiscal year ended January 2, 1999, Commission File No. 0-9478)
27 Financial Data Schedule for the year ended January 1, 2000
(b) Reports on 8-K
- ------------------
No reports on Form 8-K were filed during the quarter ended January 1, 2000 by
the Registrant.
19
<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 14, 2000.
SPECTRUM LABORATORIES, INC.
By: /s/ Roy T. Eddleman
--------------------
Roy T. Eddleman
Chairman and Chief Executive Officer
By: /s/ Jay Henis
--------------
Jay Henis
Director
By: /s/ Walter J. Lack
-------------------
Walter J. Lack
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 and
Chief Financial Officer
20
<PAGE>
SPECTRUM LABORATORIES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 1, 2000
<PAGE>
C O N T E N T S
Page
- --------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT F-1
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
Consolidated balance sheet F-2
Consolidated statements of income F-3
Consolidated statements of stockholders' equity F-4
Consolidated statements of cash flows F-5
Notes to consolidated financial statements F-6
- --------------------------------------------------------------------------------
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Spectrum Laboratories, Inc.
Rancho Dominguez Hills, California
We have audited the accompanying consolidated balance sheet of Spectrum
Laboratories, Inc. and subsidiaries as of January 1, 2000 and the related
consolidated statements of income, stockholders' equity and cash flows for the
years ended January 1, 2000 and January 2, 1999. 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 1, 2000 and the results of
their operations and their cash flows for the years ended January 1, 2000 and
January 2, 1999 in conformity with generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
Anaheim, California
March 24, 2000 except for Note 5 which is dated April 6, 2000
F-1
<PAGE>
<TABLE>
SPECTRUM LABORATORIES, INC.
CONSOLIDATED BALANCE SHEET
- ------------------------------------------------------------------------------------------------
<CAPTION>
JANUARY 1,
ASSETS 2000
--------------
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 550,000
Accounts receivable, less allowance for doubtful accounts of $143,000 1,508,000
Inventories 2,389,000
Prepaid expenses 287,000
Deferred taxes 340,000
--------------
Total current assets 5,074,000
EQUIPMENT AND LEASEHOLD IMPROVEMENTS 2,315,000
GOODWILL, net of accumulated amortization of $711,000 1,287,000
DEFERRED TAXES 1,585,000
OTHER ASSETS 167,000
--------------
Total assets $ 10,428,000
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 953,000
Accounts payable 811,000
Accrued expenses and other current liabilities:
Compensation 337,000
Other 400,000
--------------
Total current liabilities 2,501,000
--------------
LONG-TERM DEBT, net of current maturities 900,000
--------------
COMMITMENTS
MINORITY INTEREST 1,755,000
--------------
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 and outstanding -
Additional paid-in capital 8,347,000
Accumulated deficit (3,128,000)
--------------
Total stockholders' equity 5,272,000
--------------
Total liabilities and stockholders' equity $ 10,428,000
==============
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
<TABLE>
SPECTRUM LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
- ------------------------------------------------------------------------------------------------
<CAPTION>
FISCAL YEARS ENDED
------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
NET SALES $ 13,083,000 $ 12,490,000
COSTS AND EXPENSES
Cost of sales 6,381,000 6,021,000
Selling 1,431,000 1,772,000
General and administrative 3,325,000 3,337,000
Research and development 662,000 780,000
Compensation expense related to stock options 86,000 217,000
Other expense, primarily interest 185,000 251,000
-------------- --------------
Total costs and expenses 12,070,000 12,378,000
-------------- --------------
Income before provision for income taxes (credits) 1,013,000 112,000
Provision for income taxes (credits) (235,000) 14,000
-------------- --------------
Net income $ 1,248,000 $ 98,000
============== ==============
Earnings per share:
Basic $ 0.23 $ 0.02
============== ==============
Diluted $ 0.23 $ 0.02
============== ==============
Weighted average shares outstanding:
Basic 5,311,968 4,928,790
============== ==============
Diluted 5,391,843 4,985,158
============== ==============
See notes to consolidated financial statements.
</TABLE>
F-3
<PAGE>
<TABLE>
SPECTRUM LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Accumulated
other
Compre- Common stock Additional compre-
hensive ------------------------------ paid-in Accumulated hensive
income Shares Amount capital deficit income (loss)
-------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 3, 1998 4,815,458 $ 48,155 $ 3,797,264 $ (1,036,611) $ (38,985)
Comprehensive income:
Net income $ 98,000 - - - 98,000 -
Foreign currency translation
gain, net of reclassification
adjustment 38,985 - - - - 38,985
--------------
Comprehensive income $ 136,985
==============
Stock issued for cash 267,146 2,645 747,355 - -
Stock issued in exchange for
debt and accrued interest 229,364 2,200 709,000 - -
Compensation expense
related to stock options - - 217,000 - -
Cash distributions to
stockholders - - 72,381 (964,389) -
Distributions to stockholders - - 2,473,000 (2,473,000) -
-------------- -------------- -------------- -------------- --------------
Balance, January 2, 1999 5,311,968 53,000 8,016,000 (4,376,000) -
Net income - - - 1,248,000 -
Minority interest contributed
to additional paid-in capital - - 245,000 - -
Compensation expense
related to stock options - - 86,000 - -
-------------- -------------- -------------- -------------- --------------
Balance, January 1, 2000 5,311,968 $ 53,000 $ 8,347,000 $ (3,128,000) $ -
============== ============== ============== ============== ==============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
SPECTRUM LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------------------------
<CAPTION>
FISCAL YEARS ENDED
------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,248,000 $ 98,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 914,000 714,000
Noncash compensation 86,000 217,000
Deferred taxes (325,000) -
Change in working capital components:
Decrease in accounts receivable 11,000 80,000
(Increase) in inventories (693,000) (183,000)
(Increase) decrease in prepaid expenses (164,000) 43,000
Increase (decrease) in accounts payable 44,000 (253,000)
Increase (decrease) in accrued expenses (42,000) 156,000
Other - 20,000
-------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,079,000 892,000
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of equipment and leasehold improvements (557,000) (407,000)
Increase in other assets (13,000) (200,000)
Repayment of stockholder receivable - 306,000
-------------- --------------
NET CASH (USED IN) INVESTING ACTIVITIES (570,000) (301,000)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of long-term debt - 275,000
Proceeds from the sale of common stock - 750,000
Principal payments of long-term debt (814,000) (1,003,515)
Distributions to stockholders - (892,008)
-------------- --------------
NET CASH (USED IN) FINANCING ACTIVITIES (814,000) (870,523)
-------------- --------------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS (305,000) (279,523)
Cash and cash equivalents
Beginning of year 855,000 1,134,523
-------------- --------------
End of year $ 550,000 $ 855,000
============== ==============
</TABLE>
See notes to consolidated financial statements.
F-5
<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 continues as the
legal successor. The merger was a combination of two companies under
common control and has been accounted for in a manner similar to a
pooling of interests. 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 1, 2000 (fiscal year 1999) and
January 2, 1999 (fiscal year 1998) 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 insured
limits.
INVENTORIES - Inventories are stated at the lower of cost (using the
first-in first-out method) or market value.
F-6
<PAGE>
SPECTRUM LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 a prior
acquisition and is amortized on a straight-line basis over 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 1999
or 1998.
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 (79,875 and 56,368 shares in the fiscal years
1999 and 1998, respectively). During 1999 and 1998, 96,300 and 4,864
options, respectively, 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.
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 $55,000 and $68,000 during fiscal years 1999 and
1998.
F-7
<PAGE>
SPECTRUM LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 income for fiscal years 1999 and 1998 were
$0 and ($31,000), 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 1, 2000 and January 2, 1999 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) No. 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.
NOTE 2. INVENTORIES
Inventories consist of the following at January 1, 2000:
Raw materials $ 1,482,000
Work in process 118,000
Finished goods 789,000
--------------
$ 2,389,000
==============
F-8
<PAGE>
SPECTRUM LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following at
January 1, 2000:
Machinery, equipment and tooling $ 4,869,000
Office furniture and equipment 1,974,000
Artwork, at cost 974,000
Leasehold improvements 555,000
--------------
8,372,000
Less accumulated depreciation and amortization (6,057,000)
--------------
$ 2,315,000
==============
Depreciation and amortization expense of equipment and leasehold
improvements for fiscal years 1999 and 1998 was $472,000 and
$424,000, respectively.
NOTE 4. INCOME TAXES
The Company's provision for income taxes (credits) consists of the
following:
1999 1998
-------------- --------------
Current:
Federal $ 25,000 $ -
State 51,000 (14,000)
Foreign 14,000 28,000
-------------- --------------
90,000 14,000
-------------- --------------
Deferred:
Federal (325,000) -
State - -
-------------- --------------
$ (235,000) $ 14,000
============== ==============
F-9
<PAGE>
SPECTRUM LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4. INCOME TAXES (Continued)
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>
1999 1998
-------------- --------------
<S> <C> <C>
Statutory federal income tax provision $ 355,000 $ 39,000
Nondeductible amortization of intangibles 108,000 75,000
State income taxes, net of federal benefit 61,000 23,000
S corporation income exclusion - (308,000)
Change in valuation allowance (787,000) 183,000
Nondeductible expenses 48,000 -
Other (20,000) 2,000
-------------- --------------
Income tax provision $ (235,000) $ 14,000
============== ==============
</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.
The components of the Company's net deferred income tax assets as of
January 1, 2000 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Operating loss carryforwards $ 2,808,000
Intangibles 607,000
Reserves not currently deductible 378,000
Equipment and leasehold improvements 220,000
Other 112,000
--------------
4,125,000
Valuation allowance 2,200,000
--------------
Net deferred tax assets $ 1,925,000
==============
</TABLE>
The net deferred tax assets have been classified on the accompanying
consolidated balance sheet as follows:
<TABLE>
<CAPTION>
<S> <C>
Current assets $ 340,000
Noncurrent assets 1,585,000
--------------
Net deferred tax assets $ 1,925,000
==============
</TABLE>
F-10
<PAGE>
SPECTRUM LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4. INCOME TAXES (Continued)
In assessing the realizability of deferred tax assets, management has
estimated that it is more likely than not that approximately
$2,200,000 will not be realized. Approximately $1,500,000 of the
valuation allowance represents a portion of net operating loss
carryforwards attained through a prior business acquisition. As
further discussed below, tax law limits the use of an acquired
entity's net operating loss carryforwards to subsequent taxable
income of the consolidated entity. During 1999, the Company realized
approximately $1,225,000 of the total operating loss carryforwards
acquired. The realization of this amount was recorded as an offset to
the goodwill recorded in connection with this prior acquisition. The
remaining portion of net deferred tax assets realized during 1999
represents management's best estimate of projected tax liability over
the next three years. However, there can be no assurance that the
Company will meet its expectations of future taxable income.
Management will continue to evaluate the realizability of the
deferred tax assets by assessing the need for and amount of a
valuation allowance.
At January 1, 2000, the Company had approximately $8.3 million in net
operating loss carryforwards for federal income tax purposes
available to offset future taxable income. Certain of these loss
carryforwards are limited to approximately $298,000 annually. Any
unused net operating loss is carried forward. As a result of the
limitation, it is possible that more than $4,500,000 of the entity's
net operating loss may expire without utilization. Loss carryforwards
for tax purposes expire in amounts and by fiscal year as follows:
2003 $909,000; 2004 $2,279,000; 2005 $1,319,000; 2011 $20,000; 2012
$347,000; 2013 $776,000; 2014 to 2021 $299,000 per year; 2022
$275,000.
NOTE 5. LONG-TERM DEBT
At January 2, 1999, the Company had a credit agreement with a bank
which provided for two term loans. One of the term loans has an
outstanding balance at January 1, 2000 of $1,620,000, bears interest
subject to the bank's yield maintenance agreement (9.14% at January
1, 2000) 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 1,
2000 of $233,000, bears interest at prime plus .25% (8.75% at January
1, 2000) and requires monthly principal installments of $8,530 plus
interest through July 1, 2000, 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. The agreement also requires
the maintenance of certain financial and nonfinancial loan covenants
and restricts payment of dividends. The Company was not in compliance
with one non financial covenant at year end which was subsequently
waived by the bank on April 6, 2000. Future maturities of long-term
debt by fiscal year are as follows: 2000 $953,000; 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-11
<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 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
Weighted
average
Number exercise
of shares price
-------------- --------------
<S> <C> <C>
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
Forfeited (48,600) 2.80
-------------- --------------
OUTSTANDING, January 2, 1999 385,249 1.60
Forfeited (5,500) 1.97
-------------- --------------
OUTSTANDING, January 1, 2000 379,749 $ 1.59
============== ==============
</TABLE>
At January 1, 2000, 85,850 shares were available for future grants
under the plan.
A further summary of options outstanding at January 1, 2000 is as
follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ---------------------------------------------------------- ------------------------
Weighted
Weighted average Weighted
average remaining average
Range of Number exercise contractual Number exercise
exercise prices of options price life in years of options price
- ----------------- ---------- ------------ ------------- ---------- ------------
<S> <C> <C> <C> <C> <C>
$ 1.20 265,599 $ 1.20 - 214,670 $ 1.20
2.44 50,000 2.44 3.20 12,500 2.44
3.20 25,400 3.20 6.00 25,400 3.20
4.37 5,000 4.37 6.00 3,750 4.37
7.50 500 7.50 6.75 375 7.50
1.87 to $ 2.20 16,000 2.17 6.68 11,800 2.17
2.50 500 2.50 8.25 125 2.50
1.25 16,750 1.25 8.75 4,188 1.25
---------- ----------
379,749 272,808
========== ==========
</TABLE>
F-12
<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 for the options granted in 1998 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;
risk-free interest rates, ranging from 4.9% to 5.6%; and no dividends
during the 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 $1,225,000 ($0.23 per basic and diluted share) in
fiscal year 1999 and ($77,000) [($0.02) per basic and diluted share]
in fiscal year 1998.
NOTE 7. RELATED-PARTY TRANSACTIONS
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 1999 and 1998, the Company incurred royalty expenses
of $335,000 and $349,000, respectively, under this agreement.
CONSULTING AGREEMENT - The Company was committed under a consulting
agreement to pay the majority stockholder consulting fees for
services rendered in connection with product design and development.
During 1998 the Company incurred expenses of $212,000 under this
agreement. This agreement was terminated in 1998.
LEASES - The Company had leased office, manufacturing and warehouse
facilities from the majority stockholder under operating lease
agreements. Rent expense under these leases was $219,000 and $301,000
in 1999 and 1998, respectively. These leases were terminated in 1999.
LEGAL SERVICES - During 1999 and 1998, the Company incurred expenses
of $0 and $40,000, respectively, for legal services to a firm which
employed a member of the Board of Directors.
F-13
<PAGE>
SPECTRUM LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 $759,000 and $649,000 in fiscal years
1999 and 1998, respectively. Minimum future rental payments under
these operating lease agreements for the years ending December 31 are
as follows: 2000 $472,000; 2001 $413,000; 2002 $420,000; 2003
$380,000; 2004 $352,000; and thereafter $177,000 (total $2,214,000).
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 $100,000 to
$200,000 during fiscal year 2000 in connection with this research and
development project.
NOTE 9. GEOGRAPHIC INFORMATION
Sales by country for fiscal years ended 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
United States $ 10,214,000 $ 9,336,000
Japan 753,000 808,000
Other countries, each of which represent less
than 5% of total net sales 2,116,000 2,346,000
-------------- --------------
$ 13,083,000 $ 12,490,000
============== ==============
</TABLE>
There were no significant assets held abroad at January 1, 2000 or
January 2, 1999.
NOTE 10. MAJOR CUSTOMERS
Net sales for fiscal years 1999 and 1998 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 1, 2000 and January 2, 1999:
<TABLE>
<CAPTION>
1999 1998
------------------------------ ------------------------------
Trade Trade
Accounts Accounts
Net Sales Receivable Net Sales Receivable
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Customer A $ 1,980,000 $ 286,000 $ 2,078,000 $ 215,000
============== ============== ============== ==============
Customer B $ 1,402,000 $ 220,000 $ 1,529,000 $ 119,000
============== ============== ============== ==============
</TABLE>
F-14
<PAGE>
SPECTRUM LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 11. 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. One of the subsidiary's preferred stockholders
contributed its stock with a carrying value of $245,000 to the
Company. At January 1, 2000, there is $1,755,000 in preferred stock
of the subsidiary outstanding. 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 an aggregate price of
$1,755,000. 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.
NOTE 12. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
Cash paid for:
Income taxes $ 85,000 $ 50,000
============== ==============
Interest $ 222,000 $ 294,000
============== ==============
Supplemental schedule of noncash activities:
Stockholder's contribution of additional capital
from the proceeds of stockholder distributions $ - $ 72,000
============== ==============
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
============== ==============
Increase in deferred taxes offset against
acquired goodwill $ 1,225,000 $ -
============== ==============
</TABLE>
F-15
<PAGE>
SPECTRUM LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13. 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 that are
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.
Revenue by product group is as follows:
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
Laboratory products $ 11,331,000 $ 10,867,000
Operating room disposable products 1,752,000 1,623,000
-------------- --------------
$ 13,083,000 $ 12,490,000
============== ==============
</TABLE>
NOTE 14. VALUATION AND QUALIFYING ACCOUNT INFORMATION
Following is information regarding the Company's allowance for
doubtful accounts:
<TABLE>
<CAPTION>
Balance at Provision Net
beginning charged to Recoveries Balance at
of year expense (Charge-offs) end of year
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Fiscal year:
1999 $ 125,000 $ 15,000 $ 3,000 $ 143,000
============== ============== ============== ==============
1998 $ 198,000 $ 55,000 $ (128,000) $ 125,000
============== ============== ============== ==============
</TABLE>
F-16
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
STANDARD SUBLEASE
(Long-form to be used with pre-1996 AIR leases)
1. PARTIES. This Sublease, dated, for reference purposes only, January 19,
1999 is made by and between Millipore Corporation ("Sublessor") and Spectrum
Laboratories, Inc. ("Sublessee").
2. PREMISES. Sublessor hereby subleases to Sublessee and Sublessee hereby
subleases from Sublessor for the term, at the rental, and upon all of the
conditions set forth herein, that certain real property, including all
improvements therein, and commonly known by the street address of 18617
Broadwick, Rancho Domiguez located in the County of Los Angeles, State of
California and generally described as (describe briefly the nature of the
property) a +/-55,500 square foot concrete tilt-up industrial building commonly
known as 18617 Broadwick shown on Exhibit "A" attached hereto
("PREMISES").
3. TERM.
3.1 TERM. The term of this Sublease shall be for six (6) years five and
one/half (5 1/2) months commencing on March 1, 1999 and ending on July 14, 2005
unless sooner terminated pursuant to any provision hereof.
3.2 DELAY IN COMMENCEMENT. Sublessor agrees to use its best
commercially reasonable efforts to deliver possession of the Premises by the
commencement date. If, despite said efforts, Sublessor is unable to deliver
possession as agreed, Sublessor shall not be subject to any liability therefor,
nor shall such failure affect the validity of this Sublease. Sublessee shall
not, however, be obligated to pay Rent or perform its other obligations until it
receives possession of the Premises. If possession is not delivered within sixty
days after the commencement date, Sublessee may, at its option, by notice in
writing within ten days after the end of such sixty day period, cancel this
Sublease, in which event the Parties shall be discharged from all obligations
hereunder. If such written notice is not received by Sublessor within said ten
day period, Sublessee's right to cancel shall terminate. Except as otherwise
provided, if possession is not tendered to Sublessee when required and Sublessee
does not terminate this Sublease, as aforesaid, any period of rent abatement
that Sublessee would otherwise have enjoyed shall run from the date of delivery
of possession and continue for a period equal to what Sublessee would otherwise
have enjoyed under the terms hereof, but minus any days of delay caused by the
acts or omissions of Sublessee. If possession is not delivered within 120 days
after the commencement date, this Sublease shall automatically terminate unless
the Parties agree, in writing, to the contrary.
4. RENT.
4.1 BASE RENT. Sublessee shall pay to Sublessor as Base Rent for the
Premises equal monthly payments as stated in Paragraph 4.1 of the Addendum in
advance, on the First (1st) day of each month of the term hereof. Sublessee
shall pay Sublessor upon the execution hereof $13,875 as Base Rent for March,
1999
Base Rent for any period during the term hereof which is for less than one month
shall be a pro rata portion of the monthly installment.
4.2 RENT DEFINED. All monetary obligations of Sublessee to Sublessor
under the terms of this Sublease (except for the Security Deposit) are deemed to
be rent ("RENT"). Rent shall be payable in lawful money of the United States to
Sublessor at the address stated herein or to such other persons or at such other
places as Sublessor may designate In writing.
5. SECURITY DEPOSIT. Sublessee shall deposit with Sublessor upon execution
hereof $ 27 ,750 as security for Sublessee's faithful performance of Sublessee's
obligations hereunder. If Sublessee fails to pay Rent or other charges due
hereunder, or otherwise defaults with respect to any provision of this Sublease,
Sublessor may use, apply or retain all or any portion of said deposit for the
payment of any Rent or other charge in default or for the payment of any other
sum to which Sublessor may become obligated by reason of Sublessee's default, or
to compensate Sublessor for any loss or damage which Sublessor may suffer
thereby. If Sublessor so uses or applies all or any portion of said deposit,
Sublessee shall within ten days after written demand therefore forward to
Sublessor an amount sufficient to restore said Deposit to the full amount
provided for herein and Sublessee's failure to do so shall be a material breach
of this Sublease. Sublessor shall not be required to keep said Deposit separate
from its general accounts. If Sublessee performs all of Sublessee's obligations
hereunder, said Deposit, or so much thereof as has not therefore been applied by
Sublessor, shall be returned, without payment of interest to Sublessee (or at
Sublessor's option, to the last assignee, if any, of Sublessee's interest
hereunder) at the expiration of the term hereof, and after Sublessee has vacated
the Premises. No trust relationship is created herein between Sublessor and
Sublessee with respect to said Security Deposit.
6. USE.
6.1 AGREED USE. The Premises shall be used and occupied only for
general offices, warehouse, manufacturing and distribution of hospital products
and for no other purpose.
6.2 ACCEPTANCE OF PREMISES AND LESSEE. Sublessee acknowledges that:
(a) it has been advised by Brokers to satisfy itself with respect to
the condition of the Premises (including but not limited to the electrical, HVAC
and fire sprinkler systems, security, environmental aspects, and compliance with
Applicable Requirements), and their suitability for Sublessee's intended use,
(b) Sublessee has made such investigation as it deems necessary with
reference to such matters and assumes all responsibility therefor as the same
relate to its occupancy of the Premises, and
(c) neither Sublessor, Sublessor's agents, nor any Broker has made any
oral or written representations or warranties with respect to said matters other
than as set forth in this Sublease.
In addition, sublessor acknowledges that:
Page 1 of 4
1997-American Industrial Real Estate Association
REVISED FORM SBL-1-3/97E
<PAGE>
(a) Broker has made no representations, promises or warranties
concerning Sublessee's ability to honor the Sublease or suitability' to occupy
the Premises, and
(b) it is Sublessor's sole responsibility to investigate the financial
capability and/or suitability of all proposed tenants.
7. MASTER LEASE
7.1 Sublessor is the lessee of the Premises by virtue of a lease,
hereinafter the "Master Lease", a copy of which is attached hereto marked
Exhibit 1, wherein The Carson Companies is the lessor, hereinafter the "MASTER
LESSOR".
7.2 This Sublease is and shall be at all times subject and subordinate
to the Master Lease.
7.3 The terms, conditions and respective obligations of Sublessor and
Sublessee to each other under this Sublease shall be the terms and conditions of
the Master Lease except for those provisions of the Master Lease which are
directly contradicted by this Sublease in which event the terms of this Sublease
document shall control over the Master Lease. Therefore, for the purposes of
this Sublease, wherever in the Master Lease the word "Lessor" is used it shall
be deemed to mean the Sublessor herein and wherever in the Master Lease the word
"Lessee" is used it shall be deemed to mean the Sublessee herein.
7.4 During the term of this Sublease and for all periods subsequent for
obligations which have arisen prior to the termination of this Sublease,
Sublessee does hereby expressly assume and agree to perform and comply with, for
the benefit of Sublessor and Master Lessor, each and every obligation of
Sublessor under the Master Lease except for the following paragraphs which are
excluded therefrom:
None
7.5 The obligations that Sublessee has assumed under paragraph 7.4
hereof are hereinafter referred to as the "SUBLESSEE'S ASSUMED OBLIGATIONS". The
obligations that Sublessee has not assumed under paragraph 7.4 hereof are
hereinafter referred to as the "SUBLESSOR'S REMAINING OBLIGATIONS".
7.6 Sublessee shall hold Sublessor free and harmless from all
liability, judgments, costs, damages, claims or demands, including reasonable
attorneys fees, arising out of Sublessee's failure to comply with or perform
Sublessee's Assumed Obligations.
7.7 Sublessor agrees to maintain the Master Lease during the entire
term of this Sublease, subject, however, to any earlier termination of the
Master Lease without the fault of the Sublessor, and to comply with or perform
Sublessor's Remaining Obligations and to hold Sublessee free and harmless from
all liability, judgments, costs, damages, claims or demands arising out of
Sublessor's failure to comply with or perform Sublessor's Remaining Obligations.
7.8 Sublessor represents to Sublessee that the Master Lease is in full
force and effect and that to Sublessor's actual knowledge no default exists on
the part of any Party to the Master Lease.
8. ASSIGNMENT OF SUBLEASE AND DEFAULT.
8.1 Sublessor hereby assigns and transfers to Master Lessor the
Sublessor's interest in this Sublease, subject however to the provisions of
Paragraph 8.2 hereof.
8.2 Master Lessor, by executing this document, agrees that until a
Default shall occur in the performance of Sublessor's Obligations under the
Master Lease, that Sublessor may receive, collect and enjoy the Rent accruing
under this Sublease. However, if Sublessor shall Default in the performance of
its obligations to Master Lessor then Master Lessor may, at its option, receive
and collect, directly from Sublessee, all Rent owing and to be owed under this
Sublease. Master Lessor shall not, by reason of this assignment of the Sublease
nor by reason of the collection of the Rent from the Sublessee, be deemed liable
to Sublessee for any failure of the Sublessor to perform and comply with
Sublessor's Remaining Obligations.
8.3 Sublessor hereby irrevocably authorizes and directs Sublessee upon
receipt of any written notice from the Master Lessor stating that a Default
exists in the performance of Sublessor's obligations under the Master Lease, to
pay to Master Lessor the Rent due and to become due under the Sublease.
Sublessor agrees that Sublessee shall have the right to rely upon any such
statement and request from Master Lessor, and that Sublessee shall pay such Rent
to Master Lessor without any obligation or right to inquire as to whether such
Default exists and notwithstanding any notice from or claim from Sublessor to
the contrary and Sublessor shall have no right or claim against Sublessee for
any such Rent so paid by Sublessee.
8.4 No changes or modifications shall be made to this Sublease without
the consent of Master Lessor.
9. CONSENT OF MASTER LESSOR.
9.1 In the event that the Master Lease requires that Sublessor obtain
the consent of Master Lessor to any subletting by Sublessor then, this Sublease
shall not be effective unless, within ten days of the date hereof. Master Lessor
signs this Sublease thereby giving its consent to this Subletting.
9.2 In the event that the obligations of the Sublessor under the Master
Lease have been guaranteed by third parties then neither this Sublease, nor the
Master Lessor's consent, shall be effective unless, within 10 days of the date
hereof, said guarantors sign this Sublease thereby giving their consent to this
Sublease.
9.3 In the event that Master Lessor does give such consent then:
(a)Such consent shall not release Sublessor of its obligations or
alter the primary liability of Sublessor to pay the Rent and perform and comply
with all of the obligations of Sublessor to be performed under the Master Lease.
(b) The acceptance of Rent by Master Lessor from Sublessee or
anyone else liable under the Master Lease shall not be deemed a waiver by Master
Lessor of any provisions of the Master Lease.
(c) The consent to this Sublease shall not constitute a consent
to any subsequent subletting or assignment.
(d) In the event of any Default of Sublessor under the Master
Lease, Master Lessor may proceed directly against any Sublessor, guarantors or
anyone else liable under the Master Lease or this Sublease without first
exhausting Master Lessor's remedies against any other person or entity liable
thereon to Master Lessor.
(e) CROSSED OUT AND DELETED
(f) In the event that Sublessor shall Default in its obligations
under the Master Lease, then Master Lessor, at its option and without being
obligated to do so, may require Sublessee to attorn to Master Lessor in which
event Master Lessor shall undertake the obligations of Sublessor under this
Sublease from the time of the exercise of said option to termination of this
Sublease but Master Lessor shall not be liable for any prepaid Rent nor any
Security Deposit paid by Sublessee, nor shall Master Lessor be liable for any
other Defaults of the Sublessor under the Sublease.
9.4 The signatures of the Master Lessor and any Guarantors of
Sublessor at the end of this document shall constitute their consent to the
terms of this Sublease.
Page 2 of 4
1997-American Industrial Real Estate Association
REVISED FORM SBL-1-3/97E
<PAGE>
9.5 Master Lessor acknowledges that, to the best of Master Lessor's
knowledge, no Default presently exists under the Master Lease of obligations to
be performed by Sublessor and that the Master Lease is in full force and effect.
9.6 In the event that Sublessor Defaults under its obligations to be
performed under the Master Lease by Sublessor, Master Lessor agrees to deliver
to Sublessee a copy of any such notice of default. Sublessee shall have the
right to cure any Default of Sublessor described in any notice of default within
ten days after service of such notice of default on Sublessee. If such Default
is cured by Sublessee then Sublessee shall have the right of reimbursement and
offset from and against Sublessor.
10. BROKERS FEE.
10.1 Upon execution hereof by all parties, Sublessor shall pay to CB
Richard Ellis Per Separate Agreement a licensed real estate broker, ("BROKER"),
a fee as set forth In a separate agreement between Sublessor and Broker, or in
the event there is no such separate agreement, the sum of $_____________for
brokerage services rendered by Broker to Sublessor in this transaction.
10.2 CROSSED OUT AND DELETED
10.3 CROSSED OUT AND DELETED
10.4 CROSSED OUT AND DELETED
10.5 Any transferee of Sublessor's interest in this Sublease, or of Master
Lessor's interest in the Master Lease, by accepting an assignment thereof, shall
be deemed to have assumed the respective obligations of Sublessor or Master
Lessor under this Paragraph 10.
Broker shall be deemed to be a third-party beneficiary of this paragraph 10.
11. ATTORNEY'S FEES. If any party or the Broker named herein brings an
action to enforce the terms hereof or to declare rights hereunder, the
prevailing party in any such action, on trial and appeal, shall be entitled to
his reasonable attorney's fees to be paid by the losing party as fixed by the
Court.
12. ADDITIONAL PROVISIONS. If there are no additional provisions, draw a
line from this point to the next printed word after the space left here. If
there are additional provisions place the same here.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Page 3 of 4
1997-American Industrial Real Estate Association
REVISED FORM SBL-1-3/97E
<PAGE>
ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN
INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY REAL ESTATE BROKER AS TO THE LEGAL
SUFFICIENCY, LEGAL EFFECT. OR TAX CONSEQUENCES OF THIS SUBLEASE OR THE
TRANSACTION TO WHICH IT RELATES. THE PARTIES ARE URGED TO:
1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS SUBLEASE.
2 RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF THE
PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE POSSIBLE
PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PROPERTY, THE STRUCTURAL
INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND THE SUITABILITY
OF THE PREMISES FOR SUBLESSEE'S INTENDED USE.
WARNING: IF THE SUBJECT PROPERTY IS LOCATED IN A STATE OTHER THAN CALIFORNIA,
CERTAIN PROVISIONS OF THE SUBLEASE MAY NEED TO BE REVISED TO COMPLY WITH THE
LAWS OF THE STATE IN WHICH THE PROPERTY IS LOCATED.
Executed at: Bedford, MA Millipore Corporation
on: February 2, 1999 By: /s/ Edward Lang /s/ MSL
Address: 80 Ashby Road By Ed Lang, Corporate Vice-President
"Sublessor' (Corporate Seal)
Executed at: Los Angeles Spectrum Laboratories, Inc.
on: Jan 29, 1999 By: /s/ signature
Address: 18617 Broadwick, 90220 By: CEO
"Sublessee" (Corporate Seal)
Executed at:
on: By
Address: By
"Master Lessor" (Corporate Seal)
NOTE: These forms are often modified to meet changing requirements of law and
needs of the Industry. Always write or call to make sure you are utilizing the
most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700 So. Flower
St., Suite 600, Los Angeles, CA 90017. (213) 687-8777.
Page 4 of 4
1997-American Industrial Real Estate Association
REVISED FORM SBL-1-3/97E
<PAGE>
ADDENDUM FOR THE SUBLEASE DATED JANUARY 19, 1999 BY AND BETWEEN MILLIPORE
CORPORATION AS "SUBLESSOR" AND SPECTRUM LABORATORIES, INC. AS "SUBLESSEE" FOR
THE PROPERTY LOCATED AT 18617 BROADWICK, RANCHO DOMINGUEZ, CALIFORNIA
- --------------------------------------------------------------------------------
4.1 BASE RENT:
The Base Rent shall be Thirteen Thousand Eight Hundred Seventy-Five
Thousand Dollars ($13,875.00) triple net for the first six (6) months
and thereafter adjusted to Twenty-Two Thousand Two Hundred Dollars
($22,200.00) triple net per month plus rent adjustment per Lease
Addendum. In addition and without limitation, Sublessee shall pay for
all property taxes, property insurance, property maintenance, and
utilities of the subject Premises.
13. CONDITION OF PREMISES:
Sublessor shall deliver the Premises to Sublessee in "as is" condition.
AGREED AND ACCEPTED
MILLIPORE CORPORATION SPECTRUM LABORATORIES, INC.
By: /s/ Edward Lang MSL By: /s/ signature
Date: Date: Jan 29, 1999
<PAGE>
RENT ADJUSTMENT(S)
STANDARD LEASE ADDENDUM
Dated January 19, 1999
By and Between (SUBLessor) Millipore Corporation
(SUBLessee) Spectrum Laboratories, Inc.
ADDRESS OF PREMISES:18617 Broadwick, Rancho Dominguez, CA
Paragraph _______
A. RENT ADJUSTMENTS:
The monthly rent for each month of the adjustment period(s) specified below
shall be increased using the method(s) indicated below (Check Method(s) to be
Used and Fill in Appropriately)
[x] I. Cost of Living Adjustment(s) (COLA)
a. On (Fill in COLA Dates):September 1, 2001 and March 1, 2004
the Base Rent shall be adjusted by the change, If any, from the Base Month
specified below, in the Consumer Price Index of the Bureau of Labor Statistics
of the U.S. Department of Labor for (select one): [x] CPI W (Urban Wage Earners
and Clerical Workers) or [ ] CPI U (All Urban Consumers), for (Fill In Urban
Area): Los Angeles, Anaheim, and Riverside, All items (1982-1984=100), herein
referred to as "CPI". The increase shall be based upon a minimum of three
percent (3%) per annum and a maximum of seven percent (7%) per annum, cumulative
and noncompounded.
b. The monthly rent payable in accordance with paragraph A.l.a. of this
Addendum shall be calculated as follows: the Base Rent set forth in paragraph
1.5 of the attached Lease, shall be multiplied by a fraction the numerator of
which shall be the CPI of the calendar month two months prior to the month(s)
specified in paragraph A.l.a. above during which the adjustment is to take
effect, and the denominator of which shall be the CPI of the calendar month
which is two months prior to (select one): [x] the first month of the term of
this Lease as set forth in paragraph 1.3 ("Base Month") or [ ] (Fill In Other
"Base Month"): _______________ ____________________________ The sum, so
calculated shall constitute the new monthly rent hereunder, but in no event,
shall any such new monthly rent be less than the rent payable for the month
immediately preceding the rent adjustment.
c. In the event the compilation and/or publication of the CPI shall be
transferred to any other governmental department or bureau or agency or shall be
discontinued, then the index most nearly the same as the CPI shall be used to
make such calculation. In the event that the Parties cannot agree on such
alternative index, then the matter shall be submitted for decision to the
American Arbitration Association in accordance with the then rules of said
Association and the decision of the arbitrators shall be binding upon the
parties. The cost of said Arbitration shall be paid equally by the Parties.
II. THIS SECTION IS CROSSED OUT AND DELETED
Initials /s/ Initials: /s/
RENT ADJUSTMENTS
Page 1 of 2
<PAGE>
THE TOP PART OF THIS FORM IS CROSSED OUT AND DELETED
B. NOTICE:
Unless specified otherwise herein, notice of any such adjustments, other
then Fixed Rental Adjustments, shall be made as specified in paragraph 23 of the
Lease.
C. BROKER'S FEE:
The Brokers specified in paragraph 1.10 shall be paid a Brokerage Fee for
each adjustment specified above in accordance with paragraph 15 of the
Lease.
Initials /s/ Initials: /s/
RENT ADJUSTMENTS
Page 2 of 2
Exhibit 10.21
FIRST AMENDMENT TO CREDIT AGREEMENT
This First Amendment to Credit Agreement is entered into as of July
14, 1999, by and between Spectrum Laboratories, Inc., a Delaware 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 December 22, 1998 (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 The following new definitions are added to Section 1 of
the Credit Agreement:
"CD COLLATERAL" means the time deposits owned by Roy
Eddleman and/or Borrower which are maintained at CNB and
pledged as collateral securing the Obligations.
"CD RATE" means the interest rate from time to time in
effect on the CD Collateral; provided, however, if there
is more than one rate, the CD Rate shall be the highest
of such rates.
"NET INCOME" shall be determined on a consolidated basis
for Borrower and the Subsidiaries and shall mean net
income after taxes determined in accordance with GAAP.
2.2 The definition of "Cash/Securities Collateral" is
deleted from Section 1 of the Credit Agreement, and the
term CD Collateral will be substituted for the term
Cash/Securities Collateral everywhere else that the term
Cash/Securities Collateral appears in the Credit
Agreement.
2.3 The definitions of "Cash Flow from Operations" and
"Tangible Net Worth" are amended in their entirety to
provide as follows:
"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 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 during the twelve month period ending on the
date of determination, PLUS the amount of "compensation
expense related to stock options" expensed during the
twelve-month period ending on the date of determination,
which expense is reflected as an increase in Borrower's
stockholders' equity, as shown on Borrower's financial
statements delivered to CNB pursuant to the terms of
this Agreement.
1
<PAGE>
"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 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 (other than current prepaid
expenses and deferred taxes), 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) CD Collateral.
2.4 The first sentence of Section 2.1.1 is stricken and
replaced with the following:
"Effective on the later to occur of the date of the
First Amendment, or the date on which Roy T. Eddleman
opens at CNB one or more time deposits to evidence CD
Collateral in an amount not less than $843,000.00, the
Term Loan A will bear interest until due (whether at
stated maturity, by acceleration or otherwise) at a rate
equal to (a) the CD Rate plus one percent (1.0%) per
annum on that portion of the outstanding principal
amount of the Term Loan A equal to the principal amount
of the CD Collateral, and (b) nine and 14/100 percent
(9.14%) per annum on that portion of the outstanding
principal amount of the Term Loan A in excess of the
principal amount of the CD Collateral, subject to the
provisions in CNB's Yield Maintenance Agreement, a copy
of which is attached as Exhibit "C", the terms of which
shall only apply to a prepayment on the principal amount
in excess of the CD Collateral."
2.5 Section 2.2 is stricken and replaced with the following:
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 Two Hundred Seventy Five Thousand
Four Hundred Sixty Five and 44/100 Dollars
($275,465.44). The Term Loan B will be evidenced by a
promissory note ("Term Note") in the form attached
hereto as Exhibit "B". or as superseded in any amendment
to this Agreement.
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 August 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
twelve (12)
2
<PAGE>
consecutive monthly installments, consisting of eleven
(11) installments each in the amount of $8,530.00, and a
final installment in the amount of $181,635.44,
commencing on August 1, 1999, and continuing on the
first day of each month up to and including July 1,
2000, on which date all principal and accrued interest
will be due and payable in full.
2.6 Section 2.7 is stricken and replaced with the following:
"2.7 CD COLLATERAL. Borrower agrees that the aggregate
principal amount of the CD Collateral shall at no time
be less than $943,000.00, of which $843,000.00 shall be
pledged by Roy T. Eddleman; provided, however, CNB
agrees to release (a) $250,000.00 of the principal
amount of the CD Collateral pledged by Roy T. Eddleman
("Eddleman CD Collateral") if Borrower is in compliance
with Section 5.10 of this Agreement as determined by CNB
from Borrower's financial statements for its fiscal
quarter ending July 3, 1999 delivered to CNB pursuant to
the terms of this Agreement and no Event of Default
exists hereunder at the time of such release, and (b) an
additional $250,000.00 of the principal amount of the
Eddleman CD Collateral if Borrower is in compliance with
Section 5.10 of this Agreement as determined by CNB from
Borrower's financial statements for its fiscal quarter
ending October 3, 1999 delivered to CNB pursuant to the
terms of this Agreement and no Event of Default exists
hereunder at the time of such release. If concurrently
with CNB's release of the Eddleman CD Collateral as
provided in this Section 2.7, the principal amount of
the released CD Collateral is used to prepay the
principal amount of Term Loan A, the prepayment charge
set forth in CNB's Yield Maintenance Agreement shall not
apply to such prepaid principal amount."
2.7 Section 5.10 is stricken and replaced with the
following:
"5.10 FINANCIAL TESTS. Borrower shall maintain:
5.10.1 Tangible Net Worth plus Subordinated Debt
plus SLI Acquisition Corp. Preferred Stock of not less
than $2,500,000.00;
5.10.2 A ratio of Total Senior Liabilities to
Tangible Net Worth plus Subordinated Debt of not more
than 2.5 to 1 at all times;
5.10.3 A ratio of Cash Flow from Operations to
Debt Service of not less than 1.25 to 1 during the
twelve months preceding the date of determination;
5.10.4 Net Income of not less than $400,000.00 for
Borrower's' fiscal year ending; and
5.10.5 Net Income of not less than $1.00 for each
of Borrower's fiscal quarters."
2.8 Section 7.1.9 is stricken and replaced with the
following:
"7.1.9 Roy T. Eddleman fails to maintain verifiable
Liquid Assets including CD Collateral of at least
$1,500,000.00."
3
<PAGE>
2.9 Exhibit "B" currently attached to the Credit Agreement
is superseded and replaced with Exhibit "B" attached to
this Amendment.
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.
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;
4.2 CNB shall have received a new Term Loan B in the form
attached as Exhibit "B" to this Amendment, duly executed
by Borrower;
4.3 Roy T. Eddleman has opened one or more time deposits at
CNB to evidence CD Collateral in an amount not less than
$843,000.00 and CNB shall have received a pledge
agreement, duly executed by Roy T. Eddleman, pursuant to
which Roy T. Eddleman will pledge to CNB as collateral
for the Obligations CD Collateral in the foregoing
amount; and
4.4 All other documents and legal matters in connection with
the transactions described in the Agreement will be
satisfactory in form and substance to CNB
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 Laboratories, Inc., a
Delaware corporation
By: /s/ Roy T. Eddleman
-------------------------------------
Roy T. Eddleman, Chief Executive Officer
"CNB" City National Bank, a national
banking association
By: /s/ Richard Fein
----------------------------------------
Richard Fein, Vice President
[Consent of Guarantors continued on next page]
4
<PAGE>
[Consent of Guarantors continued from prior page]
CONSENT OF GUARANTORS:
The undersigned have previously guaranteed the indebtedness of
SPECTRUM LABORATORIES, INC. 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 such 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 Europe B.V., a Hydro-med Products, Inc., a
Netherlands company Texas Corporation
By: /s/ Roy T. Eddleman By: /s/ Roy T. Eddleman
----------------------------- --------------------------------
Its: CEO Its: CEO
----------------------------- --------------------------------
SLI Acquisition Corp., a Spectrum Molecular Separations, Inc., a
Delaware corporation Delaware corporation
By: /s/ Roy T. Eddleman By: /s/ Roy T. Eddleman
----------------------------- --------------------------------
Its: CEO Its: CEO
----------------------------- --------------------------------
5
<PAGE>
TERM NOTE B
(ANY INTEREST RATE)
$275,465.44 Irvine, California
July 14, 1999
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 HUNDRED
SEVENTY FIVE THOUSAND FOUR HUNDRED SIXTY FIVE AND 44/100 DOLLARS ($275,465.44),
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 twelve (12) consecutive monthly installments, consisting
of eleven (11) installments each in the amount of $8,530.00, and a final
installment in the amount of $181,635.44. commencing August 1, 1999, and
continuing on the first day of each month up to and including July 1, 2000, 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, and supersedes and replaces in its entirety
that certain Term Note B dated December 22, 1998 in the original principal sum
of $326,645.44 executed by Borrower in favor of CNB.
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: /s/ Roy T. Eddleman
----------------------------------------
Roy T. Eddleman, Chief Executive Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-START> JAN-03-1999
<PERIOD-END> JAN-01-2000
<CASH> 550,000
<SECURITIES> 0
<RECEIVABLES> 1,651,000
<ALLOWANCES> 143,000
<INVENTORY> 2,389,000
<CURRENT-ASSETS> 5,074,000
<PP&E> 8,372,000
<DEPRECIATION> 6,057,000
<TOTAL-ASSETS> 10,428,000
<CURRENT-LIABILITIES> 2,501,000
<BONDS> 900,000
0
0
<COMMON> 53,000
<OTHER-SE> 5,219,000
<TOTAL-LIABILITY-AND-EQUITY> 10,428,000
<SALES> 13,083,000
<TOTAL-REVENUES> 13,083,000
<CGS> 6,381,000
<TOTAL-COSTS> 6,381,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 15,000
<INTEREST-EXPENSE> 228,000
<INCOME-PRETAX> 1,013,000
<INCOME-TAX> (235,000)
<INCOME-CONTINUING> 1,248,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,248,000
<EPS-BASIC> .23
<EPS-DILUTED> .23
</TABLE>
