<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________________ TO _____________________
COMMISSION FILE NUMBER 0-19371
PHARMCHEM LABORATORIES INC. [LOGO]
(Exact name of registrant as specified in its charter)
CALIFORNIA 77-0187280
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
1505-A O'BRIEN DRIVE
MENLO PARK, CALIFORNIA 94025
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (650) 328-6200
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of October 30, 1998, the registrant had outstanding 5,780,873 shares
of Common Stock, no par value.
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PHARMCHEM LABORATORIES, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements ...............................3
Condensed Consolidated Balance Sheets at
September 30, 1998 (unaudited) and December 31, 1997 (audited).............4
Condensed Consolidated Statements of Operations
(unaudited) for the Three and Nine Months ended
September 30, 1998 and 1997................................................5
Condensed Consolidated Statements of Comprehensive Income (Loss)
(unaudited) for the Three and Nine Months ended
September 30, 1998 and 1997................................................6
Condensed Consolidated Statements of
Cash Flows (unaudited) for the Nine Months ended
September 30, 1998 and 1997 ..............................................7
Notes to Condensed Consolidated Financial Statements (unaudited)...........8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................................9
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders .....................14
Item 5. Other Information.........................................................14
Item 6. Exhibits and Reports on Form 8-K ........................................14
SIGNATURE ..........................................................................15
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
The condensed consolidated financial statements included herein have
been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the Company believes
that the disclosures made are adequate to make the information presented not
misleading. It is suggested that the condensed consolidated financial statements
be read in conjunction with the consolidated financial statements and the notes
thereto for the year ended December 31, 1997 included in the Company's Annual
Report on Form 10-K.
These financial statements have been prepared in all material respects
in conformity with the standards of accounting measurements set forth in
Accounting Principles Board Opinion No. 28, "Interim Financial Reporting," and
the rules and regulations as specified in the Securities Exchange Act of 1934
and reflect all adjustments, consisting only of normal recurring adjustments
which, in the opinion of management, are necessary to summarize fairly the
Company's consolidated financial position, the results of operations and cash
flows for the periods presented. The results of operations for such interim
periods are not necessarily indicative of the results to be expected for the
full year.
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PHARMCHEM LABORATORIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------- --------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 895 $ 372
Accounts receivable, net 7,360 7,608
Inventory 1,703 1,609
Prepaids and other current assets 639 456
-------- --------
TOTAL CURRENT ASSETS 10,597 10,045
-------- --------
PROPERTY AND EQUIPMENT, net 8,148 7,788
OTHER ASSETS 1,269 1,238
GOODWILL, net 3,036 3,175
-------- --------
TOTAL ASSETS $ 23,050 $ 22,246
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Revolving line of credit $ 3,258 $ 4,081
Current portion of long-term debt 334 503
Accounts payable 3,456 3,322
Accrued compensation 742 990
Accrued collectors and other liabilities 3,575 2,296
-------- --------
TOTAL CURRENT LIABILITIES 11,365 11,192
LONG-TERM DEBT, net of current portion 466 696
OTHER NONCURRENT LIABILITIES 489 147
-------- --------
TOTAL LIABILITIES 12,320 12,035
-------- --------
SHAREHOLDERS' EQUITY
Common stock, no par value, 10,000 shares authorized,
5,779 and 5,750 shares issued and outstanding at
September 30, 1998 and December 31, 1997, respectively 19,085 19,027
Accumulated other comprehensive income 145 82
Accumulated deficit (8,500) (8,898)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 10,730 10,211
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 23,050 $ 22,246
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE> 5
PHARMCHEM LABORATORIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET SALES $ 11,311 $ 10,037 $ 32,290 $ 29,098
COST OF SALES 8,175 8,402 23,698 23,572
-------- -------- -------- --------
GROSS PROFIT 3,136 1,635 8,592 5,526
OPERATING EXPENSES
Selling, general and administrative 2,558 2,142 7,570 6,234
Marketing rights and research 11 10 51 177
Amortization of goodwill 47 47 139 139
-------- -------- -------- --------
Total operating expenses 2,616 2,199 7,760 6,550
-------- -------- -------- --------
INCOME (LOSS) FROM OPERATIONS 520 (564) 832 (1,024)
Interest expense 83 105 272 289
Other expense (income), net (4) (7) (16) (6)
-------- -------- -------- --------
Total other expenses 79 98 256 283
-------- -------- -------- --------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES 441 (662) 576 (1,307)
PROVISION FOR INCOME TAXES 97 -- 178 --
-------- -------- -------- --------
NET INCOME (LOSS) $ 344 $ (662) $ 398 $ (1,307)
======== ======== ======== ========
EARNINGS (LOSS) PER SHARE:
Basic $ 0.06 $ (0.12) $ 0.07 $ (0.23)
======== ======== ======== ========
Diluted $ 0.06 $ (0.12) $ 0.07 $ (0.23)
======== ======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 5,771 5,726 5,758 5,729
======== ======== ======== ========
Diluted 5,903 5,726 5,846 5,729
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
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PHARMCHEM LABORATORIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
NET INCOME (LOSS) $ 344 $ (662) $ 398 $(1,307)
OTHER COMPREHENSIVE INCOME:
Foreign currency translation 47 5 62 15
------- ------- ------- -------
COMPREHENSIVE INCOME (LOSS) $ 391 $ (557) $ 460 $(1,292)
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
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PHARMCHEM LABORATORIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------
1998 1997
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 398 $(1,307)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 1,487 1,431
Provision for doubtful accounts 222 144
Loss on disposition of property and equipment 6 2
Changes in operating assets and liabilities:
Accounts receivable 26 2
Inventory (94) (406)
Prepaids and other current assets (183) 325
Other assets (30) (10)
Accounts payable and other accrued liabilities 1,165 (16)
Other noncurrent liabilities 342 9
------- -------
Net cash provided by operating activities 3,339 174
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,714) (1,932)
------- -------
Net cash used in investing activities (1,714) (1,932)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayments) on revolving lines of credit, net (823) 2,986
Principal payments on long-term debt (399) (1,037)
Proceeds from exercise of stock options 58 106
------- -------
Net cash provided by (used in) financing activities (1,164) 2,055
------- -------
FOREIGN CURRENCY TRANSLATION 62 (47)
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 523 250
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 372 240
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 895 $ 490
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
7
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PHARMCHEM LABORATORIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Earnings (Loss) per Share
In the fourth quarter of 1997, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share." Earnings
(loss) per share amounts for all previously reported periods have been restated
to conform with SFAS No. 128. Basic earnings (loss) per share is calculated
using the weighted average number of common shares outstanding during the
period. Diluted earnings (loss) per share is calculated using the weighted
average number of common shares and dilutive potential common shares outstanding
during the period. Dilutive potential common shares represent shares issuable
upon the exercise of outstanding options and are calculated using the treasury
stock method. Options to purchase shares of the Company's common stock for the
three and nine months ended September 30, 1997 were not included in the
computation of diluted earnings per share because their effect would have been
antidilutive. Options to purchase 10,000 shares of the Company's common stock at
September 30, 1998 were not included in the computation of diluted earnings per
share because their exercise prices were greater than the average market price
of the Company's common stock of $2.58 per share. Weighted average dilutive
options of 132,000 and 87,000 were used in the computation of earnings per share
for the three and nine month periods ending September 30, 1998, respectively.
Effective March 24, 1998, the Company engaged in a stock option exchange
program that repriced substantially all the then outstanding options having an
exercise price above the then current market price of $2.375. The repriced
options began vesting April 24, 1998 over a 48 month period. The exercise price
for all 463,480 options exchanged was $2.375.
2. Inventory
Inventory represents laboratory materials, collection materials and
products and is stated at the lower of cost or market. Cost is determined using
standard costs, including freight, that approximate actual costs on a first-in,
first-out basis. Inventory consisted of the following at September 30, 1998 and
December 31, 1997, respectively:
<TABLE>
<CAPTION>
1998 1997
------ ------
(In thousands)
<S> <C> <C>
Laboratory materials ................... $ 496 $ 412
Collection materials ................... 952 1,072
Products ............................... 255 125
------ ------
$1,703 $1,609
====== ======
</TABLE>
3. Debt
PharmChem maintains a revolving line of credit agreement ("Credit Agreement")
with a bank. In August 1998, the Company amended its Credit Agreement to provide
for $500,000 of additional borrowings under the revolver and for less
restrictive financial covenants. At September 30, 1998, the maximum that
8
<PAGE> 9
could be borrowed and the amount outstanding under the Credit Agreement were
$5,638,000 and $3,258,000, respectively.
4. New Accounting Pronouncements
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 130 "Reporting Comprehensive Income." Comprehensive income (loss)
includes net income (loss) and several other items that current accounting
standards require to be recognized outside of net income (loss).
5. Reclassifications
Certain reclassifications have been made to prior period amounts to
conform to current year presentation.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FORWARD LOOKING STATEMENTS
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" contains forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act
of 1933, which are subject to the "safe harbor" created by these Sections. The
Company's actual future results could differ materially from those projected in
the forward-looking statements. Some factors which could cause future actual
results to differ materially from the Company's recent results and those
projected in the forward-looking statements are described in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997. The Company
assumes no obligation to update the forward-looking statements or such factors.
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<PAGE> 10
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain
financial data (dollars in thousands):
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------------ -------------------------------------
1998 1997 1998 1997 1998 1997 1998 1997
------ ------ ------ ------ ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(As a % of (As a % of
net sales) net sales)
NET SALES:
Public and private employers $ 4,624 $ 4,324 40.9% 43.1% $ 13,112 $ 12,686 40.6% 43.6%
Criminal justice agencies 3,935 3,645 34.8 36.3 11,204 11,102 34.7 38.2
Drug rehabilitation programs 394 340 3.5 3.4 1,174 1,089 3.6 3.7
Domestic product sales & other 728 681 6.4 6.8 1,928 1,099 6.0 3.8
Medscreen 1,630 1,047 14.4 10.4 4,872 3,116 15.1 10.7
-------- -------- ----- ----- -------- -------- ----- -----
Total net sales 11,311 10,037 100.0 100.0 32,290 29,098 100.0 100.0
COST OF SALES 8,175 8,402 72.3 83.7 23,698 23,572 73.4 81.0
-------- -------- ----- ----- -------- -------- ----- -----
GROSS PROFIT 3,136 1,635 27.7 16.3 8,592 5,526 26.6 19.0
-------- -------- ----- ----- -------- -------- ----- -----
OPERATING EXPENSES:
Selling, general and administrative 2,558 2,124 22.6 21.3 7,570 6,234 23.4 21.4
Marketing rights and research 11 10 0.1 0.1 51 177 0.2 0.6
Amortization of goodwill 47 47 0.4 0.5 139 139 0.4 0.5
-------- -------- ----- ----- -------- -------- ----- -----
Total operating expenses 2,616 2,199 23.1 21.9 7,760 6,550 24.0 22.5
-------- -------- ----- ----- -------- -------- ----- -----
INCOME (LOSS) FROM OPERATIONS 520 (564) 4.6 (5.6) 832 (1,024) 2.6 (3.5)
-------- -------- ----- ----- -------- -------- ----- -----
OTHER EXPENSES, net 79 98 0.7 1.0 256 283 0.8 1.0
PROVISION FOR INCOME TAXES 97 -- 0.9 -- 178 -- 0.6 --
-------- -------- ----- ----- -------- -------- ----- -----
NET INCOME (LOSS) $ 344 $ (662) 3.0% (6.6)% $ 398 $ (1,307) 1.2% (4.5)%
======== ======== ===== ===== ======== ======== ===== =====
</TABLE>
Net sales for the three months ended September 30, 1998 increased
$1,274,000 (12.7%) to $11,311,000 in 1998 from $10,037,000 in 1997. Medscreen,
the Company's U.K. operation, reported a sales increase of $583,000 (55.7%) in
part due to the awarding of the drug-testing contract for H.M Prisons, one of
the largest agencies that conducts drug testing outside of the United States,
and higher maritime collection accounts throughout the world. Domestic analysis
revenues increased $644,000 (7.8%) reflecting increases across all customer
categories and higher average selling prices of 3.7%. The Company's domestic
specimen volume increased 3.6% from 1997 levels. Domestic product sales of
PharmScreenTM On-site Screening Devices and PharmChek(R) Drugs of Abuse Patch
(excluding analysis) increased slightly compared to the prior year period.
Net sales for the nine months ended September 30, 1998 increased $3,192,000
(11.0%) to $32,290,000 in 1998 from $29,098,000 in 1997, principally due to a
sales increase of $1,756,000 (56.4%) at Medscreen and higher domestic product
sales of $829,000 (75.4%). Domestic average selling prices increased modestly
and specimen volume decreased slightly.
Cost of sales for the three months ended September 30, 1998 decreased
$227,000 (2.7%) to $8,175,000 in 1998 from $8,402,000 in 1997. Cost of sales as
a percentage of net sales decreased to 72.3% in 1998 from 83.7% in 1997. Gross
profit as a percentage of net sales increased to 27.7% in 1998 from 16.3% in
1997, reflecting higher average selling prices and lower labor, material and
results transmission costs.
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<PAGE> 11
Cost of sales for the nine months ended September 30, 1998 increased
$126,000 (0.5%) to $23,698,000 in 1998 from $23,572,000 in 1997. Cost of sales
as a percentage of net sales decreased to 73.4% in 1998 from 81.0% in 1997.
Gross profit as a percentage of net sales increased to 26.6% in 1998 from 19.0%
in 1997. The improvement in gross profit for the current year's quarter and nine
months reflects the realization of benefits of the Company's cost containment
program announced late in 1997.
Selling, general and administrative (SG&A) expenses for the three months
ended September 30, 1998 increased $434,000 (20.4%) to $2,558,000 in 1998 from
$2,124,000 in 1997. SG&A expenses as a percentage of net sales increased to
22.6% in 1998 from 21.3% in 1997.
SG&A expenses for the nine months ended September 30, 1998 increased
$1,336,000 (21.4%) to $7,570,000 in 1998 from $6,234,000 in 1997. SG&A expenses
as a percentage of net sales increased to 23.4% in 1998 from 21.4% in 1997. The
increase in SG&A expenses for the quarter and for the year-to-date periods
represents higher information systems expenditures and the continued rebuilding
of the sales, marketing and administrative infrastructure.
Income from operations for the three months ended September 30, 1998 was
$520,000 compared to a loss of $564,000 for the comparable period in 1997.
Income from operations for the nine months ended September 30, 1998 was $832,000
compared to a loss of $1,024,000 for the comparable period in 1997. The Company
recorded a provision for income taxes of $97,000 for the third quarter and of
$178,000 for the nine month period ending September 30, 1998, attributed
principally to its UK operations.
Net income for the three months ended September 30, 1998 was $344,000 or
$0.06 per diluted share in 1998 compared to a net loss of $662,000 or $0.12 per
diluted share in 1997. Net income for the nine months ended September 30, 1998
was $398,000 or $0.07 per diluted share in 1998 compared to a loss of $1,307,000
or $0.23 per diluted share in 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations during the nine month period ended September 30
provided cash of approximately $3,339,000 in 1998 and $174,000 in 1997. The
improvement in cash flow from operations between 1998 and 1997 principally
reflects the current period's net income and increased current liabilities. As
of September 30, 1998, the Company had $895,000 in cash and cash equivalents.
During the nine months ended September 30, 1998, the Company used approximately
$1,714,000 in cash to acquire property and equipment, principally for
information systems and laboratory equipment.
The Company maintains a Credit Agreement with a bank. All borrowings are
secured by a lien on all assets of the Company. The Credit Agreement provides
for borrowings under the revolver limited to 85% of qualified accounts
receivables up to a maximum of $6,000,000. At September 30, 1998, the maximum
that could be borrowed was $5,638,000 and approximately $3,258,000 was
outstanding under the Credit Agreement. Year-to-date net repayments on the
revolver were approximately $823,000 as of September 30, 1998. The Credit
Agreement contains certain financial covenants which, among others, require the
Company to maintain certain levels of net worth, cash flow and profitability,
and restricts the
11
<PAGE> 12
payment of dividends. As of September 30, 1998, the Company was in compliance
with its financial covenants.
In August 1998, the Company amended its Credit Agreement to provide for
$500,000 of additional borrowings under the revolver and for less restrictive
financial covenants.
The Company anticipates that existing cash balances, amounts available
under existing and future credit agreements and funds to be generated from
future operations will be sufficient to fund operations and forecasted capital
expenditures through 1998.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and displaying
comprehensive income and its components in general-purpose financial statements
and is effective for fiscal years beginning after December 15, 1997.
Comprehensive income includes net income and several other items that current
accounting standards require to be recognized outside of net income. The Company
adopted the SFAS No. 130 disclosures in its 1998 consolidated financial
statements.
YEAR 2000
The Year 2000 ("Y2K") issue is the result of date-sensitive devices,
systems and computer applications that were deployed using two digits rather
than four digits to define the applicable year. Therefore, these technologies
may improperly recognize a year containing "00" as 1900 rather than the year
2000. This may result in a system failure or miscalculations causing disruptions
of operations. The Company is subject to various risks associated with the Y2K
impact on information systems software and hardware.
The Company began its evaluation of and action steps to correct Y2K
problems at the end of 1995 when it recorded a one-time restructuring charge of
$8.8 million, which included $1.9 million to write-down certain information
systems ("IS" assets). All of the IS assets written-down were inadequate to move
the Company forward operationally. For the period January 1, 1996 through
September 30, 1998, the Company has invested $5.0 million in new IS assets and
related equipment which have been designed to enhance its operational
capabilities as well as meet Y2K requirements.
The Company has completed its assessment of the Y2K impact on internal
information systems. The assessment identified operational inefficiencies and
Y2K non-compliance of the existing laboratory information system ("LIS"). The
Company has decided to replace its existing LIS with a new system that is also
Y2K compliant. It is estimated that the decision process on vendor selection
will be completed by the end of this year with implementation scheduled for the
third quarter of 1999. The Company estimates the cost to purchase and install
the new LIS and related hardware will be $750,000 to $1 million. Excluding the
LIS expenditures, the Company estimates additional Y2K related expenditures of
approximately $100,000 representing consulting costs and payroll for employees
dedicated to Y2K projects. The Company expects to complete all Y2K projects by
the end of the third quarter of 1999. All investments in information systems
have been funded by internally generated cash, leases or bank financing.
12
<PAGE> 13
Due to the large volume of electronic transmissions, the Company is
conducting inquiries of customers and key business partners to identify Y2K
issues. The Company has contacted all of its critical vendors informing them it
will require written confirmation that such vendors can be Y2K compliant by the
end of 1998. Customers, business partners and vendors responses are currently
being reviewed and evaluated. During the next several months, the Company plans
to commence transmission of test results to its customers using a four digit
year to determine which customers can and cannot receive such electronic results
with a year field of four digits. The Company's internal drug test results
reporting systems have been reprogrammed and tested in a parallel systems
environment and the Company continues to test external results reporting
services.
The Company is in the process of developing contingency plans that
consider scenarios whereby Y2K compliance is not significantly achieved by the
Company and/or its key customers, business partners and vendors. The Company
believes that the "most reasonably likely worst case Year 2000 scenario" would
result from a failure of third party transportation systems which would prevent
the Company from receiving specimens to test. These contingency plans, including
scenarios involving providers of transportation services, are expected to be
developed in mid-1999. Due to the general uncertainty inherent in the Y2K
issues, resulting in part from the uncertainty of Y2K readiness of third party
providers, suppliers and customers, the Company is unable to determine at this
time whether the consequences of Y2K non-compliance will have a material impact
on the Company's results of operations, liquidity or financial position.
13
<PAGE> 14
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
(a) Shareholder Proposals
The deadline for submission of shareholder proposals pursuant to
Rule 14a-8 under the Securities Act of 1934, as amended, for
inclusion in the Company's proxy statement for its 1999 Annual
Meeting of Shareholders is December 18, 1998. Additionally,
pursuant to the Company's By-laws, as amended, if a shareholder
desires to bring business before an annual meeting of shareholders
and does not attempt to have a proposal included in the proxy
statement, the shareholder must give timely written notice to the
Secretary of the Company before the annual meeting. To be timely, a
shareholder's notice must be delivered to and received by the
Secretary of the Company at least ninety days in advance of the
anniversary date of the preceding year's annual meeting. The
Company's 1998 Annual Meeting of Shareholders was held on May 19,
1998. Accordingly, a shareholder must provide written notice of
shareholder business no later than February 19, 1999. Shareholder
proposals not delivered and received by this date will be
considered untimely.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 3.03 - Amendment to By-Laws, dated October 21, 1998.
Exhibit 10.22 - Form of Indemnification Agreement.
Exhibit 10.33 - Modification to Loan & Security Agreement
between Comerica Bank-California and PharmChem Laboratories,
Inc., dated August 10, 1998
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K:
None.
14
<PAGE> 15
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
PharmChem Laboratories, Inc.
(Registrant)
Date: October 30, 1998 By: /s/ David A. Lattanzio
------------------------------------
David A. Lattanzio
Chief Financial Officer and Vice
President, Finance and
Administration (Principal Financial
and Accounting Officer)
15
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<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
Exhibit 3.03 - Amendment to By-Laws, dated October 21, 1998.
Exhibit 10.22 - Form of Indemnification Agreement.
Exhibit 10.33 - Modification to Loan & Security Agreement between
Comerica Bank-California and PharmChem Laboratories,
Inc., dated August 10, 1998
Exhibit 27 - Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 3.03
PHARMCHEM LABORATORIES, INC.
AMENDMENTS TO BY-LAWS, DATED OCTOBER 21, 1998
RESOLVED, that the Corporation be hereby authorized to enter into
Indemnification Agreements in substantially the form presented at this meeting
with all of the directors and officers of the Corporation and such key employees
of the Corporation as management of the Corporation shall determine.
RESOLVED, that Section 6.3 of the By-Laws of the Corporation is hereby
deleted.
RESOLVED that Section 2.4 of the Bylaws of the Corporation be amended to
read as follows:
"2.4 NOTICE OF SHAREHOLDERS' MEETING; ADVANCE NOTICE OF SHAREHOLDER
PROPOSED BUSINESS
All notices of meetings of shareholders shall be sent or otherwise
given in accordance with Section 2.5 of these bylaws not less than ten (10)
(or, if sent by third-class mail pursuant to Section 2.5 of these bylaws,
thirty (30)) nor more than sixty (60) days before the date of the meeting.
The notice shall specify the place, date, and hour of the meeting and (i)
in the case of a special meeting, the general nature of the business to be
transacted (no business other than that specified in the notice may be
transacted) or (ii) (in the case of the annual meeting, those matters which
the board of directors, at the time of giving the notice, intends to
present for action by the shareholders (but subject to the provisions of
the next paragraph of this Section 2.4 any proper matter may be presented
by the board of directors at the meeting for such action). The notice of
any meeting at which directors are to be elected shall include the name of
any nominee or nominees who, at the time of the notice, the board intends
to present for election.
If action is proposed to be taken at any meeting for approval of (i) a
contract or transaction in which a director has a direct or indirect
financial interest, pursuant to Section 310 of the Corporations Code of
California (the "Code"), (ii) an amendment of the articles of
incorporation, pursuant to Section 902 of the Code, (iii) a reorganization
of the corporation, pursuant to Section 1201 of the Code, (iv) a voluntary
dissolution of the corporation, pursuant to Section 1900 of the Code, or
(v) a distribution in dissolution other than in accordance with the rights
of outstanding preferred shares, pursuant to Section 2007 of the Code, then
the notice shall also state the general nature of that proposal.
At any meeting of shareholders, only such business shall be conducted
as shall have been properly brought before the meeting. To be properly
brought before a meeting, business must be specified in the notice of the
meeting (or any supplement thereto) given by or at the direction of the
board of directors in accordance with this Section 2.4,
<PAGE> 2
otherwise properly brought before the meeting by or at the direction of the
board of directors, or otherwise properly brought before the meeting by a
shareholder. For business to be properly brought before an annual meeting
by a shareholder, the shareholder must have given timely notice thereof in
writing to the secretary of the corporation. To be timely, a shareholder's
notice must be delivered to or mailed and received by the secretary of the
corporation no later than ninety (90) days in advance of the anniversary
date of the prior year's annual meting of shareholders. A shareholder's
notice to the secretary shall set forth as to each matter the shareholder
proposes to bring before the meeting: (i) a brief description of the
business desired to be brought before the meeting and the reasons for
conducting such business at the meeting, (ii) the name and address, as they
appear on the corporation's books, of the shareholder proposing such
business, (iii) the class and number of shares of the corporation which are
beneficially owned by the shareholder, (iv) any material interest of the
shareholder in such business, and (v) if applicable, any other information
that is required to be provided by the shareholder pursuant to Regulation
14A under the Securities Exchange Act of 1934, as amended (the "1934 Act"),
in his capacity as a proponent of a shareholder proposal. Notwithstanding
the foregoing, in order to include information with respect to a
shareholder proposal in the proxy statement and form of proxy for a
shareholders' meeting, shareholders must provide notice as required by the
regulations promulgated under the 1934 Act. Notwithstanding anything in
these Bylaws to the contrary, no business shall be conducted at any meeting
except in accordance with the procedures set forth in this Section 2.4. The
chairman of the meeting shall, if the facts warrant, determine and declare
at the meeting that business was not properly brought before the meeting
and in accordance with the provisions of this Section 2.4, and if he should
so determine, he shall so declare at the meeting that any such business not
properly brought before the meeting shall not be transacted."
RESOLVED, that the following be hereby added to the Bylaws of the
Corporation as Section 3.15:
"3.15 ADVANCE NOTICE OF SHAREHOLDER NOMINATION OF DIRECTORS
Nominations for the election of directors may be made by the board of
directors or by any shareholder entitled to vote for the election of
directors. Any shareholder entitled to vote for the election of directors
at a meeting may nominate persons for election as directors only if written
notice of such shareholder's intent to make such nomination is delivered to
or mailed and received by the secretary of the corporation no later than
(90) days in advance of the anniversary date of the prior year's annual
meeting of shareholders. Each such notice shall set forth: (i) the name and
address of the shareholder who intends to make the nomination and the name,
age, address and principal occupation or employment of the person or
persons to be nominated, (ii) a representation that the shareholder is a
holder of record of stock of the corporation entitled to vote at such
meeting and intends to appear in person or by proxy at the meeting to
nominate the person or persons specified in the notice, (iii) a description
of all arrangements or
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understandings between the shareholder and each nominee and any other
person or persons (naming such person or persons) pursuant to which the
nomination or nominations are to be made by the shareholder, (iv) such
other information regarding such nominee as would have been required to be
included in a proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission had each nominee been nominated by the
Board of Directors, and (v) the consent of each nominee to serve as
director of the corporation if so elected. The chairman of a shareholder
meeting may refuse to acknowledge the nomination of any person not made in
compliance wit the foregoing procedure."
PROPOSED BYLAW AMENDMENT
In connection with preparation for the Company's 1998 annual meeting of
shareholders, the Company's Bylaws do not require advance notice of shareholder
proposals or nomination of candidates to stand for election to the Board of
Directors. Most publicly held companies' bylaws establish an advance notice
procedure for shareholder nominations and business brought before an annual
meeting. These provisions would promote the orderly conduct of shareholder
meetings and would help prevent the submission of business proposals or the
nominations of directors under circumstances that leave inadequate time for
consideration by all shareholders and for management to consider its response.
(However, they would not affect an insurgent that intends to commence a proxy
contest well in advance of the meeting of shareholders.)
Under typical advance notice procedures, shareholders wishing to nominate
candidates for election to the Board would be required to give 60 to 90 days
prior written notice to the Company before the meeting at which directors are to
be elected. Shareholders would have to give a similar notice if they intend to
bring business before an annual meeting. A draft amendment to the Bylaws is
attached.
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<PAGE> 1
EXHIBIT 10.22
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is made as of this ___ day
of___________, 199__ by and between PharmChem Laboratories, Inc., a California
corporation (the "Company"), and _________________ ("Indemnitee").
WHEREAS, it is essential to the Company to retain and attract as directors
and officers the most capable persons available; and
WHEREAS, Indemnitee is a [director] [officer] [director and officer] [key
employee] of the Company, and both the Company and Indemnitee recognize the risk
of litigation and other claims being asserted against such person; and
WHEREAS, in recognition of Indemnitee's need for substantial protection
against personal liability and to enhance Indemnitee's continued and effective
service to the Company, the Company desires to provide for the indemnification
of, and the advancing of expenses to, Indemnitee to the fullest extent permitted
by law subject to the terms set forth in this Agreement.
NOW, THEREFORE, the Company and Indemnitee hereby agree as follows:
1. INDEMNIFICATION.
(a) Third Party Proceedings. The Company shall indemnify Indemnitee
if Indemnitee is or was a party or is threatened to be made a party to any
threatened, pending or completed action or proceeding, whether civil, criminal,
administrative or investigative (a "proceeding") (other than an action by or in
the right of the Company to procure a judgment in its favor) by reason of the
fact that Indemnitee is or was a director, officer, employee or agent of the
Company, or any subsidiary of the Company, by reason of any action or inaction
on the part of Indemnitee while an officer or director or by reason of the fact
that Indemnitee is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, against expenses (including attorneys' fees and any
federal, state, local or foreign tax imposed on Indemnitee as a result of the
actual or deemed receipt of any payments under this Agreement), judgments, fines
and amounts paid in settlement (if such settlement is approved in advance by the
Company, which approval shall not be unreasonably withheld) actually and
reasonably incurred by Indemnitee in connection with proceeding if Indemnitee
acted in good faith and in a manner Indemnitee reasonably believed to be in the
best interests of the Company, and, with respect to any criminal Proceeding, had
no reasonable cause to believe Indemnitee's conduct was unlawful. The
termination of any Proceeding by judgment, order, settlement, conviction, or
upon a plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that (i) Indemnitee did not act in good faith and in a manner which
Indemnitee reasonably believed to be in the best interests of the Company, or
(ii) with respect to any criminal Proceeding, Indemnitee had reasonable cause to
believe that Indemnitee's conduct was unlawful.
(b) Proceedings By or in the Right of the Company. The Company shall
indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made
a party to any threatened, pending or completed Proceeding by or in the right of
the Company or any subsidiary of the Company to procure a judgment in its favor
by reason of the fact that Indemnitee is or was a director, officer, employee or
agent of the Company, or any subsidiary of the Company, by reason of any action
or inaction on the part of Indemnitee while an officer or director or by reason
of the fact that Indemnitee is or was serving at the request of the Company as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys' fees)
and, to the fullest extent permitted by law, amounts paid in settlement, in each
case to the extent actually and reasonably incurred by Indemnitee in connection
with the defense or settlement of such Proceeding if Indemnitee acted in good
faith and in a manner Indemnitee reasonably believed to be in the best interests
of the Company and its shareholders, except that no indemnification shall be
made (i) in respect of any claim, issue or matter
<PAGE> 2
as to which Indemnitee shall have been adjudged to be liable to the Company in
the performance of Indemnitee's duty to the Company and its shareholders unless
and only to the extent that the court in which such Proceeding is or was pending
shall determine upon application that, in view of all the circumstances of the
case, Indemnitee is fairly and reasonably entitled to indemnity for expenses and
then only to the extent that the court shall determine and (ii) of amounts paid
in settling or otherwise disposing of a pending action without court approval.
2. INDEMNIFICATION PROCEDURE.
(a) Notice/Cooperation by Indemnitee. Indemnitee shall give the
Company notice in writing as soon as practicable of any claim made against
Indemnitee for which indemnification will or could be sought under this
Agreement. Notice to the Company shall be directed to the Chief Executive
Officer of the Company at the address shown on the signature page of this
Agreement (or such other address as the Company shall designate in writing to
Indemnitee). In addition, Indemnitee shall give the Company such information and
cooperation as it may reasonably require and as shall be within Indemnitee's
power.
(b) Procedure. Any indemnification provided for in Section 1 shall be
made no later than forty-five (45) days after receipt of the written request of
Indemnitee. If a claim under this Agreement, under any statute, or under any
provision of the Company's Articles of Incorporation or Bylaws providing for
indemnification, is not paid in full by the Company within forty-five (45) days
after a written request for payment thereof has first been received by the
Company, Indemnitee may, but need not, at any time thereafter bring an action
against the Company to recover the unpaid amount of the claim and, subject to
Section 14 of this Agreement, Indemnitee shall also be entitled to be paid for
the expenses (including attorneys' fees) of bringing such action. It shall be a
defense to any such action (other than an action brought to enforce a claim for
expenses incurred in connection with any action or proceeding in advance of its
final disposition) that Indemnitee has not met the standards of conduct which
make it permissible under applicable law for the Company to indemnify Indemnitee
for the amount claimed, but the burden of proving such defense shall be on the
Company. It is the parties' intention that if the Company contests Indemnitee's
right to indemnification, the question of Indemnitee's right to indemnification
shall be for the court to decide, and neither the failure of the Company
(including its Board of Directors, any committee or subgroup of the Board of
Directors, independent legal counsel, or its shareholders) to have made a
determination that indemnification of Indemnitee is proper in the circumstances
because Indemnitee has met the applicable standard of conduct required by
applicable law, nor an actual determination by the Company (including its Board
of Directors, any committee or subgroup of the Board of Directors, independent
legal counsel, or its shareholders) that Indemnitee has not met such applicable
standard of conduct, shall create a presumption that Indemnitee has or has not
met the applicable standard of conduct.
(c) Notice to Insurers. If, at the time of the receipt of a notice of
a claim pursuant to Section 2(a) hereof, the Company has director and officer
liability insurance in effect, the Company shall give prompt notice of the
commencement of such proceeding to the insurers in accordance with the
procedures set forth in the respective policies. The Company shall thereafter
take all necessary or desirable action to cause such insurers to pay, on behalf
of the Indemnitee, all amounts payable as a result of such proceeding in
accordance with the terms of such policies.
(d) Selection of Counsel. In the event the Company shall be obligated
under Section 2(a) hereof to pay the expenses of any proceeding against
Indemnitee, the Company, if appropriate, shall be entitled to assume the defense
of such proceeding, with counsel approved by Indemnitee, which approval shall
not be unreasonably withheld, upon the delivery to Indemnitee of written notice
of its election so to do. After delivery of such notice, approval of such
counsel by Indemnitee and the retention of such counsel by the Company, the
Company will not be liable to Indemnitee under this Agreement for any fees of
counsel subsequently incurred by Indemnitee with respect to the same proceeding,
provided
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<PAGE> 3
that (i) Indemnitee shall have the right to employ counsel in any such
proceeding at Indemnitee's expense; and (ii) if (A) the employment of counsel by
Indemnitee has been previously authorized by the Company, (B) the counsel
retained by the Company shall have reasonably concluded that there may be a
conflict of interest between the Company and Indemnitee in the conduct of any
such defense or (C) the Company shall not, in fact, have employed counsel to
assume the defense of such proceeding, then the fees and expenses of
Indemnitee's counsel shall be at the expense of the Company.
(e) Subrogation. To the extent of any payment under this Agreement,
the Company shall be subrogated to all of the rights of recovery of Indemnitee,
who shall execute all documents required and shall do everything that may be
reasonably necessary to secure such rights, including execution of such
documents as are necessary to enable the Company to bring suit to enforce such
rights.
3. CHANGE OF CONTROL. This Section 3 shall only apply if a Change of
Control (as hereinafter defined) has occurred.
(a) Advance of Expenses in the Event of a Change of Control. In the
event of a Change of Control, expenses, including attorneys' fees, incurred by
Indemnitee in defending or otherwise being involved in a Proceeding shall be
paid by the Company in advance of the final disposition of such Proceeding,
including any appeal therefrom, upon receipt of an undertaking (the
"UNDERTAKING") by or on behalf of Indemnitee to repay such amount if it shall
ultimately be determined that Indemnitee is not entitled to be indemnified by
the Company; provided, that in connection with a Proceeding (or part thereof)
initiated by Indemnitee, except as provided in Section 3(b), the Company shall
pay such expenses in advance of the final disposition only if such Proceeding
(or part thereof) was authorized by the Board of Directors of the Company. Any
Indemnitee to whom expenses are advanced pursuant hereto shall not be obligated
to repay pursuant to the Undertaking until the final determination of any
pending Proceeding in a court of competent jurisdiction concerning the right of
Indemnitee to be indemnified or the obligation of Indemnitee to repay pursuant
to the Undertaking.
In the event the Company shall be obligated under this Section 3 to
pay the expenses of any Proceeding involving Indemnitee, the Company, if
appropriate, shall be entitled to assume the defense of such Proceeding, with
counsel approved by Indemnitee, which approval shall not be unreasonably
withheld, upon the delivery to Indemnitee of written notice of its election to
do so. After delivery of such notice, approval of such counsel by Indemnitee and
the retention of such counsel by the Company, the Company will not be liable to
Indemnitee under this Agreement for any fees of counsel subsequently incurred by
Indemnitee with respect to the same Proceeding, provided that (i) Indemnitee
shall have the right to employ counsel in any such Proceeding at Indemnitee's
expense; and (ii) if (A) the employment of counsel by Indemnitee has been
previously authorized by the Company, (B) the counsel retained by the Company
shall have reasonably concluded that there may be a conflict of interest between
the Company and Indemnitee in the conduct of any such defense or (C) the Company
shall not, in fact, have employed counsel to assume the defense of such
Proceeding, then the fees and expenses of Indemnitee's counsel shall be at the
expense of the Company.
(b) If a Change of Control has occurred, Indemnitee upon making a
claim under Section 1 or seeking to avoid repayment to the Company pursuant to
the undertaking under Section 2(a) shall have (i) the right, but not the
obligation, to have a determination made by independent legal counsel as to
whether indemnification of Indemnitee is proper because Indemnitee has met the
applicable standard of conduct required under the California General Corporation
Law; and (ii) shall have the right to select as independent legal counsel for
such purpose any law firm as designated (or within a category designated) for
such purpose in a resolution adopted by the Board of Directors of the Company
prior to the Change of Control and in full force and effect immediately prior to
the Change of Control. If a determination has been made in accordance with the
preceding sentence, no determination inconsistent therewith by other legal
counsel, by the Board of Directors or by stockholders shall be of any force or
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<PAGE> 4
effect, provided that Indemnitee shall maintain all rights granted hereby to
bring an action as specified in Section 2(b).
"Change of Control" means any one or more of the following:
(i) the acquisition or holding by any person, entity or "group"
(within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities and
Exchange Act of 1934 [the "1934 Act"], other than by the Company or any
subsidiary or any employee benefit plan of the Company or a subsidiary, of
beneficial ownership (within the meaning of Rule 13d-3 under the 1934 Act) of
20% or more of the then-outstanding common stock or the then-outstanding voting
power of the Company; provided, however, that no Change of Control shall occur
solely by reason of any such acquisition by a corporation with respect to which,
after such acquisition, more than 60% of both the then-outstanding common shares
and the then-outstanding voting power of such corporation are then-beneficially
owned, directly or indirectly, by the persons who were the beneficial owners of
the common stock of the Company immediately before such acquisition, in
substantially the same proportions as their respective ownership, immediately
before such acquisition, of the then-outstanding common stock and voting power
of the Company; or
(ii) individuals who, as of the effective date of this Agreement,
constitute the Board of Directors of the Company (the "Incumbent Board") cease
for any reason to constitute at least a majority of the Board of Directors;
provided that any individual who becomes a director after the effective date of
this Agreement whose election or nomination for election by the Company's
shareholders was approved by at least a majority of the Incumbent Board (other
than an election or nomination of an individual whose initial assumption of
office is in connection with an actual or threatened election contest relating
to the election of the directors of the Company (as such terms are used in Rule
14a-11 under the 1934 Act)) shall be deemed to be a member of the Incumbent
Board; or
(iii) approval by the shareholders of the Company of any one or
more of the following:
(A) a merger, reorganization or consolidation (an "Extraordinary
Transaction") with respect to which persons who were the respective beneficial
owners of the common stock of the Company immediately before such Extraordinary
Transaction would not, if such Extraordinary Transaction were to be consummated
immediately after such shareholder approval (but otherwise in accordance with
the terms presented in writing to the shareholders of the Company for their
approval), beneficially own, directly or indirectly, more than 60% of both the
then-outstanding common shares and the then-outstanding voting power of the
corporation resulting from such Extraordinary Transaction, in substantially the
same proportions as their respective ownership, immediately before such
Extraordinary Transaction, of the then-outstanding common stock and voting power
of the Company,
(B) a liquidation or dissolution of the Company, or
(C) the sale or other disposition of all or substantially all of
the assets of the Company in one transaction or a series of related
transactions.
Notwithstanding the foregoing, a Change of Control shall not occur with
respect to any Indemnitee who, by agreement or understanding (written or
otherwise), participates on such Indemnitee's own behalf in a transaction which
causes the Change of Control to occur.
4. ADDITIONAL INDEMNIFICATION RIGHTS: NONEXCLUSIVITY.
(a) Scope. Notwithstanding any other provision of this Agreement, the
Company hereby agrees to indemnify the Indemnitee to the fullest extent
permitted by law, notwithstanding that such indemnification is not specifically
authorized by the other provisions of this Agreement, the Company's Articles of
Incorporation, the Company's Bylaws or by statute. In the event of any change,
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<PAGE> 5
after the date of this Agreement, in any applicable law, statute or rule which
expands the right of a California corporation to indemnify a member of its board
of directors or an officer, such changes shall be, ipso facto, within the
purview of Indemnitee's rights and Company's obligations, under this Agreement.
In the event of any change in any applicable law, statute or rule which narrows
the right of a California corporation to indemnify a member of its Board of
Directors or an officer, such changes, to the extent not otherwise required by
such law, statute or rule to be applied to this Agreement shall have no effect
on this Agreement or the parties' rights and obligations hereunder.
(b) Nonexclusivity. The indemnification provided by this Agreement
shall not be deemed exclusive of any rights to which Indemnitee may be entitled
under the Company's Articles of Incorporation, its Bylaws, any agreement, any
vote of shareholders or disinterested directors, the California General
Corporation Law, or otherwise, both as to action in Indemnitee's official
capacity and as to action in another capacity while holding such office. The
indemnification provided under this Agreement shall continue as to Indemnitee
for any action taken or not taken while serving in an indemnified capacity even
though Indemnitee may have ceased to serve in such capacity at the time of any
action or other covered proceeding.
5. PARTIAL INDEMNIFICATION. If Indemnitee is entitled under any provision
of this Agreement to indemnification by the Company for some or a portion of the
expenses, judgments, fines or penalties actually or reasonably incurred by
Indemnitee in the investigation, defense, appeal or settlement of any civil or
criminal action or proceeding, but not, however, for the total amount thereof,
the Company shall nevertheless indemnify Indemnitee for the portion of such
expenses, judgments, fines or penalties to which Indemnitee is entitled.
6. MUTUAL ACKNOWLEDGEMENT. Both the Company and Indemnitee acknowledge
that in certain instances, Federal law or applicable public policy may prohibit
the Company from indemnifying its directors and officers under this Agreement or
otherwise. Indemnitee understands and acknowledges that the Company has
undertaken or may be required in the future to undertake with the Securities and
Exchange Commission to submit the question of indemnification to a court in
certain circumstances for a determination of the Company's right under public
policy to indemnify Indemnitee.
7. DIRECTORS' AND OFFICERS' LIABILITY INSURANCE. The Company shall, from
time to time, make the good faith determination whether or not it is practicable
for the Company to obtain and maintain a policy or policies of insurance with
reputable insurance companies providing the officers and directors of the
Company with coverage for losses from wrongful acts, or to ensure the Company's
performance of its indemnification obligations under this Agreement. Among other
considerations, the Company will weigh the costs of obtaining such insurance
coverage against the protection afforded by such coverage. In all policies of
directors' and officers' liability insurance, if Indemnitee is a director or
officer of the Company, Indemnitee shall be named as an insured in such a manner
as to provide Indemnitee the same rights and benefits as are accorded to the
most favorably insured of the Company's directors, if Indemnitee is a director;
or of the Company's officers, if Indemnitee is not a director of the Company but
is an officer. Notwithstanding the foregoing, the Company shall have no
obligation to obtain or maintain such insurance if the Company determines in
good faith that such insurance is not reasonably available, if the premium costs
for such insurance are disproportionate to the amount of coverage provided, if
the coverage provided by such insurance is limited by exclusions so as to
provide an insufficient benefit, or if Indemnitee is covered by similar
insurance maintained by a subsidiary or parent of the Company.
8. SEVERABILITY. Nothing in this Agreement is intended to require or
shall be construed as requiring the Company to do or fail to do any act in
violation of applicable law. The Company's inability, pursuant to court order,
to perform its obligations under this Agreement shall not constitute a breach of
this Agreement. The provisions of this Agreement shall be severable as provided
in this Section 8. If this Agreement or any portion hereof shall be invalidated
on any ground by any court of competent jurisdiction, then the Company shall
nevertheless indemnify Indemnitee to the full extent permitted by any
5
<PAGE> 6
applicable portion of this Agreement that shall not have been invalidated, and
the balance of this Agreement not so invalidated shall be enforceable in
accordance with its terms.
9. EXCEPTIONS. Any other provision herein to the contrary
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) Excluded Acts. To indemnify Indemnitee for any acts or omissions
or transactions from which a director may not be relieved of liability under the
California General Corporation Law; or
(b) Claims Initiated by Indemnitee. To indemnify or advance expenses
to Indemnitee with respect to proceedings or claims initiated or brought
voluntarily by Indemnitee and not by way of defense, except with respect to
proceedings brought to establish or enforce a right to indemnification under
this Agreement or any other statute or law or otherwise as required under
Section 317 of the California General Corporation Law, but such indemnification
or advancement of expenses may be provided by the Company in specific cases if
the Board of Directors has approved the initiation or bringing of such suit; or
(c) Lack of Good Faith. To indemnify Indemnitee for any expenses
incurred by the Indemnitee with respect to any proceeding instituted by
Indemnitee to enforce or interpret this Agreement, if a court of competent
jurisdiction determines that each of the material assertions made by the
Indemnitee in such proceeding was not made in good faith or was frivolous; or
(d) No Duplication of Payments. To indemnify Indemnitee for expenses
or liabilities of any type whatsoever to the extent the Indemnitee has otherwise
actually received payment under any insurance policy, the Company's Articles of
Incorporation, or Bylaws, other agreements with the Indemnitee for
indemnification, vote of the shareholders or directors or otherwise of the
amounts otherwise indemnifiable; or
(e) Claims Under Section 16(b). To indemnify Indemnitee for expenses
and the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Securities Exchange Act of 1934,
as amended, or any similar successor statute.
10. EFFECTIVENESS OF AGREEMENT. This Agreement shall be effective as of
the date set forth on the first page and shall apply to acts or omissions of
Indemnitee which occurred prior to such date if Indemnitee was an officer,
director, employee or other agent of the Company, or was serving at the request
of the Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, at the time such act or
omission occurred.
11. CONSTRUCTION OF CERTAIN PHRASES.
(a) For purposes of this Agreement, references to the "Company" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, employees or agents, so that if
Indemnitee is or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, Indemnitee shall stand in the same
position under the provisions of this Agreement with respect to the resulting or
surviving corporation as Indemnitee would have with respect to such constituent
corporation if its separate existence had continued.
(b) For purposes of this Agreement, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on Indemnitee with
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respect to an employee benefit plan; and references to "serving at the request
of the Company" shall include any service as a director, officer, employee or
agent of the Company which imposes duties on, or involves services by, such
director, officer, employee or agent with respect to an employee benefit plan,
its participants or beneficiaries.
12. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall constitute an original.
13. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon, and
shall inure to the benefit of, the parties hereto and their respective spouses,
heirs, legal representatives, successors and assigns (including, without
limitation, any successor by purchase, merger, consolidation, reorganization or
otherwise to all or substantially all of the business and/or assets of the
Company).
14. ATTORNEYS' FEES. In the event that any action is instituted by
Indemnitee under this Agreement to enforce or interpret any of the terms hereof,
Indemnitee shall be entitled to be paid all court costs and expenses, including
reasonable attorneys' fees, incurred by Indemnitee with respect to such action,
unless as a part of such action, the court of competent jurisdiction determines
that each of the material assertions made by Indemnitee as a basis for such
action were not made in good faith or were frivolous. In the event of an action
instituted by or in the name of the Company under this Agreement or to enforce
or interpret any of the terms of this Agreement, Indemnitee shall be entitled to
be paid all court costs and expenses, including attorneys' fees, incurred by
Indemnitee in defense of such action (including with respect to Indemnitee's
counterclaims and cross-claims made in such action), unless as a part of such
action the court determines that each of Indemnitee's material defenses to such
action were made in bad faith or were frivolous.
15. NOTICE. All notices, requests, demands and other communications under
this Agreement shall be in writing and shall be deemed duly given (i) if mailed
by domestic certified or registered mail with postage prepaid, on the third
business day after the date postmarked or (ii) if sent by any other method, on
the date such notice is actually received. Addresses for notice to either party
are as shown on the signature page of this Agreement, or as subsequently
modified by written notice.
16. CONSENT TO JURISDICTION. The Company and Indemnitee each hereby
irrevocably consent to the jurisdiction of the courts of the State of California
for all purposes in connection with any action or proceeding which arises out of
or relates to this Agreement and agree that any action instituted under this
Agreement shall be brought only in the state courts of the State of California.
17. CHOICE OF LAW. This Agreement shall be governed by and its provisions
construed in accordance with the laws of the State of California as applied to
contracts between California residents entered into and to be performed entirely
within California.
7
<PAGE> 8
18. AMENDMENT; WAIVER. No provision of this Agreement may be amended or
modified except with the consent in writing of the Indemnitee and the Company,
nor may any provision of this Agreement be waived except in writing by the party
granting such waiver. A waiver of any provision hereof shall not be deemed a
waiver of any other provision hereof. Failure of either of the parties hereto to
insist upon strict compliance with any provision hereof shall not be deemed to
be a waiver of such provision or any other provision hereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
PHARMCHEM LABORATORIES, INC.
By:
-------------------------------------
Title:
----------------------------------
Address: 1505-A O'Brien Drive
Menlo Park, CA 94025
Telephone: (650) 328-6200
AGREED TO AND ACCEPTED:
INDEMNITEE:
Name:
--------------------------------
Address:
-----------------------------
Date:
--------------------------------
8
<PAGE> 1
EXHIBIT 10.33
MODIFICATION TO LOAN AND SECURITY AGREEMENT
This First Modification to Loan & Security Agreement (this
"Modification") is entered into by and between PharmChem Laboratories, Inc.
("Borrower") and Comerica Bank-California ("Bank") as of this 10th day of
August, 1998, at San Jose, California.
RECITALS
A. Bank and Borrower have previously entered into or are concurrently
herewith entering into a Loan & Security Agreement (Accounts & Inventory) (the
"Agreement") dated November 18, 1997 and executed on December 5, 1997.
B. Borrower has requested, and Bank has agreed, to modify the Agreement
as set forth below.
AGREEMENT
For good and valuable consideration, the parties agree as set forth
below:
Incorporation by Reference. The Agreement as modified hereby and the
Recitals are incorporated herein by this reference.
Section 1.17 Delete the following words from the Section: "computer
disks, computer tapes, literature, reports, catalogs"
Sections 1.121
1.21h, 6.2 accounts with a particular account debtor on which over
twenty-five (25%) of the aggregate amount owing is greater
than ninety-one (91) DAYS from the date of the invoice.
Section 1.27 To be deleted in its entirety.
Section 2.4 Advances under the line of credit shall be allowed up to a
maximum of $500,000.00 over the Borrowing Base but within
the line amount through and including September 30, 1998,
and shall bear interest at the rate set forth in section 2.2
Section 6.2 If any warranty is breached as to any account, or any
account is not paid in full by an account debtor within
Ninety One (91) days from the date of invoice, or an account
debtor disputes liability or
<PAGE> 2
makes any claim with respect thereto, or a petition in
bankruptcy or other application for relief under the
Bankruptcy Code or any other insolvency law is filed by or
against an account debtor, or an account debtor makes an
assignment for the benefit of creditors, becomes insolvent,
fails or goes out of business, then Bank may deem ineligible
any and all accounts owing by that account debtor, and
reduce Borrower's Borrowing Base by the amount thereof. Bank
shall retain its security interest in all Receivables and
accounts, whether eligible or ineligible, until all
Obligations have been fully paid and satisfied. Returns and
allowances, if any, as between Borrower and its customers,
will be on the same basis and in accordance with the usual
customary practices of the Borrower, as they exist at this
time. After default by Borrower hereunder, no discount,
credit or allowance shall be granted to any account debtor
by Borrower and no return of merchandise shall be accepted
by Borrower without Bank's consent. Bank may, after default
by Borrower, settle or adjust disputes and claims directly
with account debtors for amounts and upon terms which Bank
considers advisable, and in such cases Bank will credit
Borrower's account with only the net amounts received by
Bank in payment of the accounts, after deducting all Bank
Expenses in connection therewith.
Section 6.16c Account Receivable Aging on a monthly basis within 25 days
of month-end.
Account Payable Aging on a monthly basis within 25 days of
month end.
Borrowing Base Certificate on a monthly basis within 25 days
of month-end.
Lender agrees to adjust Borrowing Base within ten (10) days
of receipt of Borrowing Base Certificate and further agrees
to advise Borrower of any changes to Certificate submitted
by Borrower.
Section 6.17 Delete the words "'and non-consolidated" from the Section.
Section 6.17b Tangible Effective Net Worth in an amount not less than
$5,755,000.00 as of March 31, 1998 increasing by 75% of
quarterly net profit after tax commencing April 1, 1998;
ETNW defined as shareholder's equity less intangibles, less
deferred tax asset, less due from employees.
<PAGE> 3
Section 6.17c a ratio of Current Assets to Current Liabilities of not less
than 0.80:1.00 through June 30, 1999; 0.85:1.00 thereafter,
Current Ratio defined as Current Assets divided by Current
Liabilities.
Section 6.17e a ratio of Total Liabilities (less debt subordinated to
Bank) to Tangible Effective Net Worth of less than 2.3:1.00.
Legal Effect. Except as specifically set forth in this Modification, all
of the terms and conditions of the Agreement remain in full force and effect.
Integration. This is an integrated Modification and supersedes all prior
negotiations and agreements regarding the subject matter hereof. All amendments
hereto must be in writing and signed by the parties.
IN WITNESS WHEREOF, the parties have agreed as of the date first set
forth above.
PHARMCHEM LABORATORIES, INC. COMERICA BANK-CALIFORNIA
By: /s/ David A. Lattanzio By: /s/ James L. Weber
------------------------------- -------------------------------
David A. Lattanzio James L. Weber
Vice President & CFO Vice President
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 895
<SECURITIES> 0
<RECEIVABLES> 7,686
<ALLOWANCES> 159
<INVENTORY> 1,703
<CURRENT-ASSETS> 10,597
<PP&E> 19,433
<DEPRECIATION> 11,285
<TOTAL-ASSETS> 23,050
<CURRENT-LIABILITIES> 11,365
<BONDS> 0
0
0
<COMMON> 19,085
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 23,050
<SALES> 0
<TOTAL-REVENUES> 32,290
<CGS> 0
<TOTAL-COSTS> 23,698
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 223
<INTEREST-EXPENSE> 272
<INCOME-PRETAX> 576
<INCOME-TAX> 178
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 398
<EPS-PRIMARY> 0.07
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