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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
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.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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CALIFORNIA 7-0187280
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1505-A O'BRIEN DRIVE 94025
MENLO PARK, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (650) 328-6200
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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<S> <C>
Common Stock Nasdaq National Market
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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 reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant (based on the closing price of $2 9/16 as reported on the Nasdaq/NMS
on January 30, 1998) was approximately $14,736,000. Shares of voting stock held
by each executive officer and director and by each holder of 5% or more of the
outstanding voting stock have been treated as shares held by affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes. The number of outstanding shares of the Registrant's Common
Stock as of January 30, 1998 was 5,750,499.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the PharmChem Laboratories, Inc. Proxy Statement for the 1997
Annual Meeting of Shareholders to be filed with the Commission on or before
April 30, 1998 are incorporated by reference into Part III of this Annual Report
on Form 10-K. With the exception of those portions which are specifically
incorporated by reference in this Annual Report on Form 10-K, such Proxy
Statement shall not be deemed filed as part of this Report.
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PHARMCHEM LABORATORIES, INC.
ANNUAL REPORT ON FORM 10-K
INDEX
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PAGE
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PART I.
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 6
Item 3. Legal Proceedings........................................... 6
Item 4. Submission of Matters to a Vote of Security Holders......... 7
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters......................................... 8
Item 6. Selected Consolidated Financial Data........................ 9
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 10
Item 8. Financial Statements and Supplementary Data................. 14
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 32
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 33
Item 11. Executive Compensation...................................... 33
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 33
Item 13. Certain Relationships and Related Transactions.............. 33
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form
8-K......................................................... 33
Signatures.............................................................. 37
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PART I
ITEM 1. BUSINESS
Unless the context indicates otherwise, all references herein to
"PharmChem" or the "Company" include PharmChem Laboratories, Inc. and its
wholly-owned subsidiary, Medscreen Limited ("Medscreen").
GENERAL
PharmChem Laboratories, Inc. is a leading independent laboratory providing
integrated drug testing services to corporate and governmental customers seeking
to detect and deter the use of illegal drugs and alcohol. PharmChem is certified
by the Substance Abuse and Mental Health Service Administration (SAMHSA) of the
U.S. Department of Health and Human Services, the College of American
Pathologists (CAP) and a number of states to conduct drug testing using forensic
procedures. The Company also has "deemed status" under the Clinical Laboratory
Improvement Amendments (CLIA) as a result of its CAP certification. The forensic
procedures provide accurate and reliable test results and a chain of custody for
each specimen from its collection to the reporting of its test result. PharmChem
tests for a number of drugs of abuse, including cocaine, methamphetamine,
heroin, phencyclidine (PCP), marijuana (THC) and alcohol, primarily by
urinalysis but also with the PharmChek(R) Drugs of Abuse Patch (for testing with
sweat). PharmChem also offers PharmScreen(TM) on-site screening devices and a
comprehensive set of services that are customized to assist customers in
implementing cost-effective drug testing programs.
PharmChem was incorporated in California in 1987 to acquire PharmChem
Laboratories Operations, Inc., a California corporation, which was founded in
1971. In 1991, the Company completed its initial public offering. In 1992,
PharmChem expanded its operations through the acquisitions of London-based
Medscreen (a certified laboratory providing international drug testing services)
and of a certified laboratory in Fort Worth, Texas. The Company's customers
include private and public employers, criminal justice agencies and drug
treatment programs, primarily in the United States and the United Kingdom.
INDUSTRY BACKGROUND
Historically, the drug testing market has been served by national clinical
laboratory chains, independent national drug testing laboratories, such as
PharmChem, and numerous regional and local laboratories. Thousands of general
clinical laboratories nationwide can conduct forensic and non-forensic drug
testing, and are increasingly bidding on local contracts. Over the past several
years, however, many corporate and governmental organizations are requiring drug
testing laboratories to be certified to conduct forensic drug tests and to offer
integrated cost-effective testing services. Also, many large organizations,
particularly those in the public sector, use a competitive bidding procedure to
select their drug testing laboratories. The bidding process for these
competitive contracts is often limited to qualified bidders and certified drug
testing laboratories, which can demonstrate the ability to meet the service and
volume levels specified by the customer.
DRUG TESTING OPERATIONS
The essential elements of forensic drug testing are a secure chain of
custody for each specimen from its collection to the reporting of its test
result and accurate and reliable testing in which a second independent test is
performed to confirm each positive test result. PharmChem carefully controls
each step of the testing process with detailed written procedures and using the
specific forensic testing methods required for legal defensibility of results.
The Company performs the largest portion of its testing at its laboratory in
Menlo Park, California, which operates six days per week, 24 hours a day. The
Company also provides complete testing services at its Texas Division in Fort
Worth and its London-based subsidiary, Medscreen. The steps in the Company's
forensic drug testing process by urinalysis are as follows:
Specimen Collection and Transportation. Forensic drug testing begins with
specimen collection conducted under carefully controlled conditions. Once a
donor has provided a specimen, it is assigned a unique specimen identification
number. Information pertinent to the specimen is then recorded on a chain of
custody
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form numbered to match the specimen bottle. Specimens, together with chain of
custody forms, are delivered to the Company by courier or U.S. mail.
Receiving and Accessioning. PharmChem receives specimens in its restricted
accessioning rooms, where they are inspected for tampering and checked for
proper chain of custody documentation. Specimens are identified and tracked
using unique bar-coded laboratory accessioning numbers.
Screening. Each specimen submitted to PharmChem is screened for the
presence of the drugs specified by the customer. The Company performs in excess
of 1,300,000 screening tests on more than 220,000 specimens per month to
determine the presence of drugs. The screening methods used by the Company
include enzyme immunoassay, radioimmunoassay (RIA) and thin layer chromatography
(TLC).
Confirmation Testing. Results of specimens that screen negative are
reported to the customer. Specimens that screen positive are confirmed by
testing a separate aliquot using a different and independent technology from
that used for the initial screening. Confirmation technologies employed by
PharmChem include gas chromatography/mass spectrometry (GC/MS) and gas
chromatography (GC). GC/MS confirmation is required for federally-regulated drug
testing and most other workplace drug testing and its use has been cited with
approval in numerous legal proceedings.
Quality Assurance/Quality Control (QA/QC). PharmChem carefully monitors the
accuracy and reliability of its test results by internal and external QA/QC
programs. The Company's staff evaluates laboratory performance with open and
blind quality control samples. In addition, the Company is subject to frequent
proficiency testing by various certifying bodies, which send their own open and
blind samples to the laboratory. Further, the Company is subject to frequent
inspections by certifying agencies.
Data Review. Each test result undergoes several independent levels of
review before being reported by a certifying scientist.
Reporting of Results. PharmChem transmits most of its test results
electronically using various secure communication networks and through automated
voice reporting systems. Upon release by a certifying scientist, each test
result is made available by the Company's information systems to the customer's
computer, secure facsimile machine or by telephonic inquiry. The Company
routinely reports results for specimens that screen negative within 24 hours of
receipt in the laboratory and within 48 hours for specimens that require
confirmation.
CUSTOMER SERVICES AND TECHNICAL SUPPORT
PharmChem provides a variety of drug testing services which are customized
to each customer's specific needs. The Company employs a customer service and
technical support staff specializing in one or more of the following areas of
service.
Specimen Collection. PharmChem manages specimen collection services for a
number of its customers. The Company maintains a list of more than 5,000 clinics
and other organizations throughout the country that offer specimen collection
services that comply with forensic drug-testing procedures. PharmChem's customer
service staff identifies collectors conveniently located to customer sites,
prepares customized specimen collection procedures, conducts training of
collection personnel and monitors their performance. In 1997, PharmChem managed
more than 500,000 collections in the U.S., while Medscreen managed approximately
25,000 collections throughout the UK and at over 150 shipping ports throughout
the world.
Transportation. Most specimens are transported to PharmChem by overnight or
same-day courier, or by U.S. mail. The Company offers special specimen
transportation services for selected areas throughout the country, which provide
for pickup of specimens before the close of each business day.
Technical Consultation. The technical specialists on PharmChem's staff are
experienced in drug metabolism and other technical aspects of drug testing.
These specialists respond to requests from customers to interpret test results.
In addition, the Company is often called upon to assemble the complete chain of
custody and testing data package for specimen results that have been challenged
and to provide expert witness testimony in legal proceedings. The technical
consultation group also provides comprehensive in-service
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training for customers on topics such as substance abuse trends, toxicology and
drug pharmacology, breath alcohol testing and technical information on the
Company's testing procedures.
Program Analysis. PharmChem collects and analyzes data on test results in
order to provide comprehensive monthly statistical reports to meet customers'
regulatory requirements and to assist with drug program management.
RESEARCH AND DEVELOPMENT
PharmChem's most experienced scientists and technicians perform research
and development activities. The Company's research and development efforts
continually focus upon improving laboratory procedures and processes. The
Company believes it has engineered a number of efficiencies to improve the
accuracy and reliability of its drug tests.
PHARMSCREEN(TM) ON-SITE SCREENING DEVICE
In recent years there has been a growing trend toward the use of on-site
screening for drugs of abuse by a number of agencies, including some of the
Company's customers. On-site screening relies upon portable diagnostic devices
that may be used at the point of specimen collection to identify drugs of abuse
in urine specimens. This technology is advantageous in that it provides
virtually immediate test results at a lower cost than a laboratory-based testing
program.
The Company now offers an expanded line of on-site screening devices to
supplement the laboratory-based testing services it has traditionally offered.
In 1996, PharmChem acquired exclusive marketing rights in non-clinical markets
for PharmScreen(TM), a portable, hand-held device used for on-site screening of
drugs of abuse. In 1996, the U.S. Food and Drug Administration (FDA) cleared
PharmScreen(TM) for detecting the use of cocaine, opiates (including heroin),
amphetamines and methamphetamine. In 1997, the FDA cleared PharmScreen(TM) for
detecting PCP, benzodiazepines, barbiturates and methadone. PharmScreen(TM) is
available in single, dual, four and five test configurations and is currently
being used by certain government agencies, including the Michigan Department of
Corrections (Michigan DOC) and the Administrative Office of the United States
Courts (Federal Probation). PharmScreen(TM) provides only a preliminary
analytical result, and a more specific alternative chemical method, such as
GC/MS, is necessary to obtain a confirmed analytical result. To date, sales of
PharmScreen(TM) by the Company have not been material and there can be no
assurance that it will be commercially accepted by existing or new customers or
generate significant revenues in the future.
PHARMCHEK(R) DRUGS OF ABUSE PATCH
Since 1992, the Company has been investing in and developing PharmChek(R),
a system that uses sweat to detect the use of illegal drugs. PharmChek(R) may
offer several advantages over other drug detection systems currently available.
It does not require the handling of urine or blood, which may be objectionable
to some people. The use of sweat as a testing medium may lengthen the drug use
detection period and decrease testing costs by reducing the need for specialized
specimen collection facilities and staff.
Recent state and federal court cases in California and Nevada have affirmed
the validity of PharmChek(R) for detecting the use of illegal drugs. In 1995,
the FDA cleared PharmChek(R) for detecting the use of cocaine, opiates
(including heroin), and amphetamines (including methamphetamine) and, in 1996,
clearance was obtained for detecting the use of phencyclidine (PCP) and
marijuana (THC). The Company previously conducted pilot programs using
PharmChek(R) with the Michigan DOC and the Federal Probation. Although certain
issues had arisen with respect to the adhesive qualities of the product, the
Company believes these issues have been resolved.
The Company has incurred significant costs in connection with the
commercialization of PharmChek(R) and expects to continue to do so in the
future. To date, sales of PharmChek(R) by the Company have not been material and
there can be no assurance that it will be commercially accepted by existing or
new customers or
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generate significant revenues in the future. Refer to "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
SALES AND MARKETING
PharmChem sells its integrated drug testing services to corporate and
governmental customers. The sales force uses a consultative selling approach
emphasizing the scope of integrated services offered by the Company and
customizing these services to meet customers' particular needs.
CUSTOMERS
PharmChem provides integrated drug testing services to three primary
customer groups:
Public and Private Employers. Public and private employers use drug
testing as part of their hiring decisions in order to increase safety and
reduce costs associated with drug abuse in the workplace. In addition, an
increasing number of public and private employers test employees in certain
positions on a periodic or random basis and test other employees upon
reasonable suspicion of drug use. Sales to public and private employers
accounted for 45%, 50% and 49% of the Company's total net sales in 1997,
1996 and 1995, respectively. Sales to Sears, Roebuck and Co. accounted for
approximately 10% of the Company's total net sales in 1997, 1996 and 1995.
Criminal Justice Agencies. Criminal justice agencies use drug testing
results in criminal proceedings and to assist with making parole, drug
treatment and probation decisions. In addition, these agencies use drug
testing to monitor drug treatment of individuals under supervision and to
track drug use trends within the United States. Sales to criminal justice
agencies accounted for 41%, 37%, and 34% of the Company's total net sales
in 1997, 1996 and 1995, respectively. Sales to Federal Probation accounted
for approximately 17%, 19% and 17% of the Company's total net sales in
1997, 1996 and 1995, respectively.
Drug Treatment Programs. Drug treatment programs use drug testing to
monitor the treatment and rehabilitation of drug users in their care. Sales
to drug treatment programs accounted for less than 6% of the Company's
total net sales in 1997, 1996 and 1995.
Medscreen. This London-based subsidiary accounted for 11%, 8%, and 11%
of the Company's total net sales in 1997, 1996 and 1995, respectively.
Medscreen's primary customers operate in the maritime, oil and
transportation industries. During 1997, Medscreen sales were generated 55%
in the UK and 45% in various other countries in Europe, Asia and South
America.
SUPPLIERS
PharmChem is not dependent upon any single supplier for its raw materials.
CONTRACTING
Most of PharmChem's large potential customers, including the majority of
public employers and criminal justice agencies, use a formal competitive bid
process in which the potential customer provides a detailed specification of the
drug testing services it requires. Because many of the Company's customers use a
competitive bidding process, there is no assurance that the Company will be the
successful bidder when such contracts are up for renewal. While price is an
important factor, in most cases these organizations are not required to accept
the lowest bid, but rather may choose the winning bidders on the basis of
technical superiority and customer service.
The failure to renew a significant contract, if not replaced by comparable
contracts, could result in lower sales, lower profit margins, negative cash
flows and losses. PharmChem's contracts generally provide for no minimum amounts
or payments, and allow termination at the customer's discretion on short notice
with little or no penalty. In particular, many contracts with governmental
agencies, including criminal justice agencies, provide for termination for
convenience. Although the Company's experience has been that its customers
generally do not exercise these early termination rights, there can be no
assurance that this will continue in the
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future. For some customers, the Company performs drug testing services under a
standard service contract. With other customers, the Company has no formal
contract. In these cases, the Company typically accepts and tests specimens for
an agreed upon price which is generally renegotiated every twelve months.
Backlog is not a significant statistic for the Company.
COMPETITION
The market for drug testing services became increasingly competitive in the
early 1990's, and continues to be competitive. Drug testing laboratories compete
primarily on the basis of technical capability, customer service and price. The
Company believes it competes favorably in each of these categories. PharmChem
has significantly expanded its scope of services while its average total price
per specimen has remained relatively unchanged. PharmChem's competitors include
national clinical laboratory companies, such as Smith-Kline Beecham Clinical
Laboratories, Laboratory Corporation of America (National Health
Laboratories/Roche Biomedical Laboratories) and Quest Diagnostics (formerly
Corning Clinical Laboratories); independent national drug testing laboratories;
third party administrators; medical review officers; manufacturers and
distributors of on-site screening devices and equipment; and numerous regional
and local laboratories. The national clinical laboratories have greater
financial, marketing, laboratory and related resources than the Company. In
addition, some customers and potential customers of the Company operate their
own drug testing facilities or may develop such facilities in the future. A
majority of the Company's sales are derived from competitive bids, and the
Company believes that competitive pressure with respect to these bids,
particularly large multi-year contracts, has intensified.
CERTIFICATION AND GOVERNMENT REGULATION
Laboratories which compete in the forensic drug testing market generally
must be certified by SAMHSA. In addition, some state and local jurisdictions
require their own certification for testing of specimens involving their
residents. Such state and local certifications are essential to the Company's
business in each such respective jurisdiction. The Company's laboratory is
currently certified by SAMHSA, CAP, certain state and local jurisdictions and
has received "deemed status" under CLIA as a result of its CAP certification.
The Company believes it is certified in all jurisdictions in which it operates.
The Company is subject to frequent inspection by certifying bodies,
including annual CAP and semi-annual SAMHSA inspections. Inspections generally
result in reports describing areas for improvement or suggesting changes in
procedures. The Company may be required to take actions with respect to the
items noted in the inspection report in order to remain certified. Failure to
meet certification requirements could result in suspension or loss of
certification. The Company has never been decertified as the result of an
inspection. Certification is essential to the Company's business because some of
its customers are required to use a certified laboratory, and many of its
customers look to certification as an indication of reliability and accuracy of
results.
Employee drug testing by federal agencies and certain private employers is
regulated by certain federal agencies. Court precedent currently exists in a
number of states regarding the circumstances under which employers may test
employees and the procedures under which such tests must be conducted. The
circumstances under which drug testing can legally be required by employers is
subject to judicial review, and is challenged from time to time by employees,
unions and other groups on constitutional, privacy and other grounds.
DOMESTIC AND FOREIGN OPERATIONS
Refer to Note 10 to the Consolidated Financial Statements for net sales,
income (loss) from operations and identifiable assets by geographic location.
ENVIRONMENTAL MATTERS
A small portion of the Company's business involves testing procedures
requiring the use of chloroform and radioactive reagents, which are considered
to be hazardous materials. Failure to comply with current or
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future federal, state or local environmental laws or regulations regarding these
hazardous materials could have a material adverse effect on the Company. The
Company believes that it has adequately notified employees of potential risks
associated with working at the Company and has provided a workplace safe from
hazard, as required by the Occupational Safety and Health Administration and
certain state laws. The Company believes it is in compliance with all applicable
environmental laws and regulations.
EMPLOYEES
As of December 31, 1997, the Company had approximately 300 full-time
employees. PharmChem's employees are not represented by labor organizations. The
Company considers relations with its employees to be good.
SEASONAL OPERATING FACTORS
PharmChem's operations are affected by seasonal trends to which drug
testing laboratories are generally subject. In the past, testing volume tends to
be higher in the second and third calendar quarters and lower in the fourth and
first calendar quarters, primarily due to the hiring patterns of the Company's
public and private employer customer group which affect pre-employment drug
testing. Further, demand for the Company's services is dependent on general
economic conditions.
YEAR 2000 ISSUES
The Company is subject to various risks associated with the year 2000
impact on information systems. External risk factors are principally related to
the ability of the Company's customers and suppliers to address year 2000 issues
that may adversely impact the Company's operations if not corrected. The Company
has performed a preliminary assessment of the year 2000 impact on internal
information systems. The assessment identified year 2000 issues with respect to
the Company's laboratory information system which may require either an
investment in programming changes because of the existence of a legacy flat file
system or in the replacement of the existing system. The Company is presently in
the process of compiling a more comprehensive assessment of the year 2000
issues, evaluating enhanced capabilities of new laboratory information systems
offering a more current technological architecture and related costs. The
Company expects to arrive at a decision on the laboratory information system in
mid-1998.
ITEM 2. PROPERTIES
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LOCATION USE SQUARE FOOTAGE REMAINING LEASE TERM
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1505-A O'Brien Drive World Headquarters 35,719 3 years
Menlo Park, CA 94025 and Laboratory
1275 Hamilton Court Distribution Center 11,925 1 year
Menlo Park, CA 94025
7606 Pebble Drive Texas Division and 15,000 3 years with a 5 year
Fort Worth, TX 76118 Laboratory option
1A Harbour Quay Medscreen 13,350 5 years with a 10 year
100 Preston's Road Headquarters and option
London, E14 9QZ Laboratory
England
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ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of its business, PharmChem is sued by individuals,
primarily those in the criminal justice system, who have tested positive for
drugs of abuse. In addition, the Company frequently testifies in administrative
and court proceedings involving the results of its tests. To date, the Company
has not experienced any material liability related to these claims, although
there can be no assurance that the Company will not at some time in the future
experience significant liability in connection with such claims. There are no
pending legal proceedings, other than ordinary routine litigation incidental to
the Company's
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business, to which PharmChem is a party or to which any of its property is
subject and management does not believe the outcome of any of the proceedings
will have a material impact on its financial position or results of operations.
The Company believes that its liability insurance coverage is adequate for its
business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1997.
EXECUTIVE OFFICERS OF PHARMCHEM
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NAME AGE POSITION WITH THE COMPANY
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53 President, Chief Executive Officer and
Joseph W. Halligan Director
55 Vice President, Finance and
David A. Lattanzio Administration,
Chief Financial Officer and Secretary
Edward V. Collom (1) 51 Vice President, Business Development
44 Vice President, Laboratory Technical
Robert S. Fogerson, Jr.(2) Director
Neil A. Fortner 43 Vice President, Laboratory Operations
Elizabeth M. Lison 40 Vice President, Customer Service
Joseph L. Kurta 46 Vice President, Sales and Marketing
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(1) Effective December 31, 1997, Edward V. Collom resigned.
(2) Effective January 18, 1998, Robert S. Fogerson, Jr. resigned.
Mr. Halligan has been President, Chief Executive Officer and Director since
November 1995. From 1988 to 1995, Mr. Halligan was President and CEO of E.S.I.
Consulting Group, a private consulting practice, specializing in advising and
operating high growth, consumer and service oriented companies. Before forming
his consulting practice, Mr. Halligan served from 1983 to 1987 as President and
CEO of a privately-held company, Laura Scudder's, Inc. From 1969 to 1983, Mr.
Halligan served as Senior Vice President of Fotomat Corporation and President of
its subsidiary, Video Services of America. He holds a B.S. in Management and
Business Administration from Columbia Pacific University.
Mr. Lattanzio has been Vice President, Finance and Administration, and
Chief Financial Officer since April 1996 and Secretary since January 1997. He is
responsible for all business aspects of the Company's operations, including
accounting, corporate finance, treasury, logistics, human resources and risk
management. From 1995 to March 1996, Mr. Lattanzio performed private consulting
for several companies, including the Company. He served as Vice President,
Finance and Chief Financial Officer of Mission Foods from 1991 to 1995. Mr.
Lattanzio holds a B.B.A. in Accounting from the University of Notre Dame. He is
a certified public accountant and a member of the Employment Training Panel,
State of California.
Mr. Fortner has been Vice President, Laboratory Operations, since February
1992. Mr. Fortner joined the Company as Director, Laboratory Operations in July
1991. He is the Scientific Director and is responsible for all production
aspects of laboratory operations. From 1985 to 1991, he served as Director of
Toxicology at Southgate Medical Services. Mr. Fortner has more than 15 years
experience in forensic toxicology and he is a qualified SAMHSA and CAP
laboratory inspector. He is a member of the American Association of Clinical
Chemistry and a full member of the Society of Forensic Toxicologists, the
American Academy of Forensic Sciences and the American Board of Forensic
Examiners. Mr. Fortner holds a B.A. in Biology from Hiram College and a M.S. in
Biochemistry from Western Kentucky University.
Ms. Lison has been Vice President, Customer Service, since March 1997. Ms.
Lison joined the Company's Medscreen subsidiary in 1993, where she held various
management positions in sales and customer service. In June 1996, she relocated
to the Corporate office to serve as Director, Customer Service. From 1979 to
1993, Ms. Lison worked in various aspects of the design and delivery of
workplace drug testing programs for companies based in the UK. Ms. Lison holds a
B. Tech (Hons) in Medical Science from the University of Bradford, UK.
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Mr. Kurta has been Vice President, Sales and Marketing since joining the
Company in March 1998. Mr. Kurta is responsible for sales, marketing and the
commercial development of the Company's laboratory services and the
PharmScreen(TM) and PharmChek(R) product lines. Prior to joining the Company,
Mr. Kurta served as Director of Business Development and Director of Sales and
Marketing for the Unilab Corporation and served in various capacities at Damon
Laboratories and Corning/Metpath Laboratories. From 1979 to 1986, Mr. Kurta
owned and operated Spectrum Helicopters, Inc., Copter Quik Delivery Systems and
Geriatric HealthCare Group. Mr. Kurta holds B.A. and M.S. degrees from Alfred
University in New York.
PART II
ITEM 5.MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock trades on The Nasdaq Stock Market under the
symbol PCHM.
STOCK PRICES
The following table summarizes the high and low closing bid prices for the
Company's Common Stock by quarter for years 1997 and 1996, as reported by the
Automated Quotation System of the National Association of Securities Dealers
(Nasdaq). The prices shown represent quotations among securities dealers, do not
include retail markups, markdowns or commissions and may not represent actual
transactions.
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CALENDAR CALENDAR
QUARTER HIGH LOW QUARTER HIGH LOW
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Q1 1997 $5 5/16 $3 7/8 Q1 1996 $5 $3 1/2
Q2 1997 4 3/ 3 1/ Q2 1996 4 2 7/
Q3 1997 4 1/ 2 5/ Q3 1996 3 7/ 3
Q4 1997 3 1/ 2 Q4 1996 5 3/ 3 3/
</TABLE>
As of March 1, 1998, there were approximately 170 holders of record of
PharmChem's Common Stock. A large number of shares were held in nominee name.
Based upon information furnished by the Company's proxy solicitor, Skinner &
Co., the Company believes it had approximately 1,500 shareholders as of the same
date.
DIVIDENDS
PharmChem has never paid cash dividends on its Common Stock. The Company
plans to retain all earnings to further the operation and expansion of its
business and therefore does not expect to pay dividends in the foreseeable
future. The Company's current revolving credit agreement prohibits the
declaration or payment of dividends.
8
<PAGE> 11
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales.................................. $39,233 $41,255 $39,111 $33,640 $29,032
Cost of sales.............................. 31,311 31,757 29,771 25,777 22,110
------- ------- ------- ------- -------
Gross profit....................... 7,922 9,498 9,340 7,863 6,922
------- ------- ------- ------- -------
Selling, general and administrative
expenses................................ 8,053 7,234 6,966 6,213 5,927
Marketing rights and research costs........ 181 1,455 1,039 854 1,002
Amortization of goodwill................... 185 185 247 246 287
Provision for doubtful accounts............ 350 206 575 72 90
Restructuring and unusual charges(1)....... -- -- 8,775 -- 3,502
------- ------- ------- ------- -------
Total operating expenses........... 8,769 9,080 17,602 7,385 10,808
------- ------- ------- ------- -------
Income (loss) from operations...... (847) 418 (8,262) 478 (3,886)
Other expense, net......................... (389) (372) (368) (279) (311)
------- ------- ------- ------- -------
Income (loss) before income
taxes............................ (1,236) 46 (8,630) 199 (4,197)
Provision for (benefit from) income
taxes................................... 34 -- (1,819) 148 (340)
------- ------- ------- ------- -------
Net income (loss).................. $(1,270) $ 46 $(6,811) $ 51 $(3,857)
======= ======= ======= ======= =======
Basic earnings (loss) per share............ $ (0.22) $ 0.01 $ (1.23) $ 0.01 $ (0.70)
======= ======= ======= ======= =======
Diluted earnings (loss) per share.......... $ (0.22) $ 0.01 $ (1.23) $ 0.01 $ (0.70)
======= ======= ======= ======= =======
Basic weighted average shares
outstanding............................. 5,734 5,622 5,542 5,510 5,507
======= ======= ======= ======= =======
Diluted weighted average shares
outstanding............................. 5,734 5,710 5,542 5,560 5,507
======= ======= ======= ======= =======
Cash dividends per share................... -- -- -- -- --
======= ======= ======= ======= =======
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficiency)............... $(1,079) $ 1,707 $ 4,283 $ 4,243 $ 3,979
Total assets............................... 22,096 21,468 22,183 28,306 29,049
Long-term debt, net of current portion..... 696 1,205 3,401 1,972 1,690
Shareholders' equity....................... 10,129 11,287 11,029 17,767 17,716
</TABLE>
- ---------------
(1) As more fully discussed in Note 8 to the Consolidated Financial Statements,
in 1995, the Company recorded a provision for restructuring and unusual
charges of $8.8 million related to the marketing rights and development of
PharmChek(R), computer and peripheral equipment, Medscreen goodwill and
other unusual charges. The 1993 charges principally reflect a $2.4 million
write-down of Medscreen goodwill and other unusual charges.
Selected quarterly financial data is included in Note 11 to the
Consolidated Financial Statements.
9
<PAGE> 12
ITEM 7.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 this section. Refer
to "Factors Affecting Operating Results." The Company assumes no obligation to
update the forward-looking statements or such factors.
RESULTS OF OPERATIONS
1997 Compared to 1996. Net sales decreased 4.9% to $39,233,000 in 1997 from
$41,255,000 in 1996. This decrease is attributed to urinalysis sales decreases
of 13% to criminal justice agencies and the August 1996 awarding of the US Army
contract to another laboratory, which more than offset sales increases of 23% at
Medscreen and higher PharmScreen(TM) and PharmChek(R) product sales. The
Company's total urinalysis volume decreased 15% to 2,681,000 specimens from 1996
levels. Net sales for the 1997 fourth quarter of $10,135,000 increased slightly
from the prior year, reflecting higher product sales and Medscreen sales
partially offset by lower criminal justice sales.
Cost of sales for the year decreased 1.4% to $31,311,000 in 1997 from
$31,757,000 in 1996. The decrease was due primarily to decreased specimen
volume. Cost of sales as a percentage of net sales increased to 79.8% in 1997
from 77.0% in 1996. Gross profit as a percentage of net sales decreased to 20.2%
in 1997 from 23.0% in 1996. Cost of sales for the 1997 fourth quarter of
$7,739,000 decreased slightly from the prior year due to decreased specimen
volume partially offset by higher product cost of sales.
Selling, general and administrative (SG&A) expenses for the year increased
11.3% to $8,053,000 in 1997 from $7,234,000 in 1996. The percent of SG&A
expenses to net sales increased to 20.5% in 1997 from 17.5% in 1996. SG&A
expenses for the 1997 fourth quarter increased 19% to $1,819,000. These
increases reflect the Company's continued rebuilding of the sales, marketing,
information systems and administrative infrastructure.
Marketing rights and research costs for the year decreased to $181,000 in
1997 from $1,455,000 in 1996. Marketing rights and research costs for the 1997
fourth quarter decreased substantially from 1996. These 1997 expenses include
the costs associated with the development and commercialization of new
laboratory methods and other drug testing systems. The decreases were due to
significant expenses in 1996 associated with the commercialization of
PharmChek(R). For the year, the percent of marketing rights and research costs
to net sales decreased to 0.5% in 1997 from 3.5% in 1996.
Loss from operations for the year was $847,000 in 1997 compared to income
from operations of $418,000 in 1996. Other expense, which includes interest
expense and interest income, increased slightly to $389,000 in 1997 from
$372,000 in 1996. The Company recorded a provision for deferred income taxes of
$34,000 in the 1997 fourth quarter related to the operations of Medscreen. The
Company had no provision for income taxes in 1996.
Net loss for the year was $1,270,000 in 1997 compared to net income of
$46,000 in 1996. The Company reported net income of $37,000 in the 1997 fourth
quarter compared to a net loss of $13,000 in 1996.
1996 Compared to 1995. Net sales increased 5.5% to $41,255,000 in 1996 from
$39,111,000 in 1995. This increase is attributed to sales increases of 7% to
public and private employers and 17% to criminal and justice agencies, which
more than offset sales decreases of 23% to drug treatment programs and 22% at
Medscreen. Medscreen's sales decrease was primarily due to the 1995 loss of its
largest customer and certain one-time equipment sales, which more than offset
new business acquired in 1996. The Company's total urinalysis volume increased
6% to 3,141,000 specimens from 1995 levels.
10
<PAGE> 13
Cost of sales increased 6.7% to $31,757,000 in 1996 from $29,771,000 in
1995. The increase was due primarily to increased specimen volume, especially
volume associated with providing non-laboratory related services, such as
specimen collection and transportation. Cost of sales as a percentage of net
sales increased to 77.0% in 1996 from 76.1% in 1995. Gross profit as a
percentage of net sales decreased to 23.0% in 1996 from 23.9% in 1995.
Selling, general and administrative (SG&A) expenses increased 3.8% to
$7,234,000 in 1996 from $6,966,000 in 1995. This increase reflects the Company's
continued rebuilding of the sales, marketing, information systems and
administrative infrastructure. The percent of SG&A expenses to net sales was
unchanged at 18% for both years.
Marketing rights and research costs increased 40.0% to $1,455,000 in 1996
from $1,039,000 in 1995. These expenses include the cost associated with the
development and commercialization of new laboratory methods and other drug
testing systems. This increase was due primarily to the expensing in 1996 of
certain costs related to the commercialization of PharmChek(R) and
PharmScreen(TM). Such expenses as a percentage of net sales increased to 3.5% in
1996 from 2.7% in 1995.
Income from operations increased to $418,000 in 1996 from a loss of
$8,262,000 in 1995. The increase is primarily related to restructuring and
unusual charges in the fourth quarter of 1995 (refer to Note 8 to the
Consolidated Financial Statements). Other expense, net, which includes interest
expense and interest income, increased slightly to $372,000 in 1996 from
$368,000 in 1995.
The Company had no provision for income taxes in 1996. In 1995, the benefit
from income taxes of $1,819,000 primarily related to the restructuring and
unusual charges recorded in 1995. The Company recorded a valuation allowance in
1995 to reflect the amount of deferred tax assets which may not be realized.
Net income increased to $46,000 in 1996 from a loss of $6,811,000 in 1995,
due primarily to the restructuring and unusual charges in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations during the years ended December 31, 1997, 1996 and
1995 provided cash of approximately $1,330,000, $2,758,000 and $4,626,000,
respectively. The decrease in cash flow from operations between 1997 and 1996
reflects the 1997 loss reported by the Company. The decrease in cash flow from
operations between 1996 and 1995 reflects the non-cash restructuring and unusual
charges recorded in 1995.
As of December 31, 1997 and 1996, PharmChem had $372,000 and $240,000 in
cash or cash equivalents, respectively. During 1997, the Company had net
borrowings on the revolving line of credit of $3,079,000 which were used to
acquire $2,798,000 of property and equipment and to reduce term debt and capital
lease obligations by $1,339,000. During 1996, the Company used approximately
$2,731,000 in cash to acquire property and equipment and approximately
$2,295,000 in cash to reduce short and long term debt.
On December 5, 1997, PharmChem entered into a new revolving credit
agreement ("Credit Agreement") whereby the maximum line of credit was increased
to $6,000,000. The Credit Agreement permits borrowings of 85% of qualified
accounts receivable, bears interest at the bank reference rate plus 1.0% (9.5%
at December 31, 1997) and is secured by a lien on all assets of the Company. The
mark-up of 1.0% over the reference rate can, under certain conditions, be
reduced to 0.5%. At December 31, 1997, the maximum that could be borrowed under
the Credit Agreement was $5,007,000. The Credit Agreement contains certain
financial covenants, which among others, require the Company to maintain certain
levels of working capital, liabilities and net worth and restricts the payment
of dividends. Proceeds from the Credit Agreement were used to repay the revolver
balance outstanding under the Company's previous credit agreement which was
amended several times during 1997 and, most recently, on October 18, 1997. At
that time, the revolver maturity date was extended from November 17, 1997 to
December 5, 1997, the interest rate was increased to the bank reference rate
plus 2.0% and more flexible financial covenants were established.
11
<PAGE> 14
The Company anticipates that existing cash balances, amounts available
under the Credit Agreement and funds to be generated from future operations will
be sufficient to fund operations and budgeted capital expenditures through 1998.
FACTORS AFFECTING OPERATING RESULTS
PharmChem is subject to a number of risks which could affect operating
results and liquidity, which risks include, among others, the following:
Competition and Customer Contracts. The drug testing industry in which
PharmChem competes is often characterized by competitive bidding which results
in the award of contracts based on technical superiority, customer service and
price. The Company competes for customer contracts against firms that may have
greater financial, marketing, laboratory and related resources. The market for
drug testing services became increasingly competitive in the 1990's, and
continues to be competitive. A majority of the Company's sales arise out of
competitively bid contracts. The Company has in the past failed to renew
significant contracts, including the 1996 awarding of the US Army contract to
another laboratory which represented 4% and 7% of the Company's total sales in
1996 and 1995, respectively. While many of the Company's contracts have
multi-year terms, most contracts are subject to discretionary termination on
short notice by the Company's customers. In addition, relatively few of the
Company's contracts call for minimum contract amounts or payments. Although the
Company's historical experience has been that customers generally use its
services for the entire length of the contract term, early termination of a
substantial contract, if not replaced by comparable contracts, could have a
material adverse effect on the Company.
PharmChek(R) Drugs of Abuse Patch. Since 1992, the Company has been
investing in and developing PharmChek(R), a system which uses sweat to detect
the use of illegal drugs. The process of bringing PharmChek(R) to market has
been subject to technical and regulatory delays and there is no assurance that
there will not be similar delays in the future. To date, sales of PharmChek(R)
have not been material and there is no assurance that it will be commercially
accepted by existing or new customers or generate significant revenues in the
future. While the company that developed PharmChek(R)has obtained patents
relating to its technology, there is no assurance as to the validity of such
patents, that the products marketed by the Company will be covered by such
patents, or that competitors will not infringe upon such patents or successfully
design similar or competing products that do not infringe upon such patents. The
Company has incurred significant costs in connection with the commercialization
of PharmChek(R) and expects to continue to do so in the future. The Company's
cumulative investment in PharmChek(R) marketing rights was approximately
$1,509,000 during the past three years.
Customer Concentration. The Company's two largest customers accounted for
approximately a combined 27% and 29% of the Company's sales in 1997 and 1996,
respectively. The loss of these contracts, if not replaced by comparable
contracts, would result in lower sales, lower profit margins and in negative
cash flows and losses. The Company has in the past failed to renew significant
contracts which have had adverse effects on the Company. See "Competition and
Customer Contracts" above.
Certification. The Company is certified SAMHSA, CAP and a number of states
to conduct drug testing using forensic procedures. The Company also has "deemed
status" under the Clinical Laboratory Improvement Amendments as a result of its
CAP certification. Certification is essential to the Company's business because
some of its customers are required to use certified laboratories, and many of
its customers look to certification as an indication of accuracy and reliability
of results. In order to remain certified, the Company is subject to frequent
inspections and proficiency tests. Failure to meet any of the numerous
certification requirements to which the Company is subject could result in
suspension or loss of certification. Such suspension or loss of certification
could have a material adverse effect on the Company.
Fluctuations in Operating Results. Along with competition and customer
contracts, PharmChem's operations are affected by seasonal trends to which drug
testing laboratories are generally subject. In the past, testing volume tends to
be higher in the second and third calendar quarters and lower in the fourth and
first calendar quarters, primarily due to the hiring patterns of the Company's
public and private employer customer group which affect pre-employment drug
testing. Further, demand for the Company's services is dependent on
12
<PAGE> 15
general economic conditions. Recessionary periods generally result in fewer new
hires, and therefore may lead to fewer pre-employment drug tests for public and
private employer customers. Budget cuts at the federal, state, or local level
could reduce business from the Company's public employer, criminal justice
agency and government funded drug treatment program customers. Because expenses
associated with maintaining the Company's testing work force are relatively
fixed over the short term, the Company's profit margins tend to increase in
periods of higher testing volume and decrease in periods of lower testing
volume.
Judicial Decisions and Government Policy. State and federal courts have
generally permitted the use of drug testing under certain circumstances and
using certain procedures. However, challenges to drug testing programs are
raised from time to time by employees, unions and other groups in litigation on
constitutional, privacy and other grounds. In addition, legal precedent in a
number of states governs the circumstances under which employers may test
employees and the procedures under which such tests must be conducted. Although
the Company believes that, to date, no such litigation or law has had a material
adverse impact upon its business, new decisions, legislation or policies which
restrict the use of drug testing could have a material adverse effect on the
Company.
Credit Availability. PharmChem maintains a revolving credit agreement with
a bank. All borrowings are secured by a lien on all assets of the Company. The
credit agreement contains certain financial covenants, with which the Company
anticipates that it will be able to comply with throughout 1998, although there
can be no assurance that such compliance will be maintained.
Legal Proceedings. In the ordinary course of its business, PharmChem is
sued by individuals, primarily those in the criminal justice system, who have
tested positive for drugs of abuse. In addition, the Company frequently
testifies in administrative and court proceedings involving the results of its
tests. To date, the Company has not experienced any material liability related
to these claims, although there can be no assurance that the Company will not at
some time in the future experience significant liability in connection with such
claims. There are no pending legal proceedings, other than ordinary routine
litigation incidental to the Company's business, to which PharmChem is a party
or to which any of its property is subject and management does not believe the
outcome of any of the proceedings will have a material impact on its financial
position or results of operations. The Company believes that its liability
insurance coverage is adequate for its business.
Environmental Matters. A small portion of the Company's business involves
testing procedures requiring the use of chloroform and radioactive reagents,
which are considered to be hazardous materials. Failure to comply with current
or future federal, state or local environmental laws or regulations regarding
these hazardous materials could have a material adverse effect on the Company.
The Company believes it is in compliance with all applicable environmental laws
and regulations.
Dependence on Key Personnel. The success of PharmChem is dependent in part
on its key management and technical personnel, the loss of one or more of whom
could have a material adverse effect on the Company. None of the Company's key
employees has an employment contract with the Company. The Company believes that
its future success will depend in part upon its continued ability to attract,
retain and motivate additional highly skilled personnel.
Year 2000 Issues. The Company is subject to various risks associated with
the year 2000 impact on information systems. External risk factors are
principally related to the ability of the Company's customers and suppliers to
address year 2000 issues that may adversely impact the Company's operations if
not corrected. The Company has performed a preliminary assessment of the year
2000 impact on internal information systems. The assessment identified year 2000
issues with respect to the Company's laboratory information system which may
require either an investment in programming changes because of the existence of
a legacy flat file system or in the replacement of the existing system. The
Company is presently in the process of compiling a more comprehensive assessment
of the year 2000 issues, evaluating enhanced capabilities of new laboratory
information systems offering a more current technological architecture and
related costs. The Company expects to arrive at a decision on the laboratory
information system in mid-1998.
13
<PAGE> 16
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 131 "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 establishes
standards for disclosures about segments of an enterprise and is effective for
annual periods beginning after December 15, 1997. The Company expects to include
the SFAS No. 131 disclosures in its consolidated financial statements for the
year ended December 31, 1998.
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
expects to include the SFAS No. 130 disclosures in its 1998 consolidated
financial statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index at page 33, Item 14.(a)(1).
14
<PAGE> 17
REPORT OF KPMG PEAT MARWICK LLP, INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
of PharmChem Laboratories, Inc.:
We have audited the accompanying consolidated balance sheet of PharmChem
Laboratories, Inc. and subsidiary (the Company) as of December 31, 1997, and the
related consolidated statements of operations, shareholders' equity and cash
flows for the year then ended. In connection with our audit of the consolidated
financial statements, we also have audited the financial statement schedule as
listed in the accompanying index. These consolidated financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule 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 1997 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
PharmChem Laboratories, Inc. and subsidiary as of December 31, 1997, and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles. Also in our opinion,
the related consolidated financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
San Francisco, California
February 13, 1998
15
<PAGE> 18
REPORT OF ARTHUR ANDERSEN LLP, INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of PharmChem Laboratories, Inc.:
We have audited the accompanying consolidated balance sheets of PharmChem
Laboratories, Inc. and subsidiary (the Company) as of December 31, 1996, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the two years in the period ended December 31, 1996. These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of PharmChem Laboratories, Inc.
and its subsidiary as of December 31, 1996, and the results of their operations
and their cash flows for each of the two years in the period ended December 31,
1996 in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
San Jose, California
February 13, 1997
16
<PAGE> 19
PHARMCHEM LABORATORIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------- -------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 372 $ 240
Accounts receivable, net of allowance for doubtful
accounts of $468 and $610, respectively................ 7,608 8,168
Inventory................................................. 1,609 1,014
Prepaids and other current assets......................... 456 1,122
------- -------
TOTAL CURRENT ASSETS.............................. 10,045 10,544
------- -------
PROPERTY AND EQUIPMENT, net................................. 7,638 6,578
OTHER ASSETS................................................ 1,238 986
GOODWILL, net of accumulated amortization and write-downs of
$6,214 and $6,029, respectively........................... 3,175 3,360
------- -------
$22,096 $21,468
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit.................................. $ 4,081 $ 1,002
Current portion of long-term debt......................... 503 1,333
Accounts payable.......................................... 3,322 3,238
Accrued compensation...................................... 990 998
Accrued collectors and other liabilities.................. 2,228 2,266
------- -------
TOTAL CURRENT LIABILITIES......................... 11,124 8,837
------- -------
LONG TERM DEBT, net of current portion...................... 696 1,205
DEFERRED RENT............................................... 147 139
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, no par value, 10,000 shares authorized,
5,750 and 5,695 shares issued and outstanding at
December 31, 1997 and 1996, respectively............... 19,027 18,915
Accumulated deficit....................................... (8,898) (7,628)
------- -------
TOTAL SHAREHOLDERS' EQUITY........................ 10,129 11,287
------- -------
$22,096 $21,468
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE> 20
PHARMCHEM LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
<S> <C> <C> <C>
NET SALES................................................... $39,233 $41,255 $39,111
COST OF SALES............................................... 31,311 31,757 29,771
------- ------- -------
GROSS PROFIT................................................ 7,922 9,498 9,340
------- ------- -------
OPERATING EXPENSES:
Selling, general and administrative....................... 8,053 7,234 6,966
Marketing rights and research costs....................... 181 1,455 1,039
Amortization of goodwill.................................. 185 185 247
Provision for doubtful accounts........................... 350 206 575
Restructuring and unusual charges......................... -- -- 8,775
------- ------- -------
Total operating expenses.......................... 8,769 9,080 17,602
------- ------- -------
INCOME (LOSS) FROM OPERATIONS............................... (847) 418 (8,262)
------- ------- -------
OTHER INCOME (EXPENSE):
Interest income........................................... 8 63 93
Interest expense.......................................... (397) (435) (457)
Other..................................................... -- -- (4)
------- ------- -------
Other expense, net................................ (389) (372) (368)
------- ------- -------
INCOME (LOSS) BEFORE PROVISION FOR (BENEFIT FROM) INCOME
TAXES..................................................... (1,236) 46 (8,630)
PROVISION FOR (BENEFIT FROM) INCOME TAXES................... 34 -- (1,819)
------- ------- -------
NET INCOME (LOSS)........................................... $(1,270) $ 46 $(6,811)
======= ======= =======
EARNINGS (LOSS) PER SHARE:
Basic..................................................... $ (0.22) $ 0.01 $ (1.23)
======= ======= =======
Diluted................................................... $ (0.22) $ 0.01 $ (1.23)
======= ======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic..................................................... 5,734 5,622 5,542
======= ======= =======
Diluted................................................... 5,734 5,710 5,542
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE> 21
PHARMCHEM LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
---------------- ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT DEFICIT EQUITY
------ ------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994....................... 5,511 $18,630 $ (863) $17,767
Exercise of stock options........................ 76 73 -- 73
Net loss......................................... -- -- (6,811) (6,811)
----- ------- ------- -------
BALANCE AT DECEMBER 31, 1995....................... 5,587 18,703 (7,674) 11,029
Exercise of stock options........................ 108 212 -- 212
Net income....................................... -- -- 46 46
----- ------- ------- -------
BALANCE AT DECEMBER 31, 1996....................... 5,695 18,915 (7,628) 11,287
Exercise of stock options........................ 55 112 -- 112
Net loss......................................... -- -- (1,270) (1,270)
----- ------- ------- -------
BALANCE AT DECEMBER 31, 1997....................... 5,750 $19,027 $(8,898) $10,129
===== ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE> 22
PHARMCHEM LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR YEARS ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $(1,270) $ 46 $(6,811)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization.......................... 1,917 1,979 2,626
Provision for doubtful accounts........................ 350 206 575
Restructuring and unusual charges, net of tax
benefit............................................... -- -- 7,527
Loss (gain) on dispositions and sales of equipment..... 6 (51) --
Change in operating assets and liabilities:
Accounts receivable.................................... 210 627 (1,091)
Inventory.............................................. (595) 674 (15)
Income tax refund receivable........................... 351 (351) --
Prepaids and other current assets...................... 315 (71) (19)
Accounts payable and other accrued liabilities......... 38 (440) 1,834
Deferred rent.......................................... 8 139 --
------- ------- -------
Net cash provided by operating activities......... 1,330 2,758 4,626
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (2,798) (2,731) (2,732)
Payments for marketing rights............................. -- -- (805)
Proceeds from sale of equipment........................... -- 230 --
Decrease (increase) in other assets....................... (252) 216 (284)
------- ------- -------
Net cash used in investing activities............. (3,050) (2,285) (3,821)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayments) on revolving lines of credit,
net.................................................... 3,079 (848) (750)
Proceeds from issuance of long-term debt.................. -- 1,203 910
Principal payments on long-term debt...................... (1,339) (1,447) (1,380)
Proceeds from exercise of stock options................... 112 212 73
------- ------- -------
Net cash provided by (used in) financing
activities...................................... 1,852 (880) (1,147)
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 132 (407) (342)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. 240 647 989
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 372 $ 240 $ 647
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest, net of $46 capitalized in 1997.... $ 376 $ 548 $ 479
======= ======= =======
Cash paid for taxes....................................... $ 3 $ -- $ 123
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE> 23
PHARMCHEM LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. THE COMPANY
PharmChem Laboratories, Inc. is a leading independent laboratory providing
integrated drug testing services. PharmChem tests for a number of drugs of
abuse, primarily by urinalysis. In addition to forensic drug testing, PharmChem
offers a range of services which are customized to assist customers in
implementing cost-effective drug testing programs. The Company's customers
include private and public employers, criminal justice agencies and drug
treatment programs primarily in the United States and the United Kingdom (UK).
The consolidated financial statements include the accounts of PharmChem
Laboratories, Inc. and its wholly-owned subsidiary, Medscreen Limited
("Medscreen"), a UK company (collectively referred to as the "Company").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of the Company
after elimination of all intercompany accounts and transactions. The functional
currency of Medscreen is the local currency. The foreign currency translation
adjustment is not material for any periods presented.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash balances and all highly liquid
investments with original maturities of three months or less at the date of
purchase. At December 31, 1997 and 1996, cash and cash equivalents consist of
demand deposits maintained at established commercial banks. Such cash deposits
periodically exceed the Federal Deposit Insurance Corporation insured limit of
$100,000 for each account.
CONCENTRATIONS OF CREDIT RISK
The Company is subject to a number of risks which include, among others,
competition related to customer contracts, development and marketing of
PharmChek(R) and PharmScreen(TM), customer concentration and laboratory
certification.
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash investments and trade
receivables. The Company has cash investment policies that limit investments to
short-term, low risk instruments. Two customers accounted for approximately 27%
of the Company's sales for the year ended December 31, 1997, and one customer
accounted for approximately 24% of accounts receivable at December 31, 1997.
Concentrations of credit risk with respect to trade receivables are mitigated by
the fact that the largest customer is a federal government agency, the remaining
customer base is diversified among many corporate industries and other
government agencies, the Company's ongoing credit evaluation process and the
allowance for doubtful accounts.
21
<PAGE> 24
PHARMCHEM LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
Inventory
Inventory 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. At December 31, inventory consisted of the following:
<TABLE>
<CAPTION>
1997 1996
------ ------
(IN THOUSANDS)
<S> <C> <C>
Laboratory materials....................................... $ 412 $ 396
Collection materials....................................... 1,072 469
Products................................................... 125 149
------ ------
$1,609 $1,014
====== ======
</TABLE>
Property and Equipment
Property and equipment is recorded at cost. Depreciation and amortization
are provided using the straight-line method over the estimated useful lives of
up to 10 years. Leasehold improvements and equipment held under capital leases
are amortized over the estimated useful life. At December 31, property and
equipment consisted of the following:
<TABLE>
<CAPTION>
1997 1996
------ ------
(IN THOUSANDS)
<S> <C> <C>
Lab equipment.............................................. $7,047 $7,441
Computer hardware and software............................. 3,806 2,552
Office equipment........................................... 469 366
Furniture, fixtures and other.............................. 765 688
Leasehold improvements..................................... 3,691 3,659
Construction in progress................................... 1,692 484
------ ------
17,470 15,190
Less: accumulated depreciation and amortization............ (9,832) (8,612)
------ ------
Property and equipment, net................................ $7,638 $6,578
====== ======
</TABLE>
Expenditures for maintenance and repairs are expensed as incurred. Costs of
major replacements and betterments are capitalized. When property is retired or
otherwise disposed of, the cost and accumulated depreciation and amortization
are removed from the appropriate accounts and any gain or loss is included in
the statement of operations.
Long-Lived Assets, Including Goodwill
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," the Company
reviews, as circumstances dictate, the carrying amount of its intangible assets.
The purpose of these reviews is to determine whether the carrying amounts are
recoverable. Recoverability is determined by comparing the projected discounted
net cash flows of the long-lived assets against their respective carrying
amounts. The amount of impairment, if any, is measured based on the excess of
the carrying value over the fair value. Management believes that no impairment
of long-lived assets has occurred.
Goodwill consists of the excess of cost over the fair value of the net
assets of businesses acquired and is being amortized on a straight-line basis
over periods ranging from 20 to 40 years. Amortization expense, including
write-downs of goodwill, for the years ended December 31, 1997, 1996 and 1995
was $185,000,
22
<PAGE> 25
PHARMCHEM LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
$185,000 and $2,247,000, respectively. Refer to Note 8 for further discussion of
1995 restructuring and unusual charges.
Revenue
Revenue is recognized upon completion of laboratory analyses of specimens
submitted by customers and at the time of shipment for products. As a percentage
of gross revenues, the Company had sales to major customers as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Customer A......................................... 17.1% 18.7% 17.2%
Customer B......................................... 10.1% 10.3% 9.7%
</TABLE>
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes,"
which requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on temporary differences between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
Accounting for Stock-Based Compensation
The Company has adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," effective January 1, 1996. This statement establishes financial
accounting and reporting standards for stock-based compensation, including
employee stock purchase plans and stock option plans. As allowed by SFAS No.
123, the Company continues to measure compensation expense for awards granted to
employees under the provisions of Accounting Pronouncement Board Opinion (APB)
No. 25 "Accounting for Stock Issued to Employees." The exercise price of options
granted under these plans is equal to the market price of the Company's stock on
the date of grant, and accordingly, no compensation cost is recorded under APB
No. 25.
Earnings (Loss) Per Share
The Company has adopted SFAS No. 128, "Earnings Per Share," as of December
31, 1997, which requires the presentation of basic and diluted earnings (loss)
per share. 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. Earnings
23
<PAGE> 26
PHARMCHEM LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(loss) per share amounts for all previously reported periods have been restated
to conform with SFAS No. 128. The calculations of basic and diluted earnings
(loss) per share are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net income (loss).................................... $(1,270) $ 46 $(6,811)
Denominator for basic earnings (loss) per
share -- weighted
average common shares.............................. 5,734 5,622 5,542
Dilutive stock options............................... -- 88 --
------- ------ -------
Denominator for diluted earnings (loss) per share.... 5,734 5,710 5,542
======= ====== =======
Basic earnings (loss) per share...................... $ (0.22) $ 0.01 $ (1.23)
======= ====== =======
Diluted earnings (loss) per share.................... $ (0.22) $ 0.01 $ (1.23)
======= ====== =======
</TABLE>
Options to purchase 379,480 shares of the Company's common stock at
December 31, 1996, 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 $3.96 per share. All options to purchase shares
of the Company's common stock at December 31, 1997 and 1995, respectively, were
not included in the computation of diluted loss per share as their effect would
have been antidilutive.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments," requires certain disclosures regarding the
fair value of financial instruments. The carrying amounts of accounts
receivable, accounts payable and accrued liabilities approximates fair value
because of the short-term maturity of these instruments. The fair values of
revolving credit agreements, long-term debt and notes payable to a bank do not
materially differ from their carrying amounts since the majority of such debt
bears interest at variable rates and the fixed rate obligations generally have
near-term maturities or have matured.
Deferred Rent
Deferred rent represent unrealized rent abatements granted by the lessor of
the facility occupied by Medscreen, and is being amortized on a straight-line
basis as a reduction to rent expense over the remaining lease term.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform
to current year presentation.
24
<PAGE> 27
PHARMCHEM LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
3. DEBT
Revolving credit agreement, notes payable to bank, long-term debt and
capitalized lease obligations at December 31 consist of the following:
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Revolving credit agreement pursuant to revolver loan
agreement, secured by a lien on all assets, renewable
monthly, interest at bank reference rate plus 1.0 % (9.50%
at December 31, 1997)..................................... $ 4,081 $ --
Notes payable to a bank pursuant to the term and revolver
loan agreement, secured by a lien on all assets, paid in
full in December 1997..................................... -- 1,002
Notes payable to a bank pursuant to the term and revolver
loan agreement, due in monthly installments of
approximately $55 plus interest, secured by a lien on all
assets, paid in full in November 1997..................... -- 611
Obligations under capitalized leases, due in monthly
installments through 2001, secured by laboratory and
office equipment, interest rates ranging from 6% to 11%... 1,164 1,821
Other....................................................... 35 106
------- -------
5,280 3,540
Less: current portion and revolving line of credit.......... (4,584) (2,335)
------- -------
Long-term portion........................................... $ 696 $ 1,205
======= =======
</TABLE>
On December 5, 1997, PharmChem entered into a new revolving credit
agreement ("Credit Agreement") whereby the maximum line of credit was increased
to $6,000,000. The Credit Agreement permits borrowings of 85% of qualified
accounts receivable, bears interest at the bank reference rate plus 1.0% (9.5%
at December 31, 1997) and is secured by a lien on all assets of the Company. The
mark-up of 1.0% over the reference rate can, under certain conditions, be
reduced to 0.5%. At December 31, 1997, the maximum that could be borrowed under
the Credit Agreement was $5,007,000. The Credit Agreement contains certain
financial covenants, which among others, require the Company to maintain certain
levels of working capital, liabilities and net worth and restricts the payment
of dividends.
Proceeds from the Credit Agreement were used to repay the revolver balance
outstanding under the Company's previous credit agreement which was amended
several times during 1997 and, most recently, on October 18, 1997. At that time,
the revolver maturity date was extended from November 17, 1997 to December 5,
1997, the interest rate was increased to the bank reference rate plus 2.0% and
more flexible financial covenants were established.
The Company has leased certain laboratory and office equipment with an
original cost of approximately $2,724,000 under capital lease agreements. At
December 31, 1997, the future minimum lease payments, together with the present
value of the net minimum lease payments under these agreements, were as follows
(in thousands):
<TABLE>
<S> <C>
1998................................................ $ 553
1999................................................ 365
2000................................................ 347
2001................................................ 44
------
Total minimum lease payments.............. 1,309
Less: amount representing interest........ (145)
------
Present value of net minimum lease
payments................................ $1,164
======
</TABLE>
25
<PAGE> 28
PHARMCHEM LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
4. INCOME TAXES
The provision for (benefit from) income taxes consisted of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal......................................... $-- $ -- $ 114
State........................................... -- -- 17
Foreign......................................... -- -- --
--- ------ -------
Total current........................... -- -- 131
--- ------ -------
Deferred:
Federal......................................... -- -- (1,654)
State........................................... -- -- (296)
Foreign......................................... 34 -- --
--- ------ -------
Total deferred.......................... 34 -- (1,950)
--- ------ -------
Provision for (benefit from) income
taxes................................. $34 $ -- $(1,819)
=== ====== =======
</TABLE>
The deferred tax provision in 1997 represents the partial utilization of UK
net operating losses previously recorded as a deferred tax asset at the
statutory rate. As a result, the deferred tax asset decreased by $34,000.
The current federal and state tax provisions represent the alternative
minimum tax ("AMT") on operations for 1995. Undistributed earnings of the
Company's foreign subsidiary are not significant. The provision for (benefit
from) income taxes is reconciled with the federal statutory rate as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax provision (benefit) computed at the federal
statutory tax rate............................. $(420) $ 16 $(3,021)
State taxes, net of federal tax benefit.......... (30) 3 (526)
Effects of foreign operations.................... (27) -- (121)
Amortization and write-down of goodwill.......... 44 66 724
Increase (decrease) in valuation allowance....... 438 (83) 1,470
Other............................................ 29 (2) (345)
----- ----- -------
Total tax (benefit from) provision..... $ 34 $ -- $(1,819)
===== ===== =======
</TABLE>
26
<PAGE> 29
PHARMCHEM LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
The major components of temporary differences which give rise to the
deferred tax accounts at December 31, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
1997 1996
------- ------
(IN THOUSANDS)
<S> <C> <C>
Current deferred tax assets:
Reserves and accruals................................... $ 373 $ 753
------- ------
Total gross current asset....................... 373 753
Deferred tax valuation allowance........................ (219) (318)
------- ------
Net current asset............................... $ 154 $ 435
======= ======
Non-current deferred tax assets:
Net operating loss carryforward......................... $ 1,064 $ 243
Difference between book and tax depreciation............ 93 (283)
Restructuring and unusual charges....................... 526 876
Research tax credit carryforwards and other............. 449 512
------- ------
Total gross non-current asset................... 2,132 1,348
Deferred tax asset valuation allowance.................. (1,255) (718)
------- ------
Net non-current asset........................... $ 877 $ 630
======= ======
</TABLE>
The deferred tax asset accounts are classified with "Other current assets"
and "Other assets" on the accompanying Consolidated Balance Sheets. Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting and income
tax purposes. Although realization is not assured, the Company believes it is
more likely than not that the net deferred tax asset will be realized in the
future primarily from the generation, in subsequent years, of US source taxable
income. The amount of the deferred tax asset considered realizable, however,
could be reduced in the near term if estimates of future taxable income during
the carryforward period are lower.
As of December 31, 1997, the Company has net operating loss carryforwards
for federal and state income tax reporting purposes of approximately $2,756,000
and $1,806,000, respectively. The federal loss carryforwards expire between 2004
and 2012 and the state loss carryforwards expire between 1998 and 2002. The
Company also has net operating loss carryforwards available for UK tax reporting
purposes, which are restricted to the UK, of approximately $102,000. The Tax
Reform Act of 1986 contains provisions which may limit the net operating loss
carryforwards to be used in any given year upon the occurrence of certain
events, including a significant change of ownership.
In February 1997, the Company received a refund of federal income taxes
totaling $351,000. This amount was classified in "Other current assets" on the
accompanying Consolidated Balance Sheets at December 31, 1996.
The Internal Revenue Service ("IRS") is currently examining the Company's
income tax returns for 1992, 1993 and 1994, and has issued a Notice of
Deficiency resulting from the IRS challenging the deductibility of research
expenses related to the development of the PharmChek sweat patch device. The
Company believes the Notice of Deficiency is incorrect and has requested a
hearing with an IRS Appeals Officer. The Company does not believe the ultimate
outcome of this matter will have a material impact on the Company's consolidated
results of operations or financial position.
27
<PAGE> 30
PHARMCHEM LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
5. INCENTIVE STOCK PLANS
1997 and 1988 Incentive Stock Plans
In May 1997, the Company's shareholders approved the 1997 Incentive Stock
Plan ("the 1997 Plan") whereby stock options, including incentive stock options,
non-qualified options, restricted shares, performance shares, bonus shares and
stock appreciation rights may be granted to employees, consultants and
directors, for up to 500,000 shares of common stock. This 1997 Plan, which
expires in 2007, is administered by the Officers Compensation Committee of the
Board of Directors ("the Committee"). The Committee shall determine the term of
each stock option (up to a maximum of ten years) and the exercise price cannot
be less than 100% of the fair market value of the common stock on the date the
option is granted. Except as otherwise provided, options will be exercisable
with respect to 6.25% of the shares corresponding to the grant on the first day
of each of the first sixteen calendar quarters after the grant date. As of
December 31, 1997, no options have been granted under the 1997 Plan.
In November 1988, the Company adopted the 1988 Incentive Stock Plan ("the
1988 Plan"). Under this 1988 Plan, nonstatutory options and stock purchase
rights may be granted to employees and consultants, while incentive stock
options may only be granted to employees, for up to a total of 1,280,000 shares
of common stock. The 1988 Plan, which expires in 1998, is also administered by
the Committee. The Committee shall determine the term and exercise price of the
options and rights. Incentive stock options must be granted at a price of at
least fair market value, while nonstatutory options and stock purchase rights
must be granted at a price of at least 85% of the fair market value, based on
the trading price of the common stock on Nasdaq, as of the date of grant. Common
shares purchased pursuant to stock purchase rights issued under the 1988 Plan
are subject to repurchase at the original issuance price by the Company upon
termination of employment. The repurchase right lapses at such rate as
determined by the Committee. Options granted under the 1988 Plan vest generally
over a 48-month period and expire ten years after date of grant.
Effective January 1, 1995 the Company engaged in a stock option exchange
program that effectively repriced all then outstanding options having an
exercise price above the then current market price of $2.00 ("Repriced
grants/canceled" in the following table). The repriced options began vesting
effective January 1, 1995 over a 48-month period. The exercise price for all
options exchanged was $2.00.
28
<PAGE> 31
PHARMCHEM LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
Options to purchase approximately 309,753, 206,000 and 122,000 shares of
common stock were exercisable at December 31, 1997, 1996 and 1995 respectively.
As of December 31, 1997, only incentive stock options were outstanding. Option
information for the periods presented is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
OPTIONS -----------------------------------
AVAILABLE NUMBER WEIGHTED
FOR GRANT OF SHARES RANGE AVERAGE
--------- --------- ---------- --------
<S> <C> <C> <C> <C>
Balance at December 31, 1994........... 770,251 214,255 0.25-7.25 4.96
-------- -------- ---------- -----
Granted.............................. (687,480) 687,480 2.00-4.75 2.95
Canceled............................. 55,711 (55,711) 2.00-7.25 2.47
Exercised............................ -- (66,493) 0.25-2.00 0.74
Repriced grants...................... (157,171) 157,171 2.00 2.00
Repriced canceled.................... 157,171 (157,171) 4.50-7.25 6.84
-------- -------- ---------- -----
Balance at December 31, 1995........... 138,482 779,531 0.25-4.75 2.82
-------- -------- ---------- -----
Granted.............................. (191,000) 191,000 3.25-4.63 3.69
Canceled............................. 165,565 (165,565) 0.25-4.00 2.29
Exercised............................ -- (108,145) 0.25-2.00 1.94
-------- -------- ---------- -----
Balance at December 31, 1996........... 113,047 696,821 0.25-4.75 3.32
-------- -------- ---------- -----
Additional shares approved........... 500,000 -- -- --
Granted.............................. (40,000) 40,000 3.00-4.38 3.56
Canceled............................. 52,631 (52,631) 0.25-3.25 2.04
Exercised............................ -- (55,286) 2.00-3.25 2.06
-------- -------- ---------- -----
Balance at December 31, 1997........... 625,678 628,904 $2.00-4.75 $3.55
======== ======== ========== =====
</TABLE>
1992 Director Option Plan
In May 1992, the Company adopted the 1992 Director Option Plan ("the
Director Plan") and reserved 250,000 shares of common stock for issuance under
this plan. On March 22, 1997, the Director Plan was amended to provide for
grants to outside directors only. The options vest over a 48-month period and
expire five years from the date of grant. Options are granted at fair market
value and the plan expires in 2002. As of December 31, 1997, options to purchase
110,000 shares were outstanding at a weighted average share price of $3.52,
130,626 options were available for future grants, 88,332 options were
exercisable at a weighted average share price of $3.20 and 30,000 options
expired at a weighted average share price of $8.75. During 1997 and 1996, 10,000
options were granted each year at weighted average share prices of $5.38 and
$4.50, respectively. No options were exercised or canceled in 1997 or 1996. In
1995, 9,374 options were exercised at a weighted average share price of $2.61
and 45,000 options were granted at a weighted average share price of $2.00.
The following summarizes information about all stock option plans at
December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
- -------------------------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED WEIGHTED ----------------------------
AVERAGE AVERAGE WEIGHTED
RANGE OF OPTIONS EXERCISE REMAINING OPTIONS AVERAGE
EXERCISE PRICE OUTSTANDING PRICE CONTRACT LIFE EXERCISABLE EXERCISE PRICE
-------------- ----------- ----------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$2.00 154,424 $2.00 6.0 Years 109,691 $2.00
2.88 - 3.63 205,000 3.40 5.9 Years 88,230 3.33
4.13 - 5.38 379,480 4.27 6.4 Years 200,164 4.28
------------- ------- ----- --------- ------- -----
$2.00 - $5.38 738,904 $3.55 6.1 Years 398,085 $3.44
============= ======= ===== ========= ======= =====
</TABLE>
29
<PAGE> 32
PHARMCHEM LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
Proforma Information
The Company continues to apply APB No. 125 in accounting for its stock
based compensation. Accordingly, no compensation cost has been recorded in the
consolidated statements of operations for the stock option plans. Had
compensation cost for the Company's stock based compensation plans been
determined in accordance with the fair value method prescribed by SFAS No. 123,
the Company's proforma net loss and loss per share for the years ended December
31 would have been as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net income (loss), as reported............... $(1,270) $ 46 $(6,811)
Net loss, pro forma.......................... (1,737) (203) (7,119)
Basic earnings (loss) per share, as
reported................................... $ (0.22) $ 0.01 $ (1.23)
Basic loss per share, pro forma.............. (0.30) (0.04) (1.28)
Diluted earnings (loss) per share, as
reported................................... (0.22) 0.01 (1.23)
Diluted loss per share, pro forma............ (0.30) (0.04) (1.28)
</TABLE>
The weighted average of fair values of options granted during 1997, 1996
and 1995 were $2.31, $2.09 and $1.53, respectively. The fair value of each grant
is estimated on the date of grant using the Binomial option pricing model with
the following weighted average assumptions: risk-free interest rate of
approximately 6%, corresponding to government securities with original
maturities similar to the estimated option life; option lives ranging from 3 to
5 years; annual volatility of the Company's stock price of 80%; and a dividend
yield of 0%. The above proforma amounts include compensation expense for options
granted since January 1, 1995, and may not be representative of that to be
expected in future years.
6. PROFIT SHARING PLAN
The Company has a 401(k) plan (the "Plan") which is available to all
employees who have reached age 18 and have completed at least one year of
service. The Plan provides that each participant may contribute a portion of his
or her salary, within certain limits set forth in the US Tax Code. The Company
will make a matching contribution of 10% of the amount contributed by each
participant and may make additional matching or discretionary profit sharing
contributions. The Company's contributions vest after three years of service.
Total contribution expense recorded by the Company for 1997, 1996 and 1995 was
$41,000, $20,000, and $52,000, respectively.
7. COMMITMENTS
Future minimum lease payments for the Company's office, laboratory and
warehouse space at December 31, 1997 were as follows (in thousands):
<TABLE>
<CAPTION>
AMOUNT
------
<S> <C>
1998................................ $ 869
1999................................ 887
2000................................ 871
2001................................ 553
2002................................ 218
2003 and thereafter................. 117
------
Total commitments............ $3,515
======
</TABLE>
30
<PAGE> 33
PHARMCHEM LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
Rental expense for operating leases amounted to approximately $944,000,
$825,000 and $789,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
In connection with the original employment and relocation of one employee,
the Company has committed to participate in the purchase of the employee's
residence. Pursuant to this commitment, the Company has an outstanding loan to
the employee of $109,000 at December 31, 1997 and 1996. This loan is included in
"Other assets" in the accompanying consolidated balance sheets. The loan is due
upon the earliest of 2001 or the occurrence of certain maturity events defined
in the agreement. The loan is secured by a deed of trust on the residence and
earns contingent interest on the net proceeds, as defined, upon the sale of the
employee's residence, termination of employment or other maturity events. In
certain circumstances, the Company is contingently liable for a portion of the
mortgage payments, insurance costs and property taxes, until such time as the
property is sold.
8. RESTRUCTURING AND UNUSUAL CHARGES
During the fourth quarter of 1995, the Company recorded a provision for
restructuring and unusual charges as follows (in thousands):
<TABLE>
<CAPTION>
1995
------
<S> <C>
Write-off of marketing rights and other expenditures........ $4,073
Write-down of goodwill applicable to Medscreen.............. 2,000
Write-down of certain computer and peripheral equipment..... 1,881
Other one-time costs -- principally severance............... 821
------
$8,775
======
</TABLE>
The write-off of marketing rights and other expenditures is related to
costs incurred in connection with the acquisition of marketing rights to
PharmChek(R). The Company believed it prudent to write-off these costs given the
delays in commencing pilot tests which hampered the scheduled commercial launch
of PharmChek(R). The Company's investment in PharmChek(R) marketing rights was
approximately $0, $704,000 and $805,000 during 1997, 1996 and 1995,
respectively. The Company expects to continue its investment in PharmChek(R). To
date, there have been no material revenues generated from PharmChek(R).
During the fourth quarter of 1995, Medscreen lost a customer which
accounted for approximately 20% of its revenues. As a result, the Company
revised its assessment of the realization of the carrying value of its
investment and an additional write-down of $2,000,000 was recognized in the
fourth quarter of 1995. The write-down was determined based on the projected
discounted cash flows of Medscreen compared with the carrying value of the
Company's investment in Medscreen, including goodwill, at the date of the
write-down.
The write-down of computer and peripheral equipment is consistent with the
Company's plan to replace certain existing systems to enhance service to its
customers and provide the infrastructure to better monitor and control expenses.
9. LITIGATION
The Company is the defendant in certain legal matters which are normal for
the industry in which the Company operates. Management believes that these
matters, both individually and in the aggregate, will not have a material
adverse impact on the Company's financial position or results of operations.
31
<PAGE> 34
PHARMCHEM LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
10. GEOGRAPHICAL DATA
Information about the Company's operations in geographic areas where it
operates is as follows:
<TABLE>
<CAPTION>
DOMESTIC EUROPE TOTAL
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales for the year ended:
1997........................................ $34,970 $ 4,263 $39,233
1996........................................ 37,781 3,474 41,255
1995........................................ 34,679 4,432 39,111
Income (loss) from operations for the year
ended:
1997........................................ (1,161) 314 (847)
1996........................................ 242 176 418
1995(1)..................................... (6,590) (1,672) (8,262)
Identifiable assets at year end:
1997........................................ 17,158 4,938 22,096
1996........................................ 16,623 4,845 21,468
1995........................................ 17,298 4,885 22,183
</TABLE>
- ---------------
(1) Refer to Note 8 for discussion of restructuring and unusual charges.
11. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized selected quarterly financial data is as follows:
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------
3/31 6/30 9/30 12/31
------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1997
Net sales....................................... $9,058 $10,003 $10,037 $10,135
Gross profit.................................... 1,902 1,989 1,635 2,396
Net income (loss)............................... (378) (267) (662) 37
Basic earnings (loss) per share................. $(0.07) $ (0.05) $ (0.12) $ 0.01
Diluted earnings (loss) per share............... $(0.07) $ (0.05) $ (0.12) $ 0.01
Basic weighted average shares outstanding....... 5,714 5,719 5,726 5,729
Diluted weighted average shares outstanding..... 5,714 5,719 5,726 5,772
1996
Net sales....................................... $9,867 $10,771 $10,631 $ 9,986
Gross profit.................................... 2,241 2,531 2,625 2,101
Net income (loss)............................... (178) 82 155 (13)
Basic earnings (loss) per share................. $(0.03) $ 0.01 $ 0.03 $ 0.00
Diluted earnings (loss) per share............... $(0.03) $ 0.01 $ 0.03 $ 0.00
Basic weighted average shares outstanding....... 5,594 5,601 5,601 5,682
Diluted weighted average shares outstanding..... 5,594 5,791 5,755 5,682
</TABLE>
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
32
<PAGE> 35
PART III
ITEMS 10 TO 13 INCLUSIVE.
These items have been omitted in accordance with the General Instructions
to Form 10-K and are answered by reference to those portions of the Registrant's
definitive proxy statement with respect to the 1998 Annual Meeting of
Shareholders which contain the information required by these items. The
Registrant will file with the Commission not later than 120 days after the end
of the fiscal year covered by this report such definitive proxy statement
pursuant to Regulation 14A. Information regarding executive officers of the
Company is contained in Part I of this Annual Report on Form 10-K under caption
"Executive Officers of PharmChem."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
PAGE
NUMBER
IN THIS
REPORT
-------
<S> <C>
Report of KPMG Peat Marwick LLP, Independent
Auditors.............................................. 15
Report of Arthur Andersen LLP, Independent Public
Accountants........................................... 16
Consolidated Balance Sheets at December 31, 1997 and
1996.................................................. 17
Consolidated Statements of Operations for the years
ended December 31, 1997, 1996 and 1995................ 18
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1997, 1996 and 1995.......... 19
Consolidated Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995................ 20
Notes to Consolidated Financial Statements............. 21
(a) (2) FINANCIAL STATEMENT SCHEDULE
Schedule II Valuation and Qualifying Accounts.......... 36
</TABLE>
All other schedules are omitted because they are not applicable, not
required, or the required information is shown in the Consolidated Financial
Statements or notes thereto.
33
<PAGE> 36
(a)(3) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
3.01(1) Amended and Restated Articles of Incorporation dated August
21, 1991.
3.02(2) Bylaws, as amended May 19, 1992.
4.01(1) Restated Modification Agreement dated August 14, 1989.
10.01(1) 1988 Incentive Stock Plan, as amended.
10.02(6) Form of Stock Option Agreement.
10.03(1) Form of Stock Option Agreement (providing for accelerated
vesting upon death or disability).
10.04(6) Form of Stock Option Agreement (January 1, 1995).
10.05(1) Form of Stock Purchase Agreement.
10.06(4) 1992 Director Option Plan.
10.07(4) Form of Director Option Agreement.
10.08(9) Amendment to 1992 Director Option Plan dated February 28,
1996.
10.09(9) Amendment to 1992 Director Option Plan dated March 4, 1997.
10.10(11) 1997 Equity Incentive Plan.
10.11(11) Form of Stock Option Agreement (Nonstatutory Stock Option)
in connection with the 1997 Equity Incentive Plan.
10.12(11) Stock Option Agreement (Incentive Stock Option) in
connection with the 1997 Equity Incentive Plan. 401(k) Plan.
10.13(1) 401(k) Plan.
10.14(9) Amendment to 401(k) Plan dated August 25, 1996.
10.15(1) Lease Agreements for the Company's offices in Menlo Park,
California dated October 21, 1988 and September 11, 1990,
respectively.
10.16(8) Lease Amendment for the Company's offices in Menlo Park,
California dated November 30, 1995.
10.17(9) Lease Amendment for the Company's offices in Menlo Park,
California dated March 6, 1996.
10.18(5) Harbour Quay (London) Lease Documents.
10.19(9) Lease Agreement for the Company's offices in Fort Worth,
Texas dated October 24, 1991.
10.20(9) Lease Amendment for the Company's offices in Fort Worth,
Texas dated December 8, 1992.
10.21(9) Lease Amendment for the Company's offices in Fort Worth,
Texas dated February 9, 1996.
10.22(1) Form of Indemnification Agreement.
10.23 Loan and Security Agreement between Comerica Bank of
California and PharmChem Laboratories, Inc. dated December
5, 1997.
10.24 Security Agreement (all assets) between Comerica Bank of
California and PharmChem Laboratories, Inc. dated December
5, 1997.
10.25(4,12) License and Supply Agreement with Sudormed, Inc. dated March
10, 1992.
10.26(5,12) License and Supply Agreement with Sudormed, Inc. dated
October 25, 1993.
10.27(5,12) Supply Agreement with SolarCare Technologies Corporation
dated August 1, 1993.
</TABLE>
34
<PAGE> 37
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
10.28(8,12) First Amendment to Supply Agreement dated December 1, 1995.
10.29(4,12) Probation Division of the Administration Office of The U.S.
Courts Contract dated October 1, 1992.
10.30(5,12) Sears Merchandise Group Service Agreement dated September
22, 1992.
10.31(11) Master Lease Purchase Agreement dated December 18, 1995 with
Fidelity Leasing Corporation and Lease Purchase Addenda in
connection therewith.
10.32(11) Master Equipment Lease dated March 17, 1996 with Olympus
Commercial Credit.
16.01(10) Letter dated April 8, 1997 from Arthur Andersen LLP to the
Commission. List of Subsidiaries.
21.01 List of Subsidiaries.
23.01 Consent of KPMG Peat Marwick LLP.
23.02 Consent of Arthur Andersen LLP.
27.1 Financial Data Schedule.
</TABLE>
- ---------------
(1) Incorporated by reference from the Company's Registration Statement on Form
S-1 (File No. 33-41363), effective August 8, 1991.
(2) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1991.
(3) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1992.
(4) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1992.
(5) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1993.
(6) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994.
(7) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 1995.
(8) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995.
(9) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996.
(10) Incorporated by reference from the Company's Current Report on Form 8-K
dated April 7, 1997.
(11) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1997.
(12) Confidential treatment requested as to certain portions of this exhibit.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended December 31,
1997.
(c) EXHIBITS
See (a) (3) above.
(d) FINANCIAL STATEMENT SCHEDULE
See (a) (2) above.
35
<PAGE> 38
PHARMCHEM LABORATORIES, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND DEDUCTIONS END OF
DESCRIPTION OF PERIOD EXPENSES(1) (WRITE-OFFS) PERIOD
----------- ---------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts
Year ended:
December 31, 1995................................ $139 $955 $632 $462
==== ==== ==== ====
December 31, 1996................................ $462 $206 $58_ $610
==== ==== ==== ====
December 31, 1997................................ $610 $350 $492 $468
==== ==== ==== ====
</TABLE>
- ---------------
(1) For the year ended December 31, 1995, $380 was expensed to restructuring and
unusual charges.
36
<PAGE> 39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Menlo
Park, State of California, on this 24th day of March, 1998.
PHARMCHEM LABORATORIES, INC.
BY: /s/ JOSEPH W. HALLIGAN
------------------------------------
Joseph W. Halligan
President, Chief Executive Officer and
Director
POWER OF ATTORNEY
KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Joseph W. Halligan, acting individually,
as such person's true and lawful attorney-in-fact and agent, with full power of
substitution, for such person, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this report on Form 10-K,
and to file with same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in connection
therewith, as fully to all intents and purposes as such person might or could do
in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report on Form 10-K has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ------------------------------ --------------
<S> <C> <C>
/s/ JOSEPH W. HALLIGAN President, Chief Executive March 24, 1998
--------------------------------------------- Officer and Director
Joseph W. Halligan (Principal Executive Officer)
/s/ DAVID A. LATTANZIO Chief Financial Officer, Vice March 24, 1998
--------------------------------------------- President, Finance and
David A. Lattanzio Administration (Principal
Accounting and Financial
Officer) and Secretary
/s/ RICHARD D. IRWIN Chairman of the Board and March 24, 1998
--------------------------------------------- Director
Richard D. Irwin
/s/ THOMAS S. VOLPE Director March 24, 1998
---------------------------------------------
Thomas S. Volpe
</TABLE>
37
<PAGE> 40
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF DOCUMENT PAGE
------- ----------------------- ------------
<S> <C> <C>
3.01(1) Amended and Restated Articles of Incorporation dated
August 21, 1991...........................................
3.02(2) Bylaws, as amended May 19, 1992...........................
4.01(1) Restated Modification Agreement dated August 14, 1989.....
10.01(1) 1988 Incentive Stock Plan, as amended.....................
10.02(6) Form of Stock Option Agreement............................
10.03(1) Form of Stock Option Agreement (providing for accelerated
vesting upon death or disability).........................
10.04(6) Form of Stock Option Agreement (January 1, 1995)..........
10.05(1) Form of Stock Purchase Agreement..........................
10.06(4) 1992 Director Option Plan.................................
10.07(4) Form of Director Option Agreement.........................
10.08(9) Amendment to 1992 Director Option Plan dated February 28,
1996......................................................
10.09(9) Amendment to 1992 Director Option Plan dated March 4,
1997......................................................
10.10(11) 1997 Equity Incentive Plan................................
10.11(11) Form of Stock Option Agreement (Nonstatutory Stock Option)
in connection with the 1997 Equity Incentive Plan.........
10.12(11) Stock Option Agreement (Incentive Stock Option) in
connection with the 1997 Equity Incentive Plan.
10.13(1) 401(k) Plan...............................................
10.14(9) Amendment to 401(k) Plan dated August 25, 1996............
10.15(1) Lease Agreements for the Company's offices in Menlo Park,
California dated October 21, 1988 and September 11, 1990,
respectively..............................................
10.16(8) Lease Amendment for the Company's offices in Menlo Park,
California dated November 30, 1995........................
10.17(9) Lease Amendment for the Company's offices in Menlo Park,
California dated March 6, 1996............................
10.18(5) Harbour Quay (London) Lease Documents.....................
10.19(9) Lease Agreement for the Company's offices in Fort Worth,
Texas dated October 24, 1991..............................
10.20(9) Lease Amendment for the Company's offices in Fort Worth,
Texas dated December 8, 1992..............................
10.21(9) Lease Amendment for the Company's offices in Fort Worth,
Texas dated February 9, 1996..............................
10.22(1) Form of Indemnification Agreement.........................
10.23 Loan and Security Agreement between Comerica Bank of
California and PharmChem Laboratories, Inc. dated December
5, 1997...................................................
10.24 Security Agreement (all assets) between Comerica Bank of
California and PharmChem Laboratories, Inc. dated December
5, 1997...................................................
</TABLE>
<PAGE> 41
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF DOCUMENT PAGE
------- ----------------------- ------------
<S> <C> <C>
10.25(4,12) License and Supply Agreement with Sudormed, Inc. dated
March 10, 1992............................................
10.26(5,12) License and Supply Agreement with Sudormed, Inc. dated
October 25, 1993..........................................
10.27(5,12) Supply Agreement with SolarCare Technologies Corporation
dated August 1, 1993......................................
10.28(8,12) First Amendment to Supply Agreement dated December 1,
1995......................................................
10.29(4,12) Probation Division of the Administration Office of The
U.S. Courts Contract dated October 1, 1992................
10.30(5,12) Sears Merchandise Group Service Agreement dated September
22, 1992..................................................
10.31(11) Master Lease Purchase Agreement dated December 18, 1995
with Fidelity Leasing Corporation and Lease Purchase
Addenda in connection therewith...........................
10.32(11) Master Equipment Lease dated March 17, 1996 with Olympus
Commercial Credit.........................................
16.01(10) Letter dated April 8, 1997 from Arthur Andersen LLP to the
Commission................................................
21.01 List of Subsidiaries......................................
23.01 Consent of KPMG Peat Marwick LLP..........................
23.02 Consent of Arthur Andersen LLP............................
27.1 Financial Data Schedule...................................
</TABLE>
- ---------------
(1) Incorporated by reference from the Company's Registration Statement on Form
S-1 (File No. 33-41363), effective August 8, 1991.
(2) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1991.
(3) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1992.
(4) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1992.
(5) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1993.
(6) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994.
(7) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 1995.
(8) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995.
(9) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996.
(10) Incorporated by reference from the Company's Current Report on Form 8-K
dated April 7, 1997.
(11) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1997.
(12) Confidential treatment requested as to certain portions of this exhibit.
<PAGE> 1
[COMERICA LOGO] EXHIBIT 10.23
LOAN & SECURITY AGREEMENT
(ACCOUNTS AND INVENTORY)
<TABLE>
<CAPTION>
OBLIGOR# NOTE # AGREEMENT DATE
<S> <C> <C>
November 18, 1997
CREDIT LIMIT INTEREST RATE B+1.00% OFFICER NO./INITIALS
$6,000,000 9.50% 48201 James Weber
</TABLE>
THIS AGREEMENT is entered into on November 18, 1997 , between COMERICA
BANK-CALIFORNIA ("Bank") as secured party, whose Headquarter Office is 333 WEST
SANTA CLARA STREET, SAN JOSE, CA, and PHARMCHEM LABORATORIES, INC. ("Borrower"),
a CALIFORNIA CORPORATION whose sole place of business (if it has only one),
chief executive office (if it has more than one place of business) or residence
(if an individual) is located at 1505A O'BRIEN DRIVE, MENLO PARK, CA. The
parties agree as follows:
1. DEFINITIONS
1.1 "Agreement" as used in this Agreement means and includes this Loan &
Security Agreement (Accounts and Inventory), any concurrent or subsequent rider
to this Loan and Security Agreement (Accounts and Inventory) and any extensions,
supplements, amendments or modifications to this Loan and Security Agreement
(Accounts and Inventory) and to any such rider.
1.2 "Bank Expenses" as used in this Agreement means and includes: all costs
or expenses required to be paid by Borrower under this Agreement which are paid
or advanced by Bank; taxes and insurance premiums of every nature and kind of
Borrower paid by Bank; filing, recording, publication and search fees, appraiser
fees, auditor fees and costs, and title insurance premiums paid or incurred by
Bank in connection with Bank's transactions with Borrower, costs and expenses
incurred by Bank in collecting the Receivables (with or without suit) to correct
any default or enforce any provision of this Agreement, or in gaining possession
of, maintaining, handling, preserving, storing, shipping, selling, disposing of,
preparing for sale and/or advertising to sell the Collateral, whether or not a
sale is consummated; costs and expenses of suit incurred by Bank in enforcing or
defending this Agreement or any portion hereof, including, but not limited to,
expenses incurred by Bank in attempting to obtain relief from any stay,
restraining order, injunction or similar process which prohibits Bank from
exercising any of its rights or remedies; and attorneys' fees and expenses
incurred by Bank in advising, structuring, drafting, reviewing, amending,
terminating, enforcing, defending or concerning this Agreement, or any portion
hereof or any agreement related hereto, whether or not suit in brought. Bank
Expenses shall include Bank's in-house legal charges at reasonable rates.
1.3 "Base Rate" as used in this Agreement means that variable rate of
interest so announced by Bank at its headquarters office in San Jose, California
as its "Base Rate" from time to time and which serves as the basis upon which
effective rates of interest are calculated for those loans making reference
thereto.
1.4 "Borrower's Books" as used in this Agreement means and includes all of
the Borrower's books and records including but not limited to: minute books;
ledgers; records indicating, summarizing or evidencing Borrower's assets,
liabilities, Receivables, business operations or financial condition, and all
information relating thereto, computer programs; computer disk or tape files;
computer printouts; computer runs; and other computer prepared information and
equipment of any kind.
1.5 "Borrowing Base" as used in this Agreement means the sum of: (1) EIGHTY
FIVE percent (85.00%) of the net amount of Eligible Accounts after deducting
therefrom all payments, adjustments and credits applicable thereto (Accounts
Receivable Borrowing Base; and (2) the amount, if any, of the advances against
inventory agreed to be made pursuant to any Inventory Rider (Inventory Borrowing
Base, or other rider, amendment or modification to this Agreement, that may now
or hereafter be entered into by Bank and Borrower.
1.6 "Cash Flow" as used in this Agreement means for any applicable period of
determination, the Net Income (after deduction for income taxes and other taxes
of such person determined by reference to income or profits of such person) for
such period, plus, to the extent deducted in computation of such Net Income, the
amount of depreciation and amortization expense and the amount of deferred tax
liability during such period, all as determined in accordance with GAAP. The
applicable period of determination will be N/A, beginning with the period from
________________ to _______________.
1.7 "Collateral" as used in this Agreement means and includes each and all of
the following: the Receivables; the intangibles; the negotiable collateral, the
inventory, all money, deposit accounts and all other assets of Borrower in which
Bank receives a security interest or which hereafter come into the possession,
custody or control of Bank; and the proceeds of any of the foregoing, including,
but not limited to, proceeds of insurance covering the collateral and any and
all Receivables, intangibles, negotiable collateral, inventory, equipment,
money, deposit accounts of other tangible and intangible property of borrower
resulting from the sale or other disposition of the collateral, and the proceeds
thereof. Notwithstanding anything to the contrary contained herein, collateral
shall not include any waste or other materials which have been or may be
designated as toxic or hazardous by Bank.
<PAGE> 2
1.8 "Credit" as used in this Agreement means all Obligations, except those
obligations arising pursuant to any other separate contract, instrument, note,
or other separate agreement which, by its terms, provides for a specified
interest rate and term.
1.9 "Current Assets" as used in this Agreement means, as of any applicable
date of determination, all cash, nonaffiliated customer receivables, United
States government securities, claims against the United States government, and
inventories.
1.10 "Current Liabilities" as used in this Agreement means, as of any
applicable date of determination, i) all liabilities of a person that should be
classified as current in accordance with GAAP, including without limitation any
portion of the principal of the indebtedness classified as current, plus (ii) to
the extent not otherwise included, all liabilities of the Borrower to any of its
affiliates whether or not classified as current in accordance with GAAP.
1.11 "Daily Balance" as used in this Agreement means the amount determined by
taking the amount of the Credit owed at the beginning of a given day, adding any
now Credit advanced or incurred on such date, and subtracting any payments or
collections which are deemed to be paid and are applied by Bank in reduction of
the Credit on that date under the provisions of this Agreement.
1.12 "Eligible Accounts" as used in this Agreement means and includes those
accounts of Borrower which are due and payable within THIRTY (30) days, or
less, from the date of invoice, have been validly assigned to Bank and strictly
comply with all of Borrower's warranties and representations to Bank; but
Eligible Accounts shall not include the following: (a) accounts with respect to
which the account debtor is an officer, employee, partner, joint venturer or
agent of Borrower; (b) accounts with respect to which goods are placed on
consignment, guaranteed sale or other terms by reason of which the payment by
the account debtor may be conditional; c) accounts with respect to which the
account debtor is not a resident of the United States which are not covered by
specific Assignments of Receivables; (d) accounts with respect to which the
account debtor is the United States or any department, agency or instrumentality
of the United States;(e) <omitted> (f) accounts with respect to which the
account debtor is any State of the United States or any city, county, town,
municipality or division thereof, (g) accounts with respect to which the account
debtor is a subsidiary of, related to, affiliated or has common shareholders,
officers or directors with Borrower, (h) accounts with respect to which Borrower
is or may become liable to the account debtor for goods sold or services
rendered by the account debtor to Borrower, (i) accounts not paid by an account
debtor within ninety (90) days from the date of the invoice; (i) accounts with
respect to which account debtors dispute liability or make any claim, or have
any defense, crossclaim, counterclaim, or offset; j) accounts with respect to
which any Insolvency Proceeding is filed by or against the account debtor, or if
an account debtor becomes insolvent, falls or goes out of business; and (k)
accounts owed by any single account debtor which exceed twenty percent (20%) of
all of the Eligible Accounts with 25% concentration allowance for federal
government U.S. Courts; and (l) accounts with a particular account debtor on
which over twenty-five percent (25%) of the aggregate amount owing is greater
than ninety (90) days from the date of the invoice.
1.13 "Event of Default" as used in this Agreement means those events
described in Section 7 contained herein below.
1.14 "Fixed Charges" as used in this Agreement means and includes for any
applicable period of determination, the sum, without duplication, of (a) all
interest paid or payable during such period by a person on debt of such person,
plus (b) all payments of principal or other sums paid or payable during such
period by such person with respect to debt of such person having a final
maturity more than one year from the date of creation of such debt, plus (c) all
debt discount and expense amortized or required to be amortized during such
period by such person, plus (d) the maximum amount of all rents and other
payments paid or required to be paid by such person during such period under any
lease or other contract or arrangement providing for use of real or personal
property in respect of which such person is obligated as a lessee, use or
obligor, plus (e) all dividends and other distributions paid or payable by such
person or otherwise accumulating during such period on any capital stock of such
person, plus (f) all loans or other advances made by such person during such
period to any Affiliate of such person. The applicable period of determination
will be N/A , beginning with the period from ________ to _______________.
1.15 "GAAP" as used in this Agreement means as of any applicable period,
generally accepted accounting principles effect during each period.
1.16 "Insolvency Proceeding" as used in this Agreement means and includes any
proceeding or case commenced by or against the Borrower, or any guarantor of
Borrower's Obligations, or any of Borrower's account debtors, under any
provisions of the Bankruptcy Code, as amended, or any other bankruptcy or
insolvency law, including but not limited to assignment for the benefit of
creditors, formal or informal moratoriums, composition or extensions with some
or all creditors, any proceeding seeking a reorganization, arrangement or any
other relief under the Bankruptcy code, as amended, or any other Bankruptcy or
insolvency law.
1.17 "Intangibles" as used in this Agreement means and includes all of
Borrower's present and future general intangibles and other personal property
(including, without limitation, any and all rights in any legal proceedings,
goodwill, patents, trade names, copyrights, trademarks, blueprints, drawings,
purchase orders, computer programs, computer disks, computer tapes, literature,
reports, catalogs and deposit accounts) other than goods and Receivables, as
well as Borrower's Books relating to any of the foregoing.
<PAGE> 3
1.18 "Inventory" as used in this Agreement means and includes all present and
future inventory in which Borrower has any interest, including, but not limited
to, goods held by Borrower for sale or lease or to be furnished under a contract
of service and all of Borrower's present and future raw materials, work in
process, finished goods, advertising materials, and packing and shipping
materials, wherever located and any documents of title representing any of the
above, and any equipment, fixtures or other property used in the storing,
moving, preserving, identifying, accounting for and shipping or preparing for
the shipping of inventory, and any and all other items hereafter acquired by
Borrower by way of substitution, replacement, return, repossession or otherwise,
and all additions and accessions thereto, and the resulting product or mass, and
any documents of title respecting any of the above.
1.19 "Net Income" as used in this agreement means the net income (or loss) of
a person for any period determined in accordance with GAAP but excluding in any
event:
(a) any gains or losses on the sale or other disposition, not in the
ordinary course of business, of investments or fixed or capital assets,
and any taxes on the excluded gains and any tax deductions or credits
on account on any excluded losses; and
(b) in the case of the Borrower, net earnings of any Person in which
Borrower has an ownership interest, unless such not earnings shall have
actually been received by Borrower in the form of cash distributions.
1.20 "Judicial Officer or Assignee" as used in this Agreement means and
includes any trustee, receiver, controller, custodian, assignee for the benefit
of creditors or any other person or entity having powers or duties like or
similar to the powers and duties of trustee, receiver, controller, custodian or
assignee for the benefit of creditors.
1.21 "Obligations" as used in this Agreement means and includes any and all
loans, advances, overdrafts, debts, liabilities (including, without limitation,
any and all amounts charged to Borrower's account pursuant to any agreement
authorizing Bank to charge Borrower's account), obligations, lease payments,
guaranties, covenants and duties owing by Borrower to Bank of any kind and
description whether advanced pursuant to or evidenced by this Agreement; by any
note or other instrument; or by any other agreement between Bank and Borrower
and whether or not for the payment of money, whether direct or indirect,
absolute or contingent, due or to become due, now existing or hereafter arising,
and including, without limitation, any debt, liability or obligation owing from
Borrower to others which Bank may have obtained by assignment, participation,
purchase or otherwise, and further including, without limitation, all interest
not paid when due and all Bank Expenses which Borrower is required to pay or
reimburse by this Agreement, by law, or otherwise.
1.22 "Person" or "person" as used in this Agreement means and includes any
individual, corporation, partnership, joint venture, association, trust,
unincorporated association, joint stock company, government, municipality,
political subdivision or agency or other entity.
1.23 "Receivables" as used in this Agreement means and includes all presently
existing and hereafter arising accounts, instruments, documents, chattel paper,
general intangibles, all other forms of obligations owing to Borrower, all of
Borrower's rights in, to and under all purchase orders heretofore or hereafter
received, all moneys due to Borrower under all contracts or agreements (whether
or not yet earned or due), all merchandise returned to or reclaimed by Borrower
and the Borrower's books (except minute books) relating to any of the foregoing.
1.24 "Subordinated Debt" as used in this Agreement means indebtedness of the
Borrower to third parties which has been subordinated to the Obligations
pursuant to a subordination agreement in form and content satisfactory to the
Bank.
1.25 "Subordination Agreement" as used in this Agreement a subordination
agreement in form satisfactory to Bank making all present and future
indebtedness of the Borrower to n/a subordinate to the Obligations.
1.26 Tangible Effective Not Worth" as used in this Agreement means net worth
as determined in accordance with GAAP consistently applied, increased by
subordinated debt if any, and decreased by the following: patents, licenses,
goodwill, subscription lists, organization expenses, trade receivables converted
to notes in excess of $100,000, and money due from affiliates (including
officers, directors, subsidiaries and commonly hold companies).
1.27 Tangible Net Worth" as used in this Agreement means, as of any
applicable date of determination, the excess of:
a. The net book value of all assets of a person (other than patents,
patent rights, trademarks, trade names, franchises, copyrights, licenses,
goodwill, and similar intangible assets) after all appropriate deductions in
accordance with GAAP (including, without limitation, reserves for doubtful
receivables, obsolescence, depreciation and amortization), over
b. All total liabilities of such person.
1.28 "Total Liabilities" as used in this Agreement means the total of all
items of indebtedness, obligation or liability which, in accordance with GAAP
consistently applied, would be included in determining the total liabilities of
the Borrower as of the date Total Liabilities is to determined, including
without limitation (a) all obligations secured by any mortgage, pledge, security
interest or other lien on property owned or acquired, whether or not the
obligations secured thereby shall have been assumed; (b) all obligations which
are capitalized lease obligations; and (c) all guaranties, endorsements or other
contingent or surety obligations with respect to the indebtedness of others,
whether
<PAGE> 4
or not reflected on the balance sheets of the Borrower, including any obligation
to furnish funds, directly or indirectly through the purchase of goods,
supplies, services, or by way of stock purchase, capital contribution, advance
or loan or any obligation to enter into a contract for any of the foregoing.
1.29 "Working Capital" as used in this Agreement means, as of any applicable
date of determination, Current Assets less Current Liabilities.
1.30 Any and all terms used in this Agreement shall be construed and defined
in accordance with the meaning and definition of such terms under and pursuant
to the California Uniform Commercial Code (hereinafter referred to as the "Code"
as amended.
2. LOAN AND TERMS OF PAYMENT
For value received, Borrower promises to pay to the order of Bank such amount,
as provided for below, together with interest, as provided for below.
2.1 Upon the request of Borrower, made at any time and from time to time
during the term hereof, and so long as no Event of Default has occurred, Bank
shall lend to Borrower an amount up to the Borrowing Base; provided, however,
that in no event shall Bank be obligated to make advances to Borrower under this
Section 2.1 whenever the Daily Balance exceeds, at any time, either the
Borrowing Base or the SUM Of Six Million and No/100 ($6,000,000), such amount
being referred to herein as " Overadvance".
2.2 Except as hereinbelow provided, the Credit shall bear interest, on the
Daily Balance owing, at a rate one and no/100 (1.000%) percentage points per
annum above the Base Rate (the "Rate"). The Credit shall bear interest, from and
after the occurrence of an Event of Default and without constituting a waiver of
any such Event of Default, on the Daily Balance owing, at a rate three (3)
percentage points per annum above the Rate. All interest chargeable under this
Agreement that is based upon a per annum calculation shall be computed on the
basis of a three hundred sixty (360) day year for actual days elapsed.
The Base Rate as of the date of this Agreement is Eight and 500/1000 (8.500%)
per annum. In the event that the Base Rate announced is, from time to time
hereafter, changed, adjustment in the Rate shall be made and based on the Base
Rate in effect on the date of such change. The Rate, as adjusted, shall apply to
the Credit until the Base Rate is adjusted again. The minimum interest payable
by the Borrower under this Agreement shall in no event be less than N/A per
month. All interest payable by Borrower under the Credit shall be due and
payable on the first day of each calendar month during the term of this
Agreement and Bank may, at its option, elect to treat such interest and any and
all Bank Expenses as advances under the Credit, which amounts shall thereupon
constitute Obligations and shall thereafter accrue interest at the rate
applicable to the Credit under the terms of the Agreement.
2.3 Without affecting Borrower's obligation to repay immediately any
Overadvance in accordance with Section 2.1 hereof, all Overadvances shall bear
additional interest on the amount thereof at a rate equal to N/A (N/A%)
percentage points per month in excess of the interest rate set forth in Section
2.2, from the date incurred and for each month thereafter, until repaid in full.
3. TERM
3.1 This Agreement shall remain in full force and effect until terminated by
notice, by either party. Notice of such termination shall be effectuated by
mailing of a registered or certified letter not less than thirty (30) days prior
to the effective data of such termination, addressed to the other party at the
address set forth herein and the termination shall be effective as of the date
so fixed in such notice. Notwithstanding the foregoing, should Borrower be in
default of one or more of the provisions of this Agreement, Bank may terminate
this Agreement at any time without notice. Notwithstanding the foregoing, should
either Bank or Borrower become insolvent or unable to meet its debts as they
mature, or fail, suspend, or go out of business, the other party shall have the
right to terminate this Agreement at any time without notice. On the date of
termination all Obligations shall become immediately due and payable without
notice or demand; no notice of termination by Borrower shall be effective until
Borrower shall have paid all Obligations to Bank in full. Notwithstanding
termination, until all Obligations have been fully satisfied, Bank shall retain
its security interest in all existing Collateral and Collateral arising
thereafter, and Borrower shall continue to perform all of its Obligations.
3.2 After termination and when Bank has received payment in full of
Borrower's Obligations to Bank, Bank shall reassign to Borrower all Collateral
held by Bank, and shall execute a termination of all security agreements and
security interests given by Borrower to Bank, upon the execution and delivery of
mutual general releases.
4. CREATION OF SECURITY INTEREST
4.1 Borrower hereby grants to Bank a continuing security interest in all
presently existing and hereafter arising Collateral in order to secure prompt
repayment of any and all Obligations owed by Borrower to Bank and in order to
secure prompt performance by Borrower of each and all of its covenants and
Obligations under this Agreement and otherwise created. Bank's security interest
in the Collateral shall attach to all Collateral without further act on the part
of Bank or Borrower. In the event that any Collateral, including proceeds, is
evidenced by or consists of a letter of credit,
<PAGE> 5
advice of credit, instrument, money, negotiable documents, chattel paper or
similar property (collectively, 'Negotiable Collateral"), Borrower shall,
immediately upon receipt thereof, endorse and assign such Negotiable Collateral
over to Bank and deliver actual physical possession of the Negotiable Collateral
to Bank.
4.2 Bank's security interest in Receivables shall attach to all Receivables
without further act on the part of Bank or Borrower. Upon request from Bank,
Borrower shall provide Bank with schedules describing all Receivables created or
acquired by Borrower (including without limitation agings listing the names and
addresses of, and amounts owing by date by account debtors), and shall execute
and deliver written assignments of all Receivables to Bank all in a form
acceptable to Bank, provided, however, Borrower's failure to execute and deliver
such schedules and/or assignments shall not affect or limit Bank's security
interest and other rights in and to the Receivables. Together with each
schedule, Borrower shall furnish Bank with copies of Borrower's customers,
invoices or the equivalent, and original shipping or delivery receipts for all
merchandise sold, and Borrower warrants the genuineness thereof. Bank or Bank's
designee may notify customers or account debtors of collection costs and
expenses to Borrower's account but, unless and until Bank does so or gives
Borrower other written instructions, Borrower shall collect all Receivables for
Bank, receive in trust all payments thereon as Bank's trustee, and, if so
requested to do so from Bank, Borrower shall immediately deliver said payments
to Bank in their original form as received from the account debtor and all
letters of credit, advices of credit, instruments, documents, chattel paper or
any similar property evidencing or constituting Collateral. Notwithstanding
anything to the contrary contained herein, if sales of inventory are made for
cash, Borrower shall immediately deliver to Bank, in identical form, all such
cash, checks, or other forms of payment which Borrower receives. The receipt of
any check or other item of payment by Bank shall not be considered a payment on
account until such check or other item of payment is honored when presented for
payment, in which event, said check or other item of payment shall be deemed to
have been paid to Bank two (2) calendar days after the date Bank actually
receives such check or other item of payment.
4.3 Bank's security interest in inventory shall attach to all inventory
without further act on the part of Bank or Borrower. Upon Bank's request
Borrower will from time to time at Borrower's expense pledge, assemble and
deliver such inventory to Bank or to a third party as Bank's bailee; or hold the
same in trust for Bank's account or store the same in a warehouse in Bank's
name; or deliver to Bank documents of title representing said inventory; or
evidence of Bank's security interest in some other manner acceptable to Bank.
Until a default by Borrower under this Agreement or any other Agreement between
Borrower and Bank, Borrower may, subject to the provisions hereof and consistent
herewith, sell the inventory, but only in the ordinary course of Borrower's
business. A sale of inventory in Borrower's ordinary course of business does not
include an exchange or a transfer in partial or total satisfaction of a debt
owing by Borrower.
4.4 Borrower shall execute and deliver to Bank concurrently with Borrower's
execution of this Agreement, and at any time or times hereafter at the request
of Bank, all financing statements, continuation financing statements, security
agreements, mortgages, assignments, certificates of title, affidavits, reports,
notices, schedules of accounts, letters of authority and all other documents
that Bank may request, in form satisfactory to Bank, to perfect and maintain
perfected Bank's security interest in the Collateral and in order to fully
consummate all of the transactions contemplated under this Agreement. Borrower
hereby irrevocably makes, constitutes and appoints Bank (and any of Bank's
officers, employees or agents designated by Bank) as Borrowers true and lawful
attorney-in-fact with power to sign the name of Borrower on any financing
statements, continuation financing statements, security agreement, mortgage,
assignment, certificate of title, affidavit, letter of authority, notice of
other similar documents which must be executed and/or filed in order to perfect
or continue perfected Bank's security interest in the Collateral.
Borrower shall make appropriate entries in Borrowers Books disclosing Bank's
security interest in the Receivables. Bank (through any of its officers,
employees or agents) shall have the right at any time or times hereafter during
Borrower's usual business hours, or during the usual business hours of any third
party having control over the records of Borrower, to inspect and verify
Borrower's Books in order to verify the amount or condition of, or any other
matter, relating to, said Collateral and Borrower's financial condition.
4.5 Borrower appoints Bank or any other person whom Bank may designate as
Borrower's attorney-in-fact,, with power to endorse Borrower's name on any
checks, notes, acceptances, money order, drafts or other forms of payment or
security that may come into Bank's possession; to sign Borrowers name on any
invoice or bill of lading relating to any Receivables, on drafts against account
debtors, on schedules and assignments of Receivables, on verifications of
Receivables and on notices to account debtors; to establish a lock box
arrangement and/or to notify the post office authorities to change the address
for delivery of Borrower's mail addressed to Borrower to an address designated
by Bank, to receive and open all mail addressed to Borrower, and to retain all
mail relating to the Collateral and forward all other mail to Borrower; to send,
whether in writing or by telephone, requests for verification of Receivables;
and to do all things necessary to carry out this Agreement. Borrower ratifies
and approves all acts of the attorney-in-fact. Neither Bank nor its
attorney-in-fact will be liable for any acts or omissions or for any error of
judgement or mistake of fact or law. This power being coupled with an interest,
is irrevocable so long as any Receivables in which Bank has a security interest
remain unpaid and until the Obligations have been fully satisfied.
4.6 In order to protect or perfect any security interest which Bank is
granted hereunder, Bank may, in its sole discretion, discharge any lien or
encumbrance or bond the same, pay any insurance, maintain guards, warehousemen
or any personnel to protect the Collateral, pay any service bureau, or, obtain
any records, and all costs for the same shall be added to the Obligations and
shall be payable on demand.
4.7 Borrower agrees that Bank may provide information relating to this
Agreement or relating to Borrower to Bank's parent, affiliates, subsidiaries and
service providers.
<PAGE> 6
5. CONDITIONS PRECEDENT
5.1 Conditions precedent to the making of the loans and the extension of the
financial accommodations hereunder, Borrower shall execute, or cause to be
executed, and deliver to Bank, in form and substance satisfactory to Bank and
its counsel, the following:
a. This Agreement and other documents required by Bank;
b. Financing statements (Form UCC-1 ) in form satisfactory to Bank for
filing and recording with the appropriate governmental authorities;
c. If Borrower is a corporation, then certified extracts from the minutes
of the meeting of its board of directors, authorizing the borrowings and the
granting of the security interest provided for herein and authorizing specific
officers to execute and deliver the agreements provided for herein;
d. If Borrower is a corporation, then a certificate of good standing
showing that Borrower is in good standing under the laws of the state of its
incorporation and certificates indicating that Borrower is qualified to transact
business and is in good standing in any other state in which it conducts
business;
e. If Borrower is a partnership, then a copy of Borrower's partnership
agreement certified by each general partner of Borrower;
f. UCC searches, tax lien and litigation searches, fictitious business
statement filings, insurance certificates, notices or other similar documents
which Bank may require and in such form as Bank may require, in order to
reflect, perfect or protect Bank's first priority security interest in the
Collateral and in order to fully consummate all of the transactions contemplated
under this Agreement;
g. Evidence that Borrower has obtained insurance and acceptable
endorsements;
h. Waivers executed by landlords and mortgagees of any real property on
which any Collateral is located; and
l. Warranties and representations of officers.
6. WARRANTIES, REPRESENTATIONS AND COVENANTS,
6.1 If so requested by Bank, Borrower shall, at such intervals designated by
Bank, during the term hereof execute and deliver a Report of Accounts Receivable
or similar report, in form customarily used by Bank. Borrower's Borrowing Base
at all times pertinent hereto shall not be less than the advances made
hereunder. Bank shall have the right to recompute Borrower's Borrowing Base in
conformity with this Agreement.
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 ( 90 ) days from the date of invoice,
or an account debtor disputes liability or 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, falls or goes out of business, than 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. Any
merchandise which is returned by an account debtor or otherwise recovered shall
be set aside, marked with Bank's name, and Bank shall retain a security interest
therein. Borrower shall promptly notify Bank of all disputes and claims and
settle or adjust them on terms approved by Bank. 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.
6.3 Borrower warrants, represents, covenants and agrees that:
a. Borrower has good and marketable title to the Collateral. Bank has and
shall continue to have a first priority perfected security interest in and to
the Collateral. The Collateral shall at all times remain free and clear of all
liens, encumbrances and security interests (except those in favor of Bank).
b. All accounts are and will, at all times pertinent hereto, be bona fide
existing Obligations created by the sale and delivery of merchandise or the
rendition of services to account debtors in the ordinary course of business,
free of liens, claims, encumbrances and security interests (except as held by
Bank and except as may be consented to, in writing, by Bank) and are
unconditionally owed to Borrower without defenses, disputes, offsets,
counterclaims, rights of return or cancellation, and Borrower shall have
received no notice of actual or imminent bankruptcy or insolvency of any account
debtor at the time an account due from such account debtor is assigned to Bank.
<PAGE> 7
c. At the time each account is assigned to Bank, all property giving rise
to such account shall have been delivered to the account debtor or to the agent
for the account debtor for immediate shipment to, and unconditional acceptance
by, the account debtor. Borrower shall deliver to Bank, as Bank may from time to
time require, delivery receipts, customer's purchase orders, shipping
instructions, bills of lading and any other evidence of shipping arrangements.
Absent such a request by Bank, copies of all such documentation shall be held by
Borrower as custodian for Bank.
6.4 At the time each eligible account is assigned to Bank, all such eligible
accounts will be due and payable on terms set forth in Section 1.7, or on such
other terms approved in writing by Bank in advance of the creation of such
accounts and which are expressly set forth on the face of all invoices, copies
of which shall be held by Borrower as custodian for Bank. and no such eligible
account will then be past due.
6.5 Borrower shall keep the inventory only at the following locations _______
________________and the owner or mortgages of the respective locations are:
_______________.
a. Borrower, immediately upon demand by Bank therefor, shall now and from
time to time hereafter, at such intervals as are requested by Bank, deliver to
Bank, designations of inventory specifying Borrower's cost of inventory, the
wholesale market value thereof and such other matters and information relating
to the inventory as Bank may request;
b. Borrower's inventory, valued at the lower of Borrower's cost or the
wholesale market value thereof, at all times pertinent hereto shall not be less
than N/A Dollars ($ N/A) which no less than N/A Dollars ($ N/A) shall be in raw
materials and finished goods;
c. All of the inventory is and shall remain free from all purchase money
or other security interests, liens or encumbrances, except as held by Bank;
d. Borrower does now keep and hereafter at all times shall keep correct
and accurate records itemizing and describing the kind, type, quality and
quantity of the inventory, its cost therefor and selling price thereof, and the
daily withdrawals therefrom and additions thereto, all of which records shall be
available upon demand to any of Bank's officers, agents and employees for
inspection and copying;
e. All inventory, now and hereafter at all times, shall be now inventory
of good and merchantable quality free from defects;
f. Inventory is not now and shall not at any time or times hereafter be
located or stored with a bailee, warehouseman or other third party without
Bank's prior written consent, and, in such event, Borrower will concurrently
therewith cause any such bailee, warehouseman or other third party to issue and
deliver to Bank in a form acceptable to Bank, warehouse receipts in Bank's name
evidencing the storage of inventory or other evidence of Bank's prior rights in
the inventory. In any event, Borrower shall instruct any third party to hold all
such inventory for Bank's account subject to Bank's security interests and its
instructions; and
g. Bank shall have the right upon demand now and/or at all times
hereafter, during Borrower's usual business hours, to inspect and examine the
inventory and to check and test the same as to quality, quantity, value and
condition and Borrower agrees to reimburse Bank for Bank's reasonable costs and
expenses in so doing.
6.6 Borrower represents, warrants and covenants with Bank that Borrower will
not, without Bank's prior written consent:
a. Grant a security interest in or permit a lien, claim or encumbrance
upon any of the Collateral to any person, association, firm, corporation, entity
or governmental agency or instrumentality;
b. Permit any levy, attachment or restraint to be made affecting any of
Borrower's assets;
c. Permit any judicial officer or assignee to be appointed or to take
possession of any or all of Borrower's assets;
d. Other than sales of inventory in the ordinary course of Borrower's
business, to sell, lease, or otherwise dispose of, move, or transfer, whether by
sale or otherwise, any of Borrower's assets.
e. Change its name, business structure, corporate identity or structure;
add any new fictitious names, liquidate, merge or consolidate with or into any
other business organization;
f. Move or relocate any Collateral;
g. Acquire any other business organization;
<PAGE> 8
h. Enter into any transaction not in the usual course of Borrower's
business;
l. Make any investment in securities of any person, association, firm,
entity, or corporation other than the securities of the United States of
America;
j. Make any change in Borrower's financial structure or in any of its
business objectives, purposes or operations which would adversely affect the
ability of Borrower to repay Borrower's Obligations;
k. Incur any debts outside the ordinary course of Borrower's business
except renewals or extensions of existing debts and interest thereon;
l. Make any advance or loan except in the ordinary course of Borrower's
business as currently conducted;
m. Make loans, advances or extensions of credit to any Person, except for
sales on open account and otherwise in the ordinary course of business;
n. Guarantee or otherwise, directly or indirectly, in any way be or
become responsible for obligations of any other person, whether by agreement to
purchase the indebtedness of any other Person, agreement for the furnishing of
funds to any other Person through the furnishing of goods, supplies or services,
by way of stock purchase, capital contribution, advance or loan, for the purpose
of paying or discharging (or causing the payment or discharge of) the
indebtedness of any other person, or otherwise, except for the endorsement of
negotiable instruments by the Borrower in the ordinary course of business for
deposit or collection except for Performance guarantees for Borrower's
wholly-owned subsidiary, Medscreen Limited.
o. (a) Sell, lease, transfer or otherwise dispose of properties and
assets having an aggregate book value of more than N/A Dollars ($N/A) (whether
in one transaction or in a series of transactions) except as to the sale of
inventory in the ordinary course of business; (b) change its name, consolidate
with or merge into any other corporation, permit another corporation to merge
into it, acquire all or substantially all the properties or assets of any other
Person, enter into any reorganization or recapitalization or reclassify its
capital stock, or (c) enter into any sale-leaseback transaction;
p. Purchase or hold beneficially any stock or other securities of, or
make any investment or acquire any interest whatsoever in, any other Person,
except for the common stock of the Subsidiaries owned by the Borrower on the
date of this Agreement and except for certificates of deposit with maturities of
one year or less of United States commercial banks with capital, surplus and
undivided profits in excess of One Hundred Million Dollars ($100,000,000) and
direct obligations of the United States Government maturing within one year from
the date of acquisition thereof;
q. Allow any fact, condition or event to occur or exist with respect to
any employee pension or profit sharing plans established or maintained by it
which might constitute grounds for termination of any such plan or for the court
appointment of a trustee to administer any such plan.
6.7 Borrower is not a merchant whose sales for resale of goods for personal,
family or household purposes exceeded seventy-five percent (75%) in dollar
volume of its total sales of all goods during the twelve (12) months preceding
the filing by Bank of a financing statement describing the Collateral. At no
time hereafter shall Borrower's sales for resale goods for personal, family or
household purposes exceed seventy-five percent (75%) in dollar volume of its
total sales.
6.8 Borrower's sole place of business or chief executive office or residence
is located at the address indicated above and Borrower covenants and agrees that
it will not, during the term of this Agreement, without prior written
notification to Bank, relocate said sole place of business or chief executive
office or residence.
6.9 If Borrower is a corporation, Borrower represents, warrants and covenants
as follows:
a. Borrower will not make any distribution or declare or pay any dividend
(in stock or in cash) to any shareholder or on any of its capital stock, of any
class, whether now or hereafter outstanding, or puchase, acquire, repurchase, or
redeem or retire any such capital stock,
b. Borrower is and shall at all times hereafter be a corporation duly
organized and existing in good standing under the laws of the state of its
incorporation and qualified and licensed to do business in California or any
other state in which in conducts it business;
<PAGE> 9
c. Borrower has the right and power and Is duly authorized to enter Into
this Agreement; and
d. The execution by Borrower of this Agreement shall not constitute a
breach of any provision contained in Borrower's articles of Incorporation or
by-laws.
6.10 The execution of and performance by Borrower of all of the terms and
provisions contained In this Agreement shall not result In a breach of or
constitute an event of default under any Agreement to which Borrower Is now or
hereafter becomes a party.
6.11 Borrower shall promptly notify Bank In writing of Its acquisition by
purchase, lease or otherwise of any after acquired property of the type included
In the Collateral, with the exception of purchases of Inventory In the ordinary
course of business.
6.12 All assessments and taxes, whether real, personal or otherwise, due or
payable by, or Imposed, levied or assessed against, Borrower or any of its
property have been paid, and shall hereafter be paid In full, before
delinquency. Borrower shall make due and timely payment or deposit of all
federal, state and local taxes, assessments or contributions required of It by
law, and will execute and deliver to Bank, on demand, appropriate certificates
attesting to the payment or deposit thereof. Borrower will make timely payment
or deposit of all F.I.C.A. payments and withholding taxes required of It by
applicable laws, and will upon request fumish Bank with proof satisfactory to it
that Borrower has made such payments or deposit. If Borrower falls to pay any
such assessment, tax, contribution, or make such deposit, or furnish the
required proof, Bank may, in Its sole and absolute discretion and without notice
to Borrower, (I) make payment of the same or any part thereof, or (ii) set up
such reserves in Borrower's account as Bank deems necessary to satisfy the
liability therefor, or both. Bank may conclusively rely on the usual statements
of the amount owing or other official statements Issued by the appropriate
governmental agency. Each amount so paid or deposited by Bank shall constitute a
Bank Expense and an additional advance to Borrower.
6.13 There are no material actions or proceedings pending by or against
Borrower or any guarantor of Borrower before any court or administrative agency
and Borrower has no knowledge of any pending, threatened or Imminent litigation,
governmental Investigations or claims, complaints, actions or prosecutions
Involving Borrower or any guarantor of Borrower, except as heretofore
specifically disclosed In writing to Bank. If any of the foregoing arise during
the term of the Agreement, Borrower shall Immediately notify Bank In writing.
6.14 a. Borrower, at Its expense, shall keep and maintain Its assets Insured
against loss or damage by fire, theft, explosion, sprinklers and all other
hazards and risks ordinarily insured against by other owners who use such
properties In similar businesses for the full Insurable value thereof. Borrower
shall also keep and maintain business interruption insurance and public
liability and property damage Insurance relating to Borrower's ownership and use
of the Collateral and Its other assets. All such policies of Insurance shall be
In such form, with such companies, and in such amounts as may be satisfactory to
Bank. Borrower shall deliver to Bank certified copies of such policies of
Insurance and evidence of the payments of all premiums therefor. All such
policies of Insurance (except those of public liability and property damage)
shall contain an endorsement in a form satisfactory to Bank showing Bank as a
loss payee thereof, with a waiver of warranties (Form 438-BFU), and all proceeds
payable thereunder shall be payable to Bank and, upon receipt by Bank, shall be
applied on account of the Obligations owing to Bank. To secure the payment of
the Obligations, Borrower grants Bank a security Interest In and to all such
policies of Insurance (except those of public liability and property damage) and
the proceeds thereof, and Borrower shall direct all insurers under such policies
of Insurance to pay all proceeds thereof directly to Bank.
b. Borrower hereby irrevocably appoints Bank (and any of Bank's
officers, employees or agents designated by Bank) as Borrower's attorney for the
purpose of making, selling and adjusting claims under such policies of
Insurance, endorsing the name of Borrower on any check, draft, instrument or
other Item of payment for the proceeds of such policies of Insurance and for
making all determinations and decisions with respect to such policies of
insurance. Borrower will not cancel any of such policies without Bank's prior
written consent. Each such Insurer shall agree by endorsement upon the policy or
policies of Insurance issued by It to Borrower as required above, or by
Independent Instruments furnished to Bank, that It will give Bank at least ten
(10) days written notice before any such policy or policies of insurance shall
be altered or cancelled, and that no act or default of Borrower, or any other
person, shall affect the right of Bank to recover under such policy or policies
of insurance required above or to pay any premium in whole or in part relating
thereto. Bank, without waiving or releasing any Obligations or any Event of
Default, may, but shall have no obligation to do so, obtain and maintain such
policies of insurance and pay such premiums and take any other action with
respect to such policies which Bank deems advisable. All sums so disbursed by
Bank, as well as reasonable attorneys' fees, court costs, expenses and other
charges relating thereto, shall constitute Bank Expenses and are payable on
demand.
<PAGE> 10
6.15 All financial statements and information relating to Borrower which have
been or may hereafter be delivered by Borrower to Bank are true and correct and
have been prepared in accordance with GAAP consistently applied and there has
been no material adverse change in the financial condition of Borrower since the
submission of such financial information to Bank.
6.16 a. Borrower at all times hereafter shall maintain a standard and modern
system of accounting in accordance with GAAP consistently applied with ledger
and account cards and/or computer tapes and computer disks, computer printouts
and computer records pertaining to the Collateral which contain information as
may from time to time be requested by Bank, not modify or change its method of
accounting or enter into, modify or terminate any agreement presently existing,
or at any time hereafter entered into with any third party accounting firm
and/or service bureau for the preparation and/or storage of Borrower's
accounting records without the written consent of Bank first obtained and
without said accounting firm and/or service bureau agreeing to provide
information regarding the Receivables and Inventory and Borrower's financial
condition to Bank; permit Bank and any of its employees, officers or agents,
upon demand, during Borrower's usual business hours, or the usual business hours
of third persons having control thereof, to have access to and examine all of
the Borrower's Books relating to the Collateral, Borrower's Obligations to Bank,
Borrower's financial condition and the results of Borrower's operations and in
connection therewith, permit Bank or any of its agents, employees or officers to
copy and make extracts therefrom.
b. Borrower shall deliver to Bank within forty five (45) days after the
end of each quarter , a company prepared (10Q) balance sheet and profit and loss
statement covering Borrower's operations and deliver to Bank within ninety (90)
days after the end of each of Borrower's fiscal years a(n) Audited FYE (10K)
statement of the financial condition of the Borrower for each such fiscal year,
including but not limited to, a balance sheet and profit and loss statement and
any other report requested by Bank relating to the Collateral and the financial
condition of Borrower, and a certificate signed by an authorized employee of
Borrower to the effect that all reports, statements, computer disk or tape
files, computer printouts, computer runs, or other computer prepared information
of any kind or nature relating to the foregoing or documents delivered, or
caused to be delivered to Bank under this subparagraph are complete, correct and
thoroughly present the financial condition of Borrower and that there exists on
the date of delivery to Bank no condition or event which constitutes a breach or
Event of Default under this Agreement.
c. In addition to the financial statements requested above, the Borrower
agrees to provide Bank with the following schedules:
<TABLE>
<S> <C> <C> <C> <C>
X Accounts Receivable Agings on a Monthly basis
- -------------- ------------------
X Accounts Payable Agings on a Monthly basis
- -------------- ------------------
Job Progress Reports on a basis
- -------------- ------------------
Borrowing Base Certificate on a Monthly basis
Sales Report on a Weekly Basis
</TABLE>
6.17 Borrower shall maintain the following financial ratios and covenants on
a consolidated and non-consolidated basis:
a. Borrower shall maintain Working Capital in an amount not less than
n/a
b. Tangible Effective Net Worth in an amount not less than $6,894,000 to
increase by 75% of quarterly net profit after taxes beginning January 1, 1998.
c. a ratio of Current Assets to Current Liabilities of 0.90:1.00
d. a quick ratio of cash plus securities plus Receivables to Current
Liabilities of n/a
e. a ratio of Total Liabilities (less debt subordinated to Bank) to
Tangible Not Worth of less than 2.00:1.00
f. Borrower shall maintain a flow coverage ratio of Cash Flow to Fixed
Charges of n/a
g. Borrower shall maintain a net income after taxes of not less than
n/a
h. Borrower shall not without Bank's prior written consent acquire or
expand for or commit itself to acquire or expand for fixed assets by lease,
purchase or otherwise in an aggregate amount that exceeds Two Million and No/100
Dollars ($2,000,000) in any fiscal year; and
i. Bank to allow Borrower to refinance $500,000.00 of equipment to
support working capital needs so loan as they are in compliance with Loan
Agreement not to occur prior to receipt of December 31, 1997 financial
statements showing compliance with loan covenants. Bank reserves the right to
concurrently reduce advance rate.
j. No down streaming of cash/loans to Medscreen in excess of $2,500,000
(at 12/3/97 exchange rates).
k. Pricing will decline to prime plus 0.5% with a quarterly fee of .25%
paid in arrears upon the occurrence of the following: quarterly profitability
and total liabilities/EFTNW below 1.20 to 1. This shall be measured at the end
of each quarter and the rate shall go into effect at the beginning of the next
quarter; Fee goes into effect at the end of the quarter where covenants met.
All financial covenants shall be computed in accordance with GAAP
consistently applied except as otherwise specifically set forth in this
Agreement. All monies due from affiliates (including officers, directors and
shareholders) shall be excluded from Borrower's assets
<PAGE> 11
for all purposes hereunder.
6.18 Borrower shall promptly supply Bank (and cause any guarantor to supply
Bank) with such other information (including tax returns) concerning its affair
(or that of any guarantor) as Bank may request from time to time hereafter,and
shall promptly notify Bank of any material adverse change in Borrower's
financial condition and of any condition or event which constitutes a breach of
or an event which constitutes an Event of Default under this Agreement.
6.19 Borrower is now and shall be at all times hereafter solvent and able to
pay its debts (including trade debts) as they mature.
6.20 Borrower shall immediately and without demand reimburse Bank for all
sums expanded by Bank in connection with any action brought by Bank to correct
any default or enforce any provision of this Agreement, including all Bank
Expenses; Borrower authorizes and approves all advances and payments by Bank for
items described in this Agreement as Bank Expenses.
6.21 Each warranty, representation and agreement contained in this Agreement
shall be automatically deemed repeated with each advance and shall be
conclusively presumed to have been relied on by Bank regardless of any
investigation made or information possessed by Bank. The warranties,
representations and agreements set forth herein shall be cumulative and in
addition to any and all other warranties, representations and agreements which
Borrower shall give, or cause to be given, to Bank, either now or hereafter.
6.22 Borrower shall keep all of its principal bank accounts with Bank and
shall notify the Bank immediately in writing of the existence of any other bank
account, deposit account, or any other account into which money can be
deposited.
6.23 Borrower shall furnish to the Bank: (a) as soon as possible, but in no
event later than thirty (30) days after Borrower knows or has reason to know
that any reportable event with respect to any deferred compensation plan has
occurred, a statement of the chief financial officer of Borrower setting forth
the details concerning such reportable event and the action which Borrower
proposes to take with respect thereto, together with a copy of the notice of
such reportable event given to the Pension Benefit Guaranty Corporation, if a
copy of such notice is available to Borrower, (b) promptly after the filing
thereof with the United States Secretary of Labor or the Pension Benefit
Guaranty Corporation, copies of each annual report with respect to each deferred
compensation plan; (c) promptly after receipt thereof, a copy of any notice
Borrower may receive from the Pension Benefit Guaranty Corporation or the
Internal Revenue Service with respect to any deferred compensation plan;
provided, however, this subparagraph shall not apply to notice of general
application issued by the Pension Benefit Guaranty Corporation or the Internal
Revenue Service; and (d) when the same is made available to participants in the
deferred compensation plan, all notices and other forms of information from time
to time disseminated to the participants by the administrator of the deferred
compensation plan.
6.24 Borrower is now and shall at all times hereafter remain in compliance
with all federal, state and municipal laws, regulations and ordinances relating
to the handling, treatment and disposal of toxic substances, wastes and
hazardous material and shall maintain all necessary authorizations and permits.
6.25 Borrower shall maintain insurance on the life of n/a in an amount
not to be less than No/100s Dollars ($ n/a ) under one or more policies issued
by insurance companies satisfactory to Bank, which policies shall be assigned to
Bank as security for the indebtedness and on which Bank shall be named as sole
beneficiary.
6.26 Borrower shall limit direct and indirect compensation paid to the
following employees: n/a to an aggregate of n/a Dollars ($ n/a ) per n/a .
7. EVENTS OF DEFAULT Any one or more of the following events shall constitute a
default by Borrower under this Agreement:
a. If Borrower falls or neglects to perform, keep or observe any term,
provision, condition, covenant, agreement, warranty or representation contained
in this Agreement, or any other present or future agreement between Borrower and
Bank;
b. If any representation, statement, report or certificate made or
delivered by Borrower, or any of its officers, employees or agents to Bank is
not true and correct;
c. If Borrower falls to pay when due and payable or declared due and
payable, all or any portion of the Borrower's Obligations (whether of principal,
interest, taxes, reimbursement of Bank Expenses, otherwise);
d. If there is a material impairment of the prospect of repayment of all
or any portion of Borrower's Obligations or a material impairment of the value
or priority of Bank's security interest in the Collateral;
e. If all or any of Borrower's assets are attached, seized, subject to a
writ or distress warrant, or are levied upon, or come into the possession of any
Judicial Officer or Assignee and the same are not released, discharged or bonded
against with ten (10) days thereafter;
f. If any Insolvency Proceeding is filed or commenced by or against
Borrower without being dismissed within ten (10) days thereafter;
<PAGE> 12
g. If any proceeding is filed or commenced by or against Borrower for its
dissolution or liquidation;
h. Borrower is enjoined, restrained or in any way prevented by court
order from continuing to conduct all or any material part of its business
affairs;
i. If a notice of lien, levy or assessment is filed of record with
respect to any or all of Borrower's assets by the United States Government, or
any department, agency or instrumentality thereof, or by any state, county,
municipal or other government agency, or if any taxes or debts owing at any time
hereafter to any one or more of such entities becomes a lien, whether choate or
otherwise, upon any or all of the Borrower's assets and the same is not paid on
the payment date thereof;
j. If a judgment or other claim becomes a lien or encumbrance upon any or
all of Borrower's assets and the same is not satisfied, dismissed or bonded
against within ten (10) days thereafter;
k. If Borrower's records are prepared and kept by an outside computer
service bureau at the time this Agreement is entered into or during the term of
this Agreement such an agreement with an outside service bureau is entered into,
and at any time thereafter, without first obtaining the written consent of Bank,
Borrower terminates, modifies, amends or changes its contractual relationship
with said computer service bureau or said computer service bureau fails to
provide Bank with any requested information or financial data pertaining to
Bank's Collateral, Borrower's financial condition or the results of Borrower's
operations;
l. If Borrower permits a default in any material agreement to which
Borrower is a party with third parties so as to result in an acceleration of the
maturity of Borrower's indebtedness to others, whether under any indenture,
agreement or otherwise;
m. If Borrower makes any payment on account of indebtedness which has
been subordinated to Borrower's Obligations to Bank;
n. If any misrepresentation exists now or thereafter in any warranty or
representation made to Bank by any officer or director of Borrower, or if any
such warranty or representation is withdrawn by any officer or director,
o. If any party subordinating its claims to that of Bank's or any
guarantor of Borrower's Obligations dies or terminates its subordination or
guaranty, becomes insolvent or an Insolvency Proceeding is commenced by or
against any such subordinating party or guarantor;
p. If Borrower is an individual and Borrower dies;
q. If there is a change of ownership or control of n/a or more of the
issued and outstanding stock of Borrower, or
r. If any reportable event, which the Bank determines constitutes grounds
for the termination of any deferred compensation plan by the Pension Benefit
Guaranty Corporation or for the appointment by the appropriate United States
District Court of a trustee to administer any such plan, shall have occurred and
be continuing thirty (30) days after written notice of such determination shall
have been given to Borrower by Bank, or any such Plan shall be terminated within
the meaning of Title IV of the Employment Retirement Income Security Act
("ERISA"), or a trustee shall be appointed by the appropriate United States
District Court to administer any such plan, or the Pension Benefit Guaranty
Corporation shall institute proceedings to terminate any plan and in case of any
event described in this Section 7.0, the aggregate amount of the Borrowees
liability to the Pension Benefit Guaranty Corporation under Sections 4062, 4063
or 4064 of ERISA shall exceed five percent (5%) of Borrower's Tangible Effective
Not Worth.
Notwithstanding anything contained in Section 7 to the contrary, Bank shall
refrain from exercising its rights and remedies and Event of Default shall
thereafter not be deemed to have occurred by reason of the occurrence of any of
the events set forth in Sections 7.e, 7.f or 7.1 of this Agreement if, within
ten (10) days from the date thereof, the same is released, discharged,
dismissed, bonded against or satisfied; provided, however, if the event is the
institution of Insolvency Proceedings against Borrower, Bank shall not be
obligated to make advances to Borrower during such cure period.
8. BANKS RIGHTS AND REMEDIES
8.1 Upon the occurence of an Event of Default by Borrower under this
Agreement, Bank may, at its election, without notice of its election and without
demand, do any one or more of the following, all of which are authorized by
Borrower:
a. Declare Borrower's Obligations, whether evidenced by this Agreement,
installment notes, demand notes or otherwise, immediately due and payable to the
Bank;
b. Cease advancing money or extending credit to or for the benefit of
Borrower under this Agreement, or any other agreement between Borrower and Bank;
c. Terminate this Agreement as to any future liability or obligation of
Bank, but without affecting Bank's rights and security interests in the
Collateral, and the Obligations of Borrower to Bank;
<PAGE> 13
d. Without notice to or demand upon Borrower or any guarantor, make such
payments and do such acts as Bank considers necessary or reasonable to protect
its security interest in the Collateral. Borrower agrees to assemble the
Collateral if Bank so requires and to make the Collateral available to Bank as
Bank may designate. Borrower authorizes Bank to enter the promises where the
Collateral is located, take and maintain possession of the Collateral and the
promises (at no charge to Bank), or any part thereof, and to pay, purchase,
contest or compromise any encumbrance, charge or lien which in the opinion of
Bank appears to be prior or superior to its security interest and to pay all
expenses incurred in connection therewith;
e. Without limiting Bank's rights under any security interest, Bank is
hereby granted a license or other right to use, without charge, Borrower's
labels, patents, copyrights, rights of use of any name, trade secrets, trade
names, trademarks and advertising matter, or any property of a similar nature as
it pertains to the Collateral, in completing production of, advertising for sale
and selling any Collateral and Borrower's rights under all licenses and all
franchise agreement shall inure to Bank's benefit, and Bank shall have the right
and power to enter into sublicense agreements with respect to all such rights
with third parties on terms acceptable to Bank;
f. Ship, reclaim, recover, store, finish, maintain, repair, prepare for
sale, advertise for sales and sell (in the manner provided for herein) the
inventory;
g. Sell or dispose the Collateral at either a public or private sale, or
both, by way of one or more contracts or transactions, for cash or on terms, in
such manner and at such places (including Borrower's promises) as is
commercially reasonable in the opinion of Bank. It is not necessary that the
Collateral be present at any such sale;
h. Bank shall give notice of the disposition of the Collateral as
follows:
(1) Bank shall give the Borrower and each holder of a security interest
in the Collateral who has filed with Bank a written request for notice, a notice
in writing of the time and place of public sale, or, if the sale is a private
sale or some disposition other than a public sale is to be made of the
Collateral, the time on or after which the private sale or other disposition is
to be made;
(2) The notice shall be personally delivered or mailed, postage prepaid,
to Borrowers address appearing in this Agreement, at least five (5) calendar
days before the data fixed for the sale, or at least five (5) calendar days
before the date on or after which the private sale or other disposition is to be
made, unless the Collateral is perishable or threatens to decline speedily in
value. Notice to persons other than Borrower claiming an interest in the
Collateral shall be sent to such addresses as have been furnished to Bank;
(3) If the sale is to be a public sale, Bank shall also give notice of
the time and place by publishing a notice one time at least five (5) calendar
days before the date of the sale in a newspaper of general circulation in the
county in which the sale is to be hold; and
(4) Bank may credit bid and purchase at any public sale.
i. Borrower shall pay all Bank Expenses incurred in connection with
Bank's enforcement and exercise of any of its rights and remedies as herein
provided, whether or not suit is commenced by Bank;
j. Any deficiency which exists after disposition of the Collateral as
provided above will be paid immediately by Borrower. Any excess will be
returned, without interest and subject to the rights of third parties, to
Borrower by Bank, or, in Bank's discretion, to any party who Bank believes, in
good faith, is entitled to the excess; and
k. Without constituting a retention of Collateral in satisfaction of an
obligation within the meaning of 9505 of the Uniform Commercial Code or an
action under California Code of Civil Procedure 726, apply any and all amounts
maintained by Borrower as deposit accounts (as that term is defined under 9105
of the Uniform Commercial Code) or other accounts that Borrower maintains with
Bank against the Obligations.
6.2 Bank's rights and remedies under this Agreement and all other agreements
shall be cumulative. Bank shall have all other rights and remedies not
inconsistent herewith as provided by law or in equity. No exercise by Bank of
one right or remedy shall be deemed an election, and no waiver by Bank of any
default on Borrower's part shall be deemed a continuing waiver. No delay by Bank
shall constitute a waiver, election or acquiescence by Bank..
9. TAXES AND EXPENSES REGARDING BORROWER'S PROPERTY
If Borrower fails to pay promptly when due to another person or entity,
monies which Borrower is required to pay by reason of any provision in this
Agreement, Bank may, but need not, pay the same and charge Borrower's account
therefor, and Borrower shall promptly reimburse Bank. All such sums shall become
additional indebtedness owing to Bank, shall bear interest at the rate
hereinabove provided, and shall be secured by all Collateral. Any payments made
by Bank shall not constitute (i) an agreement by it to make similar payments in
the future, or (ii) a waiver by Bank of any default under this Agreement. Bank
need not inquire as to, or contest the validity of, any such expense, tax,
security interest, encumbrance or lien and the receipt of the usual official
notice of the payment thereof shall be conclusive evidence that the same was
validly due and owing. Such payments shall constitute Bank Expenses and
additional advances to Borrower.
<PAGE> 14
10. WAIVERS
10.1 Borrower agrees that checks and other instruments received by Bank in
payment or on account of Borrower's Obligations constitute only conditional
payment until such items are actually paid to Bank and Borrower waives the right
to direct the application of any and all payments at any time or times hereafter
received by Bank on account of Borrower's Obligations and Borrower agrees that
Bank shall have the continuing exclusive right to apply and reapply such
payments in any manner as Bank may deem advisable, notwithstanding any entry by
Bank upon its books.
10.2 Borrower waives demand, protest, notice of protest, notice of default or
dishonor, notice of payment and nonpayment, notice of any default, nonpayment at
maturity, release, compromise, settlement, extension or renewal of any or all
commercial paper, accounts, documents, instruments chattel paper, and guarantees
at any time hold by Bank on which Borrower may In any way be liable.
10.3 Bank shall not in any way or manner be liable or responsible for (a) the
safekeeping of the inventory; (b) any loss or damage thereto occurring or
arising in any manner or fashion from any cause; (c) any diminution in the value
thereof; or (d) any act or default of any carrier, warehouseman, bailee,
forwarding agency or other person whomsoever. All risk of loss, damage or
destruction of inventory shall be borne by Borrower.
10.4 Borrower waives the right and the right to assert a confidential
relationship, if any, it may have with any accountant, accounting firm and/or
service bureau or consultant in connection with any information requested by
Bank pursuant to or in accordance with this Agreement, and agrees that a Bank
may contact directly any such accountants, accounting firm and/or service bureau
or consultant in order to obtain such information.
10.5 BORROWER AND BANK EACH WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY ACTION OR
PROCEEDING RELATING TO THIS AGREEMENT OR ANY TRANSACTION HEREUNDER, OR
CONTEMPLATED HEREUNDER, OR ANY OTHER CLAIM (INCLUDING TORT OR BREACH OF DUTY
CLAIMS) OR DISPUTE HOWSOEVER ARISING BETWEEN BANK AND BORROWER.
10.6 In the event that Bank elects to waive any rights or remedies hereunder,
or compliance with any of the terms hereof, or delays or falls to pursue or
enforce any term, such waiver, delay or failure to pursue or enforce shall only
be effective with respect to that single act and shall not be construed to
affect any subsequent transactions or Bank's right to later pursue such rights
and remedies.
11. ONE CONTINUING LOAN TRANSACTION. All loans and advances heretofore, now
or at any time or times hereafter made by Bank to Borrower under this Agreement
or any other agreement between Bank and Borrower, shall constitute one loan
secured by Bank's security interests in the Collateral and by all other security
interests, liens, encumbrances heretofore, now or from time to time hereafter
granted by Borrower to Bank.
Notwithstanding the above, (i) to the extent that any portion of the
Obligations are consumer loan, that portion shall not be secured by any deed of
trust or mortgage on or other security interest in the Borrower's principal
dwelling which is not a purchase money security interest as to that portion,
unless expressly provided to the contrary in another place, or (ii) if the
Borrower (or any of them) has (have) given or give(s) Bank a deed of trust or
mortgage covering real property, that deed of trust or mortgage shall not secure
the loan and any other Obligation of the Borrower (or any of them), unless
expressly provided to the contrary in another place.
12. NOTICES. Unless otherwise provided in this Agreement, all notices or
demands by either party on the other relating to this Agreement shall be in
writing and sent by regular United States mail, postage prepaid, properly
addressed to Borrower or to Bank at the addresses stated in this Agreement, or
to such other addresses as Borrower or Bank may from time to time specify to the
other in writing. Requests to Borrower by Bank hereunder may be made orally.
13. AUTHORIZATION TO DISBURSE. Bank is hereby authorized to make loans and
advances hereunder upon telephonic or other instructions received from those
individuals designated on Borrower's Telephone and Facsimile authorization
attached hereto, or at the discretion of Bank if said loans and advances are
necessary to meet any Obligations of Borrower to Bank. Bank shall have no duty
to make inquiry or verify the authority of any such party, and Borrower shall
hold Bank harmless from any damage, claims or liability by reason of Bank's
honor of, or failure to honor, any such instructions.
14. DESTRUCTION OF BORROWER'S DOCUMENTS. Any documents, schedules, invoices
or other papers delivered to Bank, may be destroyed or otherwise disposed of by
Bank six (6) months after they are delivered to or received by Bank, unless
Borrower requests, in writing, the return of the said documents, schedules,
invoices or other papers and makes arrangements, at Borrower's expense, for
their return.
15. CHOICE OF LAW. The validity of this Agreement, its construction,
interpretation and enforcement, and the rights of the parties hereunder and
concerning the Collateral, shall be determined according to the laws of the
State of California. The parties agree that all actions or proceedings arising
in connection with this Agreement shall be tried and litigated only in the state
and federal courts in the Northern District of California or the County of Santa
Clara.
16. GENERAL PROVISIONS
16.1 This Agreement shall be binding and deemed effective when executed by
the Borrower and accepted and executed by Bank at its headquarter office.
<PAGE> 15
16.2 This Agreement shall bind and inure to the benefit of the respective
successors and assigns of each of the parties, provided, however, that Borrower
may not assign this Agreement or any rights hereunder without Bank's prior
written consent and any prohibited assignment shall be absolutely void. No
consent to an assignment by Bank shall release Borrower or any guarantor from
their Obligations to Bank. Bank may assign this Agreement and its rights and
duties hereunder. Bank reserves the right to sell, assign, transfer, negotiate
or grant participations in all or any part of, or any interest in Bank's rights
and benefits hereunder. In connection therewith, Bank may disclose all documents
and information which Bank now or hereafter may have relating to Borrower or
Borrower's business.
16.3 Paragraph headings and paragraph numbers have been set forth herein for
convenience only; unless the contrary is compelled by the context, everything
contained in each paragraph applies equally to this entire Agreement.
16.4 Neither this Agreement nor any uncertainty or ambiguity herein shall be
construed or resolved against Bank or Borrower, whether under any rule of
construction or otherwise; on the contrary, this Agreement has been reviewed by
all parties and shall be construed and Interpreted according to the ordinary
meaning of the words used so as to fairly accomplish the purposes and intentions
of all parties hereto. When permitted by the context, the singular includes the
plural and vice versa.
16.5 Each provision of this Agreement shall be severable from every other
provision of this Agreement for the purpose of determining the legal
enforceability of any specific provision.
16.6 This Agreement cannot be changed or terminated orally. Except as to
currently existing Obligations owing by Borrower to Bank, all prior agreements,
understandings, representations, warranties, and negotiations, if any, with
respect to the subject matter hereof, are merged into this Agreement.
16.7 The parties intend and agree that their respective rights, duties,
powers, liabilities, obligations and discretions shall be performed, carried
out, discharged and exercised reasonably and in good faith.
16.8 In addition, if this Agreement is secured by a deed of trust or mortgage
covering real property, then the trustor or mortgagor shall not mortgage or
pledge the mortgaged promises as security for any other indebtedness or
obligations. This Agreement, together with all other indebtedness secured by
said deed of trust or mortgage, shall become due and payable immediately,
without notice, at the option of Bank, (a) If said trustor or mortgagor shall
mortgage or pledge the mortgaged promises for any other indebtedness or
obligations or shall convoy, assign or transfer the mortgaged promises by deed,
installment sale contract or other instrument; (b) If the title to the mortgaged
promises shall become vested in any other person or party in any manner
whatsoever, or (c) If there is any disposition (through one or more
transactions) of legal or beneficial title to a controlling interest of said
trustor or mortgagor.
IN WITNESS WHEREOF, the parties hereto have caused this Loan & Security
Agreement (Accounts and Inventory) to be executed as of the data first
hereinabove written.
ATTEST:
Title:
BORROWER: PharmChem Laboratories, Inc.
Accepted and effective as of By: /s/ David Lattanzio
November 18, 1997 at --------------------------------
Bank's Headquarter Office Signature of
Title: VP & CFO
-----------------------------
By: /s/ James Weber
-------------------------------
Signature of James Weber
Title: First Vice President
----------------------------
<PAGE> 1
[COMERICA LOGO] EXHIBIT 10.24
SECURITY AGREEMENT (ALL ASSETS)
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As of NOVEMBER 18, 1997, for value received, the undersigned ("Debtor") grants
to COMERICA BANK-CALIFORNIA, ("Bank") a California banking corporation, a
continuing security interest in the Collateral (as defined below) to secure
payment when due, whether by stated maturity, demand, acceleration or otherwise,
of all existing and future Indebtedness ("Indebtedness") to the Bank of
PHARMCHEM LABORATORIES, INC. (Borrower) and or Debtor. Indebtedness includes
without limit any and all obligations or liabilities of the Borrower and/or
Debtor to the Bank, whether absolute or contingent, direct or indirect,
voluntary or involuntary, liquidated or unliquidated, joint or several, known or
unknown; any and all obligations or liabilities for which the Borrower and/or
Debtor would otherwise be liable to the Bank were it not for the invalidity or
unenforceability of them by reason of any bankruptcy, insolvency or other law,
or for any other reason; any and all amendments, modifications, renewals and/or
extensions of any of the above; all costs incurred by Bank in establishing,
determining, continuing, or defending the validity or priority of its security
interest, or in pursuing its rights and remedies under this Agreement or under
any other agreement between Bank and Borrower and/or Debtor or in connection
with any proceeding involving Bank as a result of any financial accommodation to
Borrower and/or Debtor; and all other costs of collecting Indebtedness,
including without limit attorney fees. Debtor agrees to pay Bank all such costs
incurred by the Bank, immediately upon demand, and until paid all costs shall
bear interest at the highest per annum rate applicable to any of the
Indebtedness, but not in excess of the maximum rate permitted by law. Any
reference in this Agreement to attorney fees shall be deemed a reference to
reasonable fees, costs, and expenses of both in-house and outside counsel and
paralegals, whether or not a suit or action is instituted, and to court costs if
a suit or action is instituted, and whether attorney fees or court costs are
incurred at the trial court level, on appeal, in a bankruptcy, administrative or
probate proceeding or otherwise.
1. Collateral shall mean all the following property Debtor now or later owns or
has an interest in, wherever located:
TO EXCLUDE ANY TYPE OR SPECIFIC ITEM OF PROPERTY FROM COLLATERAL, BANK AND
DEBTOR MUST INITIAL THE LINES IMMEDIATELY FOLLOWING THAT TYPE OR SPECIFIC ITEM
OF PROPERTY.
All Accounts Receivable (For purposes of this Agreement "Accounts Receivable"
consists of all accounts, general intangibles, chattel paper, deposit accounts,
documents and instruments). _______________________ _________________
BANK OFFICER'S INITIALS DEBTOR'S INITIALS
All inventory._______________________ _________________
BANK OFFICER'S INITIALS DEBTOR'S INITIALS
All Equipment and Fixtures. _______________________ _________________
BANK OFFICER'S INITIALS DEBTOR'S INITIALS
Specific items listed below and/or on attached Schedule A, if any, is/are also
included in Collateral.
SEE EXHIBIT "A" ATTACHED HERETO AND MADE APART HEREOF.
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All goods, instruments, documents, policies and certificates of insurance,
deposits, money or other property (except real property which is not a fixture)
which are now or later in possession of Bank, or as to which Bank now or later
controls possession by documents or otherwise.
All additions, attachments, accessions, parts, replacements, substitutions,
renewals, interest, dividends, distributions, rights of any kind (including but
not limited to stock splits, stock rights, voting and preferential rights),
products, or proceeds of or pertaining to the above including, without limit,
cash or other property which were proceeds and are recovered by a bankruptcy
trustee or otherwise as a preferential transfer by Debtor.
2. Warranties, Covenants and Agreements. Debtor warrants, covenants and agrees
as follows:
2.1 Debtor shall furnish to Bank, in form and at intervals as Bank may request,
any information Bank may reasonably request and allow Bank to examine, inspect,
and copy any of Debtor's books and records. Debtor shall, at the request of
Bank, mark its records and the Collateral to clearly indicate the security
interest of Bank under this Agreement.
2.2 At the time any Collateral becomes, or is represented to be, subject to a
security interest in favor of Bank, Debtor shall be deemed to have warranted
that (a) Debtor is the lawful owner of the Collateral and has the right and
authority to subject it to a security interest granted to Bank; (b) none of the
Collateral is subject to any security interest other than that in favor of Bank
and there are no financing statements on file, other than in favor of Bank; and
(c) Debtor acquired its rights in the Collateral in the ordinary course of its
business.
2.3 Debtor will keep the Collateral free at all times from all claims, liens,
security interests and encumbrances other than those in favor of Bank. Debtor
will not, without the prior written consent of Bank, sell, transfer or lease, or
permit to be sold, transferred or leased, any or all of the Collateral, except
for inventory in the ordinary course of its business and will not return any
inventory to its supplier. Bank or its representatives may at all reasonable
times inspect the Collateral and may enter upon all premises where the
Collateral is kept or might be located.
2.4 Debtor will do all acts and will execute all writings requested by Bank to
establish, maintain and continue a perfected and first security interest of Bank
in the Collateral. Debtor agrees that Bank has no obligation to acquire or
perfect any lien on or security interest in any asset(s), whether realty or
personally, to secure payment of the Indebtedness, and Debtor is not relying
upon assets in which the Bank may have a lien or security interest for payment
of the Indebtedness.
2.5 Debtor will pay within the time that they can be paid without interest or
penalty all taxes, assessments and similar charges which at any time are or may
become a lien, charge, or encumbrance upon any Collateral, except to the extent
contested in good faith and bonded in a manner satisfactory to Bank. If Debtor
falls to pay any of these taxes, assessments, or other charges in the time
provided above, Bank has the option (but not the obligation) to do so and Debtor
agrees to repay all amounts so expended by Bank Immediately upon demand,
together with interest at the highest lawful default rate which could be charged
by Bank to Debtor on any Indebtedness.
2.6 Debtor will keep the Collateral in good condition and will protect it from
loss, damage, or deterioration from any cause. Debtor has and will maintain at
all times (a) with respect to the Collateral, insurance under an "all risk"
policy against fire and other risks customarily insured against, and (b) public
liability insurance and other insurance as maybe required by law or reasonably
required by Bank, all of which insurance shall be in amount, form and content,
and written by companies as may be satisfactory to Bank, containing a lender's
loss payable endorsement acceptable to Bank. Debtor will deliver to Bank
immediately upon demand evidence satisfactory to Bank that the required
insurance has been procured. If Debtor fails to maintain satisfactory insurance,
Bank has the option (but not the obligation) to do so and Debtor agrees to repay
all amounts so expended by Bank immediately upon demand, together with interest
at the highest lawful default rate which could be charged by Bank to Debtor on
any Indebtedness.
2.7 If Debtor's Accounts Receivable are pledged as Collateral under this
Agreement, on each occasion on which Debtor evidences to Bank the account
balances on and the nature and extent of the Accounts Receivable, Debtor shall
be deemed to have warranted that except as otherwise indicated (a) each of those
Accounts Receivable is valid and enforceable without performance by Debtor of
any act; (b) each of those account balances are in fact owing, (c) there are no
setoffs, recoupments, credits, contra accounts, counterclaims or defenses
against any of those Accounts Receivable, (d) as to any Accounts Receivable
represented by a note, trade acceptance, draft or other instrument or by any
chattel paper or document, the same have been endorsed and/or delivered by
Debtor to Bank, (e) Debtor has not received with respect to any Account
Receivable, any notice of the death of the related account debtor, nor of the
dissolution, liquidation, termination of existence, insolvency, business
failure, appointment of a receiver for, assignment for the benefit of creditors
by, or filing of a petition in bankruptcy by or against, the account debtor, and
(f) as to each Account Receivable, the account debtor is not an affiliate of
Debtor, the United States of America or any department, agency or
instrumentality of it, or a citizen or resident of any jurisdiction outside of
the United States. Debtor will do all acts and will execute all writings
requested by Bank to perform, enforce performance of, and collect all Accounts
Receivable. Debtor shall
1
<PAGE> 2
neither make nor permit any modification, compromise or substitution for any
Account Receivable without the prior written consent of Bank. Debtor shall, at
Bank's request, arrange for verification of Accounts Receivable directly with
account debtors or by other methods acceptable to Bank.
2.8 Debtor at all times shall be in strict compliance with all applicable laws,
including without limit any laws, ordinances, directives, orders, statutes, or
regulations an object of which is to regulate or improve health, safety, or the
environment ("Environmental Laws" ).
2.9 If marketable securities are pledged as Collateral under this Agreement and
if at any time the outstanding principal balance of the Indebtedness exceeds
N/A of the value of the Collateral, as such value is determined from time to
time by Bank (herein called the "Margin Requirement"), Debtor shall immediately
pay or cause to be paid to Bank an amount sufficient to reduce the Indebtedness
such that the remaining principal outstanding thereunder is equal to or less
than the Margin Requirement. Bank shall apply payments made under this paragraph
in payment of the Indebtedness in such order and manner of application as Bank
in its sole discretion elects. In the alternative, Debtor may provide or cause
to be provided to Bank additional collateral in the form of cash or other
property acceptable to Bank and with a value, as determined by Bank, that when
added to the Collateral will constitute compliance with the Margin Requirement.
2.10 If Bank, acting in its sole discretion, redelivers Collateral to Debtor or
Debtor's designee for the purpose of (a) the ultimate sale or exchange thereof;
or (b) presentation, collection, renewal, or registration of transfer thereof;
or (c) loading, unloading, storing, shipping, transshipping, manufacturing,
processing or otherwise dealing with it preliminary to sale or exchange; such
redelivery shall be in trust for the benefit of Bank and shall not constitute a
release of Bank's security interest in it or in the proceeds or products of it
unless Bank specifically so agrees in writing. If Debtor requests any such
redelivery, Debtor will deliver with such request a duly executed financing
statement in form and substance satisfactory to Bank. Any proceeds of Collateral
coming into Debtor's possession as a result of any such redelivery shall be held
in trust for Bank and immediately delivered to Bank for application on the
Indebtedness. Bank may (in its sole discretion) deliver any or all of the
Collateral to Debtor, and such delivery by Bank shall discharge Bank from all
liability or responsibility for such Collateral. Bank, at its option, may
require delivery of any Collateral to Bank at any time with such endorsements or
assignments of the Collateral as Bank may request.
2.11 At any time and without notice, Bank may (a) cause any or all of the
Collateral to be transferred to its name or to the name of its nominees; (b)
receive or collect by legal proceedings or otherwise all dividends, interest,
principal payments and other sums and all other distributions at any time
payable or receivable on account of the Collateral, and hold the same as
Collateral, or apply the same to the Indebtedness, the manner and distribution
of the application to be in the sole discretion of Bank; (c) enter into any
extension, subordination, reorganization, deposit, merger or consolidation
agreement or any other agreement relating to or affecting the Collateral, and
deposit or surrender control of the Collateral, and accept other property in
exchange for the Collateral and hold or apply the property or money so received
pursuant to this Agreement.
2.12 Bank may assign any of the Indebtedness and deliver any or all of the
Collateral to its assignee, who then shall have with respect to Collateral so
delivered all the rights and powers of Bank under this Agreement, and after that
Bank shall be fully discharged from all liability and responsibility with
respect to Collateral so delivered.
2.13 Debtor delivers this Agreement based solely on Debtor's independent
investigation of (or decision not to investigate) the financial condition of
Borrower and is not relying on any information furnished by Bank. Debtor assumes
full responsibility for obtaining any further information concerning the
Borrower's financial condition, the status of the Indebtedness or any other
matter which the undersigned may deem necessary or appropriate now or later.
Debtor waives any duty on the part of Bank, and agrees that Debtor is not
relying upon nor expecting Bank to disclose to Debtor any fact now or later
known by Bank, whether relating to the operations or condition of Borrower, the
existence, liabilities or financial condition of any guarantor of the
Indebtedness, the occurrence of any default with respect to the Indebtedness, or
otherwise, notwithstanding any effect such fact may have upon Debtor's risk or
Debtor's rights against Borrower. Debtor knowingly accepts the full range of
risk encompassed in this Agreement, which risk includes without limit the
possibility that Borrower may incur Indebtedness to Bank after the financial
condition of Borrower, or Borrower's ability to pay debts as they mature, has
deteriorated.
2.14 Debtor shall defend, indemnify and hold harmless Bank, its employees,
agents, shareholders, officers, and directors from and against any and all
claims, damages, fines, expenses, liabilities or causes of action of whatever
kind, including without limit consultant fees, legal expenses, and reasonable
attorneys' fees, suffered by any of them as a direct or indirect result of any
actual or asserted violation of any law, including without limit Environmental
Laws, or of any remediation relating to any property required by any law,
including without limit Environmental Laws.
3. Collection of Proceeds.
3.1 Debtor agrees to collect and enforce payment of all Collateral until Bank
shall direct Debtor to the contrary. Immediately upon notice to Debtor by Bank
and at all times after that, Debtor agrees to fully and promptly cooperate and
assist Bank in the collection and enforcement of all Collateral and to hold in
trust for Bank all payments received in connection with Collateral and from the
sale, lease or other disposition of any Collateral, all rights by way of
suretyship or guaranty and all rights in the nature of a lien or security
interest which Debtor now or later has regarding Collateral. Immediately upon
and after such notice, Debtor agrees to (a) endorse to Bank and immediately
deliver to Bank all payments received on Collateral or from the sale, lease or
other disposition of any Collateral or arising from any other rights or
interests of Debtor in the Collateral, in the form received by Debtor without
commingling with any other funds, and (b) immediately deliver to Bank all
property in Debtor's possession or later coming into Debtor's possession through
enforcement of Debtor's rights or interests in the Collateral. Debtor
irrevocably authorizes Bank or any Bank employee or agent to endorse the name of
Debtor upon any checks or other items which are received in payment for any
Collateral, and to do any and all things necessary in order to reduce these
items to money. Bank shall have no duty as to the collection or protection of
Collateral or the proceeds of it, nor as to the preservation of any related
rights, beyond the use of reasonable care in the custody and preservation of
Collateral in the possession of Bank. Debtor agrees to take all steps necessary
to preserve rights against prior parties with respect to the Collateral.
3.2 If Accounts Receivable are pledged as Collateral under this Agreement,
Debtor agrees that immediately upon Bank's request (whether or not any Event of
Default exists), Debtor shall at its sole expense establish and maintain: (a) an
United States Post Office lock box (the "Lock Box"), to which Bank shall have
exclusive access. Debtor expressly authorizes Bank, from time to time to remove
contents from the Lock Box, for disposition in accordance with this Agreement.
Debtor agrees to notify all account debtors and other parties obligated to
Debtor that all payments made to Debtor (other than payments by electronic funds
transfer) shall be remitted for the credit of Debtor, to the Cash Collateral
Accounts, and Debtor, at Bank's Request, shall include a like statement on all
invoices. Debtor shall execute all documents and authorizations necessary to
establish and maintain the Lock Bock and the Cash Collateral Account.
3.3 All items or amounts which are remitted to the Lock Box or otherwise
delivered by or for the benefit of Debtor to Bank on account of partial or full
payment of, or with respect to, any Collateral shall, at Bank's option, (1) be
applied to the payment of the indebtedness, whether then due or not, in such
order of application as Bank may determine in its sole discretion, or, (ii)
shall be deposited to the Cash Collateral Account. Debtor agrees that Bank shall
not be liable for any loss or damage which Debtor may suffer as a result of
Bank's processing of items or its exercise of any other rights or remedies under
this Agreement, including without limitation indirect, special or consequential
damages, loss of revenues or profits, or any claim, demand or action by any
third party arising out of or in connection with the processing of items or the
exercise of any other rights or remedies under this Agreement. Debtor agrees to
indemnify and hold Bank harmless from and against all such third party claims,
demands or actions, including without limitation attorney fees.
4. Defaults, Enforcement and Application of Proceeds.
4.1 Upon the occurrence of any of the following events (each an "Event of
Default"), Debtor shall be in default under this Agreement:
(a) Any failure to pay the Indebtedness when due, or such portion of it as may
be due, by acceleration or otherwise; or
(b) Any failure or neglect to comply with, or breach of, any term of this
Agreement, or any other agreement or commitment between Borrower, Debtor, or any
guarantor of any of the Indebtedness ("guarantor") and Bank; or
(c) Any warranty, representation, financial statement, or other information
made, given or furnished to Bank by or on behalf of Borrower, Debtor, or any
guarantor shall be, or shall prove to have been, false or materially misleading
when made, given, or furnished; or
2
<PAGE> 3
(d) Any loss, theft, substantial damage or destruction to or of any Collateral,
or the issuance or filing of any attachment, levy, garnishment or the
commencement of any proceeding in connection with any Collateral or of any other
judicial process of, upon or in respect of Borrower, Debtor, any guarantor, or
any Collateral; or
(e) Sale or other disposition by Borrower, Debtor, or any guarantor of any
substantial portion of its assets or property or voluntary suspension of the
transaction of business by Borrower, Debtor, or any guarantor, or death,
dissolution, termination of existence, merger, consolidation, insolvency,
business failure, or assignment for the benefit of creditors of or by Borrower,
Debtor, or any guarantor; or commencement of any proceedings under any state or
federal bankruptcy or insolvency laws or laws for the relief of debtors by or
against Borrower, Debtor, or any guarantor; or the appointment of a receiver,
trustee, court appointee, sequestrator or otherwise, for all or any part of the
property of Borrower, Debtor, or any guarantor; or
(f) Bank deems the margin of Collateral insufficient or itself insecure, in good
faith believing that the prospect of payment of the Indebtedness or performance
of this Agreement is impaired or shall fear deterioration, removal, or waste of
Collateral.
4.2 Upon the occurrence of any Event of Default, Bank may at its discretion and
without prior notice to Debtor declare any or all of the Indebtedness to be
immediately due and payable, and shall have and may exercise any one or more of
the following rights and remedies:
(a) exercise all the rights and remedies upon default, in foreclosure and
otherwise, available to secured parties under the provisions of the Uniform
Commercial Code and other applicable law;
(b) institute legal proceedings to foreclose upon the lien and security interest
granted by this Agreement, to recover judgment for all amounts then due and
owing as Indebtedness, and to collect the same out of any Collateral or the
proceeds of any sale of it;
(c) institute legal proceedings for the sale, under the judgment or decree of
any court of competent jurisdiction, of any or all Collateral; and/or
d) personally or by agents, attorneys, or appointment of a receiver, enter upon
any premises where Collateral may then be located, and take possession of all or
any of it and/or render it unusable; and without being responsible for loss or
damage to such Collateral, hold, operate, sell, lease, or dispose of all or any
Collateral at places and times and on terms and conditions as Bank may deem fit,
without any previous demand or advertisement; and except as provided in this
Agreement, all notice of sale, lease or other disposition, and advertisement,
and other notice or demand, any right or equity of redemption, and any
obligation of a prospective purchaser or lessee to inquire as to the power and
authority of Bank to sell, lease, or otherwise dispose of the Collateral or as
to the application by Bank of the proceeds of sale or otherwise, which would
otherwise be required by, or available to Debtor under, applicable law are
expressly waived by Debtor to the fullest extent permitted.
At any sale pursuant to this Section 4.2, whether under the power of sale, by
virtue of judicial proceedings or otherwise, it shall not be necessary for Bank
or a public officer under order of a court to have present physical or
constructive possession of Collateral to be sold. The recitals contained in any
conveyances and receipts made and given by Bank or the public officer to any
purchaser at any sale made pursuant to this Agreement shall, to the extent
permitted by applicable law, conclusively establish the truth and accuracy of
the matters stated (including, without limit, as to the amounts of the principal
of and interest on the Indebtedness, the accrual and nonpayment of it and
advertisement and conduct of the sale); and all prerequisites to the sale shall
be presumed to have been satisfied and performed. Upon any sale of any
Collateral, the receipt of the officer making the sale under judicial
proceedings or of Bank shall be sufficient discharge to the purchaser for the
purchase money, and the purchaser shall not be obligated to see to the
application of the money. Any sale of any Collateral under this Agreement shall
be a perpetual bar against Debtor with respect to that Collateral.
4.3 Debtor shall at the request of Bank, notify the account debtors or obligors
of Bank's security interest in Accounts Receivable and direct payment of it to
Bank. Bank may, itself, upon the occurrence of any Event of Default so notify
and direct any account debtor or obligor.
4.4 The proceeds of any sale or other disposition of Collateral authorized by
this Agreement shall be applied by Bank first upon all expenses authorized by
the Uniform Commercial Code and all reasonable attorney fees and legal expenses
incurred by Bank; the balance of the proceeds of the sale or other disposition
shall be applied in the payment of the Indebtedness, first to interest, then to
principal, then to remaining Indebtedness and the surplus, if any, shall be paid
over to Debtor or to such other person(s) as may be entitled to it under
applicable law. Debtor shall remain liable for any deficiency, which it shall
pay to Bank immediately upon demand.
4.5 Nothing in this Agreement is intended, nor shall it be construed, to
preclude Bank from pursuing any other remedy provided by law for the collection
of the Indebtedness or for the recovery of any other sum to which Bank may be
entitled for the breach of this Agreement by Debtor. Nothing in this Agreement
shall reduce or release in any way any rights or security interests of Bank
contained in any existing agreement between Borrower, Debtor, or any guarantor
and Bank.
4.6 No waiver of default or consent to any act by Debtor shall be effective
unless in writing and signed by an authorized officer of Bank. No waiver of any
default or forbearance on the part of Bank in enforcing any of its rights under
this Agreement shall operate as a waiver of any other default or of the same
default on a future occasion or of any rights.
4.7 Debtor irrevocably appoints Bank or any agent of Bank (which appointment is
coupled with an interest) the true and lawful attorney fo Debtor (with full
power of substitution) in the name, place and stead of, and at the expense of,
Debtor:
(a) to demand, receive, sue for, and give receipts or acquittances for any
moneys due or to become due on any Account Receivable and to endorse any item
representing any payment on or proceeds of the Collateral;
(b) to execute and file in the name of and on behalf of Debtor all financing
statements or other filings deemed necessary or desirable by Bank to evidence,
perfect, or continue the security interests granted in this Agreement; and
(c) to do and perform any act on behalf of Debtor permitted or required under
this Agreement.
4.8 Upon the occurrence of an Event of Default, Debtor also agrees, upon request
of Bank, to assemble the Collateral and make it available to Bank at any place
designated by Bank which is reasonably convenient to Bank and Debtor.
5. Miscellaneous.
5.1 Until Bank is advised in writing by Debtor to the contrary, all notices,
requests and demands required under this Agreement or by law shall be given to,
or made upon, Debtor at the address indicated in Section 5.15 below.
5.2 Debtor will give Bank not less than 90 days prior written notice of all
contemplated changes in Debtor's name, chief executive office location, and/or
location of any Collateral, but the giving of this notice shall not cure any
Event of Default caused by this change.
5.3 Bank assumes no duty of performance or other responsibility under any
contracts contained within the Collateral.
5.4 Bank has the right to sell, assign, transfer, negotiate or grant
participations or any interest in, any or all of the Indebtedness and any
related obligations, including without limit this Agreement. In connection with
the above, but without limiting its ability to make other disclosures to the
full extent allowable, Bank may disclose all documents and information which
Bank now or later has relating to Debtor, the Indebtedness or this Agreement,
however obtained. The undersigned agree(s) that the Bank may provide information
relating to this Security Agreement or to the undersigned to the Bank's parent,
affiliates, subsidiaries and service providers.
5.5 In addition to Bank's other rights, any indebtedness owing from Bank to
Debtor can be set off and applied by Bank on any Indebtedness at any time(s)
either before or after maturity or demand without notice to anyone.
3
<PAGE> 4
5.6 Debtor waives any right to require the Bank to: (a) proceed against any
person or property; (b) give notice of the terms, time and place of any public
or private sale of personal property security held from Borrower or any other
person, or otherwise comply with the provisions of Section 9-504 of the
California or other applicable Uniform Commercial Code; or (c) pursue any other
remedy in the Bank's power. Debtor waives notice of acceptance of this Agreement
and presentment, demand, protest, notice of protest, dishonor, notice of
dishonor, notice of default, notice of intent to accelerate or demand payment of
any Indebtedness, any and all other notices to which the undersigned might
otherwise be entitled, and diligence in collecting any Indebtedness, and
agree(s) that the Bank may, once or any number of times, modify the terms of any
Indebtedness, compromise, extend, increase, accelerate, renew or forbear to
enforce payment of any or all Indebtedness, or permit Borrower to incur
additional Indebtedness, all without notice to Debtor and without affecting in
any manner the unconditional obligation of Debtor under this Agreement. Debtor
unconditionally and irrevocably waives each and every defense and setoff of any
nature which, under principles of guaranty or otherwise, would operate to impair
or diminish in any way the obligation of Debtor under this Agreement, and
acknowledges that such waiver is by this reference incorporated into each
security agreement, collateral assignment, pledge and/or other document from
Debtor now or later securing the Indebtedness, and acknowledges that as of the
date of this Agreement no such defense or setoff exists.
5.7 Debtor waives any and all rights (whether by subrogation, indemnity,
reimbursement, or otherwise) to recover from Borrower any amounts paid by Debtor
pursuant to this Agreement.
5.8 In the event that applicable law shall obligate Bank to give prior notice to
Debtor of any action to be taken under this Agreement, Debtor agrees that a
written notice given to it at least five days before the date of the act shall
be reasonable notice of the act and, specifically, reasonable notification of
the time and place of any public sale or of the time after which any private
sale, lease, or other disposition is to be made, unless a shorter notice period
is reasonable under the circumstances. A notice shall be deemed to be given
under this Agreement when delivered to Debtor or when placed in an envelope
addressed to Debtor and deposited, with postage prepaid, in a post office or
official depository under the exclusive care and custody of the United States
Postal Service. The mailing shall be by overnight courier, certified, or first
class mail.
5.9 Notwithstanding any prior revocation, termination, surrender, or discharge
of this Agreement in whole or in part, the effectiveness of this Agreement shall
automatically continue or be reinstated in the event that any payment received
or credit given by Bank in respect of the Indebtedness is returned, disgorged,
or rescinded under any applicable law, including, without limitation, bankruptcy
or insolvency laws, in which case this Agreement, shall be enforceable against
Debtor as if the returned, disgorged, or rescinded payment or credit had not
been received or given by Bank, and whether or not Bank relied upon this payment
or credit or changed its position as a consequence of it. In the event of
continuation or reinstatement of this Agreement, Debtor agrees upon demand by
Bank to execute and deliver to Bank those documents which Bank determines are
appropriate to further evidence (in the public records or otherwise) this
continuation or reinstatement, although the failure of Debtor to do so shall not
affect in any way the reinstatement or continuation.
5.10 This Agreement and all the rights and remedies of Bank under this Agreement
shall inure to the benefit of Bank's successors and assigns and to any other
holder who derives from Bank title to or an interest in the Indebtedness or any
portion of it, and shall bind Debtor and the heirs, legal representatives,
successors, and assigns of Debtor. Nothing in this Section 5.10 is deemed a
consent by Bank to any assignment by Debtor.
5.11 If there is more than one Debtor, all undertakings, warranties and
covenants made by Debtor and all rights, powers and authorities given to or
conferred upon Bank are made or given jointly and severaly.
5.12 Except as otherwise provided in this Agreement, all terms in this Agreement
have the meanings assigned to them in Division 9 (or, absent definition in
Division 9, in any other Division) of the Uniform Commercial Code, as of the
date of this Agreement. "Uniform Commercial Code" means the California Uniform
Commercial Code, as amended.
5.13 No single or partial exercise, or delay in the exercise, of any right or
power under this Agreement, shall preclude other or further exercise of the
rights and powers under this Agreement. The unenforceability of any provision of
this Agreement shall not affect the enforceability of the remainder of this
Agreement. This Agreement constitutes the entire agreement of Debtor and Bank
with respect to the subject matter of this Agreement. No amendment or
modification of this Agreement shall be effective unless the same shall be in
writing and signed by Debtor and an authorized officer of Bank. This Agreement
shall in all respects be governed by and construed in accordance with the laws
of the State of California without regard to conflict of laws principles.
5.14 To the extent that any of the Indebtedness is payable upon demand, nothing
contained in this Agreement shall modify the terms and conditions of that
Indebtedness nor shall anything contained in this Agreement prevent Bank from
making demand, without notice and with or without reason, for immediate payment
of any or all of that Indebtedness at any time(s), whether or not an Event of
Default has occurred.
5.15 Debtor's chief executive office is located and shall be maintained at
________________________________________________________________________________
__________________________________________________ If Collateral is located at
other than the chief executive office, such Collateral is located and shall be
maintained at __________________________________________________________________
______________________ Collateral shall be maintained only at the locations
identified in this Section 5.15.
5.16 A carbon, photographic or other reproduction of this Agreement shall be
sufficient as a financing statement under the Uniform Commercial Code and may be
filed by Bank in any filing office.
5.17 This Agreement shall be terminated only by the filling of a termination
statement in accordance with the applicable provisions of the Uniform Commercial
Code, but the obligations contained in Section 2.14 of this Agreement shall
survive termination.
4
<PAGE> 5
6. DEBTOR AND BANK ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A
CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED. EACH PARTY, AFTER CONSULTING (OR
HAVING HAD THE OPPORTUNITY TO CONSULT WITH COUNSEL OF THEIR CHOICE, KNOWINGLY
AND VOLUNTARILY, AND FOR THEIR MUTUAL BENEFIT WAIVES ANY RIGHT TO TRIAL BY JURY
IN THE EVENT OF LITIGATION REGARDING THE PERFORMANCE OR ENFORCEMENT OF, OR IN
ANY WAY RELATED TO, THIS AGREEMENT OR THE INDEBTEDNESS.
7. Special Provisions Applicable to this Agreement. (*None, if left blank)
SEE GOVERNMENT RECEIVABLES RIDER TO SECURITY AGREEMENT (ALL ASSETS) ATTACHED
HERETO AND MADE A PART HEREOF.
DEBTOR: PHARMCHEM LABORATORIES, INC.
/S/ David A. Lattanzio
- ------------------------------------------
BY:
- ------------------------------------------
BY:
- ------------------------------------------
BY:
- ------------------------------------------
BY:
<PAGE> 1
EXHIBIT 21.01
LIST OF SUBSIDIARIES
Medscreen Limited
1A Harbour Quay
100 Preston's Road
London, England E149QZ
<PAGE> 1
EXHIBIT 23.01
CONSENT OF KPMG PEAT MARWICK LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
PharmChem Laboratories, Inc.:
We consent to the incorporation by reference in the registration statements
(File numbers 33-45481, 33-64770 and 333-36885) on Form S-8 of PharmChem
Laboratories, Inc. of our report dated February 13, 1998, relating to the
consolidated balance sheet of PharmChem Laboratories, Inc. and subsidiary as of
December 31, 1997, and the related consolidated statements of operations,
shareholders' equity and cash flows for the year then ended, and related
schedule, which report appears in the December 31, 1997 annual report on Form
10-K of PharmChem Laboratories, Inc.
KPMG PEAT MARWICK LLP
San Francisco, California
March 25, 1998
<PAGE> 1
EXHIBIT 23.02
CONSENT OF ARTHUR ANDERSEN LLP, INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders
PharmChem Laboratories, Inc.:
As independent public accountants, we hereby consent to the incorporation
of our report included in this Form 10-K into the PharmChem Laboratories, Inc.
and subsidiary's (the Company) previously filed Registration Statements (File
numbers 33-45481, 33-64770 and 333-36885) on Form S-8. It should be noted that
we have not audited any financial statements of the Company subsequent to
December 31, 1996 or performed any audit procedures subsequent to the date of
our report.
ARTHUR ANDERSEN LLP
San Jose, California
March 24, 1998
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 372
<SECURITIES> 0
<RECEIVABLES> 8,076
<ALLOWANCES> 468
<INVENTORY> 1,609
<CURRENT-ASSETS> 10,045
<PP&E> 17,470
<DEPRECIATION> 9,832
<TOTAL-ASSETS> 22,096
<CURRENT-LIABILITIES> 11,124
<BONDS> 0
0
0
<COMMON> 19,027
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 22,096
<SALES> 0
<TOTAL-REVENUES> 39,233
<CGS> 0
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<INTEREST-EXPENSE> 397
<INCOME-PRETAX> (1,236)
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<INCOME-CONTINUING> (1,270)
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